VIOLATION OF THE SHAREHOLDERS’ AGREEMENT: AN ALTERNATIVE REMEDY.
The Court of Milan has ruled in favour of the possibility, for the parties, to obtain as a precautionary measure a ruling that prevents the shareholder from conduct in conflict with the negotiating structure contained in the shareholders’ agreement entered into with the other shareholders, thus preventing its probable breach.
By decree dated 9 October 2022, the Court of Milan upheld an interim injunction pursuant to Article 700 of the Italian Code of Civil Procedure filed by a shareholder, thus admitting the injunctive remedy in respect of shareholders’ agreements: although not very recent, this decision is particularly interesting as it addresses the relevant issue – connected to the efficacy of the agreements – concerning the possible protection that jurisprudence grants to the parties to the agreement in the event of non-performance of such agreements.
The dispute in relation to which the Court of Milan has issued its order concerns the shareholders of a joint-stock company, Tizio and Caio, who had at the time entered into a shareholders’ agreement concerning the exercise of voting rights in relation to the composition of the company’s governing body. Notwithstanding the provisions of the agreement, pending the shareholders’ meeting for the renewal of the governing body, Caio had openly manifested his intention not to fulfill its commitments as provided by the shareholders’ agreement and had filed proceedings on the merits to have the shareholders’ agreement terminated for alleged breaches of contract by the other party. Tizio appeared in the proceedings, opposing the plaintiff’s claim, has counterclaimed for the exact performance of the covenant, and has taken precautionary action asking the Court to prohibit Caio from engaging in conduct that could be characterised as breach of the shareholders’ agreement. At the end of the preventive proceedings, the Court of Milan – finding that the conditions for the grant of interim protection were met – has acknowledged the applicant’s request, prohibiting the shareholder from engaging in a conduct in breach of the shareholders’ agreement.
In order to understand the reasons that led the Court to uphold the interim injunction, it is necessary to dwell briefly on the notion of shareholders’ agreement. The agreement concluded between the parties, indeed, had as its object the exercise of the voting right, an available right of which the shareholders may freely dispose by defining the manner of exercise and the content. Such an agreement, as is well known, where concluded in order to stabilise the ownership structure or corporate governance, is expressly defined by the Civil Code as shareholders’ agreement: Article 2341-bis of the Civil Code. In fact, Article 2341-bis of the Italian Civil Code provides that agreements that “have as their object the exercise of voting rights in joint-stock companies and their controlling companies” may be qualified as such – and are therefore subject to the relevant rules. Such an agreement is therefore fully legitimate, to the extent it does not conflict either with the free expression of the shareholder’s right to vote in the shareholders’ meeting or with the principles of company law that attribute to that body the power/duty to take certain decisions relating to the life of the company (first and foremost, the appointment of the governing body), and this inasmuch as such an agreement, as will be seen below, does not limit the organisation of the company in any way.
Shareholders’ agreements are now explicitly recognised by Italian law, which, however, dictates a very meagre discipline, limiting itself to specifying that: (a) the duration of such agreements may not exceed five years (except for the right of withdrawal if the agreement does not indicate the duration) and (b) limited to companies that have recourse to the capital market, the aforesaid agreements must be communicated to the company and declared at the opening of each shareholders’ meeting, under penalty of prohibiting the shareholders from exercising their voting rights. Further provisions are specifically envisaged for listed companies, with respect to which Articles 122 et seq. of the Consolidated Law on Finance provide for stricter rules of disclosure and duration (reduced to three years).
The most significant peculiarity of shareholders’ agreements is their effectiveness in the corporate context, for which they are different from ‘company agreements” (the deed of incorporation and the company bylaws): whereas the latter, by express provision of law, bind all shareholders (present and future) and their effects may also affect third parties (so-called real effectiveness), whilst shareholders’ agreements – on the basis of the general principle of relativity of the effects of the contract pursuant to Article 1372 of the Civil Code – produce effects only among the parties to the agreement (and therefore, potentially, not even among all the current shareholders), any effect vis-à-vis future shareholders, the company and third parties being excluded (so-called obligatory effect).
Nonetheless, over time, there has been a trend to recognise an increasing efficacy to such agreements: think of the possibility of entering into shareholders’ agreements in favour of the company pursuant to Article 1411 of the Civil Code, or of providing by statute that the circulation of the company’s shareholdings is subject to the purchaser’s adherence to the shareholders’ agreement to which the seller is a party.
