A new set of corporate rules, enacted under Legislative Decree
No 6 of January 17 2003, came into force on January 1 2004.
Among the goals achieved by the reform, the statutory gap
concerning corporate groups has been filled, an issue that had been
ignored under the previous legal framework.
The new statutory provisions aim to create transparent group
management and balance the interests of holding and controlled
companies. Rules have been laid down that finally acknowledge the
importance of corporate groups and address the main issues raised
by the exercise of corporate governance at a group level.
Corporate groups pre-reform
Before the reform, the law dealing with corporate group
structures was limited to banking groups and controlling
relationships between corporate entities.
The banking regulation, aimed at enhancing the effectiveness of
the Bank of Italy's supervision, has a limited scope and provides
no guidelines for non-banking groups.
Meanwhile, the legal notion of corporate control does not cover
the whole range of group relationships. Section 2359 of the Italian
Civil Code (the Code) only maintains that control is regarded to
occur when either: (i) a company holds the majority of the voting
rights at the ordinary shareholders' meeting of another company; or
(ii) a company holds voting rights at the shareholders' meeting of
another company, such as to exercise a dominating influence; or
(iii) a company is able to exercise such influence by virtue of a
contractual relationship (such as the influence enjoyed by credit
institutions financing the business of a company, or by the
company's main suppliers).
Holding company liability pre-reform
The notion of control, although recalled under several
provisions, has not traditionally been recognized as sufficient
grounds to infer the liability of the controlling entity for the
damages incurred/generated by the companies controlled by a single
At a statutory level, the liability of the controlling entity's
directors was only provided for under Section 90 of Legislative
Decree No 270 of July 8 1999 (governing the insolvency of large
corporations) in the event of insolvency of the controlled
companies. This liability was conditional upon evidence of: (i) a
single direction (that is, a single managing power exercised
throughout the group); and (ii) an abuse of that power, to be
assessed on a case-by-case basis. The controlling company could not
be held liable for the existence of a dominant influence in itself,
as provided under Section 2359 of the Code.
Potential solutions to the issue of holding company's liability
have been developed by case law but without enough clear-cut
direction about which actions are considered unlawful. On one hand,
certain courts maintain that liability should operate as a general
principle, not limited to the insolvency of the controlled entity.
On the other hand, abuse of single group
direction/management has normally been excluded on the basis of
the benefits enjoyed by the controlled entities as a consequence of
their link with the group, which would offset the disadvantages
caused by the holding's actions, (the theory of offsetting
Corporate groups post-reform
Although no specific definition of corporate groups has been
provided, the reform has finally set out principles that should
encourage intra-group governance to achieve sound group management
Under Sections 2497 and following of the Code, a specific
liability of entities (holding companies) with directing and
coordinating powers over other companies (directed companies)
for damages incurred/generated by the latter is expressly
Strict publicity requirements must be fulfilled, aimed at
ensuring third parties' knowledge of the group's structure.
The reform has also introduced a specific right of withdrawal
for minority shareholders of directed companies and has provided
for the ranking of intra-group financings.
Liability of holdings post-reform
Under the new Section 2497, paragraph 1, of the Code:
"Companies or legal entities which - in carrying out direction
or coordination activities on other companies - act in the
interests of their own or third parties' business, in breach of the
principle of correct corporate management, are directly liable: (i)
vis-à-vis the shareholders of the directed/coordinated
companies, for the damages occurred to the profitability and value
of their shareholding; and (ii) vis-à-vis the creditors of
the same companies, for the damages occurred to the integrity of
the corporate assets."
Direction and coordination activities
The liability of holding companies relies on the concept of
direction and coordination, which is not further
Italian case law and scholars had typically identified single
direction (direzione unitaria) as the management of the
group as a whole, where a constant flow of instructions is provided
to downstream entities concerning corporate management, account
policies and business counterparties' choice. Accordingly,
coordination is regarded as a specific means of implementing
a single direction by creating links between the management
of all the group entities.
Clearly, the notion of direction and coordination does not
coincide with that of control. Although, with control there is
always direction, the absence of control does not preclude carrying
out directing activities. In this respect, under new Section 2497
sexies of the Code, legal entities, either controlling other
companies pursuant to Section 2359 of the Code, or bound to
accounting consolidation, are legally regarded as directing and
coordinating the controlled/consolidated companies, unless they
provide evidence to the contrary.
