Italy: How to Avoid Unwanted Liability as a Director: New Italian Rules Provide Clearer Guidance

Last Updated: 15 November 2005
Article by Francesco Portolano

The Italian government introduced, effective on January 1, 2004, a new set of rules to modernize Italian corporate law. These new rules include several provisions which significantly and positively innovate in the area of Directors’ duties and liabilities.

Past Rules: All Directors Are Made Equal

The old corporate rules described the duties and liabilities of Directors in general terms (e.g., duty of loyalty, duty of care, duty of supervision). Pursuant to the courts’ interpretation of the duty of supervision, all Directors were practically always be held jointly and severally liable due to an alleged failure to "supervise." These applied also to non-executive Directors who found themselves most of the times in exactly the same position as executive Directors.

Instead, the new corporate rules:

  • describe more clearly the duties and liabilities of all Directors, indicating specific duties and tasks;
  • distinguish between the duties and tasks (and liability) of executive and non-executive Directors;
  • restrict appropriately the scenarios when a Director can be held accountable for actions (or omissions) of other Directors.

Transparency Is Keyword

As a general premise, a strengthened "transparency" principle underlies almost all new corporate rules on Directors’ duties and liabilities.

Duty Of Information

This is achieved mainly through a new encompassing "duty of information," which is characterized, depending on the circumstances, as a duty either to provide information (in the case of executive Directors) or to request information (for non-executive Directors). Not insignificantly, this duty of information is specifically expressed in a new generally applicable statement: "Directors must act in an informed manner."

We will describe below how this encompassing duty of information affects: (a) the new role of the Chairman of the Board; (b) the executive Directors reporting duties; (c) the non-executive Directors duty to solicit information from the executive Directors; (d) the duty to seek professional advice, when appropriate; (e) all Directors’ duty to disclose interest in a transaction.

Duties Of A Chairman

In the past, a Chairman could limit his/her activity to calling and supervising Board meetings, making the chairmanship at times almost only an honorary position. The duties of the Chairman are now instead specifically listed, making him/her a much more central and active figure in the management of a corporation.

Chairman To Collect Information

The Chairman is still responsible for calling and chairing Board meetings (although such duty is now specifically listed with a new specific provision to this effect). However, now, much more importantly, the Chairman is primarily responsible to ensure that adequate information is provided on the Board meetings’ agenda items. This is a significant addition to the statutory duties of a Chairman, who becomes now statutorily bound to arrange for the preparation, collection and distribution of appropriate reports and documentation.

What Is A Chairman To Do

In practical terms, a Chairman, depending on the circumstances, should, among other things, carry out these tasks:

  • solicit executive Directors to prepare appropriate documentation regarding the items on the agenda and to distribute same prior to the meeting, if appropriate;
  • not allow resolutions on an agenda item without the Board having been sufficiently informed;
  • insert in the minutes of Board meetings wording to specifically acknowledge the existence and circulation of any documentation (e.g., "the Chairman distributed a report on … prepared by …"); and
  • attach such information/documentation to the meeting minutes, when appropriate.

In deciding whether and to what extent to exercise such "duty to collect information," a Chairman should look at several factors: (a) the complexity of the matter at issue; (b) its potential effects on the business (e.g., a bet-your-company litigation); (c) the specific knowledge of each Director in connection with the matter; (d) whether immediate action is required; etc.

The new corporate rules also innovate in the relationship between executive and non-executive directors and their respective duties, tasks, and liabilities. Thanks to these new principles, Directors, in their respective roles, can now operate under clearer guidelines.

To clarify the role of executive Directors, the new corporate rules take a two prong approach: (a) they introduce a list of tasks to be carried out by executive Directors; and (b) establish a new "reporting duty."

Executive Directors Must …

In this respect, although the tasks’ list is rather "obvious," it is significant nonetheless since executive Directors should now regard it as a minimum "To do list." In other words, an executive Director not properly carrying out these tasks will be held almost automatically liable for breach of his/her duties.

As to the actual content of the list, an executive Director’s statutorily tasks will be to:

  • set up an operational, administrative, and accounting structure adequate to the nature and size of the business;
  • prepare the business’ strategic, industrial, and financial plans;
  • monitor the ongoing and possible future development of the business.

