The Rules Governing the Share Holdings of Controlling Companies

On May 4, 1995, the EEC directive of November 23, 1992 n.101, which modified the second EEC directive on shareholding companies, was implemented by law decree n.315.

The new directive is justified by the fact that it fills the gap of the provisions under Italian company law regulating the purchase by the issuing company of its own shares.

Today the controlled company can purchase shares or quotas of its controlling company only if lawfully authorized by the shareholders' meeting (Art. 2359 bis paragraph 2) and if it decides to do so can only purchase up to a ten percent limit of the corporate capital of the controlling company. (Art. 2359 bis, paragraph 3). The purchase can be executed exclusively within the limits of profit available for distribution and of disposable reserves resulting from the latest regularly approved balance sheet. Only shares fully paid in can be purchased.

For the purpose of clarity, it should be noted that Article 2359 of the Italian Civil Code defines controlled companies as:

1) the companies in which another company has the majority of the votes that can be exercised at the ordinary shareholders' meeting;

2) the companies in which another company has votes sufficient to exercise a dominant influence at the ordinary shareholders' meeting;

3) the companies which are under the dominant influence of another company by virtue of particular contractual arrangements with it.

The controlled company which purchases the shares of the controlling one, must organize and maintain a non disposable reserve equal to the amount of the shares or quota of the controlling company owned by it until the disposal of such shares is effected. (Art. 2359 bis paragraph 4). The voting rights relating to these shares are suspended. This provision applies also for the controlling company shares which are acquired by the controlled company through a fiduciary company or an intermediary.

In case of an unlawful purchase by the controlled company of shares of the controlling company, the controlled company must sell the said shares within the time period of one year: otherwise, the controlling company must cancel such shares and reduce accordingly its own capital. In case the shareholders' meeting does not convene on a reduction of the corporate capital such reduction can be obtained by the Court.

The shares purchased as a consequence of a general succession or of a merger, or on occasion of a forced execution,or free of charge do not fall under the limits set forth by Article 2359 bis. and, for those shares exceeding the said quantitative limit of 10%, a sale period of 3 years is applied.

Particularly relevant is the provision of the last paragraph of Article 2359 quater. This provision regulates the cases when a controlled company purchases shares of the controlling company and goes beyond the 10% limit for reasons other than those set forth by the article provisions stated above.

In this case, the controlling company, pursuant to the Italian Civil Code must effectuate the disposal of the shares exceeding the 10% limit within three years.

Article 2359 quinquies of the Italian Civil Code which governs the subscription of new shares and quotas in the controlling company, fully reiterates the existing regulations concerning the self subscription by the controlling company of its own shares: under this article this possibility is absolutely excluded and any share or quota so subscribed is subject to the so called legal conversion. The legal conversion is defined according to Article 2357 quater, which states that whoever subscribes shares of the company in his own name, but on behalf of the company, is considered to be in all effects as a subscriber on his own account.

Furthermore, it should be noted that the 10% limit that the legislator has introduced in Article 2359 now applies also to Article 2357 of the Italian Civil Code which regulates a company purchase of its own shares.

In fact, the law decree provides that under no circumstance shall the nominal value of a company's own shares purchased by that same company exceed the limit of the 10% of its corporate capital, and in calculating the ten percent it must be taken into account the shares possessed by the controlled companies. The computation of such quota must, therefore, include all the shares which are owned by it and those owned by its controlled companies pursuant to Article 2359 of the Italian Civil Code.

This article was intended to provide general guidelines. Specialist advice should be sought about specific facts.