The fear generated globally by this emergency situation (for instance, countries have banned the entry into their territories by individuals arriving from Italy, most airlines have suspended their flights from or to Italy, several foreign investors have put on hold their investments in Italian targets until the emergency situation will be finished, etc.) and the drop in the demand for Italian goods from other countries, particularly those countries affected by the same situation, are significantly impacting the Italian economy and most local business fields.

Certain restrictive measures adopted by the Italian government to face the spread of the virus, including interim restrictions to individuals’ movement within the Italian territory (under decrees of the President of the Council of Ministers of 8 March 2020 and 9 March 2020 movements of individuals to, from and within the whole Italian territory are temporarily restricted, except in case of (i) “well-grounded work-related reasons,” (ii) “status of necessity” or (iii) “health-related reasons”) and, lately, the temporary shutdown of retailing activities (under a decree of the President of the Council of Ministers of 11 March 2020, retailing activities have been temporarily shut down, except for sale of foods and certain other essential sales) will also inevitably affect the ability of the local businesses to operate as usual.

In light of the above, business players in Italy will likely need to assess which legal implications in their affairs may stem from the economic consequences of the COVID-19 emergency. This document therefore focuses on certain of such implications from an Italian law perspective.

ONGOING NEGOTIATIONS: LEGAL FRAMEWORK APPLICABLE TO POTENTIAL WALKAWAYS

While most issues arising from the impact of the COVID-19 emergency on ongoing business relationships relate to the legal consequences on existing contracts, attention should also be paid to potential implications that such emergency situation may have under Italian law in connection with ongoing negotiations which have not yet resulted in the execution of an agreement by the relevant parties.

Article 1337 of the Italian Civil Code expressly requires the parties to “act in good faith during the negotiations and in the finalization of an agreement.” A typical case of breach of the obligation to negotiate in good faith has been identified in a situation where a party withdraws from the negotiations without justified reasons at a point when the other party is relying on a positive outcome of the negotiations.

(Among others, see decision of the Italian Supreme Court no. 7545 of 15 April 2016, according to which a liability pursuant to Article 1337 of the Italian Civil Code arises if “negotiations are pending between the parties; the same have reached a point which is sufficient to raise for the party claiming the liability of the other party a reasonable expectation on the finalization of the agreement; the negotiations have been terminated, without justified reason, by the party alleged to be liable; and, finally, notwithstanding the ordinary diligence used by the party claiming the liability of the other one, no circumstances exist that should have excluded its reasonable expectation to enter into the agreement”.)

Consequences of an unfair withdrawal in violation of Article 1337 are usually deemed to consist of an obligation of the withdrawing party to indemnify the other party for costs or liabilities incurred in connection with the negotiations and damages for any loss of other chances (so-called negative interest, to be proved, according to general principles of Italian law, by the allegedly damaged party). In large transactions, the economic consequences for the withdrawing party may therefore be significant.

If a party decides to terminate ongoing negotiations as a result of the emergency situation when such negotiations are at a final stage, it is likely that such party will take the position that the unexpected materially adverse situation occurred only at a later stage of the negotiations and thus constitutes a justified reason allowing a withdrawal without any violation of Article 1337.

Presumably, the other party, if willing to claim compensation for violation of Article 1337, would try to prove that under the circumstances the impact of the COVID-19 emergency would not be such to materially impair the economics of the transaction being negotiated (e.g., by alleging that the industry concerned is not, and is not reasonably expected to be, affected by the crisis by any material means).

As it is often the case, the respective arguments would need to be evaluated and assessed on a case-by-case basis as the merit would mainly depend on the factual circumstances surrounding the matter, including the relevant business industry and the extent to which it would be directly or indirectly impacted.

In general, in connection with ongoing negotiations, parties may nevertheless consider specifying in writing, as a general disclaimer, that no party shall rely on the positive outcome of the negotiations also in light of the situation deriving from the COVID-19 emergency, and independently from any direct impact thereof on the transaction being negotiated. This would hopefully help demonstrate the absence of any reasonable expectations by the counterparty on the finalization of the agreement. In any event, specific advice should be sought on a case-by-case basis.

