DECISIONAL DEADLOCK IN CORPORATIONS

DECISIONAL DEADLOCK IN CORPORATIONS

What is a decision deadlock?

Decisional deadlock occurs when the governing bodies of a company fail to make decisions due to lack of necessary majorities. This can occur due to disagreement among shareholders or directors, or due to their inertia in corporate activities. Conflicts can arise for various reasons, such as divergent visions or different economic interests. Such a scenario is even more possible and evident in the presence of equal partners (50%-50%). Stalemate situations ultimately result in the unfeasibility of the objectives of the business activity.

What are the possible solutions

• The best way to avoid deadlock situations is to anticipate them through the adoption of some preventive measures. The first remedy is the introduction of deadlock clauses in the statute or in shareholders' agreements. The latter aim to stabilize ownership structures or govern the company. Deadlock clauses come in various forms, such as those that provide for mechanisms of consultation and preventive conciliation, up to the casting vote, which allows a shareholder to have the decisive vote in the event of a deadlock, often not easily predictable, as it implies the subordinate position of one or more shareholders towards others. It is more complicated to foresee that the deadlock decision is delegated to third parties outside the company. Sometimes the best solution has been found in granting one or more shareholders a put option, i.e., the right to sell their shares at a predetermined (or determinable) price, or a call option whereby one or more shareholders have the right to purchase the shares of others. There is also the so-called Russian roulette clause, which envisages that in the event of a deadlock, one shareholder may require the other to choose between buying the offering shareholder's stake at the price proposed by him or selling his own stake to him at the same price. Another possible deadlock solution is related to the statutory discipline of the right of withdrawal, with the provision of additional withdrawal scenarios, in addition to those provided by law, taking into account possible conflicts among shareholders.

A practical example of employing the Russian roulette clause

* In the last few days, the press has reported on a corporate deadlock situation involving a well-known Italian singer and his partner in the management of the company that publishes a popular podcast. One of the two equal partners offered to take over the shares of the other partner, thus activating the Russian roulette clause. The partner who received the offer, by refusing to sell his shares, found himself in a position to buy the shares of the bidder who, in turn, refused to sell them. The matter resulted in precautionary proceedings. This demonstrates that the Russian roulette clause is a rather complex mechanism to manage, both in the preventive phase and, in some cases, in the enforcement phase.

Conclusions

• In the lifetime of a company, it is more frequent than people think to be facing deadlock situations. In such cases, the activity may have negative implications both in terms of results and internal relations. Therefore, before starting an activity in company form, it would be worthwhile investing time in the design and planning phase of the best possible set-up

Prohibition of competition in the transfer of a company: silence can cost you dearly

Mattia Raffaelli – Of Counsel

Sofia Mercedes Bovoli– Trainee

An important provision that must be taken into consideration when preparing for the transfer of a company, a company branch or, in any case, an operation similar/comparable to the same, is art. 2557 of the Civil Code concerning competition.

Art. 2557 of the Civil Code sanctions, for the specific protection of the purchaser of a company, the prohibition for the transferor, following the completion of the operation, to conduct competitive activities, for a maximum period of five years from the transfer. Therefore, as a natural and automatic effect of the transfer, whoever proceeds to the alienation of a company will have to refrain from starting a new business which, due to its object, location or other circumstances, is likely to divert the customers of the transferred company.

There are two issues that need to be highlighted: on the one hand, the automatic application of the prohibition and, on the other, the extensive force and analogical application of the same.

Analyzing by points:

(a) The automatic application of the prohibition: the prohibition of competition is placed by the legislator as a natural effect of the business transfer, underlying the social economic function of the transaction itself. Therefore, in the silence of the parties, this prohibition will unfold its effects independently of an explicit will in this sense. Consequently, unless otherwise provided for, the prohibition will automatically apply within the limits and under the conditions imposed by the legislator.

However, the parties are allowed to derogate from the non-competition clause either by weakening or strengthening it. First of all, with regard to its duration, it is possible to provide for a duration shorter than the 5 years provided for by the legislator, but never longer, in order to protect the private initiative of the assignor. In addition, the scope of application of the prohibition can be limited from the point of view of object or location and therefore the assignor can be prevented from exercising the activity in competition only in a delimited territory and for specific activities. On the contrary, in a specularly opposite manner, it is possible to envisage limits that extend the effectiveness of the regulatory provision, extending the object of the prohibition to further activities with respect to those already exercised through the transferred company. In any case, any "worsening" derogations imposed on the transferor cannot be such as to effectively prevent him from carrying out of any professional activity.

b) Extensive force and analogical application of the provision: The Supreme Court has, on more than one occasion, reiterated the non-exceptional nature of the prohibition and has, therefore, acknowledged, on several occasions, the analogical application of article 2557 of the Civil Code. Consequently, it seems appropriate to identify the cases and the operations assimilated to the transfer of a company to which it is possible to extend this prohibition.

