Italian Corporate Law Reform

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Elmer Hampton
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1 Italian Corporate Law Reform A brief look at some of the more important changes to Italian corporate law rules, introduced by Legislative Decree n. 6 of January 17, 2003, which entered into force on January 1, 2004 Milan, February 2004 DE BERTI JACCHIA

2 I. INTRODUCTION The reform of Italian company law, contained in Legislative Decree. n. 6/2003 ( the Law ), finally came into force on January 1, 2004, and was then soon followed by some corrective provisions. The aim was to introduce a comprehensive reform covering all companies, whether listed or not, giving them the opportunity of creating more varied forms of financial instruments and modern alternatives for corporate governance, thus freeing them from some of the legal restrictions and formalities which have in the past reduced their efficiency and flexibility, while at the same time increasing transparency and the accountability of management. This document is aimed at providing a brief outline of the more important changes, highlighting those entailing practical implications for Italian non-listed companies. II. SHARES. QUOTAS. BONDS A. Joint Stock Companies (Società per Azioni SpA ). Shares and other Securities Where provided by its Articles of Association (and except where specifically applicable laws provide otherwise), an SpA may now issue the following wide variety of shares and securities: Shares without certificates, or providing other means of evidencing ownership or transfer of title Shares not proportional to the percentages of capital invested by the shareholders Shares having no nominal value Shares of different classes and having different rights in relation to participation in the profits/losses of the company or specific parts of the business thereof (so-called tracking shares ) voting at general meetings (e.g. with no voting rights or voting rights limited to specific subjects) 2

3 Special shares with specifically tailored rights and rules relating to transfer, such as in the case of employees. For employees or other persons who have contributed work or services it is also possible to issue special financial securities with no or restricted voting rights. B. Private Limited Liability Companies (Società a responsabilità limitata Srl ). Quotas An Srl (the participation in the capital of which is represented, by ideal quotas thereof, rather than by certificates) may now issue their capital upon contribution by the quotaholders not only of cash or assets in kind, but also of any other contribution capable of economic valuation. (e.g. work and/or services, know-how etc). As with other contributions in kind, the value of the capital contribution must be confirmed by a registered accountant (a Court appointed expert is no longer necessary). The contribution may be guaranteed up to its entire value (where the Articles so provide) by an insurance policy, bank guarantee or security deposit paid in by the quotaholder attribute to certain quotaholders specific rights in relation to the management of the company or the distribution of profits. C. Transfer of Shares and Quotas The general principle is that the shares of an SpA and the quotas of an Srl are freely transferable. However a company s Articles may provide restrictions. In particular, the Law has now widened the possibility to validly impose restrictions to transfers of SpAs shares (such as a restriction that shares may not be sold to a competitor). Please note, however, that if share transfers are subject to the mere approval of the Board of Directors or the other shareholders, the Articles must also place an obligation on the company or the other shareholders to purchase the shares of the shareholder who intends to sell; alternatively, the latter shall be granted a right of withdrawal. Restrictions on Srls quotas were and remain possible. Should the transfer of quotas be subject to the mere approval of the Board of Directors, the other quotaholders or third parties, the right of withdrawal of the quotaholder who intends to sell is provided, but no purchase obligations are imposed on the company or the other quotaholders. D. Bonds Unless provided otherwise by the Articles, in an SpA the issue of bonds may now be resolved by the Directors. 3

4 The Law has also introduced the possibility for an Srl to issue bonds, but they may be sold only to institutional investors, and, if transferred, the transferor is responsible as towards the transferee (unless the transferee is either an institutional investor or a quotaholder) for the solvency of the company. III. SEPARATE POOLS OF ASSETS AND TARGETED LOANS An interesting innovation introduced by the Law is the possibility of an SpA creating one or more separate pools of assets dedicated to a specific deal thus separating such deal from the other activities of the SpA. Such separate pools of assets may not exceed ten per cent of the net equity of the company. They may be financed by the company or by third parties through either the subscription of financial instruments issued by the company in relation to the separate pool, or a loan agreement. Upon creation of the pool, a detailed financial business plan must be prepared. The company is liable for debts incurred in relation to the specific deal up to the value of the separate pool concerned. Similarly, an SpA may now borrow funds for a specific deal ( targeted loan ), and devote the income thereof to the repayment of the borrowed amounts. Where the company obtains a targeted loan which may or may not be destined to the financing of a separate pool the relevant loan agreement shall inter alia contain a detailed financial business plan. IV. CORPORATE GOVERNANCE It is particularly in the area of corporate governance that the Law has widened the gap between SpAs and Srls. An SpA may now choose between three forms of corporate governance, but only a few concessions have been made to reducing formalities and paperwork; directors responsibilities and functions have been increased (it is now possible for the Articles to delegate a far wider range of decisions to the directors) and their accountability has been reinforced. Srls, on the other hand, have been given choice of a far greater flexibility and simplicity in management and generally running the affairs of the company. It should be noted that all provisions set forth in relation to the directors under the traditional system also apply to the members of the Managing Board under the dual management body system (see A. 2. below) as well as to the directors under the single member board system (see A.3. below). A. Joint Stock Companies (SpAs) 1. The traditional system of governance This system will apply, after September 30, 2004, to all SpAs, in the absence of a different choice. It is comprised of a Board of Directors, which is elected by 4