Sound corporate management
The performance of direction and coordination activities is not
regarded as unlawful in itself. Following case law, the lawfulness
of centralized group management is now recognized at a statutory
level, under the assumption that the holding aims to pursue the
whole group's interests. So a specific breach by the holding
company of the principle of sound corporate management is required
to trigger its liability.
The assessment of whether correct management principles have
been complied with will be carried out on a case-by-case basis,
focusing on the balance between the potentially conflicting
interests of the holding and the directed companies.
Entities entitled to action and underlying interests
To be entitled to bring action against the holding, shareholders
and creditors of the directed companies must prove that the
holding's directing and coordinating powers caused damage to
the following interests:
The shareholders' interest to keep the profitability and value
of their shareholdings. To be indemnified, shareholders should show
that another strategy would have been possible that would have had
a less prejudicial impact on their interests.
The interest of the creditors in the integrity of the corporate
assets. For the purposes of obtaining compensation for the relevant
damages, the creditors should bring evidence that the residual
assets of the directed company, after the losses incurred under the
management of the holding company, are not enough for the purposes
of their repayment.
Shareholders and creditors may not claim damages against the
holding company unless they have first claimed them against the
For the holding company to be held liable, the existence of
actual damage is essential.
Under Section 2497, paragraph 1, of the Code:
"In the light of the overall outcome of the direction and
coordination activity, the liability of the holding company is
excluded if no damage occurs, or such damage is entirely
removed/eliminated, including by means of transactions targeted to
Clearly, the absence of actual damage excludes any possible
liability of the holding. Further, assessment will probably be
carried out based on the theory of offsetting benefits,
where the prejudicial impact of the holding company's decisions may
eventually be offset by the benefits arising from the directed
companies' participation in the group structure (such as easier
access to financing, participation in cash pooling agreements, and
the possibility to share services within the group, as well as to
exploit scale economies).
On these grounds, scholars further maintain that the damage
relating to a directed company should be compensated at a whole
group level, that is, having regard to the overall results achieved
by the group. These results should be assessed on the grounds of
the plans implemented by all the group companies.
The reasons given by both the holding and the directed
companies, as to the final aims of their respective business
initiatives, represent a key element of the assessment. In this
respect, under the new Section 2494 ter of the Code,
corporate resolutions of directed companies, where influenced by
the holding company, must be analytically motivated, providing
specific reference to the reasons and interests that have
influenced the resolution. Consequently, extra attention must be
paid to accurate drafting of the minutes.
Other liable persons
As well as the holding comany's liability, Section 2497,
paragraph 2, of the Code also provides for the joint and several
liability of "any legal entity or individual participating in the
damaging action, as well as, any such person which has consciously
enjoyed some benefit arising therefrom, within the limits of such
Unlike the general liability under Section 2497, paragraph 1,
individuals can incur liability arising under this last rule of
law. This could allow an extension of liability to non-corporate
holdings that would otherwise enjoy an unjustified exemption.
Moreover, based on paragraph 2 above, liability may be also
charged on the shareholders and creditors of the holding that have
required or authorized the implementation of group strategies that
were detrimental to the directed companies, and on the holding's
shareholders that enjoyed a dividend distribution or an increase in
the value of their shareholding because of an abuse of the holding
company's ability to provide direction.
The minority shareholders of the directed companies may also
have a right of withdrawal if the holding carries out directing and
coordinating activities. In particular, minority shareholders are
entitled to withdraw when: (i) a resolution of the holding company
changes the corporate purpose of the directed company; (ii) a court
finds the holding company liable pursuant to Section 2497 of the
Code; or (iii) the directing and coordinating activities that
modify the risks connected to minority participations in unlisted
directed companies commence or end.
Lastly, the reform established that the credits arising from
intra-group financings do not enjoy a pari passu ranking
with the other credits claimed against the company. If the
ratio between the financed company's net worth and
indebtedness is widely unbalanced, or the financial situation of
the financed company would have required a capital contribution
instead of a financing: (i) such financings may be reimbursed only
upon full repayment of any other credit claimed against the
company, with priority only in respect of the reimbursement of the
corporate capital to the shareholders; and (ii) if the financing
has been reimbursed in the year before the adjudication in
bankruptcy of the financed company, the whole amount must be
returned by the financing entity.