In distressed M&A transactions—i.e., cases where the seller or the target company is in a situation of crisis or even insolvency—certain precautions must be taken to protect the buyer from potential legal risks.
Therefore, it is usually advisable to complete the transaction under the protective umbrella of a legal instrument for resolving business crises: from agreements executed in compliance with certified turnaround plans to debt restructuring agreements or pre-insolvency composition with creditors, there are various frameworks within which distressed M&A transactions can be structured to minimize potential legal issues as much as possible.
In this regard, the Negotiated Settlement for Business Crisis Resolution (CNC) has been gaining increasing traction in recent years. This out-of-court process involves the appointment of an expert by the Chamber of Commerce where the debtor has its registered office, following a request submitted by the distressed debtor. The expert acts as a mediator/negotiator to facilitate negotiations with creditors, aiming at business continuity for the company (Articles 12–25 quinquies of the Italian Business Crisis and Insolvency Code, CCII).
Some of the typical legal risks in distressed M&A transactions are thus minimized if the transaction is completed within the framework of the negotiated settlement. For instance, Article 22, paragraph 1, letter d), CCII provides that, upon the entrepreneur’s request, the Court—after verifying the functionality of the transaction concerning business continuity and the best satisfaction of creditors—may authorize the debtor to transfer the company or one or more of its branches in any form, without the effects provided by Article 2560, paragraph 2, of the Italian Civil Code, while establishing the appropriate measures based on the requests of the interested parties and to protect the involved interests. At the same time, Article 2112 of the Italian Civil Code remains in force, ensuring compliance with the principle of competitiveness in the selection of the buyer. Essentially, this provision means that the buyer is exempt from liability for pre-existing debts, unlike in solvent transactions where such debts are legally transferred—even if they are recorded in mandatory accounting books. This exemption, typical of insolvency proceedings, has been extended by the legislator to the more streamlined and out-of-court Negotiated Settlement for Business Crisis Resolution.
It is clear that this provision addresses some potential risks from the outset, such as avoidance actions. At the same time, the need—or even just the opportunity—to proceed within a competitive framework, albeit with fewer formalities than in insolvency proceedings, may help secure a better offer in the interest of stakeholders and the debtor’s business continuity.
In recent times, case law has been very active in ruling on business transfers within the negotiated settlement framework. In a recent ruling (still unpublished at the time of writing) by the Court of Perugia, dated March 11, 2025, R.G. 107/2025 V.G., the judge authorized the transfer of a business to the sole bidder, even at a price lower than the originally set minimum. In this case, the judge found that the debtor’s proposed plan was consistent with achieving the best satisfaction of creditors and thus deemed it appropriate to authorize the sale at a lower price, considering that continuing operations was not feasible due to the business crisis.
Courts have been increasingly inclined to approve business transfer requests within the negotiated settlement framework, focusing primarily on whether the transfer facilitates business continuity, thereby preventing the complete dissipation of value and the accumulation of further losses. This approach is reflected in the recent ruling of the Court of Turin on February 27, 2025.
The paradigm of distressed M&A transactions is thus shifting: the transaction is completed earlier than in formal insolvency proceedings, yet with the legal protections of a „controlled environment.“ Additionally, courts are increasingly focusing on whether the business transfer supports business continuity and maximizes creditor satisfaction, imposing appropriate measures when granting authorization while ensuring compliance with competitive selection criteria for the buyer.
For reference, in the Court of Parma’s ruling on July 30, 2024, the judge held that the evaluation of the economic feasibility of the business transfer was essential to prevent the dissipation of value and further losses. The decision also took into account the interests of creditors, the purpose of the negotiated settlement, and the restructuring plan built around the negotiations, ensuring its suitability to overcome the debtor’s economic and financial distress.
One of the traditional obstacles in distressed M&A transactions within insolvency proceedings is the requirement to conduct a competitive auction, even in the presence of a pre-identified bidder. However, the Negotiated Settlement for Business Crisis Resolution offers greater flexibility in this regard, as courts tend to require fewer formalities compared to insolvency proceedings. This reduces the risks for a pre-identified bidder, who might otherwise be discouraged from proceeding due to the uncertainty of a competitive auction.
Within the negotiated settlement framework, courts may also allow the business (or its branches) to be sold to a pre-identified buyer. In a ruling by the Court of Brescia on November 7, 2024, the judge ruled that a bidder may be pre-selected, provided that a public notice process—even without particular formalities—has been carried out. This helps mitigate concerns over transactions that could be detrimental to creditors.
All these elements, as outlined by case law, help strike a balance between mitigating risks for investors and protecting creditors from fraudulent transactions that are not in their interest or do not support business continuity. This approach allows for a reconciliation of interests between potential buyers and creditors, thereby reducing the typical risks of distressed M&A transactions.
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