5 the general meeting of shareholders, and is responsible for the management of the company, and a Committee of Statutory Auditors (now subject to much stricter requirements of independence). The Board of Directors may delegate duties and functions to a managing director or executive committee chosen from amongst its members. Despite its name, the traditional system contains a series of changes as compared to the previous law, including the following: the Committee of Statutory Auditors has a far broader role in supervising the general management of the company, whereas, unless the Articles provide otherwise (and this is only possible in an unlisted company) the audit of the accounts must be undertaken by an independent auditor or auditing firm the management of the company is now solely in the hands of the directors, who are no longer given the possibility to submit to the shareholders decisions on matters comprised within their competence; the Articles may provide that on certain matters the prior authorization of the shareholders is required, but the directors will remain liable for the resolution they adopted, even if authorized by the shareholders any director(s) to whom powers have been delegated by the Board have a specific duty to check that the organisation, management and accounting structure of the company are of a kind and size adequate to the company and must report to the Board at least every six months the Articles may require the directors to possess specific requisites relating to an honourable reputation, professional qualifications and independence directors must give detailed information to the Board and the Committee of Statutory Auditors of all and any interest they may have, on their own account or that of third parties in any transaction to be entered into by the company. Where the Managing Director has an interest, he/she must refrain from undertaking the transaction (should this be comprised within his/her powers) and refer the matter to the Board. Resolutions adopted in the presence of an interest of one or more directors must in any event specify the reason for the transaction and its advantages for the company directors degree of care is now more stringently required to be appropriate to the nature of the function and their specific areas of responsibility. 2. The Dual Management Body System Under this system the general meeting of shareholders appoints a Supervisory Board, at least one of whose members must be a registered accountant. The Supervisory Board, none of whose members may also be member of the Managing Board, has not only most of the supervisory powers and duties of the Committee of Statutory Auditors under the traditional system, but also (inter alia) 5

6 the power and duty to: appoint the Managing Board approve the accounts and, where appropriate, the consolidated accounts report at least once a year to the general meeting of shareholders. The Managing Board has sole responsibility for the management of the company, and its members are subject to the same provisions as those applicable to directors under the traditional management system (see 1. above). The auditing of the accounts must be undertaken by an independent auditor or auditing firm. 3. The Single Management Body System The general meeting of shareholders appoints a Board of Directors, at least one third of whom must meet the same requirements of independence as laid down for the Committee of Statutory Auditors under the traditional system. The Board of Directors is solely responsible for the management of the company, and appoints from amongst its members who meet the independence requirements mentioned above and hold no delegated powers or special functions, a Management Control Board. At least one member of the Management Control Board must be a registered accountant. The Management Control Board has functions and duties similar to those of the Committee of Statutory Auditors in the traditional system. The auditing of the accounts must be undertaken by an independent auditor or auditing firm. 4. Audit of Accounts As indicated above, except in the case of non-listed companies having the traditional system of corporate governance, all joint-stock companies must now have their annual accounts audited by an independent auditor or auditing firm. The independent auditors cannot be statutory auditors of the company or of its parent companies, subsidiaries or affiliated companies (i.e. those which are placed under the same control as the company). The following are also now barred from office as either independent auditor or statutory auditor of a company: a spouse or relative of a director of the Company and a director, spouse or relative of a director of its parent companies, subsidiaries or affiliated companies any person having a continuous remunerated working or consultancy 6

7 relationship with the company or its parent companies, subsidiaries or affiliated companies, or any other relationship of an economic nature therewith that might compromise their independence. B. Private Limited Liability Companies (Srls) 1. Management In stark contrast to the provisions applicable to joint-stock companies, the Law provides that, unless the Deed of Incorporation provides otherwise, the management of an Srl will be carried out by one or more quotaholders. However, where more than one quotaholder (or non quotaholders) are entrusted with the management of the company, a Board of Directors is constituted, whose members may be responsible for all or part of the management on a joint or joint and several basis; its decisions may be made simply on the basis of written consultation or consent. Quotaholders who do not participate in the management are entitled to receive from the directors information concerning the company s business and to consult the company s books and documents. Quotaholders who have intentionally allowed the carrying out of acts prejudicial to the company, the other Quotaholders or third parties will be jointly and severally liable together with the directors. 2. Audit of Accounts The Deed of Incorporation can provide for the accounting audit to be carried out by an independent registered accountant; otherwise in the circumstances where the law requires it, which are substantially unchanged the audit will be carried out by the Committee of Statutory Auditors. 3. Decisions of Quotaholders Along with the matters already previously reserved for the quotaholders (approval of accounts, appointment of directors, etc) the members may take decisions on any matters indicated in the Articles as falling within their competence and any further matters on which one or more directors or at least one third of the quotaholders ask their approval. An extremely practical innovation is also the provision that the Deed of Incorporation may provide for quotaholders decisions to be taken by written consultation or consent provided always that the subject matter of the decision itself and the consent are clear. 7