EXISTING CONTRACTS: REMEDIES AND OTHER IMPLICATIONS

It is reasonable to anticipate that, as a result of the COVID-19 adverse impact on existing contractual relationships (i.e., when an agreement is already in force), parties may explore remedies available to them at law or under the relevant agreement to mitigate such impact. They may also need to review their existing agreements to assess whether any additional covenant or burden is triggered thereunder by such adverse impact.

Preliminarily, it should be noted that this document deals with legal implications that may arise under Italian law in respect of agreements governed by such law. It does not cover legal implications arising in connection with agreements that are subject to other laws, even if they may relate to Italy-associated transactions or other matters.

Italian law does not contemplate an express general notion of force majeure applicable to all contracts, but it does set forth mechanisms of protections (including the notions of supervening impossibility and hardship) aimed at protecting a party from supervening facts and events which affect a party’s ability or reasonable interest to perform a contract. In addition, with specific regard to certain areas where forms of agreements tend to be more sophisticated, specific clauses contained in Italian law agreements may address the force majeure issues.

Under certain agreements, the economic impact of the coronavirus crisis may even result in an increase of a party’s covenants thereunder.

Therefore, the following paragraphs analyze certain of the actual or potential legal implications of the COVID-19 outbreak on existing Italian law agreements:

(a) Supervening impossibility (impossibilità sopravvenuta)

The Italian Civil Code sets forth protections for parties whose obligations are no longer capable of being performed due to a supervening impossibility (impossibilità sopravvenuta) not imputable to the same parties. In particular, the following provisions should be noted:

• Release from liabilities. Article 1218 releases a party from its damage-related liabilities for non-performance of its obligations if it proves that such non-performance (or delay in performing) is due to an event not imputable to the same. (The burden of proof would be on the party claiming its release.)
• Extinguishment of obligations. Article 1256 provides for the extinguishment of an obligation if its performance becomes impossible for an event not imputable to the obligor. If the impossibility is only temporary, the obligor would not be liable for the delay, but when it continues up to a time when the obligor is no longer to be deemed to be obligated, based on the reason underlying and the nature of the relevant obligation, or the other party has no longer an interest in receiving the obligor’s fulfillment, the obligation will expire.
  Certain case law has maintained that under certain circumstances the remedy under Article 1256 would also be available to the party who becomes unable to receive the performance. In particular, several decisions have been issued in the context of employment matters, whereby Italian courts (including the Italian Supreme Court) have maintained that if the employer becomes totally unable, without negligence, to receive the services of an employee, the remedies granted by the law in connection with a supervening impossibility should apply to the effect that the employer would be released to pay the remuneration for such services (see, among others, decisions no. 2018/1375 and no. 2019/14684 of the Italian Supreme Court). It is plausible that the same position may be taken also in connection with other agreements (e.g., servicing agreements, distribution agreements, etc.).
• Termination of contract. Article 1463 dictates that a party released from an obligation that has become impossible is not entitled to claim the performance from the other party to the relevant agreement. In a nutshell, the agreement would terminate with full release of the parties.
• Partial impossibility. Under Article 1464, in the event a party’s performance has become impossible only in part, the other party may request a proportional reduction of its (counter)obligation and, absent any reasonable interest in receiving only part of the originally agreed performance, also claim termination of the agreement.

There are at least two categories of events that may potentially trigger the operation of a release due to a supervening impossibility arising from the COVID-19 outbreak, which are outlined below:

