With Recommendation no. 204 of July 5th, 2022, the Milan Notarial Council intervenes on the interpretation of the measures that can be implemented in the case of occurrence of losses exceeding one third of the share capital of S.p.A. (Società per Azioni) and S.r.l. (Società a responsabilità limitata), without affecting the legal minimum.

In this circumstances, pursuant to articles 2446 for S.p.A., and 2482-bis for S.r.l., of the Italian Civil Code, the management body shall convene the shareholders' meeting in order to expose the financial situation of the company, through a report containing the observations of the audit body, and to resolve upon appropriate measures to be taken in the so-called “grace period” (periodo di grazia), i.e. the period between the arising of the losses and the approval of the financial statements for the following fiscal year.

If, upon approval of the following financial statements, the loss is still exceeding one third of the share capital, the latter shall be reduced in proportion to the losses occurred.

In this respect, until now the prevailing legal literature and case law provide that, in the circumstances referred to in the aforementioned articles, only two possibilities for the shareholders may be followed, namely: (i) to carry forward the losses, or (ii) to proceed directly to cover the loss in its entirety.

This well-established interpretation is based on a twofold order of reasons:

– the literally interpretation of the rule, which would provide for an identity between loss and reduction of the share capital, and;

– the risk of circumvention of the alarm system provided for in articles 2446 and 2482-bis of the Italian Civil Code through the partial coverage of the loss aimed at hiding the real financial situation of the company to third parties.

The Recommendation intervenes on this interpretation, providing for the possibility for shareholders to also partially cover the loss, during the “grace period”, by making partial reductions of the share capital.

In fact, the Milan Notarial Council recognizes full freedom of action to the shareholders to cover the loss during the grace period, stating that the full coverage of the loss becomes mandatory only if the losses are not reabsorbed under the limit of one third of the capital, within the shareholders' meeting convened to approve the financial statements of the following year.

The Recommendation also states that the danger of circumvention feared by legal literature and case law is in fact groundless since the partial coverage through reductions of the share capital is subject to the mandatory regime of legal publicity, which safeguards the interest of third parties.

Finally, the Recommendation specifies that this interpretation does not affect the discipline relating to “sterilized” losses occurred in the financial years as of December 31st, 2020 and/or December 31st, 2021, provided for by Law no. 178/2020 which provides for the suspension, for five fiscal years, of the obligations to cover such losses and of the cause of dissolution referred to in Article 2484 par. 1, n. 4 of the Italian Civil Code.

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.