8 Last, it should be noted that, where quotaholders decisions are not taken by written consultation or consent, the quotaholders meeting may pass certain resolutions with the favourable vote of the majority of the capital represented at the relevant meeting (which majority could be, in the event of only fifty per cent of the capital being represented at a certain meeting, as little as twenty five plus one per cent of the capital, provided such resolutions do not concern specified matters in relation to which the favourable vote of at least fifty per cent of the capital of the company is required)). V. Additional Rights of Minority Shareholders These include: Withdrawal rights In addition to the withdrawal rights referred to above in relation to share/quota transfers (see II.C above), the Law has also introduced new exit rights for dissenting shareholders/quotaholders in the event of disagreement with specified fundamental changes to the company s Articles; in particular, shareholders of a company subject to direction and coordination (see VI. below) may withdraw from the company in the event of resolutions which substantially and directly change the economic condition of the company, adopted by the controlling entity. Calling a shareholders meeting It is now possible for shareholders of a joint stock company representing only one tenth of the share capital (or the lower percentage as provided for in the Articles) to demand the calling of a shareholders meeting. Liability action A liability action against directors who have purportedly damaged the company may now be brought by shareholders representing at least one fifth of the capital (or the different percentage as provided in the Articles, but not in excess of one third of the capital). Such action does not need to be resolved by the shareholders meeting of the company. Should the action be successful, indemnification should be paid by the directors to the company, and the latter should reimburse to the claimant shareholders the cost of the case. VI. Groups A further innovation introduced by the Law is a series of new rules applicable to Groups of companies, defined in a fairly broad manner. In particular: a company or other body which, in exercising direction and coordination of a second company, acts in its own or a third party s interests in breach of 8

9 the principles of proper business management with regard to the second company will (together with any persons involved in such acts directors beware!), in the event the second company has not satisfied the relevant claims, be directly liable to the shareholders of the second company for any prejudice to the profitability and the value of their shares and to the creditors for any damage caused to them by the prejudice caused to the second company s assets. However, no liability will exist where the resulting damage is compensated or eliminated, also as a consequence of the overall benefit deriving to the company concerned from being part to a Group the second company must indicate the fact that it is subject to such direction and coordination in all its documents and correspondence, and file details thereof on a special section to be created at the Companies Registry. Failure to do so may result in directors of the second company being liable to other shareholders or third parties for damages suffered due to lack of knowledge of the subjection a shareholder/quotaholder of a company subject to direction and coordination may in certain circumstances withdraw from the company (see V. above) where the first company grants finance to the second company in the presence of an unbalanced debt/equity ratio, which would have made an equity investment more advisable or reasonable, the right of the first company to reimbursement of such finance by the second company comes after satisfaction of other creditors rights; if such finance is reimbursed by the second company during the year preceding its bankruptcy, the relevant sums must be returned to it by the first company. The Law contains a presumption that a company is subject to the direction and coordination of another when its accounts are consolidated, or when it is controlled pursuant to the provisions of Article 2359 of the Civil Code (i.e. where one company is under the dominating influence of another as a result of the availability of the majority voting rights or the existence of specific contractual relationships). VII. SHAREHOLDERS AGREEMENTS Shareholders Agreements, previously not mentioned in the Italian Civil Code, are now restricted in duration to five years, renewable. Where no duration is provided either party can withdraw upon giving 180 days notice to the other. The five year duration of Shareholders Agreements in existence as at the entering into force of the Law shall be deemed as running from January 1,

10 VIII. SOLE SHAREHOLDER JOINT STOCK COMPANIES Under the past system, SpAs (as opposed to Srls) could not be incorporated by a sole shareholder. After incorporation, all shares may have become owned by a sole shareholder, but in this case (as opposed to the case of Srls) the latter would loose the benefit of the limited liability. The Law has now introduced the possibility also for SpAs to be incorporated, or subsequently owned, by a sole shareholder, who will keep the benefit of the limited liability, provided certain disclosure requirements are complied with. IX. TERM FOR AMENDING THE ARTICLES Term for amending the Articles of Association in order to bring them in compliance with the Law is September 30, Please note that, after such term, should a company not have amended the Articles accordingly, all mandatory provisions contained in the Law will automatically apply. *** *** *** Numerous other new provisions have been introduced by the Law, for instance in relation to incorporation, winding up, merger and company transformation procedures, which we have not contemplated in this Memorandum, but shall be pleased to address separately. 10

ASTALDI S.P.A. A) COMPANY WHOSE FINANCIAL INSTRUMENTS ARE THE OBJECT OF THE SHAREHOLDERS AGREEMENTS

ASTALDI S.P.A. A) COMPANY WHOSE FINANCIAL INSTRUMENTS ARE THE OBJECT OF THE SHAREHOLDERS AGREEMENTS Essential information pursuant to article 122 of Legislative Decree no. 58 of 24 February 1998 (the Consolidated Finance Act TUF ) and art. 130 of the CONSOB regulation no. 11971/1999 ( Issuers Regulation