2010 IDI Annual Meeting How to deal with a distributor facing a critical financial situation?

1. 2010 IDI Annual Meeting How to deal with a distributor facing a critical financial situation? Edoardo Betto Piaggio & C. S.p.A. Corporate and Legal Affairs

2. SUPPLIERS’ MAIN DILEMMA: to supply or not to supply? When a distributor becomes insolvent, the supplier generally has the following dilemma: 1) to keep supplying the distributor, thus increasing its financial exposure; or 2) to stop supplying the distributor, thus lessening its chances of being repaid at all (especially if distributor is an exclusive one and/or goes bankrupt/becomes chronically insolvent as a consequence thereof). AIM: TO RECOUP ALL, OR MOST, OF ANY OUTSTANDING AMOUNTS WITHOUT WORSENING DISTRIBUTOR’S FINANCIAL CONDITION. NB: The above scenario gets more complicated if the payables of the supplier are factorised on an ongoing basis to a factoring company.

3. NON-CONTENTIOUS REMEDIES FOR SUPPLIERS: GENERAL OVERVIEW Suppliers have a broad array of non-contentiouslegal and financial tools to avoid or minimise the risks deriving from the indebtedness of distributors. There are various stages at which these remedies may kick in and intertwine among each other: (i) when a distributor is solvent (i.e. to avoid/minimise any possible future debts); (ii) when a distributor becomes insolvent (however, please note that most of the remedies used when a distributor is insolvent may be subject to bankruptcy revocatory actions); (iii) when a distributor goes bankrupt. NB: needless to say that the extent and/or the mechanics of the various remedies may vary greatly amongst jurisdictions. Given that there is not a “one size fits all” answer, the following is a general, non-comprehensive account of international trade practice.

4. # 1:REMEDIES TO MINIMISE DEBTS BY DISTRIBUTORS 1) In general: cash sales vs. credit sales (cash sales as the strictest of all remedies which, however, may lead to losing sales volumes/market share to the benefit of competitors selling on credit) 2) Strictly observe any credit limit granted to distributor (may be difficult if managers want/need to push sales) 3) Proceed to offsetting whenever possible 4) Retention of title clause (goods are invoiced and delivered; simple clauses (property is retained until purchase price is paid) vs. extended clauses (e.g. buyer sells the goods as an agent of seller, thus becoming a trustee of the proceeds of sale); extended-type retention of title clauses may not be construed by implication; registration as a charge may be required; be aware of purchases by bona fide third parties without notice] 5) Consignment stock (goods are delivered to distributor but not invoiced; goods remain property of supplier until distributor picks them up at will/need and informs supplier; seems more convenient for distributors than suppliers) 6) Bank guarantees(e.g. promissory notes; first demand guarantees), Real guarantees(e.g. mortgages) and/or other types of guarantees (e.g. L/Cs; “strong” comfort letters; floating charges; insurance policies) 7) Merchant finance (e.g. factoring; forfaiting; direct debit)

5. # 2:REMEDIES AGAINST INSOLVENT DISTRIBUTORS 1) Tracking and evaluating the financial solidity of distributor as soon as risks arise (e.g. land registry, bankruptcy, Companies House searches) 2) Entering into ‘reasonable’ repayment schemes (shorter repayment schemes with higher instalments may not be fulfilled at all by distributor) 3) Cash advance order / Cash advance invoice / Cash advance delivery (payments are made at different stages before goods are actually delivered) 4) Cash on delivery / Cash against documents (payment is made when goods are delivered; particularly suitable in case of Ex-Works contracts, whereas payments under FOB or CIF contracts are usually done through a bank) 5) Buying-back supplied goods 6) Supplier’s lien on sold goods (possible only until goods are in actual possession of the supplier) 7) Stoppage of goods in transit (can be exercised only until goods are in possession of buyer or until a buyer’s agent acknowledges that it holds the goods on behalf of the buyer other than for shipment purposes)

6. # 3:BANKRUPTCY OF A DISTRIBUTOR: FOOD FOR THOUGHT 1) Remedies for, and consequences of, debtor’s bankruptcy vary greatly amongst jurisdictions 2) Contrast supplier’s liens on sold goods with retained-ownership sales in a bankruptcy scenario 3) Some jurisdictions do not allow Supplier to automatically terminate the distribution contract in case Distributor is declared bankrupted importance of terminating the contract before bankruptcy is declared also in view of appointing a new distributor 4) Can Suppliers be held responsible towards the creditors of Distributor if they kept supplying notwithstanding the insolvency of Distributor? 5) How does offsetting operate after petition for bankruptcy is filed?

