1. Introduction

Recently Italian Company Law has been substantially modified by Legislative Decree no. 6/2003, which entered into force on January 1, 2004. This article focuses on the changes made by this legislation ("Reform") to the rules governing the management and representation powers of directors of limited stock companies ("S.p.a.").

On the one hand, the new legislation defines more accurately the prerogatives of the governing body of the company compared to those of the shareholders’ general meeting. On the other hand, in the attempt to strengthen the directors’ fiduciary obligation owed to shareholders and the company’s creditors, the Reform has increased the degree of diligence and transparency required from the directors.

The role the Reform imposes on directors is based on new assumptions: the directors are no longer considered as the shareholders’ "delegates" but, on the contrary, they derive the power to manage the company directly from the law and their power is exclusive. Hence, the directors must act independently from any interests except those of the company. The degree of diligence the directors must observe is no longer that of the careful paterfamilias, but rather is linked to the scope of their function and to the technical and professional capabilities for which they were appointed as directors.

2.1. The managing power

The managing power is the power of taking decisions that will directly affect the organization and management of the business of the company. It must be distinguished from the authority to represent the company, which consists of the power to take on rights and obligations on behalf of the company through a director’s own acts. The two powers do not necessarily coincide and, in fact, the Reform has widened the independence of one from the other.

The new Sec. 2380-bis of the Italian Civil Code ("ICC") expressly sets forth the principle that "the management of the company’s activities lies exclusively with the directors who carry out the operations necessary for the fulfillment of the company’s object." This rule constitutes simultaneously the foundation of the directors’ management power and the delimitation of its boundaries, which are defined by the company’s statutory object. As we will explain below, the new rule does not leave room for interference by the shareholders in the management of the company.

2.2. Distribution of powers between shareholders’ general meeting and directors – activities subject to the general meeting’s authorization

This topic raises two questions:

(a) Whether, through a special provision in the by-laws, it would be possible to grant to the directors powers attributed by the law to the shareholders’ general meeting; and, conversely

(b) Whether it would be possible to grant the to shareholders’ general meeting powers attributed by the law to the directors.

With respect to the first question, the Reform has not changed the previous regime: it is not possible to grant to the board of directors the powers which the law attributes to the shareholder’s general meeting, except for the cases expressly identified by the legislation (in particular, new Sec. 2365, § 2 ICC provides that the by-laws may grant the board of directors the power to modify the by-laws in a limited number of situations).

With respect to the second question, the combined wording of new Sec. 2380-bis and of no. 5, § 1 of Sec. 2364 ICC sets forth the principle that the by-laws may not grant to the shareholders’ meeting the power to decide upon matters concerning the management of the company’s business; what remains possible is to subject the directors’ decisions to the prior approval of the shareholders’ meeting, when they relate to the specific matters that must be defined in the by-laws.

Furthermore, the new Sec. 2364 ICC no longer allows directors at their discretion to defer to the shareholders’ general meeting decisions related to the management of the company.

Finally, the new law specifies that, in any case, authorization by the shareholders’ general meeting does not relieve the directors of their responsibilities to the company for the acts which the directors are authorized to perform.

2.3. The managing power as duty

The new wording of Sec. 2380-bis ICC does imply that the management of the company is not only a power of the directors but also is their duty.

The directors must run the company while acting in the interest of both the shareholders and the creditors of the company. With regard to the shareholders, the protection of the minority shareholders is usually embedded in the generic duty of safeguarding the value and the profitability of their stockholding. As a result, directives of the controlling shareholder(s) which are not in the company’s interest should be disregarded by directors (Sec. 2947, §1 ICC). With regard to the company’s creditors, the directors are responsible for the protection of the company’s assets. By contrast, in the Italian legal system the directors do not have a fiduciary duty owed generally to the employees of the company, and the employees do not have any right to be represented on the board of directors.

New Sec. 2381 ICC has also better defined the role and responsibilities of the non-managing directors with respect to their duty to control over the actions of the managing directors, and, conversely, has imposed on the managing directors the duty to report periodically to the whole board (at least every 180 days) on the general course of the company’s business and on the most significant operations performed. To this regard the last section of Sec. 2381 ICC now expressly states that the directors must act in an informed way, and that each director can ask the managing directors to report to the board on any aspect of the company’s business. However, non-managing directors do not have the power, nor the duty, individually to investigate into the conduct of the managing directors.

When a director has a personal or business interest in relation to a decision affecting the company’s operation, he or she must fully inform the board of directors of that interest before taking any initiative, and the decision of the board must expressly state the reasons why it is considered to be in the best interest of the company notwithstanding the director’s personal or business interest in it (Sec. 2391 ICC).

The role of the directors after the Reform is philosophically changed: by accepting the appointment, a director commits himself or herself not only to prudently manage the assets of the company but also to make the best possible use of company’s resources for the achievement of the company’s purpose. Also, the role of the non-managing directors having been better defined, it will be more difficult for them to escape liability to the company on the ground that any violation or dereliction of duty was committed by the managing directors in the absence of a duty of the non-managing directors to counteract or oppose the action or omission.

2.4. Limits to the managing power

The directors have broad discretionary powers in deciding how to pursue the corporation’s object: the directors may carry out not only the activities expressly indicated in the description of the statutory corporate object but also those activities that are functionally necessary for its achievement.

Determining whether or not an act is functionally necessary for the corporate object is a question to be addressed through case-by-case analysis and by taking into account all circumstances which the directors knew or ought to know at the moment when a particular decision was taken.

The carrying out of activities in violation of the corporation’s object exposes the directors to be recalled by the shareholders’ meeting and makes them liable for the damages caused to the company (Sec. 2392 ICC). However, as we will describe here below, this does not automatically imply that the directors’ acts which exceed the company’s object are invalid and not binding on the company.

3. The authority to represent the company and its limitations

As mentioned above, a director’s authority to represent the company is the power to take on rights and obligations on behalf of the company through the director’s own acts. Normally this representation power is parallel to the managing power, but it is not so necessarily. It is possible, in fact, that a director may be granted managing powers but no authority to represent the company. Unlike the managing power, which is normally exercised collectively, the authority to represent the company is granted to directors individually (Sec. 2383, § 4 ICC) except that authority may be expressly granted jointly with one or several other director(s).

Normally it is the shareholders’ meeting that decides which of the directors has power to represent or act on behalf of the company, but the by-laws may give that power to the board of directors (Sec. 2365, § 2 ICC).

Whereas the purpose of the company’s object is to limit the discretionary power of the directors in the interests of both the shareholders and the company’s creditors, the legal rules governing directors’ authority to represent the company are essentially aimed at the protection of creditors’ and other third parties’ trust when dealing with the company.

To this end, the law requires that the directors, within thirty days from their appointment, must file their registration with the Company Register, indicating who among them has the authority to represent the company, and specifying whether the representation power is joint or several (Sec. 2383, § 4 ICC).

According to new Sec. 2384 ICC, the authority to represent the company is always general and any limitation to it, even if set forth in the by-laws or resulting from the company’s object, is no defense to third parties unless the company can demonstrate that the third party knew of the limitation and acted in bad faith with a view to cause damage to the company (so called exceptio doli - willful act).

In conclusion, after the Reform a clear distinction must be made between the director’s collective management powers and individual directors’ authority to represent the company: the limitations arising out of the by-laws, in particular with respect to the corporate purpose, only apply to the management power, while the representation power is always general but for the exceptio doli. Hence, while the violation of such limitations does expose the director(s) to liability to the company, the director’s acts even in violation of the limitations will remain valid and binding on the company.

For more information please contact the author at ealemagna@ssd.com

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.