1. NEW POSSIBILITIES FOR THE SALE OF GOING CONCERN OF ITALIAN COMPANIES IN DISTRESS 10th May 2013 - Massimo F. Dotto

2. Italian Insolvency Law (Legge Fallimentare or L.F.) An effort to re-launch economic growth The rationale of these amendments: to offer Italian companies in financial difficulties more flexible schemes which allow them to overcome their difficulties while preserving their business continuity Easier access to alternative procedures to insolvency (fallimento) 1942 2005 – 2007 2012 R.D. No. 267/1942 D.L. No. 35/2005 Law Decree No. 83/2012 (“Decree on Development”) converted into Law No. 134 (August 7th 2012) 2

3. Company in distress Running out of cash / financial resources No access to new financing (fresh credit lines are needed) Risk of breaching covenants 3

4. Alternative procedures to insolvency Pre-insolvency creditor arrangements Possible solutions (depending on the seriousness of the crisis): a) Judicial composition with creditors (Art. 161 L.F.) (concordato preventivo) with or without continuity b) Court-ratified debt restructuring agreement (Art. 182 bis L.F.) (accordo di ristrutturazione dei debiti) c) Out of Court recovery plan (Art. 67, co. II, Lett. d L.F.) (piano di risanamento) 4

5. Procedure - The Application Application + detailed plan (Insolvency Court / Register of Companies) Assistance of a lawyer and a financial advisor 5

6. The plan The plan:  must contain analytical description of the modalities, timing and financial means for implementation of the proposed arrangements  the feasibility of the plan must be assessed by an expert Contents of the proposal:  disposal of (not instrumental) assets  implementation of extraordinary transactions  issuance of shares to creditors /debt to equity swap  etc. 6

7. The experts Independence requirements (to avoid conflict of interests) Role of guarantor Civil / Criminal liability (false statement / omissions) 7

8. The blank request Easier access to the procedure To allow the debtor to seek immediate protection (e.g. enforcement proceedings frozen) The restructuring plan and the other documents required by the law can be filed in a given time (the following 60-120 days) Possible risks (abuse of the tool) 8

9. Procedure  The (blank) application is filed before the Court  The Court sets a deadline for the filing of a proposal (60 days with a possible extension of 60 more days or even a further 60 days)  The proposal is examined by the Court  If approved, a judicial commissary for the procedure is appointed to supervise the implementation of the plan  The proposal is then submitted to an assembly of creditors  If the proposal is approved by the majority of the creditors (calculated by values of credits) the agreement will be ratified by the Court  If the proposal is not approved by the creditors (for example if deemed not satisfactory of their claims), the company is declared insolvent 9

10. Pre-insolvency creditor arrangements with going concern / continuation of business Specific provision (art. 186-bis L.F.) relating to pre-insolvency creditor arrangements that provide for the continuation of the business of the company in distress.  sale of the going concern of the relevant party to third parties  sale of assets deemed non instrumental to the core going concern In this case the admission request must contain :  a detailed forecast of the costs and revenues expected from the continuation of the business activity  a detailed indication of the financial resources required for the continuation of the business and the relevant sources  the plan must be certified by an expert who must confirm that the continuation of the business is in the best interest of the creditors 10

11. The most important effects of the filing of the application (the Authomatic Stay)  The creditors cannot start or continue enforcement proceedings over the company’s assets  Possibility to postpone up to one year the payment of privileged creditors  Any judicial mortgage registered in the ninety days prior to the filing of the application with the Companies’ Registry is ineffective against the creditors existing at the time of filing of such an application  The debtor is allowed to terminate contracts which are non- profitable or excessively burdensome, with prior authorization of the court  Inapplicability of the clauses involving termination of the contract on the ground of the corporate crisis 11

12. Extraordinary and ordinary management Set of rules for the maintenance of the ordinary and extraordinary operation of the business (guarantees for the new business partners)  the debtor may be authorized to carry out urgent act for its extraordinary and ordinary management  super prior ranking (prededucibilità) for third party claims arising as a result of transactions authorized by the court  payments made by the debtor cannot be clawed back in the event that the distressed company goes insolvent  opportunity to participate in tenders aimed at entering into contracts with public bodies  easier access to new finance (authorization to obtain new dip financing from the banks or other sources of credit and to pay creditors which are crucial to ensure continuity of the business)  the laws on the restoring of the corporate capital in case of losses are not applicable 12

13. Case study 13 COMPANY IN DISTRESS INVESTOR good potential business (solid company structure, good market position, high quality know how, positive order acquisition trend, etc.), but temporary cash flow and financial crisis with necessity of fresh credit impossibility of paying suppliers / fulfilling contractual obligations (orders) interested in expanding its market taking over the brand and know how

14. Case study  The company submits a blank application to be admitted to pre – insolvency proceedings with continuation of the business  The investor, at the end of a thorough due diligence process, even through a NewCo with the company, makes an irrevocable offer for:  a going concern lease agreement with the company (e.g. for one or two years)  a purchase option for the acquisition of the going concern  Both are subject to the ratification of the plan by the Court and then by the creditors 14

15. Case study The company (within the given term of 60 days) submits the detailed plan on the ground of the Investor’s proposal The plan might provide for:  continuation of the business activity through the lease and subsequent sale of the going concern  payment of the creditors (with the sale of not instrumental assets) / the income of the lease / the purchase price 15

16. Case study  The plan is admitted by the Court and approved by the creditors  The Investor will benefit from the protection provided by the new rules and run the business  A judicial commissary supervises the execution of the plan with respect of the debtor’s (old company) obligations  After the lease period, the Investor purchases the going concern and old creditors are paid back (in the percentage provided by the plan)  Once the plan is fully executed the proceedings before the Court are over 16

17. Advantages The possibility for the investor to take over and safeguard the company’s  the brands  the know how (both technical and commercial)  the market  the continuity of the contracts already signed with customers  the plant and equipment  the organization, experience and core competence of the employees The investor would not be accountable for any debt of any nature pertaining to previous management 17

18. Disadvantages / risks  The proposal / plan is not accepted by creditors  The Court might receive a more attractive proposal from other investors  Insolvency of the company 18