The essential Corporate Law in Italy

These are the highlights if you want to know more about the essential Corporate Law in Italy. This entry was drafted by Cajola & Associati. Link to E-Iure Network.

This collaboration is a brief step-by-step guidance. In no case it can be considered as legal advice. If you want -or need – legal advice, ask for a lawyer or a law firm. In that case Cajola & Associati is an excellent option in Italy.

1.01   Regulations and rules

Since 1 January 2004, Italy has enacted new rules for company formation, start up, organization and administration.[1] This reform has brought Italian company law into line with that of other more advanced countries, introducing simplifications and greater flexibility for corporate decision-making. These new rules have replaced those which had been in place for 60 years.

The key element of the reform is self-regulation, which allows companies vast powers to establish specific rules in their By-Laws and Articles of incorporation, without too many strict, pre-defined mandatory requirements. Other examples of flexibility can be found in the many financial tools available as well as in the different corporate governance forms.

The reform amended and supplemented portions of the Italian Civil Code and modified Italy’s Unified Text of provisions on financial intermediation, which now include specific provisions for listed companies[2].

Overall, the 2004 reform successfully introduced changes to the structure of limited companies which simplify and speed up the procedures for establishing a business, new financial instruments for companies to create special categories of shares and new rules providing greater flexibility and choice in corporate governance.

Corporate responsibility for groups clarifies issues related to liability, transparency and publicity.

1.02   Types of business associations and liability of shareholders

Prospective foreign investors wanting to set up a business in Italy with a more permanent presence other than establishing a mere representative office or a branch may decide to incorporate a company.

By considering doing so, they will need to choose the most suitable organizational structure in accordance with the nature of their businesses.

Foreign investors are free to adopt any of the forms of business entities available to Italian citizens. The type  of entity chosen will largely depend on the strategy to be adopted, as well as on management, financial and taxation considerations.

1.03   Capital Companies and Partnerships

Types of business associations may be classified in two categories created by the law, depending on the circumstance that they are organized on a stock capital basis (“società di capitali” or capital companies) or on a personal basis (“società di persone” or partnerships).

The difference between the two categories is that only the capital companies are regarded as having a legal entity entirely separate and distinct from the individuals who compose it, with the capacity of continuous existence or[3] succession and having a capacity of taking holding and conveying property.

A capital company’s liability is normally limited to its assets and the stock or quota holders are protected against personal liability in connection with the business of the company

There is an exception to the above distinction that is represented by a rarely used business association structure, the so called “società in accomandita per azioni” or Partnership Limited by Shares that is a form of company organized on a stock capital basis, where two category of shareholders exist: those who enjoy the shield of corporate privilege of this business association and do not respond on a personal basis for the obligations of the limited share partnership (“soci accomandanti”) and those who are instead entrusted with the management of the company and are as well personally liable for the obligations (“soci accomandatari”).

The main types of business associations in the Civil code are stated below:

1.04 Capital Companies

Only the Corporation (Società per Azioni) and the Limited Liability Company (Società a Responsabilità Limitata) possess full and separate legal identity. Foreign investors usually choose one of these two structures to minimise potential liability exposure. Società per Azioni and Società a Responsabilità Limitata may be deemed respectively close to the Public and Private Companies in United Kingdom, as well as to the Corporation and Limited Liability Companies in the United States of America.

Capital companies are:

1.05 Limited Liability Company (“Società a Responsabilità Limitata – S.r.l.”)

Small or medium-sized enterprises may adopt the Limited liability company form to run their businesses in Italy.

This form of business association – with a minimum capital contribution required of € 10,000[4] – enjoys a great degree of internal flexibility in terms of management and control that makes it attractive to closely held enterprises. This flexibility leaves the stockholders free to develop their organizational structure and to some extent their own management rules and principles.

Stockholders are not personally liable for debts of a Limited liability company, unless the following circumstances concur altogether:

[A] Sole Stockholder Company

[B] Insolvency of the company

[C] Stock contributions have not been fully paid, rules concerning payment of the stock or rules regarding duty of legal publicity have not been observed.[5]

In the above circumstances, the stockholder is personally liable for debt of the company.

The contribution of a stockholder may be cash, property and services as long as a contribution can be financially  evaluated. Participation of a member is a quota that cannot be represented by shares.

1.06 Corporation (“Società per Azioni – S.p.a.”)

In a corporation, the capital holdings of members are represented by shares. The corporation has the same major features as the corporate form in most other countries.

A corporation is governed by the shareholders at the general meeting, by the directors and the board of statutory auditors. Its statutory regulation provides that circulation of corporate capital is a relevant factor in order to classify:

[A] Companies without outstanding shares held by public investors (Closely Held Corporations)

[B] Companies with outstanding shares held by public investors, namely, companies issuing stock shares that are traded on regulated markets or circulating in the market on a relevant scale, circulating among Italian issuers with net capital no less than € 5 million and with a number of shareholders or bondholders greater than 200. Specific rules are provided for these public companies.[6]

There is a minimum capital contribution required of € 120,000.[7]

1.07 Partnership Limited by Shares (“Società in Accomandita per Azioni – S.a.p.a.”)

Very rarely used[8],  this structure has the same features of Limited partnerships and stock companies.

