This note is inspired by a recent 'abuse of majority' case and focuses on meeting resolutions passed with the sole intent of harming minority shareholders as well as on immediate enforceability of first-instance judgments ordering the cancellation of such resolutions.
Share capital increase and reduction of quorum for passing resolutions
In two subsequent meetings, respectively, of 2 August and 29 October 2013, the shareholders' meeting of P.G. S.p.A. (hereinafter, for ease of reference, the "Company") resolved upon a share capital increase involving the reduction of the share held by minority shareholder G.R. from 20% to 0.73%.
Both the above resolutions were subsequently challenged by G.R. before the Court of Milan, which, by judgment 10048 of 2017, found the August resolution ineffective and ordered cancellation of the October resolution, on the ground that the capital increase resolved upon by the resolution of 2 August 2013 had not been effected, there being no evidence of its actual subscription within the time limit set out in the resolution.
On 27 January 2017, with its majority shareholders voting in favour, the Company resolved upon the reduction of the quorum set out in the by-laws for passing resolutions on key issues (e.g. distribution of dividends, capital increase and extraordinary corporate transactions), from 85% to 65% of the share capital.
G.R. challenged said resolution too, alleging its invalidity on the following grounds: (i) untruthfulness of the majorities on the basis of which the resolution was passed, having been calculated based on the capital increase declared non-existing and cancelled by the Court of Milan; (ii) abuse of majority with the intent to avoid the effects of the judgment ordering cancellation, unfavourable to the Company's majority shareholder; (iii) existence of a danger in delay (periculum in mora) in light of the majority shareholder's intention to effect further capital increases. The application filed by G.R. was dismissed by court order.
The basic ground for such order for dismissal of the Court of Milan is that the first-instance judgment, being subject to challenge, cannot be considered to be final and, therefore, to have "the effect of immediately and automatically invalidating all company resolutions passed by majorities formed under a resolution cancelled only at a later time (on a non-final basis)". G.R. appealed against the above order on the grounds stated previously.
The appeal against the order of the Court of Milan
On 7 June 2018, the Court of Milan upheld the claim in second instance, by a judgment revoking the challenged decision and suspending the enforcement of the resolution. In the grounds for the judgment, it is stated that the Company failed to clarify its reasons for reducing the quorum to pass resolutions, limiting itself to generically mentioning "facilitation of corporate governance".
Moreover, there is a clear link between the passing of the challenged resolution and the unfavourable effect expected to arise to the Company from the cancellation order (albeit provisionally enforceable).
In this regard, the argument of the defendant company that only final judgments be immediately enforceable is not acceptable. Indeed, Article 282 of the Italian Code of Civil Procedure makes no distinction among types of judgment, and the effectiveness of judgments under Article 2908 of the Italian Civil Code (titled "Constitutive effects of judgments") is likewise unrelated to their being final.
In addition, Article 2377, paragraph 7, of the Italian Civil Code provides that the cancellation of a resolution shall be effective vis-à-vis all shareholders, without requiring a final judgment having been made for that purpose; moreover, Article 2378, paragraph 3, of the Italian Civil Code provides for registration with the register of enterprises of both suspension orders and judgments on challenged resolutions.
The registration requirement for both orders has been construed by legal commentators in the sense of attributing to a judgment (even if not final) the same effect as a suspension order.
It is therefore essential to deem effective first-instance judgments too, even if challengeable, as the immediate enforceability of a judgment is the only way to prevent cancellation of resolutions passed in the period between the filing of an appeal and the relevant judgment, which cancellation would certainly call into question the effectiveness of the principle of legality in respect of corporate resolutions. In this regard, it is worth noting that any effect of resolutions might be subsequently suspended by the appeal judge if the relevant preconditions are deemed to exist.
