Some Critiques of Italy’s Capital Markets Reform put a Real Understanding of the New Rules at Risk

In a recent essay on this Blog (here), Professors Renzo Costi and Luca Enriques strongly criticize a recent Capital Markets Reform (the full text, in Italian, can be found here) proposed by the Italian government and aimed at reducing gold plating and making Italian law more flexible. Focusing on a set of optional rules for newly listed corporations and SMEs, they argue that these measures will not achieve their goals and will put investors’ protection at risk. Additionally, they warn about the risk of unconstitutionality. 

We disagree with both their criticism of the merits and of the method. We have written a more detailed response available here, but we are happy to also share our ideas, in a shorter form, on this Blog. 

A Little Background on the Reform

In the interest of full disclosure, we are law professors in Italy and were part of a technical group of experts required by the Ministry of Finance to draft a text that was later used as a basis for the bill now under discussion. The group was very diverse and included almost 50 members: law professors and professors of economics, finance or business administration from a wide range of different universities or schools, practicing attorneys from Italian or international law firms, and representatives of supervisory authorities. The technical commission, as well as the legislature, were bound by the delegation received by Parliament (Article 19 of the 'Capital Law' of 2024), which included some relatively precise directives to the delegated legislature, including reduction of gold plating, greater space to private ordering and bylaws contractual freedom, and simplification also with respect to specific provisions, for example related parties transactions. Surely enough, the reform is not perfect, an ad hoc committee has been created to evaluate and propose improvements also in the next few years, but the specific observations raised by our colleagues require some comments. 

Simplifications for SMEs and Newly Listed Companies: How Opt-outs can be Adopted

Costi and Enriques focus on only one—although relevant—of the many innovations of the reform, an optional regime for ‘IPO companies’ and SMEs already listed and identified as companies that capitalize less than one billion euros. Since one of the complaints is that the reform inappropriately reduces investors’ protection, it is fair to remember that the draft also includes several rules—of course applicable also to IPO companies and SMEs—that reinforce investors’ protections and/or attribute stronger powers to supervising authorities. But this is of course not the point, we mention it only to offer a more complete and balanced view of the new rules. 

The central criticism is that for the above-mentioned categories of issuers the new regime allows opting out, through charter amendments, of fundamental protection for smaller investors, without sufficient procedural protection. The authors mention three sets of rules: board representation for minority shareholders; core safeguards on related-party transactions; and the supermajority (two-thirds) requirement for extraordinary shareholders’ resolutions, including charter amendments and mergers. Our colleagues object that these opt-outs are allowed without giving sufficient voice to minorities and their preferences, eg, through ‘majority-of-the-minority’ (MOM) requirements. 

For IPO companies, however, issuers are obviously subject to a market test that is even stricter than any MOM rule: simply, investors can decide not to buy or subscribe to new shares at the IPO stage, thus signaling their evaluation. This has already occurred with pre-IPO multiple voting shares introduced a few years ago: an extremely small number of new issuers have so far adopted them (less than 10), suggesting that even in Italy a market test exists. For SMEs, on the other hand, MOM rules do apply when an issuer intends to choose the new regime: each and any of the opt-outs must satisfy a MOM rule requiring the positive vote of a majority of shareholders different from the majority shareholder(s). Consob must issue a regulation to mandate more specific criteria, and opting out issuers must be identified in a public register. 

A second criticism is the ‘gateway’ opt-out argument. Costi and Enriques dislike the fact that if a newly listed issuer, or an SME, opts out of just one of the above-mentioned rules, it retains the possibility of additional opt-outs within the list after a few years. While this system is admittedly a little more complex than a rule allowing (all) opt-outs only before listing or allowing all SMEs permanently to adopt the more flexible regime (a solution that they would support), we find an inherent contradiction, or at least a problem, with this argument. If investors are able to assess pre-IPOs charters, or to vote intelligently on proposed bylaws amendments in an already listed SME—with the MOM rule that, as mentioned, is in place—they should also be capable to ‘discount’ the risk that, by choosing one of the opt-outs, issuers ‘reserve’ the possibility to adopt additional ones in the future. In addition, if the law makes certain rules optional in general, there is always a ‘risk’ that some of them will be opted out in the future: if anything, the reform limits this possibility. 