Their share capital consists of stocks and shareholders are divided into two groups: general partners, who manage the company and have unlimited, collective and contingent liability; and limited partners, whose exposure to debt is limited to the shares each underwrote, and who cannot carry out management activities within the company.

In case of plurality of Directors, the appointment of a new director is subject to the approval of the other Directors.[9]

1.08 Partnerships

Partnerships are not legal entities distinct from its members, although they may acquire property and assume obligations in their own trade name. They are:

[A] Simple Society (“Società semplice”) – Rarely used, the main feature of this business structure would be used for the exclusive purpose of non-commercial economic activities, such as the management of small real estate property or agricultural activities.

[B] General Partnership (“Società in Nome Collettivo”) – The partners have unlimited liability for the partnership’s obligations.[10] A general partnership may not have a corporate partner. An SNC may transact business, acquire, hold property, sue and be sued in its own trade name. It must operate under a business name that includes the name of one or more or the partners and indicates the partnership relationship. No minimum level of capital contribution is required, and contributions may be in the form of cash, property or services. The consent of all partners is required for the transfer of a partnership interest.

Partnership profits and losses are distributed in proportion to each partner’s contribution, unless otherwise stated in the partnership agreement. Any stipulation in the partnership agreement limiting the extent of a partners’ losses is void.

[C] Limited Partnership (“Società in Accomandita Semplice”) – A Limited Partnership must be composed of at least one partner with unlimited liability and at least one partner with liability limited to the extent of the partner’s capital contribution.[11] The partner with limited liability may not participate in a partnership management. Several Court decisions have held that a corporation may not be a partner in a partnership management. Trade name of the partnership must include the name of at least one general partner and indicate that it is a limited partnership. Unless stated differently in the partnership agreement, the interest of a partner may be transferred only by the votes of partners representing a majority of the partnership’s capital. In general, provisions relating to General Partnerships apply to limited partnerships as well.

1.09 Share capital (Minimum and Minimum paid in amount)

[A] Amount of stated capital in corporations (s.p.a.) and capital contributions – The minimum amount required is € 120,000; however, companies existing on January 1, 2004 do not have to comply with such new rule until their duration stated in the By-Laws elapses.

As a condition of the incorporation, shareholders must subscribe the entire stated capital. Shareholders shall pay upon subscription at least 25% of the stated capita (if there is a sole shareholder, deposit of the stated capital as a whole is required). The term for restitution to the company of the percentage deposited in the bank for subscription of the shares has been reduced to 90 days. If the shares have not been entirely paid in, it is not possible for the company to increase its stated capital.

[B] Amount of stated capital in limited liability companies (s.r.l.) and capital contributions – The minimum amount required is € 10,000.

The same rules concerning the entire subscription of the stated capital, the payment of the 25% of the stated capital and the eventual contributions in kind apply. Different than corporations, contribution of a quota-holder may be also intellectual property and labour services as long as the contribution may be economically appraised.

Contributions by members of limited liability companies cannot be represented by shares, nor they can be publicly traded. If the Articles of incorporation do not provide differently, participation of the members is determined in proportion with the contribution. The Articles of incorporation may provide grants to single members of special rights relating to the management of the company or the distribution of profit.[12]

1.10 Classes of shares

[A] Stock shares in Corporations – Corporations are generally authorized according to their By-Laws to issue different classes of stock, which may differ in their right to dividends, their voting rights and their right to share.

The sale of shares with no par value is now allowed in Italy. Shares may be linked to a fraction of the stated capital as well as Limited liability companies. The only requirement is to make an explicit reference about it in the By-Laws.

Nominal shares are transferable upon authenticated signature. Bearer shares are transferred with delivery of the certificate. Power to exercise corporate rights is transferred upon signature. If the share transfer is conditioned, it has to be accepted by either the other shareholders or the Board of Directors. By-Laws shall provide that in the event that such acceptance is denied:

[1] The company and/or its shareholders undertake to purchase the share; or

[2] The seller has a right to withdraw at expense of the company and/or its shareholders.[13]

In order to be enforceable stock transfer restrictions must be mentioned on the stock certificate.

Issue of redeemable shares is now permitted.[14] Redeemable shares may be relevant in the event that participation in the stock capital is connected to a specific relationship from outside the company.

In case of assignment of shares, the transferer is jointly and severally liable with the transferee for a period of three years from the date of the transfer for payments still due on the shares.

1.11 Principal classes of shares

The following are the principal classes of shares:

[A] Common Stock –  Full voting rights, save for those shares issued for specific corporate business activities

[B] Stock having different rights If there is specific provision in the By-Laws it is possible to create categories of stock having different rights even with reference to a predetermined and actual level of losses

[C] Stock and other instruments for to the benefit of employees – The extraordinary general meeting has the power to determine assignments, rules, rights, eventual expiration terms and facility for repurchase

[D] Non-voting Stock – They have no voting rights. Such shares may be only issued by companies whose shares are traded on the Stock exchange for an amount of stock capital not greater than 51%.