Finally, to conclude, the existence of periculum in mora is considered as a necessary requirement for granting an urgent suspension order like the one applied for in the case at issue. Periculum in mora must be assessed having regard to the provisions of Article 2378, paragraph 3 and 4, thus comparing the harm caused to a shareholder and the harm the company might suffer from suspension of resolutions, if any. In the case at issue, the Company would in no way be endangered if the quorum set out in by the by-laws were maintained, whereas G.R. would certainly and directly be harmed by the choices of majority shareholders, being unable to invoke, on a precautionary basis, the legitimate quorum provided for by the by-laws.
Comments on the judgment of the Court of Milan
The judgment of the Court of Milan has been the subject of a great deal of comments by authoritative legal commentators, particularly concerning the interpretation given in respect of abuse of majority.
According to certain scholars, reference should be made by analogy to Article 1345 of the Italian Civil Code as a tool for sanctioning abuse by majority shareholders to the detriment of minority shareholders. It is therefore necessary to examine the reasons behind a resolution, whose invalidity can be declared only if the required quorum is not reached after deducting from the votes cast any votes cast in the pursuit of unlawful reasons. It should be noted, in any event, that the prevailing view of courts is contrary to applying Article 1345 of the Italian Civil Code to meeting resolutions, in light of the absence of any real unlawful reason, meaning breach of mandatory rules. The reason for this is that cancellation of meeting resolutions passed to the detriment of minority shareholders is allowed depending on the pursuit of unlawful interests and not on breach of mandatory rules.
According to the most widely supported view, meeting resolutions can be challenged for misuse of powers. Reference is here made to any meeting resolutions that are aimed at pursuing any interests other than corporate ones to the detriment of minority shareholders, in light of the shareholders' duty to perform any act required to achieve the company's purpose.
More recently, to determine misuse of powers in the context of passing meeting resolutions, reference has been made to the principle of fairness and good faith in performing contracts. More specifically, in partnership agreements, parties are expected to act in such a way as not to endanger the other parties' legitimate expectations. Misuse of powers would consequently arise whenever a resolution is passed to the exclusive benefit of majority shareholders to the detriment of minority shareholders, in breach of Article 1375 of the Italian Civil Code. Since the shareholders' activity expresses itself through the decision-making process, it is legitimate to say that the observance of the principle of fairness should be assessed in the context of the exercise of voting rights. Consequently, any breach of the duty of fairness should result in invalidity of resolutions. Article 1375 of the Italian Civil Code allows respecting the balance between contractual autonomy and the majority system, with each shareholder being entitled to expect the other parties to comply with certain contractual limits. This could not happen if the majority system were to allow one to benefit from any advantages other than those on which the social contract is based. It is indeed worth recalling that a partnership agreement realises a commonality of interests, so that, if on the one hand it allows an individual to be subject to the majority where required to meet a corporate interest, on the other hand it prevents the exercise of voting rights for any other purposes.
Before concluding, reference should be made to the interim enforceability of first-instance judgments. At the appeal stage, G.R. alleged the immediate enforceability of the cancellation order, on the ground that Article 2378, paragraph 3, allows the suspension, on an interim basis and with a reasoned decree, of the enforcement of a resolution if the required preconditions are met. The Court of Milan upheld the appellant's arguments in light of the absence, in our legal system, of a provision allowing immediate enforceability of judgments against a party, contrary to what argued by the Company. Moreover, as often noted, the Court declares that Article 282 of the Italian Code of Civil Procedure makes no distinction among types of judgment, generically mentioning the enforceability of first-instance judgments.
To conclude, the judgment of the Court of Milan briefly examined here has revealed the openness of the Court in assessing abuse of majority shareholders to the detriment of minority shareholders. In the case at issue, abuse of majority shareholders has arisen from passing a resolution to reduce the quorum set out in the by-laws to prevent any unfavourable effect arising from challenging the judgment on share capital increase. According to the Court, the purpose of avoiding the effects of the first-instance judgment is manifestly clear, as the resolution was not justified by any particular corporate interest.
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.