Merger leveraged buyout

Merger leveraged buyouts (MLBO) are regulated by art. 2501-bis of the Civil Code: these are mergers of companies following transactions of leveraged buyouts (LBO). LBOs are acquisitions of another company (target) using a significant amount of borrowed money to meet the cost of acquisition; the assets of the acquired company are often used as collateral for the loans, along with the assets of the acquiring company, which can be a newco company or an existing company.

Art.2501-bis set an “enhanced” procedure for MLBOs, which is based on several additional transparency duties for the parties involved, to protect creditors and minority shareholders from abuses. The directors’ report and the expert report (as set by art.2501-quinquies and art.2501-sexies) must contain the reasons for the transaction and the financial resources provided specifically for the obligations arising from the merger. Auditors of the target company or the purchasing company will have to attach a report of the accounts to the proposed merger. The enhanced procedure also involves the disapplication of any simplification provided by articles. 2505 and 2505-bis: for example, the lack of the directors’ report and the expert report, or the lack of the exchange ratio of shares.

Regarding the indebtedness of the acquiring company, main doctrine considers that for the purposes of the enhanced procedure there must be a “qualified” debt. A debt is “qualified” when it causes an excessive imbalance with respect to equity, or when these are debts contracted “at a time when the company was in a financial situation in which it would have been reasonable not to contract them”. It is therefore relevant the type of activity exercised by the acquiring company and, above all, its ability to produce cash flows to pay off debt without using the flows produced by the target company.

It is also worth noting the doctrinal debate on whether the enhanced procedure should be disapplied in the presence of other protections already present in the system. For example, when the debt for the acquisition of the target company was made through shareholders’ financing, under such circumstances the protections offered by art. 2467 c.c., which provides for the posterization of the repayment of members’ loans to the company in relation to the satisfaction of other creditors, would apply. Similarly, in case of management and coordination activities the art. 2497 c.c., which rules the protections provided for minority shareholders and creditors in case of an injury to the profitability and value of social participation, would also be applied. Based on these considerations, some doctrinal authors believe that the enhanced procedure could be derogated, assuming that the protections already provided by the Civil Code are sufficient to ensure adequate protection for both creditors and minority shareholders of the company.