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Reform of Italian company law

Investors can now benefit from greater flexibility and protection when structuring investments in Italian companies, thanks to the company law reform introduced in October. Freshfields Bruckhaus Deringer outlines the reforms and explains how they will affect investors in Italian private companies.

The recent entry into force of Law 366/2001 (the Company Law Reform), represents a significant legislative initiative which provides the Italian government with a framework of general principles and guidelines intended to enable it to issue specific legislative decrees to deal with the following main areas of reform:

• reform of a number of areas of current regulation of companies - both the società a responsabilità limitata (Srl) or limited liability company and the società per azioni (SpA) or joint stock company - and cooperatives;
• redefinition of the criminal offences and administrative violations relating to companies; and
• the introduction of new procedural rules in relation to pending proceedings in company law matters.
  

Our analysis is principally directed at the first main area above, and is intended to provide an outline of the points of major interest in the Company Law Reform which, in summary, are:

• the express intention of the legislature to simplify company law (in particular increasing the autonomy of companies to regulate their internal workings) and envisaging the Srl and the SpA as the principal company models;
• the introduction of the ability of shareholders to agree changes in the relative power and rights attached to their shareholdings;
• specifically for the Srl, the ability to place debt instruments with institutional investors;
• significant changes to the governance and management of the SpA, including alternative models of supervisory control;
• the simplification of mergers, demergers and reorganisations, including confirmation of the acceptance of mergers in a leveraged buy out context;
• the introduction of rules governing groups of companies;
• the revision of certain aspects of financial reporting; and
• the reformulation of the law on cooperatives.
  

PROCEDURE FOR ENACTMENT OF LEGISLATIVE DECREES

It is important to stress that the new Law is framework legislation. For the precise terms of the new legislation (and the actual significance in practical terms of the changes) we must wait for a series of legislative decrees to be made by the government under the auspices of the new Law.
These legislative decrees are to be issued by the Government by 23 October 2002 (although the law provides for a 90 day extension). Within the first year of each decree coming into force, the Government may also enact corrective and supplementary provisions.

GENERAL PRINCIPLES AND OBJECTIVES

The declared objective of the Company Law Reform “to favour the setting up, growth and competitiveness of enterprises, including by way of access to both domestic and international capital markets”, finds its expression in a desire to simplify the rules governing Italian companies, to expand significantly the ability of companies to regulate their internal governance, as well as providing two clear alternative company models in the Srl and the SpA. The former is intended for use by closely held businesses, while the latter is aimed at companies with a potentially large shareholder base, and where the company intends to access equity capital markets.

THE LIMITED LIABILITY COMPANY (SRL)

The principles of broad autonomy in regulating the internal workings of the company and freedom of structural organisation which characterise the Company Law Reform are based on the philosophy that the shareholders should have the greatest influence in the governance arrangements for the company.

Incorporation
The Company Law Reform is aimed at simplifying the incorporation and contribution procedures, and is intended to allow shareholders to adapt an Srl's capital and corporate structure, decision-making procedures and the level of individual shareholder protection to the type of business carried on. The application of these guidelines in practice may result, for example, in a derogation from the need to hold shareholders' meetings in one place for resolutions to be valid, and from the existing rule which establishes shareholding thresholds for the ability to bring actions against the Srl's Directors.

Non-proportionality
It is worth noting the principle in the Company Law Reform which aims at “allowing shareholders to regulate the importance of their holding in the company on a contractual basis”. As a result, the influence of each shareholder may not strictly reflect the proportionate value of his shareholding. Of course for many years equivalent “disproportionality” (e.g. veto rights on key decisions, rights to appoint directors etc) have been provided in shareholders agreements, but it is nevertheless welcome that the principle of shareholders' contractual freedom is now confirmed in enacted law.

Exit
A key and mandatory principle of the Company Law Reform is the invalidity of clauses prohibiting the transfer of quotas if there are not also provisions in the SrL's articles giving quotaholders the ability to “exit” the company by redeeming the relevant shares. See also the section on Groups below on this point.

Accounting controls
As far as accounting controls are concerned (except for a minimum threshold beyond which they would become mandatory ), Srls will have more flexibility to decide not to have their accounts audited. Furthermore, if the relevant threshold is met, the controls will presumably be carried out by auditing companies, thus eliminating the need for a board of statutory auditors (Collegio Sindacale) in an Srl.

Debt placing
A further significant change is the possibility for an Srl to place debt instruments with qualified investors, who may issue such instruments to the public. By contrast, it will continue not to be possible for Srls to make equity offerings to the public.

The enhanced deregulation of the legal regime governing Srls described above may have the result of encouraging commercial entities which are currently organised as partnerships to become Srls.

THE JOINT STOCK COMPANY (SPA)

As mentioned above, the new rules on joint stock companies should provide for a single basic model, with different additional rules depending on whether or not the company seeks to access the capital markets.

Incorporation
It will be possible for a sole shareholder to incorporate an SpA. In addition, the recent court decision abolishing the need to have Court approval for the incorporation process and for resolutions adopted in extraordinary shareholders' meetings has been confirmed.

Meetings
The requirements for the convening and publicising of shareholders' meetings, as well as those relating to attendance, discussion and voting, are to be simplified. It is possible that the number of notices required in order to call shareholders' meetings could be decided on by shareholders in the articles of association, which may also envisage different majorities for shareholders' resolutions depending on the subject of the resolution. The right of withdrawal from the company (i.e. by the company redeeming shares) may be introduced for dissenting shareholders as an alternative to the remedy of challenging shareholders' resolutions.