Executive Directors Reports

More importantly, executive Directors must now specifically report to the Board (a) on their performance of these tasks; and (b) on the most relevant transactions (for their characteristics or size) regarding their company or its subsidiaries. The new corporate rules require executive Directors to make such reports at least every six months (or more often if the by-laws so require).

The Board as a whole, in turn, will be responsible for analyzing the information provided by the executive Directors and, if appropriate based on the information received, the Board must take corrective measures.

Set Up A Reporting System

In the future, therefore, the executive/non-executive Director relationship (and the respective liabilities) will be based on the setting up, under the responsibility of all Directors, of an appropriate information reporting system.

In this new scenario, executive Directors will no longer be allowed to operate entirely independently of their Boards (within the limits of the authority granted to them) and will instead have to make a positive effort to periodically provide the Board with information on the business. At the same time, in our opinion, this reporting system will not hinder the efficient management of a corporation, since executive Directors will retain their authority and power, and will instead only be subject to clearer reporting and supervision duties.

Non-Executive Directors Perspective

From a non-executive Director’s point of view, all the above means that a non-executive Director must:

  • carefully monitor that the executive Directors’ reports are given timely and contain all mandatory information;
  • carefully analyze and assess the information provided by the executive Directors;
  • solicit additional information when appropriate;
  • require that the Chairman and the executive Directors provide adequate information (and adequate time to review it) on any resolution proposed;
  • object to (and vote against) resolutions, if he/she believes not to have sufficient information (or not enough time to review it);
  • propose adequate corrective measures, based on the information received,

In this respect, it must be stressed that the role of non-executive Directors is completely transformed and that, actually, only thanks to these new rules is it possible to finally clearly differentiate between executive and non-executive Directors.

Under the old corporate rules executive and non-executive Directors were bound by the same duties and therefore non-executive Directors were held liable in the same manner and degree as executive Directors.

Now, instead, the new corporate rules expressly state that Directors will be liable "depending on the nature of the office." This is a clear acknowledgement that the duties, role and liabilities of a Managing Director, for example, cannot be identical to those of any other Director.

As a consequence, while the Managing Director will remain liable for the management of (or failure to manage) the company, non-executive Directors will be liable if they (a) do not solicit or collect information from the executive Directors; or (b) do not take any corrective measure, when such measures should be taken based on the information provided by the executive Directors. In other words, non-executive Directors will not be liable if they have relied in good faith on the information provided by the executive Directors.

In light of all the above, although the reporting system described above imposes a partially new burden, its benefits in our opinion significantly outweigh its disadvantages. The reporting system will be beneficial since it will involve the Board as a whole in the supervision of the management and will help reduce the areas of uncertainty regarding the liability of both executive and non-executive Directors: (a) executive Directors, on the one hand, will benefit from the input from the Board; (b) non-executive Directors will be able to monitor closely the actions of executive Directors and to take any appropriate corrective action.

Benefits Of Setting Up Reporting System

In light of these principles, we are of the opinion that Boards should make extensive use of such a reporting system, possibly beyond what is statutorily required. In larger companies and/or companies with several shareholders or in general in companies paying particular attenton on governance issues, the Board should consider setting up specific reporting guidelines and in particular the Board could require reports to be made more often than as required by the law (180 days). In any event, executive Directors should report timely to the Board on any significant event affecting the company.

From a practical point of view, such reports should be preferably made in writing and circulated in a somewhat formal way. We would suggest that, as a minimum, the statutorily required half-year report be formally circulated and discussed in a meeting and attached to the relevant minutes. Such report should be drafted with care so as to adequately describe all relevant information.

Directors No Superhumans

As indicated above, the new corporate rules graduate a Director’s liability based on "the nature of the office and [his/her] specific competences."

This means that a Director will no longer be "presumed" to be, and judged as, an expert on all possible aspects of a company’s operation (e.g., corporate, legal, financial, accounting, tax, industrial, human resources).

By way of example, a physician holding a non-executive directorship in a health care company will not be assumed to understand in the same manner complex amortization issues on the one hand and patient treatment protocols on the other.

Duty To Seek Professional Advice

As a consequence of this acknowledgment that a Director is no longer supposed to know everything, and given that a Director will still be under a duty to act "in an informed manner," Boards and Directors should now be deemed under a stricter duty to seek specific professional advice in certain circumstances to supplement their lack of specific, in-depth knowledge of a certain matter.

