The recent so-called Reform of the Italian Corporate Law (i.e., Legislative Decree no. 6 of January 17, 2003), introduced a new way to provide a corporation with the benefit of a further limited liability in addition to the general one derived from the corporation’s status.

More specifically, the Reform added a new subparagraph (sections 2447-bis through 2447-decies) in the newly amended Title V of Book V of the Italian Civil Code, designating the so-called "asset destined to a specific business."

Two aspects of this legal institution are expressly regulated:

1) Section 2447-bis, 1st paragraph, letter a) states that a corporation may exclusively link part of its assets to the realization of a specific business, subject to certain conditions specified in sections 2447-ter through 2447-novies;

2) Section 2447-bis, 1st paragraph, letter b) states that a corporation may enter into a financing agreement for a specific business, and repay the debt exclusively (or primarily) by all or part of the profits generated by the business itself, provided that the requirements of Section 2447-decies are met.

Linking assets to realization of specific business

If all legal requirements are met, assets linked to a specific business constitute a segregated portion of the whole corporation’s assets. As a consequence, general creditors of the corporation do not have any rights vis-à-vis such assets nor vis-à-vis the profits generated by the specific business other than those pertaining the company. Also, creditors for obligations stipulated for the realization of the specific business, unless otherwise resolved by the relevant board resolution (as analyzed below), cannot attach the corporation’s assets not included in the segregated portion in case their credits are originated by a contractual relationship. If such credits are derived from a tort liability in the realization of the specific business, then no limited liability may be opposed to them and the company also is responsible for its residual assets. Creditors for stipulated obligations also cannot attach assets that are linked to other specific businesses.

In any case, the segregated portions in relation to one or more specific businesses cannot exceed 10 percent of the total company’s net asset.

To obtain this benefit, the law provides for several requirements:

A) First, the board of directors must resolve the segregation of assets with the absolute majority of its members. The relating resolution must be filed with the Registrar of Enterprises. This public notice is necessary to ensure that the corporation’s creditors learn of the thinning of the company’s total assets, which constitutes the primary guarantee of their credits. It must be noted that the corporation still owns the segregated assets, but its powers of disposal are reduced as they relate to the specific business. Such creditors, which are known as general creditors, have the right to contest the board’s resolution within two months from the date it is filed with the Registrar of Enterprises. This particular opposition is well known under Italian Corporate Law as it also can be used in the procedure of so-called reduction of corporate capital due to superabundance, as well as in mergers. This opposition is aimed at preserving the assets at the corporation’s disposal to fulfill its obligations. Notwithstanding the pending of an opposition, the Court may permit the attainment of the resolution, upon issuance of an adequate guarantee by the company.

It is worthwhile to highlight two differences with the case above. First, in addition to the recording rules, the company must adopt accounting and cashing systems, because the segregated asset is based on expectations of future profits, which highlight and keep separate the cash flows of the specific business and the company itself.

Secondly, the bankruptcy of the corporation will not automatically halt the specific business. If bankruptcy prevents the company from the realization of such specific business, then the financier acquires the right to file a request against the company as general creditor for the unpaid portion. The financier, in fact, will face typical entrepreneurial risk, but such risk is annulled in case of bankruptcy. The financier will not receive any payment if the business is unable to generate profits. If the company will impede the business being operated, then it is appropriate that the financier is treated as a normal creditor for the residual credit.

B) The resolution constituting the segregated asset needs must indicate: (i) the specific business the company is willing to realize, (ii) the assets (goods or contracts) that will be destined to it, (iii) a business plan indicating, inter alia, that the segregated asset is adequate for the realization of the relating business, (iv) possible third parties’ contributions and their control on the management as well as the conditions for their shares of profits, (v) the possibility to issue securities representing the participation to the business, with the specific indication of the relating rights, (vi) the appointment of an external auditor, if not yet appointed and if the company issues securities "on the patrimony" prominently spread among the public, and (vii) the rules to record the specific business in the accounting books.

C) Moreover, all contracts stipulated for the specific business must contain express reference to the specific business. Otherwise, the company will be deemed liable for the fulfillment of the relevant obligations with its generic (residual) assets.

D) The specific business’ accounting books must be provided. The corporation’s financial statements must indicate separately the assets part of the segregated portion and highlight the common costs and revenues, which may arise if resources are shared between the company’s activity and the specific business.

In the event the business has been realized, there is no chance that it could be realized or any qualified circumstance exists as an ending event in the board resolution occurs, or the company goes bankrupt, then the directors must draw a final report and file it with the Registrar of the Enterprises. Creditors of the segregated assets, if not fully satisfied, may request liquidation within three months of the final report’s submission. Once all the creditors of the segregated assets are satisfied, then the remaining segregated assets are considered the general assets of the company.