Shareholders Agreements
The duration of shareholders agreements in relation to non-listed companies may not exceed 5 years. Shareholders agreements must be subject to adequate disclosure. In contrast with the rules applicable to agreements between shareholders of listed companies in the Testo Draghi, the Company Law Reform would appear not to permit shareholders agreements for non-listed companies which do not have a fixed term.

Supervision
The principle of the separation between the supervision of management and of financial activities is confirmed and it is provided that accounting controls are to be entrusted to an auditing company whilst the control over management and compliance by the Board of Directors with the law, the Articles of Association and the principle of fair administration is entrusted to supervisory bodies (described below). Depending on which governance model is adopted it will no longer be necessary in all cases for SpAs to appoint statutory auditors.

Management and control
The Company Law Reform provides for three alternative models for the management of SpAs, the first represented by the current model (Board of Directors and Statutory Auditors), the second deriving from the German model (Board of Directors and Supervisory Board, appointed by the shareholders' meeting), the third deriving from the Anglo-US model providing for the appointment by the Board of Directors of an internal committee responsible for the internal supervision of management and composed by non-executive and independent directors.
With respect to the second model, it is worth noting that the Supervisory Body would be entitled to appoint and remove Directors as well as to bring actions against the Directors.
The Company Law Reform is also aimed at allowing the Board of Directors to amend the Articles of Association where such amendments pertain to the management structure of the company and do not affect the shareholders' rights, as well as at allowing shareholders to delegate to the Board of Directors the power to effect share issues without pre-emption rights (whether subscribed in cash or in kind), thus considerably simplifying and accelerating the procedure for such issues.

Non-proportionality
The ability, described above in relation to an Srl, for shareholders to regulate the relative importance of their shareholdings on a contractual basis is applied also to the SpA. The Company Law Reform also provides for the possibility of issuing shares without a nominal value and for the issue of financial instruments with different rights derogating from article 2348 of the Civil Code, according to which all shares must have the same value and must confer the same rights on each shareholder. Furthermore, the object of the Company Law Reform is to subject the shares of non listed SpAs to the rules for dematerialisation which are currently in force for listed shares.

Dedicated assets
One of the potentially most innovative elements of the Company Law Reform is the ability of an SpA to create separate pools of assets, issuing “shares” giving rights only in relation to those pools. This suggest the possibility of creating “letter stock” as has been seen in the US, but there are many conceptual difficulties which the legislative decree will need to address.

Bonds
The current limits on the issue of bonds, whether convertible or not, are to be relaxed or completely removed.

Redemption
As for the Srl, the Company Law Reform aims to revise the current rules on redemption of shares, allowing companies to include wider provisions in their articles than those currently permitted.

MERGERS, DEMERGERS, AND REORGANISATIONS.

The Company Law Reform attempts to simplify the procedures for mergers, demergers and reorganisations and, in particular, envisages a more open approach in relation to mergers between companies as part of a leveraged buy out. In particular, the Company Law Reform establishes that if a company takes on a debt in order to acquire an interest in another company, it may then merge into that other company without breaching the prohibition on financial assistance set out in art. 2358 of the Civil Code, or the provisions of art 2357 and 2357 as amended, relating to unlawful financial assistance for acquisitions of own shares.

GROUPS

The Company Law Reform envisages the introduction of rules governing groups of companies (other than groups of cooperatives). Currently this issue is not expressly regulated by any Italian statute or by the Civil Code, but has been elaborated in case law. In particular, the interests of the group, subsidiary companies and their minority shareholders need to be adequately reconciled. Furthermore there will be provisions relating to the disclosure of interests held in companies belonging to the group, the protection of shareholders when their company joins and exits the group, as well as the right of redemption for shareholders in the event that the requirements to make a compulsory offer to minority shareholders are not satisfied.

ANNUAL REPORTS

The review of the rules relating to annual reports is intended primarily to: (i) eliminate the overlap with the tax regulations on companies' income; (ii) establish specific rules relating to the treatment of currency transactions, derivatives, bonds, financial leasing and other financial transactions; (iii) increase the cases in which the preparation of an abbreviated form of balance sheet and a simplified profit and loss account are permitted; and (iv) regulate the cases in which internationally recognised accounting principles may be applied.

COOPERATIVES

With regard to cooperatives, the object of the Company Law Reform is to introduce new rules to: (i) ensure the achievement of the mutual purpose; (ii) favour access to capital markets; (iii) facilitate participation by the members in the decision making process; (iv) strengthen internal management controls; and (v) limit legislative controls only to the so called “protected cooperation” (for example with the possibility of derogating from the rules governing votes on a show of hands in the light of the mutual interest of the members).

SUMMARY OF CRIMINAL OFFENCES AND ADMINISTRATIVE VIOLATIONS RELATING TO SRLS AND SPAS

The expressed intent of the reform of the criminal provisions is a reorganisation of the offences committed by companies engaged in commercial activities and the introduction of significant changes to the existing regulations. The criminal offences and administrative violations which are subject to review are:

• false statements in accounts, reports or other documents required by the law to be produced by the company;
• false statements in a prospectus, meaning any document intended to solicit investment or lead to a listing on a regulated exchange, or in documents published in relation to a public takeover;
• false statements in auditors reports;
• actions by the board to prevent the supervision of management by shareholders, other corporate organs or by the auditors;
• omissions in or failures to make statements, communications or filings;
• fictitious subscription of share capital;
• unlawful return of capital;
• unlawful distributions of dividends and reserves;
• unlawful transactions relating to the shares or the quotas of a company or its holding company;
• transactions defrauding creditors;
• wrongful distribution of the company's assets by the liquidators;
• breach of duties by the directors, the general manager, liquidators, auditors or accountants;
• undue influence on the shareholders;
• failure to call required shareholders' meetings; and
• market manipulation.
  

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