• Factum principis. Regulations or orders from authorities to counteract the contagion may prevent a party from performing its obligations under an agreement (e.g., an order to interrupt a business activity or a block of export of goods to be delivered abroad).When an obligation ceases to being capable of performance as a result of regulations or orders issued to face the COVID-19 crisis, it is plausible to believe that the obligor should be released from such obligation to the extent the circumstance was out of its control and was not foreseeable at the time of the execution of the relevant contract and the impossibility is actual (i.e., there are no alternative methods of delivering what is required to be delivered). Italian case law has taken the view that an order that prevents the performance of an obligation would not release the affected party from its liabilities if such order was foreseeable using the ordinary diligence at the time the obligation was assumed (see, for instance, decision of the Italian Supreme Court no. 2059 of 23 February 2000).Finally, it has to be pointed out that, under Article 91 of law decree of 17 March 2020 no. 18 (so-called “Italy-care” decree (decreto “Cura Italia”)), which is dealt with in more details below, a new provision has been set forth, whereby compliance with certain restrictive measures imposed to face the COVID-19 emergency “shall always be taken into account for the purpose of the exclusion, under Article[s] 1218 [and 1223] of the Italian Civil Code, of the liability of the obligor, also with regard to any acceleration or any liquidated damages applicable to delayed or omitted performance”. Although the actual scope of application of this new provision and its actual implications still require some analysis, it appears that the provisions is aimed at encouraging, in principle, the release of those parties whose performance has been (actually) affected by the imposition of the relevant restricting measures, on the basis of a supervening impossibility.
• Third-party non-performance. A party may become unable to perform a contract due to a non-performance of contractual obligations by such party’s suppliers or other third-party providers (e.g., a distributor becomes unable to deliver sold products to its customers due to an interruption of their manufacturing or delivery by the principal).In case of an inability to perform a contract due to a failure by third parties, the issue would be less clear-cut and would most likely need to be assessed on a case-by-case basis, as Italian case law has sometimes taken the view that the mere breach of a contract that causes the inability of the non-breaching party to perform another contract does not necessarily constitute an event releasing such non-breaching party from its obligations under the other contract.For instance, the Court of Milan, in its decision no. 8335/2017, has taken the view that the breach of a third party that had agreed to make available to another funds to be used to make a capital contribution to a company does not release such party from its obligation to make such capital contribution under a separate agreement entered into with such company and its shareholder.However, it is plausible to believe that, when the third-party non-performance is not a contractual breach (i.e., such third party is released from its obligation due to supervening events originating from the COVID-19 emergency), the party suffering such non-performance would have more chances to claim that it is, in turn, released from its obligations towards its counterparty under the other contract.It is interesting to consider that the Italian Supreme Court, in its decision of 29 May 1998 no. 5347, has maintained that when a party has undertaken to procure a performance from a third party and such performance becomes impossible, the promising party is released from its obligation to procure such performance, as the supervening impossibility is a concept of “general application.”

(b) Hardship (eccessiva onerosità) 

Pursuant to Article 1467 of the Italian Civil Code, in connection with agreements to be performed on a continuative or recurring basis or otherwise providing for a deferred term, if the performance of a party becomes excessively burdensome (eccessivamente onerosa) due to the occurrence of “extraordinary and unforeseeable events”, such party may claim the termination of the agreement, provided that the other party is entitled to avoid it by offering to revise the terms of the agreement to re-achieve fairness.

The termination remedy is not available in case the hardship falls within the risk normally associated with the nature of the agreement. More specifically, it does not apply to any agreement that is not affected by hardship (contratto aleatorio) by its nature or by acceptance of the risk by the parties thereto.

The hardship remedy granted by Article 1467 may be sought by parties to agreements which are still in the process of being performed.

For instance, in connection with acquisition or financial transactions to be completed under existing agreements that were entered into before the COVID-19 outbreak started in Italy, it is possible that if a party has lost an interest in closing the transaction due to the change in its underlying economics, such party may try to claim the termination of the relevant agreement (for instance, by claiming that, respectively, the price for a target company has become too high if compared to its current financial situation as a result of the crisis or the terms of the loan are no longer convenient or sufficiently protective for the lender due to the distress suffered by the borrower).

It cannot be ruled out that the virus spread may be considered an extraordinary and unforeseeable event for the purpose of the hardship remedy in respect of agreements entered into before the crisis started. It may be less clear cut whether it would be invoked with regard to agreements entered into at an early stage of the spread (when a party may allege that it could not foresee the subsequent magnitude of the event).

In order to successfully seek for the termination, a party should also prove that the crisis has resulted in a material unbalance of the terms of the transaction and such event is not to be disregarded based on the nature of the agreement or the acceptance of the risk by the parties at the outset.

Finally, the party that receives a claim for termination under the hardship remedy may, under certain circumstances, propose to revise the terms in order to avoid the termination. For instance, a seller may propose to bring down the price to reflect the actual loss in value of the good being sold.

(c) Force majeure and similar clauses (e.g., MAC/MAE) 

Italian law agreements entered into in certain business fields do often contain supplementary clauses addressing material changes that may occur after their execution. Such clauses may grant to the parties mostly impacted by the spread of COVID-19 additional remedies or facilitations in enforcing their remedies.