7. A PRACTICAL CASE # 1: rupture brutale in France • 1) FACTS OF THE LITIGATION • in August 2007 Piaggio stops supplying a French dealer (“Dealer”) due to its repeated contractual breaches (non payment of invoices for a total of € 180K) and non-fulfilment of two repayment schemes agreed with Piaggio itself; • the termination notice period foreseen in the 2-year contract was 3 months; • Dealer has been distributing on a non-exclusive territorial basis only Piaggio’s products for almost 30 years; • on Dec. 31, 2007 the underlying distribution contract expires and is mutually not extended any further; • in 2008 Piaggio begins litigation for recouping the outstanding debt (€ 180K); • Dealer files a counterclaim of € 4M, grounding the same on the presumed breach by Piaggio of art. L. 442-6.I.5°of the French Commercial Code.

8. A PRACTICAL CASE # 1: rupture brutale in France • 2) ARTICLE L. 442-6.I.5°OF THE FRENCH COMMERCIAL CODE • in order to counterbalance the market freedom to fix prices introduced by Ordonnance N. 86-1243 of Dec. 1, 1986, the same Ordonnance sets down a new form of liability for indemnifying weak contractual parties from damages incurred by the harsh breaking up (rupture brutal) of a business relationship; • this liability ranks as a rule of public economic order (hence prevailing over any conflict-of-laws rules); • liability for rupture brutale is a statutory tort liability; • contractual limitations of liability have no validity if liability for rupture brutale is claimed.

9. A PRACTICAL CASE # 1: rupture brutale in France • 3) CONDITIONS TO BE MET FOR CLAIMING LIABILITY FOR RUPTURE BRUTALE • existence of business relationships (even de facto, i.e.without contract); • breaking up of the business relationship • partially (e.g. supplier supplies less goods or does not supply certain goods) • totally (i.e. termination or non-renewal of the contract); • harshness of the break harshness is caused by the lack of a reasonable termination notice period which, instead, should take into account the following criteria: - overall duration of the business relationship; - possible economic dependence (e.g. distribution with or without exclusivity); - investments made by distributor; - flexibility of the market (i.e. how long does distributor take to find other similar suppliers on the market?); • termination notice must be given in writing

10. A PRACTICAL CASE # 1: rupture brutale in France • 4) EXTENT OF DAMAGES AWARDED BY COURTS (i) compensation is determined as profits which distributor would have made had the termination period been reasonable (i.e. not brutale); - initially, French courts used to calculate said lost profits on the average distributor’s turnover taking into account the 3 years preceding the termination notice; - more recently, French courts adopt a less burdensome approach by calculating lost profits on the average margin realised by distributor in the 3 years preceding termination notice. Courts have yet to finally settle whether to consider gross or net margin though; (ii) in addition, French courts may compensate further damages (e.g. investments made upon request of supplier, expenditures for laying personnel off)

11. A PRACTICAL CASE # 1: rupture brutale in France • 5) SUPPLIER’S DEFENCES • force majeure; • serious contractual breach of distributor; and/or • serious downturn of the market conditions

12. A PRACTICAL CASE # 1: rupture brutale in France • 6) OUTCOME OF THE LITIGATION • Dealer claimed that the termination period should have been 3 years having in mind (i) that the business relationship with Piaggio lasted for 30 years and (ii) that it was a mono-brand distributor • in April 2010, the Courts of Paris of first instance entirely rejected the counterclaim of Dealer stating that: • Piaggio had legitimately suspended any supplies in consideration of the fact that it had agreed with Dealer two repayment schemes which Dealer never fulfilled (good faith of Piaggio); and • the contractual breach of Dealer was a severe one.

13. A PRACTICAL CASE # 2: the “factoring” variation • WHAT IS FACTORING? • It is a continuous arrangement between a factoring company (factor) and the seller of goods or services (client), whereby the factor purchases from the client accounts receivable at a discount in exchange for immediate money. • Probably the most common form of factoring (in terms of client numbers) is the ‘full service’: in addition to purchasing receivables, the factor will also, inter alia, administer and control the client’s sales ledger and collect due debts from the client’s customers.