[E] Stock of participation to a determined business – Financial instrument of participation, whose rights must be specifically predetermined.

A corporation may authorize – not more than 51% of stock capital – specific stock without voting rights, with restricted voting rights, with limited or subordinated voting rights.[15]

Stock for the benefit of employees or issued pursuant to services or work carried out by shareholders or third parties may carry the right to vote on specific arguments of particular interest for the rights of the stock itself and a member of the controlling board may represent them.

The mandatory deposit with consequent prohibition of withdrawal of the shares for a corporate meeting  has been eliminated.

1.12 Shares representing assets dedicated to specific business

Corporations may dedicate and link a proportion of the stock,( not more than 10% of the stock capital), to the results of a determined area of business (with the exclusion of business activities with a reserved statutory regulation).[16]

To that extent, a corporation may:

[A] Set up one or more assets specifically dedicated to the realization of a specific business (a single business or an entire business activity to be carried out along with the main business activity of the company).

[B] Establish the financial resources necessary for carrying on the activity have to come from the specific business itself

The purpose of this regulation is to allow for split management and to enable different activities and businesses to be valued independently

Possible purposes are:

[A] Disposition of assets – the setting up of a separate corporate entity internal to the company, without the need to deal with rules and regulations of the Civil Code applicable to de-merge of companies, therefore without bearing related costs (i.e. investment of corporate equity in financial speculations aimed at risk diversification). When there is provision in the Bylaws offsetting the criteria for calculation of income and expenditure for the specific business, the issuance of stock directly linked to results of the specific business is permitted.

[B] New contributions and need of new resources for developing a new project – Separate accounting for the specific business activity is mandatory (Contributors may decide on the basis of the substance and the content of the single project or operation)

A specific resolution of the Shareholders Meeting is necessary in order to bind some assets to a specific business. The meeting shall determine:

[1] The object of the business

[2] Assets involved

[3] Financial and economical business plan (in order to determine congruity, criteria of management, expected result, guaranties etc.)

[4] Contributions specifically undertaken and financial instruments issued for the operation

[5] Appointment of an auditing company in case the corporation issues equity securities publicly traded and offered to non-professional investors

[6] Rules of accounting of the specific business.

The resolution must be filed with the Companies Registry. Actual creditors may file an objection within two months from the filing.

1.13 Debt Securities

Corporations are allowed to issue debt securities offered to the market for subscription. The decision to issue debt securities as a financial instrument, may be led by the:

[A] Preference of raising financial resources without granting new subjects the right to vote and without altering corporate control

[B] Necessity of financing projects or operations, which only need a temporary financing

[C] Circumstance that the purchase of equity stock is not a sound investment during a particular period of time.

Issuance of equity security instead may sound convenient for raising permanent resources, acquiring new resources without paying additional financial costs, or financing the stock capital without being subject to statutory limitations provided for the issuance of debt securities.

Unless otherwise provided by either the certificate of incorporation or the bylaws, the Board of Directors may adopt the resolution for issuance of debt securities. The extraordinary general meeting may vote for issuance of convertible bonds. To be enforceable, the resolution of issuance must be entered in the minutes of the meeting and must be filed in accordance with the regulation established for By-Laws amendments.[17]

The threshold for the issue of debt security has now been raised to an amount equal to twice the aggregate of the stock capital, of the legal reserve and of the available reserves as shown on the last approved balance sheet. It would seem possible to make reference to the subscribed stock capital and not to the stock capital paid, since the law is silent in this respect.

The following situations are not subject to the above limitations:

[A] Bonds issued in excess that are subscribed by professional investors subject to prudential control in accordance with specific regulations and that are traded among non professional purchasers (situation where bond subscribers are liable for the solvency of the company).

[B] Bonds backed by first mortgage over real estate owned by the company up to 2/3 of their value

[C] Authorization by governmental authority.

Rules and regulations concerning convertible bonds has not changed (extraordinary General Meeting + stated capital increase for an amount equal to the shares to issue in conversion). Stated capital must be entirely paid.

[1] Legislative Decree No. 6/2003

[2] Civil code, Articles 2257 through 2510 and Act No. 58/1998, known as “TUF”. TUF has been significantly amended by means of Act No. 262/2005, which provides rules aimed to safeguard savings.

[4] Civile code, Article 2463.

[5] Civile code, Articles 2462 and 2464.

[6] Civil code, Article 2325bis and TUF.

[7] Civil code, Article 2327.

[8] Save for a noteworthy exception, that is “Giovanni Agnelli & C. S.a.p.a.”, the holding company of  “Fiat Group”.

[9] Civil code, Article 2457.

[10] Civil code, Article 2291.

[11] Civil code, Article 2313.

[12] Civil code, Article 2468.

[13] Civil code, Article 2355bis.

[14] Civil code, Article 2437sexies.

[15] Civil code, Article 2351.

[16] Civil code, Article 2447bis.

[17] Civil code, Articles 2410 and 2436.