Among such clauses, it is worth mentioning (i) the force majeure clause often contained in certain commercial agreements (distribution agreements, supply agreements, etc.) and (ii) the material adverse change (MAC) or material adverse effect (MAE) clauses often contained in agreements entered into in connection with merger and acquisition and finance transactions. This paragraph contains some comments on the potential enforcement of such clauses and the remedies attached thereto, taking into account that the actual scope of application would typically depend on the actual content of each clause, which should therefore be analyzed on a case-by-case basis.

• Force majeure clauses. It is not uncommon to find force majeure clauses in commercial agreements to be performed in Italy, and governed by Italian law. Such type of clauses usually regulate extraordinary matters described therein upon the occurrence of which the affected party may suspend performance of the agreement. (Sometimes the definition includes all events beyond a party’s control with a non-exhaustive list of relevant events. In 2003, the International Chamber of Commerce released a standard form of force majeure clause that could be used in commercial agreements (the so-called ICC Force Majeure Clause 2003).)The clauses usually allow the affected party to suspend its performance until the circumstance continues and grant the other party (or both parties) the termination right if the event continues for a certain period of time.Compared to the remedies available at law, the clause may grant more certainty on the issue of whether the remedy is available, a reduced burden of proof for the party seeking for its enforcement, and more clarity on the terms of application of the remedy.Whether the COVID-19 spread falls within the scope of the clause would mainly depend on the description of the relevant events contained in the relevant clause.
• MAC and MAE. MAC and MAE clauses usually deal with supervening events that are or would reasonably be expected to be materially adverse to a party or a target and their business operations in a material manner. Based on the type of agreement (including merger and acquisition agreements or finance agreements), it may raise different consequences.Typically, when this type of clause is contained in an agreement concerning a merger and acquisition transaction the clause would consist of a condition precedent to closing (often in favor of the buyer) that is satisfied if no MAC or MAE has occurred prior to the completion of the transaction (i.e., the target or the relevant business has not been materially affected). The occurrence of a MAC or MAE would release the buyer or both parties from its or their obligations to complete the acquisition.In loan facility agreements, the occurrence of a MAC or MAE may (i) release the lender from its obligation to disburse the funds to the borrower and/or (ii) after the loan has been disbursed, entitle the lender to accelerate its repayment.In the context of an evaluation as to whether a MAC or MAE clause may be enforced as a result of the COVID-19 crisis, careful attention should be paid to any carve-out that may be contained in the relevant definition, including in particular the exception that excludes from the definition any change in general economic conditions or any change occurring generally in the business industries of the affected party or target. (The exception to a MAC or MAE consisting of changes in general economic conditions sometimes is, in turn, subject to a carve-out in case of changes having a disproportionate impact on the affected party of the target relative to other companies in the same industry, in which case the relevant MAC and MAE would apply.)

(d) Other potential implications on existing contracts 

The economic consequences of the COVID-19 crisis may also impact the terms of existing contracts increasing the burden for the parties. Some examples of such implications are outlined below:

• Reporting covenants. Certain contracts (such as most loan facility agreements and certain commercial agreements) contain reporting obligations whereunder a party is required to notify the other party of material changes that may affect its business operations. The adverse consequences of the COVID-19 emergency may trigger an obligation to report.
• Acceleration. The economic issues arising from the crisis may also result in breach of certain financial covenants contained in some contracts (typically, in finance agreements), thus triggering an acceleration of its obligations and/or a termination of the agreement. In particular, EBITDA/operating income-based as well as value-based financial covenants may be affected by the current situation. Apart from any specific clause that may allow a party to withdraw from an agreement in case of an acceleration event set out therein, pursuant to Article 1186 of the Italian Civil Code an acceleration is triggered by operation of law in case the obligor becomes insolvent.
• Suspension of performance. Under Article 1461 of the Italian Civil Code, if the financial situation of a party to an agreement has become such that its ability to perform such agreement is in jeopardy, the other party may suspend its performance.
• Revisions of terms. Certain agreements contain clauses whereby the parties agree to renegotiate a revision to the price in case of extraordinary events materially altering the underlying economics. For specific contracts, the revisions may apply by operation of law. Article 1664 of the Italian Civil Code provides for possible revisions to the price payable under a contracting agreement due to circumstances (and based on thresholds) identified therein, under which the performance of the contractor becomes more burdensome or difficult.
• Market disruption. Under financing agreements, customary market disruption clauses may be triggered in the unlikely event facilities’ benchmark rates were not be quoted as expected.

