Negotiating M&A and Joint Venture Deals

1. Negotiating M&A and Joint Venture Deals Rome, 8 June 2005

2. Index of Contents: • Section 1 Evaluating the deal • Section 2 The due diligence process • Section 3 The structure of the SPA • Section 4 The Price • Section 5 The Closing • Section 6 Interim Management • Section 7 Representations and Warranties • Section 8 Indemnification Clause • Section 9 Structure of the SHA/Capital Structure/shareholder funding • Section 10 Corporate Governance provisions • Section 11 Mechanisms of deadlock resolution

3. Case Study:A transaction involving the purchase of a 51% stake in a non listed Italian company

4. Confidentiality Agreement Letter of Intent Exclusivity or Standstill letter Memorandum of understanding Auction process vs. one-on-one negotiation (including data room rules, etc.) Good faith as driving principle of pre contractual negotiations (in civil law countries) 1. Evaluating the deal Negotiations and early stage agreements

5. 2. The due diligence process Analisys under a tax, accounting, financial business, environmental and legal point of view of the target company’s business – inc. exam of documentation The Aim is to : • assess the risks/critical areas of the business and of the Company; • determine the value of the target company/asses quality of its management; • evaluate whether to proceed with the transaction and on what terms and conditions. Linkage between due diligence (disclosure) and Seller’s warranties/indemnities in the SPA and its attachments

6. 3. The structure of the SPA (Share Purchase Agreement) • SPA is normally structured as a binding (sometimes conditional) agreement with deferred implementation at Closing • Main provisions regulate: • Conditions precedent (e.g. antitrust/other regulatory approval) • Price determination and payment; • Management of the company in the interim period; • Closing events; • Representations and warranties; • Indemnification provisions; • Dispute resolution; • [The corporate governance provision (possibly) • The mechanism to solve deadlocks. In SHA]

7. 4. The Price The contractual price may be:   • determined in a fixed amount; • determinable on the basis of certain formula (which may vary depending on the shareholding’s evaluation criteria adopted: i.e criterio patrimoniale, reddituale o finanziario – NAV, DCF, etc.); • mixed, partially determined and partially determinable and uncertain (linked to the occurrence of certain circumstances, eventually containing an earn-out component); with possible • third party determination, in part (also as a means to overcome possible conflicting views between the parties)

8. 5. The Closing Reasons for the signing/closing structure of M&A deals: • assumption of all the contractual obligations upon signing • deferral to closing of the actual implementation of the transaction i.e. transfer of shares and payment of price • lag of time required for occurrence of condition precedent to closing such as:    • Antitrust clearance; • Granting of licenses, authorizations and permits, etc; • Carrying out communications and consultancy procedures required by law or contract; • Lapse of pre-emption rights of other shareholders; • Approval of transaction by the necessary corporate bodies; • Achievement of certain results (such as net financial position).

9. 6. Interim Management General undertaking of the Seller to manage the Company in the Interim period between signing and closing • in a diligent and ordinary manner, • in accordance with past practice As a result, no extra-ordinary transaction are allowed unless with Buyer’s approval

10. 7. Representations and warranties Are representations and warranties essential? Yes, because • Implied warranties (i.e. seller’s warranties provided for by law) are not always offered by legal systems in relation to the Company’s net worth, underlying assets and business activities • E.g. Italian case law: Implied warranty is provided for only with respect to the (title and quality of) the shares • Other remedies under general principles of law may be of little practical use

11. 8. Indemnification Clause • WHY TO INSERT AN INDEMNITY CLAUSE • IN ADDITION TO THE REPS AND WARRANTIES? • Because the indemnity clause clarifies Buyer’s right to damages (also where the breach of the warranty is not imputable to the Seller) • Because, in addition to indemnification for breach of reps & warranties, the indemnity clause may cover the occurrance of specific events identified in the course of the due diligence process the risk of which is assumed by the Seller • Because it introduces specific limits and measures (de minimis, deductibles and caps)

12. CORPORATE GOVERNANCE PROVISIONS(more tipically contained in Shareholders’ Agreement ) Applicability where one party acquires/retains partial stakes in a Company. They might include: • Right to designate a certain number of directors/auditors • Reserved matters / veto rights at shareholders' meeting and board of directors’ level; • Dividend policy; • Right to receive periodical reporting on the company’s management and results • Preemptive rights, drag along/tag along provisions

13. 10. Mechanisms of deadlock resolution What is a deadlock? A deadlock occurs when a resolution (which is determined as being essential to the Company's activity) on certain reserved matters • is not approved by the required majority and • no agreement thereon is reached among the relevant shareholders within a certain timeframe