New law allows allocation of assets

Author: | Published: 24 May 2005
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The reform of Italian corporate law introduced by the Legislative Decree 6 of February 17 2003 has updated the joint-stock company and created a new legalconcept called patrimoni destinati ad uno specifico affare (allocated assets to operate a specific business). The new Sections 2447 bis and following regulate this company law innovation.

Under the new rules, certain assets of a joint-stock company may be kept separate from the general assets of the company so that, while general corporate assets guarantee all of the company's obligations, the allocated assets guarantee only the obligations that concern a specific business.

Sections 2447 bis and following of the Italian Civil Code (the Code) provide for two different kinds of allocated assets:

  • those established by a resolution of the board of directors or of the managing board (consiglio di gestione, the board of directors in joint-stock companies adopting the dualistic system), and are composed of certain assets of the company; or
  • those established as a result of a financing agreement with third parties that are composed of the proceeds arising out of a specific business.

Allocated assets established by company resolution

Section 2447 bis of the Code provides that a joint-stock company may establish one or more groups of allocated assets, each one dedicated exclusively to carrying out a specific business. The aim of this legislation is to avoid the need to incorporate a new company, as a result of the demerger of the existing company, to operate a specific business.

According to Section 2447 ter of the Code, the board of directors or the managing board of a company can adopt a resolution regarding the establishment of allocated assets without putting the issue to vote at a shareholders' meeting.

The contents of the resolution are indicated in detail in Section 2447 ter of the Code. This requires not only the specific indication of any property that will compose the allocated assets and the specific business to which it is addressed, but also:

  • a financial plan that shows the adequacy of the allocated assets for the specific business, the rules governing the use of the allocated assets, the purpose that the company wishes to pursue and any guarantee offered to third parties and creditors;
  • any other contribution of third parties and the extent to which they may carry out surveillance on the administration of the allocated assets and how any proceeds derived from the specific business will be shared;
  • the possibility of issuing financial certificates regarding the allocated assets and any rights referring to such certificates;
  • the appointment of an auditing company if the company that establishes the allocated assets is not subject to an audit of its accounts and the above financial certificates are placed among investors other than professional investors; and
  • the rules governing the reporting of the specific business.

Based on the combined provisions contained in Section 2447 ter and 2447 quinquies of the Code, the resolution adopted may provide for the unlimited liability of the company in connection to the obligations undertaken in operating the specific business. Lacking such a provision in the resolution, the company will be liable for those obligations, only to the extent of the allocated assets. Limited liability will not be enjoyed if any obligation is undertaken in the context of an unlawful action, in which case the liability of the company will be extended to all the assets of the company, both the allocated assets and the general assets.

An adequacy control concept has been introduced to the discipline governing joint-stock companies for the first time. Although Section 2447 ter of the Code does not include a general adequacy control provision of the capital stock with respect to a company's purpose, and instead only refers to the relationship between the allocated assets and the specific business it is intended to operate, this is certainly a significant innovation.

As indicated above, the company's resolution to create the allocated assets must indicate any contribution of third parties (Section 2447 ter of the Code, paragraph 1d). The wording of the provision seems to refer to any kind of contribution, not just money or other tangible assets, including intangible assets such as know-how.

The resolution may provide for the issuance of certificates representing a financial participation in the allocated assets. In this case, it must identify any rights referring to the financial certificates issued.

If the company's resolution does not provide for the issuance of certificates, any contribution of third parties will be governed by the financing agreement executed between the company and the third parties. According to commentators, such financial certificates are not comparable to shares so do not allow their underwriters to acquire shareholder status.

Financial certificates seem to be similar to bonds that cannot be converted into shares or, because of their peculiar features, to US tracking shares. Like US tracking shares, the financial certificates assign certain rights adjusted on the outcome of a specific business but, unlike tracking shares, the financial certificates do not assign shareholder status to their underwriters.

The board of directors or the managing board adopts the resolution concerning the issuance of financial certificates. This provision is peculiar because, pursuant to the legal discipline of the joint-stock company, the issuance of bonds or stocks or other financial instruments is resolved by the shareholders at an extraordinary meeting and is implemented through an amendment to the bylaw, in accordance to the resolutions adopted at the meeting.

Further, Section 2447 octies of the Code sets out the rules that govern the meetings of the underwriters of such financial certificates. This introduces a legal discipline similar to that concerning special meetings of shareholders underwriting special stocks or similar to bondholders' meetings.

Finally, as indicated, the resolution to establish the allocated assets must also provide for the rules governing their management. The board of directors or the managing board must keep appropriate accounts for the allocated assets and, in the case of issuance of financial certificates, an appropriate book, similar to a shareholder's book. For any allocated assets created, a specific report must be drafted and be attached to the annual balance sheet. Further, the supplementary notes to the balance sheet must indicate if the resolution provides for the unlimited liability of the company with respect to the obligations undertaken in the operation of the specific business.