Beyond the abovementioned particular cases, the circumstance that shareholders’ agreements have mandatory effectiveness has a direct repercussion on the level of remedies available in the event of breach. As to the voting syndicate in particular, the immediate consequence of the mandatory effectiveness of the agreement is that resolutions passed in breach of the shareholders’ agreement cannot be challenged, since the shareholders’ agreement is not effective vis-à-vis the company, the resolution will be free of defects, unlike of what occurs when the provisions of the articles of association are breached. Thus, the only remedy generally recognised in such cases is compensation for damages against the party that has breached the agreements executed. As it may be well understood, however, such a remedy is not always capable of ensuring effective redress for the one who suffers the breach of the agreements, which is why in practice there is often a tendency to include in the shareholders’ agreement penalty clauses of large amounts so as to dissuade the other party from breaching the provisions contained therein.
With a view to preventing breach, an alternative remedy that has been envisaged is that of preventive protection pursuant to Article 700 of the Code of Civil Procedure in the form of an interim injunction against the conduct in breach of the shareholders’ agreement. This is an innovative solution and partly controversial and open to criticism if one considers that the covenant has only an obligatory (and not a real) effect and if one takes into account the non-enforceability of the infungible obligations to act (aspect that also concerns the exercise of the right to vote by a covenant holder).
Nonetheless, in the order under comment, the Court of Milan has considered that the possible criticisms of the possibility of granting a precautionary injunction could be overcome: starting from the assumption that the preventive action was, in the specific case, instrumental to the action for exact performance brought by the plaintiff in the proceedings on the merits, it concluded that (i) the prevent injunction was not a protection of a real nature (such as to modify the compulsory effectiveness of the shareholders’ agreement) since the measure would remain binding only on the shareholders, and (ii) such possibility has been confirmed, with reference to various cases, by the Court of Cassation which has recognised the possibility of issuing judgments of condemnation concerning infungible obligations to do.
From a further point of view, it should be recalled that urgent protection can be recognised only if the prerequisites of fumus boni iuris and periculum in mora exist. In the present case, the Court of Milan found that the precondition of fumus boni iuris was the fact that the shareholders’ meeting had already been convened and had as its specific object the renewal of the offices of the administrative body (also providing for the reduction of the number of members, in breach of the shareholders’ agreement), while the periculum in mora was the party’s manifest intention not to comply with the provisions of the shareholders’ agreement, thus rendering admissible the emergency interim injunction against the shareholder from engaging in conduct constituting a breach of the shareholders’ agreement.
WHISTLEBLOWING: THE MAIN CHANGES FOLLOWING THE ENTRY INTO FORCE OF LEGISLATIVE DECREE NO. 24 OF 10 MARCH 2023.
Legislative Decree No. 24 of 10 March 2023, which transposes Directive no. 1937/2019, extends the scope of application of the “whistleblowing” rules and provides for four main innovations: the extension of the obligation to all private legal entities with at least 50 employees even if they do not have an organisational model, the introduction of a new external reporting channel, the possibility of making public disclosures and greater guarantees for whistleblowers.
Legislative Decree No. 24 of 10 March 2023, which implements the “Directive (EU) 2019/1937 of the European Parliament and of the Council on the protection of persons who report breaches of Union law and on the protection of persons who report breaches of national laws” was published in the O.G. on 15 March 2023 and will enter into force on 15 July 2023.
Until now, the matter has been regulated by Law no. 179/2017 “Provisions for the protection of the authors of reports of offences or irregularities of which they have become aware in the context of a public or private employment relationship”, which had extended the obligation to establish reporting channels also to private sector legal entities having adopted an organisational model pursuant to Legislative Decree 231/2001.