POSSIBLE DISRUPTION IN THE TRADING OF LISTED SECURITIES

The COVID-19 crisis has caused an unprecedented drop in the official prices of securities listed on the Italian Stock Exchange (Borsa Italiana).

There has been a debate at the national level as to whether the government should take any measure to suspend the sale of listed securities until the current turmoil comes to an end and the distress ceases. The main concern relates to potential adverse effects that may arise from short-selling activities in connection with speculative raids.

The Italian legal framework, which also reflects the provisions set out by MiFID II (Directive 2014/65/EU on markets in financial instruments), already provides for a default suspension of the trading of single securities when the fluctuation of their price exceeds a certain range. Pursuant to Article 48(1) of MiFID II, “Member States shall require a regulated market to have in place effective systems, procedures and arrangements to […] have sufficient capacity to deal with peak order and message volumes, are able to ensure orderly trading under conditions of severe market stress […].” Article 65-sexies paragraph 2 of the Italian Consolidated Code on Finance (Legislative Decree no. 58 of 24 February 1998) requires the stock exchange to “have in place effective systems, procedures and arrangements to […] suspend or limit on a temporary basis the trading if a significant fluctuation occurs in respect of the price of a security […] in a short timeframe.”

Furthermore, the Italian regulator on the stock exchange (Commissione Nazionale per le Società e la Borsa – Consob) has the power to suspend or cause the suspension of listed securities and, under the EU Regulation no. 236/2012 on Short Selling (SSR), it has the power, among other restrictive measures, to prohibit or restrict short selling of financial instruments on a temporary basis in the case of a significant fall in price.

On 8 March 2020, Consob issued a press release excluding any intention to suspend the trading on the Italian Stock Exchange as a whole by basically indicating that this measure should be applied to listed securities on a case-by-case basis and that an overall suspension of trading activities may result in a disruption of the Italian and other European markets and should in any event be coordinated with the other EU countries to avoid adverse consequences.

Due to the increasing drop in the prices of the instruments listed in all the EU stock exchanges, on 11 March 2020, the European Securities and Markets Authority (ESMA) issued its recommendations to the financial-market participants in connection with effects of the COVID-19 outbreak on EU financial markets. Such recommendations include the request to the issuers to disclose as soon as possible any relevant significant information concerning the impacts of COVID-19 on their fundamentals, prospects or financial situations and provide transparency on actual and potential impacts of COVID-19 on their business activities, financial situations and economic performance in their 2019 year-end financial reports.

On 12 March 2020, after the unprecedented drop in the official prices on the Italian Stock Exchange, Consob issued a resolution (no. 21301) to temporarily suspend the short selling of a number of listed securities on 13 March 2020. On 16 March 2020, Consob further suspended the short selling of a number of listed securities on 17 March 2020.

On 17 March 2020, following a resolution adopted by EMSA on 16 March 2020 to temporarily lower the thresholds applicable to the disclosure of net short positions in the EU financial markets, Consob issued a new resolution (no. 21303) to suspend the short selling of all the shares listed on the Italian Stock Exchange for three months (subject to certain exceptions).

On the same date, Consob issued another resolution (no. 21304) lowering the minimum thresholds for the disclosure of the holding of shares in no. 48 listed companies to: (i) 3% for those of such listed companies which fall within the category of small-medium size companies and (ii) 1% for the other ones.

Investments made in instruments on the Italian Stock Exchange on a short-term basis may be therefore affected by the measures taken or that may be taken in the future to face the financial crisis and stabilize the market for the benefit of more long-term investments.

CERTAIN INTERIM MEASURES ADOPTED IN ITALY (INCLUDING THE “ITALY-CARE” DECREE)

In response to the emergency caused by the COVID-19 spread and its serious impact on the Italian economy and business relationships, the Italian government is in the process of enacting regulations to help the local players to overcome the operating and financial issues raised by the contingencies (Article 1 of Decree of 8 March 2020 no. 11).