The third parties' guarantee provisions

Section 2447 bis of the Code provides that the allocated assets cannot be established for a value higher than 10% of the net general assets of the company. There is no control on compliance with this proportion and there are no sanctions if this proportion is infringed. Based on the wording of the provision, the proportion seems to only be required at the moment the allocated assets are established and not after.

To protect third parties' interests, the resolution that creates the allocated assets must be filed with the Register of Companies (Section 2447 quater of the Code). Furthermore, if the allocated assets include real estate properties or registered moveable properties, the resolution must be registered with the relevant registers; if not, the separation of the assets from the general assets of the company will not be effective with regard to third parties.

Once the resolution is registered with the Register of Companies, the creditors of the company existing before the separation of the company's general assets may object to the separation within two months of the registration date. In any event, the objection will not suspend the separation of the company's assets - the competent court may authorize the implementation of the resolution, upon payment of a guarantee by the company.

If the two months elapse with no objection from the creditors, or the competent court authorizes the separation pending any objection proceedings, creditors of the company will not have any claim on the company's property included in the allocated assets, but only on the proceeds arising from the allocated assets and due to the company.

Whenever the company operates in the context of the specific business, Section 2447 quinquies of the Code requires that the company indicate the connection of such operations with the specific business. If the company fails to do so, its liability will be extended to all of the general assets of the company and not limited to the allocated assets.

Dissolution of the allocated assets

There are grounds for dissolution of the allocated assets when the specific business purpose the allocated assets were instituted for is achieved or it becomes impossible to achieve that business purpose. Additional grounds of dissolution are provided by Section 2447 novies of the Code, including bankruptcy of the company and other grounds specified by the resolution that established the allocated assets.

Once the allocated assets are dissolved, the directors of the company must prepare the final statement of accounts, which must be filed with the Register of Companies.

If creditors that have rights strictly connected with the specific business are not paid in full, a special procedure for the liquidation of the allocated assets has been provided. Within three months from the filing date of the final statement with the Register of Companies, the creditors may request, by means of a registered letter to the company, the liquidation of the company's properties included in the allocated assets.

Legal commentators are still uncertain about what happens if the creditors are not entirely satisfied, despite the liquidation of the allocated assets.

Based on the opinion of certain authors, in this circumstance the company creditors' right would be enforceable on all of the company's general assets; but according to other authors it would be possible to declare the company bankrupt, even if the general assets were enough to guarantee the payment of the creditors.

Obviously, the two opinions are based on different assumptions; according to the first one, which appears to be preferable, the only purpose for the separation of the general assets of the company is to avoid general creditors of the company claiming satisfaction through the allocated assets. Nevertheless, the separation could not prevent the creditors connected to the specific business enforcing their rights on the remaining assets of the company. The second opinion is based on a strict distinction between the two groups of creditors: the general creditors would not be entitled to enforce their rights on the allocated assets and the special creditors would not be entitled to enforce their rights on the general assets.

Financing allocated to a specific business

The second kind of allocated assets, set out by Section 2447 bis of the Code, can be established through a financing agreement between the company and one or more investors. Such allocated assets do not include assets already owned by the company, but originate from the proceeds of the specific business.

The Code provides a detailed list of requirements for the financing agreement; for this kind of allocated asset, pursuant to Section 2447 decies of the Code, the issuance of any financial instrument in favour of the investors is prohibited, save the applicability of certain provisions regarding securitization.

Section 2447 decies of the Code does not provide for control on the adequacy of the assets devoted to the specific business, lacking any specific binding destination of such assets. A specific binding destination involves only the proceeds from the specific business and any assets acquired with those proceeds.

As a consequence of the contractual nature of these allocated assets, Section 2447 decies the Code sets out, in favour of the investor, the right to control the carrying out of the specific business.

The financing agreement must indicate the term within which the reimbursement of the financing may be requested. Once elapsed the unclaimed reimbursement will not be due to the investors.

The solidity of the financing agreement depends on the satisfaction of two further requisites: filing the financing agreement with the Register of Companies and adopting a system of collection and book-keeping for any proceeds from the specific business. The system must assure that such proceeds can be identified at any time, even if Section 2447 decies of the Code does not provide an obligation to draw up a specific statement of accounts, as is the case with allocated assets established by a board resolution.

In any case, the supplementary notes to the balance sheet will have to identify the destination of the proceeds of the assets used to carry out the specific business and of any assets acquired with those earnings.

As a consequence of the establishment of the allocated assets, the creditors of the company, until the repayment of the financing, or until the term set for requesting the reimbursement of the financing expires, will only be entitled to take preserving actions on the allocated assets to safeguard their own rights.

Lastly, the provisions regarding allocated assets do not set out any cause regarding dissolution: only the declaration of bankruptcy of the company, which prevents the realization of the specific business purpose, is contemplated. Such declaration involves the dissolution of the allocated assets, and it allows creditors/investors to take legal action on such assets; moreover, any investor may claim its credit in the bankruptcy proceedings.