Doctrine and jurisprudence agree in considering possible the analogical application of the prohibition to all the hypotheses in which, in substance, operations similar and analogous to the transfer of a company or a branch of it are carried out. Jurisprudence has recognized the automatic application of the prohibition also in the case of the transfer of majority shareholdings in a company. Moreover, the violation of this prohibition would take place both in the event that the transferring shareholders set up a new company with the same corporate purpose as the one transferred and in the event that they take on the role of directors in a competing company. The need to protect the transferee is always the same, consider, for example, the possibility of diversion of clients deriving from the taking over of the management of a subject who, being known to the clientele, of which he knows the tendencies and habits, may have a considerable capacity to attract them. Therefore, in order to evaluate the possible analogical application of the provisions of art. 2557 Civil Code, also because of its automatic application, it is necessary to evaluate case by case the underlying will of the parties and the economic result they intend to pursue with a certain operation. In fact, not infrequently, the choice between transferring a company or a shareholding is mainly determined by reasons of fiscal opportunity or limitation of the transferee's responsibilities.

It should be pointed out that violation of the non-competition clause governed by art. 2557 of the Civil Code would entitle the transferee to request

a) termination due to breach of contract.

b) compensation for the damage suffered and incurred as a result of the violation (equal, for example, to the loss of earnings or the reduction in the value of the company due to the diversion of customers);

c) the inhibition, as a precautionary measure, of the illicit conduct pursuant to art. 700 c.p.c..

In conclusion, taking into account the automatic effect of the regulations analyzed here, when we are about to undertake operations that in fact realize a substitution of one subject for another in the running of the company and in the exercise of a given activity, it is necessary, in order to avoid incurring unpleasant surprises, to move accordingly, regulating the application and scope of the prohibition.

Italian version

The Judicial Determination of the Remuneration of Directors of Limited Liability Companies

Stefano Bonacina - Senior Associate

Gilda Lucchetti - Trainee

The Italian legal system recognises the right of directors of limited liability companies to receive specific remuneration for the activities performed in fulfilment of their mandate. Exactly as any other professional activity, even such a role must be considered to be for valuable consideration, at least on a presumptive basis.

The director of a company, by accepting the office, acquires therefore the right to be remunerated for the activity carried out in the performance of the task entrusted and the amount of the remuneration may be determined, alternatively or cumulatively, in the Articles of association, in the deed of appointment or by an independent resolution of the shareholders' meeting (the determination of remuneration cannot be implied in the resolution approving the annual financial statements).

In the absence of such formal acts, the remuneration is not defined by the parties and any other different form of possible determination, such as an oral agreement between the director and the majority shareholder, is ineffective.

Therefore, if the Articles of association does not provide anything in this regard, the shareholders' meeting does not quantify such amount or if it determines it in an inadequate measure, the director can file a claim in Court in order to request a specific judicial determination, also by means of an equitable determination of the amount.

It is necessary to clarify that a minimum level remuneration does not exist and the directors may completely waive their fees or accept to be paid in a measure that is objectively inadequate to the activity performed. In the latter cases, the director must give his express consent, even if it can be deduced from tacit conduct that can be univocally interpreted as a waiving intention. Indeed mere inertia or silence are not considered to be sufficient.

As recently clarified by a decision of the Court of Milan, specialized business section (published on 22 June 2020), for the equitable determination of the remuneration due to a professional, the Court must take into account not only the nature of the mandate, but also the quantity and quality of the activities actually carried out by the director.

In particular, the Court must quantify the amount of the remuneration due to the director in proportion to the extent of the services performed by him and to the outcome actually achieved by the principal (i.e. the company), given that the determination of the remuneration can only be made on an equitable basis with a wide discretion of the Court.

In the light of the above, in the proceedings for the determination of the remuneration brought by a director of a limited liability company, it is necessary to indicate and prove the specific quality and quantity of the services actually performed. The mere allegation of the remuneration agreed in different business years or in favour of different directors in similar positions is not sufficient. The equitable determination of the remuneration due to the director must be based on the analysis of the data that can be obtained from the documents submitted. These documents must be jointly assessed in order to be able to determine the actual extension and relevance of the activity specifically performed by the director.

Agriculture and Limited Companies under Italian Law

Mattia Raffelli - Partner

Gilda Lucchetti - Trainee

1)  Farming in the form of limited companies

Agricultural activity, which historically in Italy has mainly taken the form of sole proprietorships or family businesses, can also be exercised under other corporate forms. The latter, in fact, on the one hand allow the aggregate exercise of the enterprise and on the other, are able to provide greater protection of personal assets.

2)  Criticism: the right of agricultural pre-emption

Agricultural pre-emption is the right to be preferred to others for the purchase of agricultural land when the owner decides to sell it.

According to the provisions of Article 8 of Law 590/1965, the right of first refusal belongs first of all to the direct farmer (or a farm in which at least half of the partners are direct farmers) who has been renting, for at least two years, the land offered for sale. In addition, pursuant to Article 7 of Law 817/1971, where the land is not leased to a direct farmer (or a farm), the right of first refusal arises for direct farmers (or farms in which at least half of the members are direct farmers) who own neighboring land. On the other hand, agricultural partnerships in which less than half of the partners are direct farmers are excluded from the right of first refusal, irrespective of whether they are professional farmers, and joint stock companies are always excluded, even if they have direct farmers as partners.