The new legislation, in particular Article 3 (1) and (2), sets out different rules for different categories of entities which shall apply them:
(i) for public sector entities only, the guarantees of protection cover both internal and external reports, i.e. all those relating to the violations listed in Article 2(1)(a), such as the “conduct, acts, or omissions prejudicial to the public interest or to the integrity of the public administration”;
(ii) as to the private sector, Article 3(2)(a) applies with reference to entities operating in Italy that:
– have an average of at least 50 employees in the last year, with permanent or fixed-term labour contracts, regardless of whether they have adopted or not an organisational model pursuant to Legislative Decree 231/2001;
– fall within the scope of Legislative Decree 231/2001 and adopt the organisational models provided therein;
– regardless of the number of employees, fall within the scope of application of the European Union’s provisions “on financial services, products and markets, prevention of money laundering and terrorist financing, transport safety and environmental protection“, as indicated in the “Annex” to the Legislative Decree, i.e. the regulations providing for the protection of consumers and investors in the financial services and capital markets of the EU Union (Annex I of Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013).
Legal entities falling into the above categories shall comply with these provisions by and not later than 15 July 2023, in the case of public or private entities employing 250 or more units, or by and not later than 17 December 2023 in case of private legal entities employing 50 or more employees, by providing for:
– the adoption of internal channels for the submission of reports in writing, even orally or through telematic means, their management by qualified staff or by qualified external parties (articles 4 and 5);
– the adoption of external channels and of specific procedures for making public disclosures and for the transmission of written or oral reports to ANAC (National Anti-Corruption Authority) or to an any other entity that must send them to ANAC (articles 6 and 7);
– the adoption of specific procedures for the management of the above-mentioned channels, providing that potential whistleblowers receive clear and precise information on the applicable procedures, an acknowledgement of receipt of the report sent, within 7 days of submission, and feedback on the outcome within the following 3 months;
– the adoption of appropriate protective measures for whistleblowers.
In addition, the Decree provides for a further alternative regulatory regime applicable to legal entities which have adopted Model 231 but do not employ an average of 50 employees: the relevant whistleblowers will only report internal violations, relevant to the adopted Model 231, but will not have the possibility of using the new external channels and public disclosure procedures.
With reference to the subjective scope of application of the legislative decree, i.e. the reporting parties and the relevant protections, the new provisions apply to all those who, in their capacity as employees, collaborators, subordinate and self-employed workers, freelancers, volunteers, trainees, shareholders and the other categories listed in Articles 3 and 4 of the Legislative Decree, might be in the position of reporting violations of which they have become aware in the context of their work.
Lastly, ANAC may impose administrative sanctions up to € 50,000 should the receipt or processing of the report has been hindered in any way or if the reporting channels have not been properly established.
The above are the applicable provisions. From their analysis, some scholars have also identified different scope of reporting, depending on whether the report comes from the public or private sector entities, for the latter up to the extent to exclude the possibility of reporting violations provided by Legislative Decree No. 231/2001. The regulation certainly needs to be “digested” and some analysis are needed on the way to implement them concretely, also in relation to the activity carried out by the legal entity.
INTERNATIONAL SALE AND PURCHASE AGREEMENT: THE JOINT CHAMBERS, THE INCOTERMS… AND THE IMPORTANCE OF WRITING CLAUSES PROPERLY.
One of the most relevant issues in international contracts (i.e. when the parties belong to different Countries) is to state which Judge is competent to decide on claims that may arise therefrom. This is confirmed by a recent case, whereby the Joint Chambers of the Supreme Court had to intervene to state whether the jurisdiction (or better said the international competence) lied with the Italian or the French courts (Court of Cass. JC 2.05.2023 no. 11346).
As is known, the Regulation EU no. 1215/2012 provides for different applicable criteria to identify the jurisdiction:
– on the one hand, the general principle provided for by art. 4, states that competence lies with the Judge of the Country where the defendant has its domicile (and, for companies, the registered office);
– the special principle in contractual matters, on the other hand, is provided for by art. 7, no. 1, according to which a person may also be sued in the courts of the
place of performance of the obligation in question;
– with reference to the sale and purchase agreement, letter b) of same article 7 specifies that the place of performance is “the place in a Member State where, under the contract, the goods were delivered or should have been delivered”.
The case at stake stems from a contract of sale of mineral water between an Italian selling company and a French purchasing company. The parties had foreseen, for what is relevant here, the clause of Incoterms (International Commercial Terms, contractual terms codified by the International Chamber of Commerce) called “ex works”, i.e. the delivery of the goods at the seller’s premises. The typical effect of this clause is the passing of risk (of loss, carriage, etc.) at the time the goods are made available to the other party at the seller’s premises.