14. A PRACTICAL CASE # 2: the “factoring” variation • There are basically two types of factoring arrangement: (i) Recourse: the factor does not provide protection against bad debts. In the event of a bad debt (or possibly before, depending on the age of the debt) the factor will recover from the client’s account any money advanced against the debt; and (ii) Non-recourse: the factor absorbs losses incurred by a customer’s inability to pay (a.k.a. ‘bad debt protection’). The factor will usually set credit limits for customers. The fee payable to Factor to cover the credit risk transferred is higher.

15. A PRACTICAL CASE # 2: the “factoring” variation • TYPICAL PRACTICAL SCENARIOS 1)Supplier enters into a distribution contract with a distributor (“X”) by virtue of which inter alia (i) X provides Supplier with certain bank guarantees, and (ii) Supplier grants a certain payment term to X; 2) Supplier and Factor enter into a factoring agreement whereby inter alia (A)Supplier assigns to Factor on an ongoing basis all the receivables arising from any relationship with any dealer (which has agreed to participate in the factoring program), with and/or without recourse (see 4 below); (B) a line of credit to the benefit of Distributor is jointly agreed upon by Factor and Supplier; (C) Supplier assigns to Factor any bank or other guarantees originally taken out in its name (see 1 above);

16. A PRACTICAL CASE # 2: the “factoring” variation • (continues: TYPICAL PRACTICAL SCENARIOS) 3) depending on the kind of factoring arrangement, Factor may either (i) pay Supplier immediately upon assignment of the receivables discounting the interests that will accrue until expiry of the payment term (more burdensome for Supplier) or (ii) pay Supplier the invoiced amount against payment of transactional costs of Factor on the date when receivables fall due (less burdensome for Supplier);

17. A PRACTICAL CASE # 2: the “factoring” variation • (continues: TYPICAL PRACTICAL SCENARIOS) 4) any order placed by X below the credit limit agreed with Supplier generates a correspondent receivable which is assigned to Factor on a non-recourse basis. Depending on the type of factoring agreement entered into, any order placed by X above the agreed credit limit is either (i) not assignable to Factor at all, or (ii) assignable to Factor with recourse; 5) Example # 1: X is granted by Factor/Supplier a credit limit of € 100 and has placed two orders (one amounting to € 100, and the other one amounting to € 40). Goods up to €100 are then supplied and the underlying accounts receivable factorised without recourse. Depending on the arrangement with Factor, the remaining € 40 (which falls outside the scope of the bad debt protection), will be either (i) supplied as ordered and factorised with recourse, or (ii) supplied and factorised without recourse after the credit limit has become sufficient again (and to any extent thereof);

18. A PRACTICAL CASE # 2: the “factoring” variation • (continues: TYPICAL PRACTICAL SCENARIOS) 6) Example # 2: as a variation to Example # 1 above, Supplier and X enter into a distribution agreement with a retention of title clause and Supplier assigns this right to Factor along with any commercial receivables. In this way, Factor is backed by a greater, more concrete security and can thus grant a higher credit ceiling to X; X is able to pay Factor 7) when the payment term expires, X is not able to pay Factor

19. A PRACTICAL CASE # 2: the “factoring” variation • (continues: TYPICAL PRACTICAL SCENARIOS) 8) if X is not able to fulfil the initially-agreed payment term, Factor can grant a further extension of payment terms by invoicing interests directly to X); 9) If X is not able to pay Factor on or after the expiry of the initially-agreed payment term, Factor can e.g. revoke (totally or partially) the once-granted credit limit, call on bank guarantees, begin judicial debt collection proceedings (summary judgements), re-assign to Supplier any receivable factorised on a recourse basis, repossess any vehicle whose property was retained etc.

20. A PRACTICAL CASE # 2: the “factoring” variation • CONCLUSIONS • Factoring brings in several advantagesto both • Suppliers, as it e.g. gives immediate cash, reduces bad debts and administration costs, allows to pay suppliers on time; and • Distributors, as it allows them to finance their purchases (in case the factoring arrangement allows repayment by distributors beyond the original payment term, c.f. point 8 above). • Unlike traditional bank financing, factoring relies on the credit-worthiness of Supplier’s customers. Hence, it is very important for Supplier and Factor to exchange information in order to jointly prevent any risk of default by Distributor To this end, Piaggio and its Factors have put in place a procedure whereby (i) Piaggio collects and transmits to its Factors certain data of each of its factorised Dealers such as e.g. stock aging, balance sheets and other financial data, net margin structure etc. and (ii) Factor elaborates said data, collects other data and express a rating vote. Needless to say that Piaggio’s dealers will need to express their consent to this information exchanges according to the applicable privacy laws.