Initially adopted measures included, inter alia:

• Granting of contributions, up to €2,500,000 per entrepreneur, to entrepreneurs based in certain most affected areas (which may be subsequently extended) (Article 25 of Decree of 2 March 2020 no. 9).
• Granting of a 12-month moratorium period to borrowers under certain loan facilities granted in certain most-affected areas by Invitalia (a state-owned company incorporated to support the development of business initiatives) (Article 6 of Decree of 2 March 2020 no. 9).
• Suspension of the payments for utility services in certain most-affected areas until 30 April 2020 (Article 4 of Decree of 2 March 2020 no. 9).
• Adjournment of hearings and suspension of terms in pending dispute proceedings in the period between 9 March 2020 and 22 March 2020 (Decree of 8 March 2020 no. 11).
• Certain tax measures.

Specific rules on personal data processing applicable during the emergency period (Article 14 of Decree 9 March 2020 no. 14).

As a result of the current economic consequences arising from the restrictions imposed on individuals and business operations to face the COVID-19 spread, on 17 March 2020, the Italian government enacted the law decree no. 18 (so-called “Italy-care” decree (decreto “Cura Italia”)) implementing a massive set of additional measures to support the local economy with an extra-budget of €25 billion. The measures adopted under such decree are broken down into five macro areas, as follows: (i) measures to support the national healthcare system, (ii) measures to support employment, (iii) measures to face cash requirements through the banking system, (iv) tax measures to support families and businesses, and (v) other measures.

Such measures include, inter alia:

• Additional contributions to (and other measures in favor of) the health system.
• Government incentives to manufacturers and distributors of healthcare items (which incentives include no-recourse contributions and loans on convenient terms, with an overall budget of up to €50 million subject to compliance with the EU applicable regulations).
• Temporary measures allowing the requisition (against payment of an indemnity) of healthcare structures, personal assets and, ultimately, hotels or similar premises, as may necessary to face the emergency.
• Temporary extension to small companies of the availability of social security cushions (which are currently available only to bigger companies) and other measures expanding the social security cushions available to certain employers and employees.
• Measures in favor of employees (e.g., granting of parental leaves and other benefits, provisions on the use of masks (that will have to be provided to the employees who cannot work from home during the emergency period), a 60-day preclusion or suspension of collective dismissals, a 60-day preclusion of individual dismissals for objective justified reasons, etc.).
• Government indemnities for the month of March 2020 in favor of self-employed individuals (with the exclusion of certain qualified individuals) and certain employees working in specific sectors.
• Temporary measures to support the export.
• Temporary increase of the support granted to small-medium size companies (or other entrepreneurs) by an existing fund that guarantees their financing.
• Temporary increase of the scope of application of the fund that allows the temporary suspension of repayments to be made under loans used for the purchase of a “first house”.
• Temporary measures for the financial support to micro, small or medium size companies (or other entrepreneurs) having their seats in Italy, basically consisting of the temporary freezing of their exposures to banks or other financial institutions under credit facilities, loans, financial leasing contracts, etc. (to the extent such exposures do not related to debtors who are already in a distressed financial situation).
• Several tax measures (that are not dealt with in this document).
• Setup of a fund for the support of the Italian export and the internationalization of the Italian economic system.
• Temporary simplification of certain public tendering procedures.
• Support to the air transportation system (with a budget of €500 million), including specific measures regarding Alitalia airlines.
• Extension of the temporary suspension of hearings and procedural terms in connection with disputes before Italian courts.
• Temporary suspension of rents for the use of sporting facilities by sport associations and clubs.
• 60-day extension of the deadline for the holding of the shareholders’ meetings of Italian companies for the approval of their 2019 financial statements and provisions to facilitate the holding of the shareholders’ meetings or the adoption of their resolutions without physical presence of the relevant individuals during the emergency period.
• Increase of the support to the development of learning distance platforms.

The government has already announced that additional measures will be adopted to support the local economy.

It will be worth monitoring any developments on the measures adopted by the government in the near future and their actual implementation.

This document briefly outlines some preliminary issues related to general legal implications associated with, or which may arise from, the COVID-19 emergency we are currently facing and shall not be deemed to replace specific legal advice. We encourage parties to seek qualified legal counsel in order to address their needs in detail.

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