The ratio for these rules was, in the past, the need to encourage the purchase of agricultural land by direct farmers. In fact, the legislator's aim was to improve the productive structures of agriculture. In particular, the tenant pre-emption promotes (or establishes) new ownership by bringing together in the same person the ownership of the agricultural undertaking and the ownership of the land on which it is exercised, thus favoring the continuation of the same; the neighbor pre-emption enlarges direct farming ownership by combining neighboring land, thus creating larger and more efficient agricultural undertakings from a technical and economic point of view.

The lack of agrarian pre-emption for limited companies will therefore be an element to be carefully assessed in the choice of the form of company to be adopted in the specific case.

3)  The requirements for a farm established as a limited company

As already mentioned, farms can certainly also be set up in the form of limited companies. In fact, our legal system provides for the possibility of S.r.l. (Limited liability company), S.r.l.s. (Simplified limited liability company) e S.p.a. (limited companies), may take on the status of “Farm” provided, however, that they meet the following three essential requirements:

a) exclusive exercise of farming activities and related activities;

b) compulsory indication of “Farm” status;

c) possession of certain professional qualifications.

A. Exclusive exercise of farming activities and related activities

As regards the first requirement, companies must have as their exclusive object the exercise of agriculture and related activities.

In this regard, Article 2135 of the Civil Code introduces a definition of these activities which, in brief, concern:

- the cultivation of the land;

- forestry;

- animal breeding;

- all other related activities.

The law literally specifies that 'Cultivation of land, forestry and livestock farming are activities aimed at the care and development of a biological cycle or a necessary stage of that cycle, of a plant or animal nature, using or capable of using land, woodland or fresh, brackish or sea water'.

With regard to related activities, these are defined as:

- activities aimed at handling, preserving, processing, marketing and adding value to products obtained mainly from the cultivation of land or forests or the rearing of animals;

- activities aimed at providing goods or services using mainly farm equipment or resources;

- other activities, e.g. management of agritourisms.

Connected activities, therefore, take place alongside the main activities and aim to make the agricultural undertaking multifunctional. In order to be considered connected, account is taken of both the objective element, i.e. the activity carried out, and the subjective element, i.e. that the activity must be carried out by the same entrepreneur as the main activity.

B.   Compulsory indication of “Farm” status

The first paragraph states that the name or company name of companies whose object is the exclusive pursuit of the activities referred to in Article 2135 of the Civil Code must include the words "Farm". It should be pointed out that this is obviously not a new type of company: the companies that can be set up are still those referred to in the Civil Code, which, in the case of the exclusive exercise of agricultural activities, must bear the indication "Farm" in the name or company name.

C.   Possession of professional qualifications

As to the third and last requirement, pursuant to Article 1 of Legislative Decree no. 99/2004, at least one director must be a professional farmer (or a direct farmer if he also meets the requirements for being a professional farmer). In view of the possibility that, in limited companies, the administration may also be entrusted to non-members, this could lead to the case of an agricultural company in which none of the partners is an agricultural entrepreneur or direct farmer. Even in the case of a single-member company, the presence of at least one director with the above-mentioned requisites allows the company to qualify as a farm and gain access to the related benefits.

It should also be noted that the qualification of professional agricultural entrepreneur (in Italian, I.A.P.) can be conferred by the director to only one company, in order to avoid the creation of fictitious administrative offices, with the sole purpose of obtaining the benefits due to farms.

4)  The procedure for setting up a farm in the form of a limited company

The farm can therefore be set up in the form of a limited company if the three above-mentioned requirements are met.

Particular attention must therefore be paid to the figure of the qualified director.

First of all, a "professional agricultural entrepreneur (I.A.P.) is a person who, possessing professional knowledge and skills within the meaning of Article 5 of Regulation (EC) No 1257/1999, dedicates at least fifty per cent of his total working time, either directly or as a partner in a company, to the agricultural activities referred to in Article 2135 of the Civil Code and who derives at least fifty per cent of his total income from such activities".

Normally, if you are a direct farmer you also meet all the requirements to be considered a professional farmer, but this is not necessarily the case, because the legal requirements for these two professions operate on two different levels.

Below, without any claim to completeness, is the sequence of the most significant requirements for setting up a farm in the form of an ordinary and/or simplified limited liability company:

1)   Setting up of the farm in the form of an ordinary and/or simplified limited liability company;

2)   opening a VAT number;

3)   opening of a certified e-mail address;

4)   registration of the company in the ordinary section of the Companies' Register and in the REA (Economic and Administrative Register) of the province where the company's registered office is based;

5)   acquisition by the company of an established farm and/or setting up of a farm by the company, by means of renting the rustic fund and/or loaning it for use;

6)   submission of the application for “Inizio attività” at the Companies' Register of the province where the company's registered office is based, with simultaneous registration of the company in the “Special Farm Section”.

Finally, the most important task following the setting up of the company, the opening of the VAT number and the other tasks not included in the above list (such as the choice of the applicable VAT regime) will obviously consist in the acquisition or ex novo setting up of a farm.