Proposed amendments to Italian corporate law: the quest for legal certainty and a sound corporate governance

The Italian Parliament has recently passed Law no. 155 of 19 October 2017 (the ‘Law’),  empowering the Government to adopt certain legislative measures aimed at: (a) reforming the current legal framework on business crisis and insolvency, as well as (b) amending certain fundamental corporate rules set forth under the Italian Civil Code (the ‘ICC’), seeking long-lost legal certainty and sounder corporate governance.

1. Directors’ duty of care

The Law refers the Government to introduce a specific directors’ duty of care in properly managing the company in case of (current or approaching) business crisis or insolvency.

Directors shall set up a ‘corporate structure effective in timely detecting any business crisis or loss of business continuity', with the aim of preventing or mitigating the potential adverse effects of the state of crisis, for the benefit of the company, its shareholders and the other stakeholders. Such obligation falls within the directors’ broader duty to assess the adequacy of the organizational, administrative and accounting structure of the company.

In compliance with the general principles of Italian corporate governance (Art. 2381, par. 3 and 5 ICC), while the board of directors should be competent in assessing the adequacy of the organizational, administrative and accounting structure of the company, only the executive directors should be charged with the responsibility of structuring and implementing it.

Therefore, the Law proposes an expansion of the directors’ duty of care, as they are unequivocally called to monitor not only the ‘physiological’ course of business, but also its ‘pathological’ - yet relatively frequent in the current economic context - phases.

2. The right to bring claims for damages towards the directors

Art. 2394-bis ICC sets forth that, after a joint stock company (società per azioni) is declared bankrupt, any claim for damages towards its directors (excluding direct suits under Art. 2395 ICC) shall only be brought by the official receiver (curatore) appointed by the Court, so to avoid redundant or overlapping claims.

The Law delegates the Government to repeal that provision. No legal vacuum is intended, though. In fact, the Law sets out a thorough and exhaustive framework aimed at regulating claims for damages towards the directors in case of bankruptcy. It stipulates that only the official receiver shall be empowered to promote, inter alia: (i) corporate claims for damages, (ii) creditors’ claims for damages, (iii) corporate and/or creditors’ claims for damages for breach of the duties arising from being the parent of an integrated group.

The provisions to be adopted by the Government, pursuant to the Law, will grant the presence of a clearer legal framework, for the benefit of investors and legal practitioners.

3. Management and supervision of limited liability companies

3.1 Filling two fundamental regulatory gaps

The Law requires the Government to fill two legislative gaps currently existing with regard to the regulatory regime applicable to limited liability companies (società a responsabilità limitata).

On the one hand, Art. 2394 ICC provides that the directors of a joint stock company shall be liable towards the company’s creditors, in case their actions wilfully or negligently damage the company’s assets, thus reducing the creditors’ chances to obtain timely payment of their credits. No such explicit provision exists for limited liability companies.

This gap has triggered a lively debate both among scholars and in courts. The Law, with the aim of granting a more certain legal environment, calls upon the Government to pass a delegated act extending the provision under Art. 2494 ICC to limited liability companies, thus restoring equal treatment for joint stock companies and limited liability companies’ stakeholders.

On the other hand, under Art. 2409 ICC, in case a minority of shareholders or the supervisory body of a joint stock company (ie the board of statutory auditors, in most cases) suspects with good reason that any of the directors have committed serious irregularities in their managing activities that can be potentially detrimental for the company, it shall be empowered to submit a complaint to the competent Court seeking the issuance of the most suitable temporary measures (ie any measure deemed effective by the Court including, but not limited to, the judicial removal of the directors at fault).

However, that provision is not explicitly included in the legal framework for limited liability companies, as Art. 2477(4) ICC vaguely states that, in case of appointment of a supervisory body, the joint stock companies’ regime shall apply to limited liability companies as well, but gives no further guidance with specific regard to this judicial remedy.

For the benefit of legal certainty, the Law sets forth that the aforementioned provision shall apply also to limited liability companies. The Government will nonetheless need to clarify which corporate body and/or interested party shall be entitled to submit the complaint envisaged under Art. 2409 ICC in the event that the company has not appointed a supervisory body (in the cases where such non-appointment is permitted by the applicable laws, as immediately explained below).

3.2 Mandatory appointment of a supervisory body

Under Italian law, all joint stock companies shall appoint a supervisory body (in most cases, a board of statutory auditors), but only certain limited liability companies shall bear the same burden.

A limited liability company shall appoint a supervisory body (or an external auditor) where: (i) the company is required to consolidate the accounts of any of its subsidiaries, or (ii) it controls a company that is itself required to appoint an external auditor.
Moreover, such appointment is required for non-SMEs limited liability companies, which trigger certain dimensional thresholds provided for under Art. 2477 ICC.

The Law empowers the Government to lower such thresholds, stipulating that a limited liability company shall appoint a supervisory body (or an accounting auditor), in the event that at least one (currently: two) of the following thresholds is triggered:

1. total assets: 2 million Euro (currently: 4.4 million Euro);
2. revenues: 2 million Euro (currently: 8.8 million Euro);
3. average number of employees: 10 (currently: 50).

No appointment shall any longer be due when, for three (currently: two) consecutive financial years, none of the above-mentioned dimensional thresholds is exceeded.

Therefore, given the substantial reduction in the size thresholds, many existing limited liability companies will be required to appoint a supervisory board (or an external auditor). That is consistent with the goal of a sounder corporate governance, but will of course raise companies’ costs.

4. Causes for dissolution of the company

The Law provides that in case a judicial winding-up process is initiated, the company shall enter in the ordinary termination phase, thus granting an adequate regulatory co-ordination.

Lastly, certain national rules governing distressed companies from a legal standpoint (eg urgent recapitalization measures in case of serious loss of legal capital or termination of the company should no mandatory measures be implemented in the event of a serious loss of capital) shall be suspended in the event that certain protective measures are adopted (eg debt restructuring, arranged insolvency mechanisms, etc.), thus granting the company with more time to delay its termination, while seeking business recovery.

This post comes to us from Alessandro De Nicola and Federico Urbani of Orrick, Herrington & Sutcliffe LLP, and is based on an article first published here.