During the performance of the relationship, disputes arose and the purchaser stopped payments. The seller therefore applied for and obtained from the Court of Brescia an injunction decree.
The purchasing company brought an opposition, raising as a preliminary issue the lack of jurisdiction of the Court of Brescia in favour of the Court of Versailles. The Court of Brescia upheld the opposition, holding that the French Courts had jurisdiction because (i) the defendant company had its registered office in France and (ii) the “ex works” clause was relevant only for the purposes of the passing of risk and was therefore not sufficient to establish the jurisdiction of the Italian Courts pursuant to Article 7, No. 1) lett. b) of Regulation (EU) No. 1215/2012. The Court of Appeal upheld the first instance decision.
The selling company then appealed the judgment before the Court of Cassation, and the First Chamber referred the case to the Joint Chambers, noting contrasting orientations on the point at hand.
Well, the Joint Chambers, recalling the principles established by the Court of Justice of the European Union (“Electrosteel” judgment of 9 June 2011, rendered in Case C-87/10 and “Granarolo” judgment of 14 July 2016 in Case C-196/15) clarified that an “ex works” clause providing, therefore, for delivery of the goods at the seller’s premises, is valid not only for the purposes of identifying the passing of risk, but also to identify the place, agreed between the parties, of performance of the obligation in question, within the meaning and for the purposes of Art. 7, No. 1), lett. b) Reg. (EU) No. 1215/2012. Consequently, jurisdiction will lie with the court of that place.
In the present case, it was stipulated that the delivery of the goods took place in Italy and, therefore, the Supreme Court found that the decision of the Court of Appeal was wrong in affirming the jurisdiction of the French court and not the Italian court.
Having clarified this, the Joint Chambers pointed out two further problematic aspects:
(i) often the clauses referring to Incoterms are not at all clear and unambiguous and, therefore, it is not easy to link them with certainty to the “ex works” clause;
(ii) even more often the “ex works” clause is affixed unilaterally by only one of the parties (e.g. on the acceptance of the order or on the invoice) and, therefore, it cannot be considered with certainty that an agreement has been reached between the parties on this point.
The conclusion to be drawn, therefore, is that utmost care is required when drafting and negotiating such clauses.
Finally, one last consideration be allowed. Article 25 of the same Regulation (EU) No. 1215/2012 provides for the possibility for the parties to establish by mutual agreement the competent Court to hear any disputes arising from the contract (so-called prorogation of jurisdiction). Such an agreement prevails over all other criteria when determining the competent court. A clause of this kind that was clear, explicit, well-written and approved by the parties would have completely avoided all the complications of the present case.
ITALIAN DPA: COMPANY FINED FOR FAILURE TO MONITOR ITS SUPPLIERS.
Following the outcome of an investigation, the Italian Data Protection Authority, issued a fine against a company (LINK) for failing to take appropriate precautions in the selection of its subcontractors from the perspective of privacy compliance.
The fine was issued against a company operating in the event organization sector for breaching data protection regulations. The proceedings originated from a complaint made by an individual who had received an email without consent.
In particular, the company that had been commissioned by the data controller to carry out the advertising campaign, had selected a subcontractor having email lists available to send the marketing communications. Upon receipt of the complaint, the Data Protection Authority requested clarification from the company, without receiving any answer.
Following no reply, the investigation started. The company defended itself by claiming the absence of any privacy role within the business relationship, stating explicitly that it was merely the data controller (the client) in touch with the supplier who sent the emails.
Instead, following the conclusion of the proceedings, the Data Protection Authority stated that:
– no explanation had been given regarding the failure to respond to the request for information;
– no evidence had been given to show that consent had been gathered from the recipients of the emails;
– the company had independently selected the supplier who actually sent the emails, after contracting with the data controller.
This circumstance was deemed sufficient to deny the company’s extraneousness to the data processing. In fact, since personal data were being processed on behalf of the client, the company had to qualify itself as a data processor and obtain/verify consent for each of the email recipients.
Specifically, the company had a number of obligations, especially concerning monitoring, such as: to verify that the identified provider complied with the GDPR criteria and in general, the supplier’s reliability from a data protection perspective. None of this had been done by the company.
In conclusion, therefore, the failure to respond to the Data Protection Authority’s requests, the unlawfulness of the processing of personal data in sending commercial communications (carried out without the necessary consent of the data subjects), and, above all, the violation of the obligations of control and verification that every entity has over its suppliers (whether it is an owner/manager relationship or a manager/sub-manager relationship) was contested.