Interest Of Directors In Company Transactions

In the area of conflicts of interest, a Director bearing (personally or on behalf of third parties) an interest in a certain resolution or transaction must disclose all details of such interest. If it is an executive Director’s interest, then he/she must abstain from the transaction and must submit the matter to the Board.

Consistently with the transparency principles inspiring the new corporate rules, Directors must disclose not only conflicting interest but all interest. In other words, also interests coinciding with those of the company must be disclosed. By way of example, if a company is about to lease real estate from one of its Directors, such Director must make an appropriate disclosure to the Board even if the transaction is extremely favorable to the company.

Board Must Motivate

Following the disclosure by the interested Director, the Board, to approve the transaction at issue, must adequately explain the "reasons and benefits to the company" of the transaction. If a Director believes the transaction is not beneficial to the company, he/she must expressly motivate, and record in the minutes or elsewhere, his/her dissent.

From a practical point of view, in certain circumstances, a Director bearing an interest in a certain transaction should consider providing such information in writing and in advance. The Board, in turn, will be under a positive duty to request any necessary additional information and to adequately discuss the transaction in question. In light of this, Board meeting minutes will be more complex then before. The minutes will need to comply with all the formal requirements under the new corporate rules and, among other things, specifically describe: (a) detailed information regarding any Director’s interest; (b) adequate discussion and motivation for approving the transaction; (c) any dissenting opinions; etc.

It must be stressed that a Director bearing an interest in a transaction will not avoid his/her liability by simply abstaining. The only means to avoid liability is appropriate disclosure.

If, however, a Director bears an interest in a transaction and has not disclosed such interest, he/she will be liable only to the extent that the transaction has damaged the company. The breach of the duty of disclosure, therefore, should not in itself trigger the immediate liability of the non-disclosing Director.

Corporate Opportunity

The new corporate rules also introduce in Italy the "corporate opportunity theory". It is expressly stated now that "a Director is liable for the damages caused to the company by the utilization, to the benefit of third parties’ or his/her own, of data, information, or business opportunities acquired in the discharge of his/her office." Although it is not expressly indicated, we are of the opinion that this principle applies while the Director is holding office and also following termination of his/her office.

It is not clear at this point what will be the scope of application of this general statement and where courts will draw the line between legal and illegal behaviors. We suggest the following issues for reflection:

  1. not all "business opportunities" should trigger application of the corporate opportunity but only those related to the business in which the company operates;
  2. whether "data and information" should be interpreted to include specific proprietary data of company or instead other information as well. By way of example, a secret formula or an innovative pricing model should be deemed protected;
  3. to what extent a Director can take advantage of a business opportunity if he/she has disclosed it to the Board and the Board has rejected it. In our opinion a Director should be entitled to disclose a corporate opportunity and then, if the Board rejects it, to pursue it. If however the corporate opportunity is in competition with the company, the Director may be prevented from pursuing it in light of his/her general non-competition obligation;
  4. the length of time, following termination of the Director’s office, during which a Director is prevented from using the "data, information, and business opportunity." In this respect, the restriction of a Director’s freedom will need to be determined taking into account the actual circumstances. The time window could be as long as to allow that the use of the data, information or corporate opportunity is either (a) no longer of interest to the company (pro-company approach) or (b) no longer damaging to the company (pro-Director approach). In most cases, probably, the time window should range from a few months to a couple of years.

As a consequence of all the above, based on the new rules, in the future the liability of a Director should mainly derive from a positive breach of a specific duty (e.g., duty to provide information to the Board, for an executive Director; duty to require information, for a non-executive Director; duty to act in an informed manner; duty to disclose interests in a transactions; etc.).

However, a Director will still be liable, not surprisingly, if he/she is aware of circumstances damaging the company and has not acted to prevent them or to reduce their damaging impact.

Conclusion

In conclusion, we believe that the new "information system" should be beneficial to the functioning of Board of Directors and the allocation of the respective duties and liabilities of executive and non-executive Directors.

The new system will require a more "formal" approach to the relationship between executive and non-executive Directors. Board meeting minutes will need to appropriately reflect all information required by the law (e.g., circulation of reports, detailed disclosure of interests) and in certain cases certain information will need to be exchanged in writing.

Correct adoption of such more formal approach, however, will allow to more clearly identify and allocate Directors’ duties and liabilities.

The new corporate rules set forth a clear set of guidelines to be followed by executive and non-executive Directors.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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