A. Recent changes to the law in general.

Under Italian law, a company may purchase its own shares only within strict limits and subject to certain restrictions. The law in this area has been amended twice in the last few years in order to comply with relevant EC Directives, first in 1986 in implementation of the II EC Directive, and subsequently in 1994 in implementation of EC Directive 92/101. The latter directive was deemed necessary to deal with the purchase of a company's shares by a controlled company, the presumption being that the latter is acting on behalf of, and in the interests of, its parent company, for the purposes of the transaction in question.

B. Definition of Controlled Company.

Article 2359 of the Italian civil code defines a "controlled company" for these purposes as being a company:
- in which another company has available a majority of the votes exercisable in an ordinary general meeting; or
- in which another company has available sufficient votes to enable it to exercise a dominant influence at such meeting; or
- which is under the dominant influence of another company by virtue of particular contractual ties with the latter.

In the first two cases, for the purposes of calculation, votes of other controlled companies, fiduciary companies and nominees must be counted.

C. Legitimacy of Purchase by a Company of its own Shares.

In determining whether purchase by a company of its own shares is legitimate, the Italian civil code lays down four pre-requisites:

(1) the purchase may only be made up to the limits of distributable profits and available reserves, as shown in the latest approved accounts;

(2) shares may only be purchased which have been paid up in full;

(3) the purchase and the details thereof must be authorised by the shareholders in general meeting;

(4) in no case may the nominal value of its own shares which a company owns exceed a tenth of the share capital. For the purposes of this calculation shares held by controlled companies are also taken in to consideration.

In relation to the above it should be noted that:

- in relation to (3), the shareholders' meeting, in granting authorisation for such a purchase must also make provision for the procedure to be followed for the purchase, indicating in particular the maximum number of shares to be purchased, the period for which the authorisation is granted (this may not exceed 18 months), and the minimum and maximum prices at which the shares may be purchased.

- in relation to (4), in calculating the shares held by the company, shares acquired through fiduciary companies or third parties acting in their own names but on behalf of the company must also be taken into account.

D. Shares purchased in breach of restrictions.

Any shares purchased in breach of the above restrictions must be transferred within a year of their purchase in the manner specified by the shareholders in general meeting. Where the general meeting fails to take the necessary action, then the responsibility lies with the directors and the statutory auditors, who must apply to the court without delay for the cancellation of the shares and the corresponding reduction in the corporate capital. What constitutes "delay" will be a question for the court to decide on a case by case basis.

E. Exceptions to the Restrictions.

Pursuant to article 2359-bis, the above limits do not apply when the purchase of a company's own shares takes place:
- further to a resolution of the general meeting to reduce the corporate capital, where such reduction is to be made by the redemption and cancellation of shares;
- where no consideration is to be paid, providing that the shares have been fully paid up;
- by way of succession or merger;
- in the case of a compulsory sale in relation to the satisfaction of a debt of the company (again providing the shares have been fully paid up).

In the event that following any of the above (except for a reduction of capital), the 10% limit is exceeded, then the shares in excess must be disposed of within three years.

F. Regulations applicable to own shares held.

With regard to any of its own shares which a company possesses:

- article 2357-ter provides that the directors may not dispose of such shares without the prior authorisation of the general meeting which must make provision for the relevant procedures;
- the right to profits and any option rights will be attributed proportionally to the other shares, for the period for which the shares are so held;
- voting rights in respect of those shares are suspended; and
- a reserve equal to the amount of the shares owned by the company must be established and maintained until such time as the shares have been transferred or cancelled.

G. Prohibition on subscription of own shares.

Pursuant to article 2357-quater, it is prohibited for a company to subscribe to its own shares. In the event of breach of this provision, the shares will be treated as having been subscribed by the promoters or founding members of the company, who will be liable for payment of the shares. In the event of an increase in capital, this liability falls on the directors (except for those who can show that they were without fault).

H. Purchase of shares by a controlled company.

Article 2359-bis of the civil code concerning the purchase of shares or quotas by a controlled subsidiary in its parent company was amended in 1994.

The restrictions on the purchase by a controlled company of shares in its controlling company are the same as those applicable to the purchase of own shares (cf. point C. above). In this case however, for the purposes of determining whether the nominal value of the shares purchased exceeds a tenth of the corporate capital of the controlling company, any shares held by the controlling company itself, together with any shares held in it by other controlled companies, must be taken into consideration.

A reserve must be created and maintained in this case too. Pursuant to the new provisions introduced in 1994, a controlled subsidiary may not exercise the right to vote attached to any shares it holds in this manner in the general meeting of its controlling company.

In the event of breach regarding the limits on shares which may be held, then the provisions referred to above at paragraph G. regarding transfer within 1 year must be complied with, failing which the parent company must cancel the shares without delay and reduce the corporate capital accordingly.

The same exceptions listed at E. above regarding mergers etc. apply, with any purchases in excess to be disposed of within three years of the purchase.

The new article 2359-quinquies prohibits the subscription by a controlled subsidiary of shares or quotas in its parent company. In the event of breach the shares in question will be deemed subscribed and must be paid up by the directors with the exception of any who can show that they are without blame for the matter.

I. Criminal Sanctions for Breach

The new law sets out criminal sanctions applicable to directors found to be in breach of the above provisions, including imprisonment of between six months and three years and a fine of between 400,000 and 2,000,000 Lire.

Members of the board of auditors may receive a sentence of imprisonment of up to a year and a fine of between 200,000 and 2,000,000 Lire.

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.