Italy: Transfer Of Company Shares Subject To Condition: Conduct Requirements For The Parties With A Mixed Potestative Condition Pending

Last Updated: 24 July 2019
Article by Marco Cosa
Most Read Contributor in Italy, September 2019

By a judgment of 25 May 2017, the Court of Milan ruled on the non-fulfilment of a mixed potestative condition applying to the company Beta, stating that the failure by the purchaser company Alfa to take the necessary actions required for the satisfaction of such condition is relevant to the fictio whereby a condition is assumed to be fulfilled under Article 1359 of the Italian Civil Code. 

Preamble. The fact of the case.

The above-mentioned judgment relates to a contractual dispute concerning the enforceability of the remedy under Article 1359 of the Italian Civil Code (the fictio whereby a condition is assumed to be fulfilled) in connection with a mixed potestative condition which, according to the defendants, was not satisfied as a result of failure by the plaintiff, which resulted in termination of the contract.

More specifically, the company Alfa (purchaser) and the shareholders of the company Beta (sellers) entered into a share purchase agreement concerning the whole Beta's share capital. Such agreement provided for two conditions, both expressly envisaged in favour of Alfa: (i) the obtainment by a third company (Gamma) of the so-called "single authorisation" for developing a vegetable biomass power plant   and (ii) the conclusion of a procurement contract between Alfa and Gamma to develop such plant.

The non-occurrence of any of said conditions would involve an obligation, respectively, on the part of the purchaser, to return the shares to the seller and, on the part of the sellers, to return the part of the price received to the purchaser.

Even before the final deadline provided for the fulfilment of the two conditions, Alfa asked Beta's shareholders to return the part of the price paid (in addition to Alfa concomitantly returning  Beta's shares  to the sellers) since, despite the occurrence of the first condition, one might expect with substantial certainty that the second condition could not be fulfilled.

Alfa therefore sued Beta's shareholders before the Court of Milan, asking the Court to ascertain the non-fulfilment of the condition and, accordingly, to declare the contract terminated and to order the sellers to return the first instalment of the price.

On their part, Beta's shareholders objected that the non-fulfilment of the condition was ascribable to Alfa S.r.l., whose omission allegedly resulted in the termination of the agreement.

The disputed contractual condition and the conduct of Alfa

The condition that is the subject of dispute between Alfa and Beta's shareholders (i.e. the execution of a procurement contract between Alfa and Gamma for the development of a vegetal biomass power plant) was classified by the Court of Milan as a "mixed potestative condition".

Such condition is indeed a combination of coincidental and potestative components, namely:

  • a coincidental component, depending on the action of a third company (Gamma); and
  • a (not merely) potestative component, depending on the conduct of the person in the interest of whom such condition is provided for (Alfa).

In mixed potestative conditions, particular relevance must be attached to the conduct of the party in whose interest the condition has been placed, considering that such party has a power to affect, as a matter of fact, the occurrence or not of the condition, which involves a risk of manipulation by such party in the event that, pending the condition, its interest were to become contrary to the fulfilment of the condition.

The narrative section of the judgment of the Court of Milan sheds light on how Alfa failed to take any appropriate action to reach an agreement with Gamma and, therefore, to allow the fulfilment of the condition, namely:

  • Alfa failed to submit a bid to Gamma to enter into the procurement contract;
  • only after numerous meetings among the parties concerned, it became clear that Alfa was unable to provide the financial guarantees required for the performance of the procurement contract;
  • Alfa failed to pursue its proposal of meeting financial requirements by setting up a joint venture with a third company, which was not done;
  • against the proposal to extend the time limit for fulfilment of the condition, Alfa first gave a favourable opinion and, then, asked for termination of the contract with Beta's shareholders even before expiry of the original time limit.

In relation to any manipulative conduct of the parties to a contract subject to condition, the Italian Civil Code provides for two corrective remedies.

Article 1358 of the Italian Civil Code provides that "a party who is bound by, or has transferred a right subject to, a condition precedent, or acquired it subject to a condition subsequent, shall, pendente conditione, act in good faith to safeguard the interests of the other party".

The Code therefore provides for an obligation of good faith aimed at specifically safeguarding the interests of the other party. As a penalty for the non-performance of said obligation, Article 1359 of the Italian Civil Code provides for the fictio whereby a condition is assumed to be fulfilled: "a condition is considered fulfilled when it fails for a cause imputable to the party who had an interest contrary to its fulfillment".

The preconditions for the fictio of fulfilment under Article 1359 of the Italian Civil Code

As noted above, Article 1359 of the Italian Civil Code provides for two preconditions for the applicability of the legal fiction of fulfilment of the condition:

  • an interest contrary to the fulfilment of the condition; and
  • the non-fulfilment of the condition for reasons ascribable to such party.

As far as the first precondition is concerned, of no relevance is the circumstance that the condition was originally provided for in the interest of Alfa only. The Court of Milan indeed followed the approach of the Italian Supreme Court 1, according to which the fictio under Article 1359 of the Italian Civil Code may  well apply to the case in which the interest of a party changes to an extent of becoming contrary to the fulfilment of the condition.

By contrast, in case of a potestative condition or of a mixed potestative condition, the party in whose interest the condition is placed and on whom its fulfilment is conditional, will enjoy the benefit of a special ius poenitendi, being entitled to impose its "change its mind" on the other party, preventing, by doing so,  the condition from being fulfilled.

The Court of Milan clarifies that, pending a mixed potestative condition, both contracting parties are under a statutory obligation to act in good faith pursuant to Article 1358 of the Italian Civil Code and even "to take steps, each insofar as it is concerned, in order to trigger the action of the third party that is the subject of the condition".

Non-performance of such obligation of good faith shall involve the non-fulfilment of the condition being ascribable to the defaulting party, which allows the second precondition under Article 1359 of the Italian Civil Code to be met.

Conclusions

In consideration of the above, the Court of Milan dismissed the plaintiff's claims, while considering the disputed condition to be fulfilled pursuant to Article 1359 of the Italian Civil Code.

More specifically, the Court of Milan found that sufficient evidence was provided to demonstrate the existence of the two preconditions for the purposes of the operation of the fictio whereby the condition is assumed to be fulfilled, in light of the following circumstances:

  • Alfa's general and continued inactivity in preparing the documents and material required for submitting a bid to Gamma and then entering into a procurement contract; and
  • the circumstance that Alfa itself acknowledged its technical and financial inability to perform the procurement contract.

It follows from the above that the provision for a mixed potestative condition shall not at the same time involve any reservation in favour of the person on whom its fulfilment is conditional in such a way as to prevent stabilisation of the conditioned effects, if its interest in making the deal were to change.

Footnote

1 See Italian Supreme Court's judgments No. 23014/2012, No. 7405/2014 and No. 16501/2014.

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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