Segregated asset as financing arrangement

The second situation in which a segregated asset repays a financing is different. In this case, the corporation can provide in a financing contract for a specific business that the interest payment as well as the granted loan are exclusively or primarily secured by all or part of the profits generated by the financed business itself.

If all the legal requirements are met and the contract reflects the minimum content of the constituting resolution of the board of directors, with the necessary adjustments, then the profits relating to the specific business will form part of the segregated assets. The general creditors will not have any rights in relation to them, and the financier may claim the reimbursement only vis-à-vis the segregated assets as defined earlier if no further guarantee is provided.

As a general comment, most provisions seem very clear and appropriate to grant the benefit of a further limited liability. However, some sections are problematic.

Starting from the most peculiar problem, in relation to the very denomination of the new institution itself, the word "business" (i.e., in Italian "affare") has already been used in the Italian Civil Code, but there is no definition of it. Accordingly, it would probably be wrong to attempt to provide a definition arising from an interpretation of the regulations. On the other hand, it seems necessary to compare the "business" meaning with the word "activity," which is used to indicate the object and purpose of the enterprises and of the companies.

As to this comparison, it seems that the word "business" denotes a narrower concept than the word "activity":

1) From a lexical point of view, the discipline provides for the "realization" of the business. In fact, it is difficult to imagine the realization of the entrepreneurial activity. In relation to the segregated asset as a financing arrangement, the contract must indicate a description of the financed "operation," which term is probably an even narrower concept than the word "business."

2) From an operational point of view, the limit to the constitution of segregated assets is set at 10 percent of the total net asset of the company. This suggests a sphere of application too limited for the "wide" entrepreneurial activity, as defined in Section 2082 of the Italian Civil Code, which stresses the "professional" and not occasional nature of the activity itself.

Accordingly, the partition line between activity and business must be examined according to the expectations created by them. The specific business is not a reiterated or potentially "eternal" operation or group of operations. It is characterized by limits consisting not in quantitative elements, but in the feeling or perception that it is something inherently realizable.

Just to give an example, a company structured into different divisions will perform different activities, but the launch of a new single product (not a category of products) from a single line of production may be considered a specific business.

Many other aspects seem uncertain, due to the fact that this kind of segregated asset is a new scenario in the Italian Corporate Law. In fact, one cannot omit the problem arising from the issuance of securities connected to the specific business if provided in the resolution of the board of directors. It is impossible to insert such particular securities in the categories of equity and debt. On one side, the peculiar participation to a business hardly qualifies them as shares of corporate capital, but, on the other side, the term "participation" seems also to suggest something different from a simple bond. Accordingly, the only category it seems to belong to is that of the so-called hybrid securities, indeed out from the usual dichotomy between equity and debt.

In order to complete the scenario in this section, it must be noted that Section 2350 of the Italian Civil Code, 2nd paragraph (as amended by the Reform) provides that, in cases other than those described by sections 2447-bis and following, the corporation may issue what can be reasonably interpreted as tracking shares. Tracking shares, in the American experience, are a subset of the ordinary shares of a listed company, which are linked to the performance of a particular business unit. This is achieved by "ring fencing" the assets and the liabilities of the business unit in accounting terms, requiring separate accounts to be calculated for the tracking shares. In the United States, such securities never experienced much success, mostly because they were supposed to highlight the most profitable and rapidly growing activities, but public investors never separated (probably correctly) the tracking activities from those of the company as a whole. The negotiation of the tracking shares on the stock market proved unable to gather large funds if the issuing company was performing well only in the tracked activities.

Notwithstanding the similarities in relation to the accounting requirements, tracking shares and assets destined to a specific business, are, as highlighted by the wording of Section 2350, 2nd paragraph ("in cases other than"), quite different cases. Tracking shares are securities that represent shares of corporate capital, whereas the latter do not. However, in both cases no new legal entity is created, so the tracked activity or specific business cannot be considered separately from the whole company’s activity.

In conclusion, the essence of both cases of destined assets is that they provide the benefit of the limited liability without the need of a new legal entity. Accordingly, their success, measured on the appeal they will express vis-à-vis the Italian entrepreneurial scenario, will mostly depend on the capabilities of this new institution to deal and compete with other institutions that may result in a somewhat similar outcome.

In particular, the financing for a specific business will have more opportunity to become a popular tool for the entrepreneurs. Several efficient qualities allow it to provide solutions previously obtained only through a specifically incorporated new company, without the limitation of the 10 percent of the total company’s net assets provided for the first case considered, which limitation may indeed be of essence. For example, the segregation of future cash flows, which in a common project financing structure is obtained through the incorporation of the so-called Special Purpose Vehicle, may also be achieved simply by providing for such peculiar financing contract, destining the eventual income to the same creditors who would have benefited from the "specific purpose" of the Special Purpose Vehicle.

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