Finally, Costi and Enriques do not underline that the first opt-out triggers appraisal rights of shareholders with a statutory-determined price, and this protection extends to the ‘minority or the minority’ that does not approve it.  

How Dangerous are, Substantively, the Possible Simplification and the Expansion of Private Ordering?

The allegedly extreme reductions of protections that are made possible through opt-outs (and, once again, let’s underline: with shareholders’ consent) are, in fact, quite minor, or simply align Italian corporate law to the rules existing in a majority of other EU States and permissible under EU law, reducing some forms of gold plating. 

Directors’ elections. A quite peculiar mandatory provision of Italian law, non-existent in other European jurisdictions and very rare also internationally, allows qualified minorities, under certain conditions, to appoint one director on the board of directors. The reform does maintain this rule (which we believe is often useful and desirable), only making it the default, optional regime. Issuers can, however, through a qualified majority, limit its rigidity, and also introduce a vote on every single candidate with a possible minority-premium, something that several scholars and international investors find attractive and in line with international practices. It should also be mentioned that the opt-out is not allowed if a company uses control-enhancing devices such as MVSs, or is controlled by the State, or does not have a majority of independent directors. Finally—as for SMEs—we are talking about approximately 70 issuers representing way less than 10% of market capitalization, and often companies in which list voting, with all its costs and legal hurdles is mandated, but not actually used by minorities. 

Related Parties Transactions. Differently from other systems and EU Directives, Italian law imposes procedural safeguards not only on RPTs above a relevance threshold set by Supervisors, but also to those below it. The reform, once again, simply allows shareholders to decide that these rules will only apply to relevant transactions. 

Supermajority requirements for shareholders’ meetings. A third simplification decried by Costi and Enriques is the possibility that shareholders of SMEs and newly listed issuers before the IPO accept—changing the charter—that future amendments of corporate bylaws could be approved by a simple majority instead of the current requirement of a minimum quorum of 2/3 of shares represented at the meeting. This generalized supermajority rule, not common in the international scenario, was however introduced in 1998, when shareholders’ turnout at the annual meeting was extremely low (see Consob’s annual report for 1998). In the last few years, for a number of reasons, shareholders’ participation and institutional investors engagement has increased dramatically and consistently, in Italy (see data here) and internationally. It is obvious that in such a different scenario, the meaning of a quorum is utterly different. 

Critiques on the Methodology

In addition, Costi and Enriques raise another critique. They argue that the new rules could create an unconstitutional unequal treatment among issuers, and this would offer an argument to extend the new flexibility to all issuers. They even hint that this is a sort of intentional ‘constitutional poison pill’ designed to facilitate further changes in the law. This line of thinking is wrong for at least two reasons. 

First, the doubts concerning the alleged unconstitutionality of the reform are flimsy if not plainly wrong. Different dimensions or the circumstance of being newly listed after the entry into force of the new rules, appear a more than sufficient basis to justify a (slightly?) different treatment.

Second, there is no hidden plan: The idea that these (or other) new provisions, if appreciated by the market and positively evaluated by experts and supervisors, might in the future be extended to other regulated entities, has been clearly stated and repeated in the public and academic debate. It is indeed a very common legislative approach, and to some degree a prudent one. 

The authors’ article can be found here. 

Niccolò Abriani is Professor of Business Law at the University of Florence.

Eva Desana is Professor of Business Law at the University of Turin.

Michele Siri is Professor of Business Law at the University of Genoa.

Marco Ventoruzzo is Professor of Business Law at Bocconi University.