This decision is very interesting because it highlights an aspect often overlooked by companies when choosing their suppliers: privacy compliance.
When choosing a supplier who will process personal data during the assignment the client must:
– select the supplier by assessing compliance with privacy regulations, if necessary, also by requesting internal documents (such as procedures, appointments of authorised people, appointments of sub-contractors);
– provide the supplier with adequate and complete instructions on how to process and in general protect personal data, according to the data controller’s internal policies;
– carry out periodic audit activities, even if only through checklists, regarding the performance of suppliers both during and after the execution of the contract.
This can limit the risk of incurring economic sanctions resulting from a supplier’s actions.
PRESUMPTION OF “TAX INVERSION”: THE ITALIAN SUPREME COURT CLARIFIES THAT “MEDIATED” CONTROL IS NOT RELEVANT.
With decision no. 9400 of 5th April 2023, the Italian Supreme Court of Cassation ruled on “tax inversion”, clarifying that, in order to determine whether or not a foreign company is controlled by an Italian company, the test of legal internal control always requires that the majority of the shares of the foreign company be held by the Italian company, without any relevance of the so-called “mediated” forms of control through third parties.
The case involves four tax assessments that had been served to an Italian resident company (“ItaCo”) concerning Income Tax (IRES) and Regional Tax on Productive Activities (IRAP), as well as omitted payment of withholding taxes, attributable to a company governed by Luxembourg law (“LuxCo”). These tax assessments were the result of an audit, carried out by the Italian tax authorities, which led to the conclusion that LuxCo was, de facto, a foreign Italian taxpayer.
The first instance judgement followed, at the end of which the above-mentioned Italian tax authorities’ position was confirmed by First Instance Tax Court of Brescia, which rejected ItaCo’s claim.
Then, the second instance Tax Court of Lombardia also rejected the taxpayer’s appeal. The second instance judges held that “tax inversion” was confirmed in the case at hand, considering as convincing the conclusions reached by the first instance judge, with respect to the omission of withholding taxes and the non-deductibility of costs.
ItaCo, consequently, appealed against the decision of the Second Instance Tax Court of Lombardia, claiming the infringement of Article 73(3) and (5-bis) of Presidential Decree no. 917/1986 (“Income Tax Code”) since the judges of second instance attributed relevance, for the purpose of identifying LuxCo’s tax residence, to all controlling shares, in relation to which the Office merely carried out a mathematical calculation, qualifying LuxCo as an Italian entity, for tax purposes.
Therefore, the Italian Supreme Court deemed ItaCo’s argument be well-founded, accepting the complaint and quashing the second instance decision.
Article 73(5-bis) of the Income Tax Code, in fact, provides for a legal presumption of “tax inversion” in the Italian territory of the solely companies located abroad which hold controlling shares (pursuant to Article 2359(1) of the Civil Code) in limited companies and commercial entities.
To this extent, article 2359(1), of the Civil Code lists three types of control: 1) a majority of votes in the ordinary shareholders’ meeting (legal internal control); 2) the availability of sufficient votes to exercise a dominating influence in the ordinary shareholders’ meeting (de facto internal control); 3) the dominating influence of a company by virtue of contractual terms. As for the application of the first two cases, par. 2 points out that voting rights held by subsidiaries, trust companies and intermediaries are also considered, but voting rights held on behalf of third parties are not.
In order to correctly apply the above mentioned rules, the Italian Supreme Court issued the following principle of law: “Regarding “tax inversion”, in order to ascertain whether a foreign company is subject to the control of an Italian company, the existence of the conditions set forth by Article 2359(1), no. 1, of the Civil Code (so-called legal internal control) requires to determine whether the majority of the shares of the foreign company are held by the Italian company solely, without any relevance to the possible holding of other shares by the latter’s shareholders, this being precluded by Article 2359(2) of the Civil Code, which excludes, in this respect, the taking into account of voting rights held on behalf of third parties”.
In other words, for the purposes of “tax inversion”, the definition of control for subsidiaries requires that only one company has most of the shares or of the dominating influence, without the so-called “mediated” control resulting from the holding of shares by third parties holding any relevance.
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