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"The Private Limited Company in Italian Law in

a comparative perspective"

Avv. Cecilia CarraraBerlin, November 13, 2008

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Introduction

• The limited liability company (“S.r.l.”) is the most widespread type of company in the Italian market.

• The rules governing the S.r.l. are contained in the Civil Code and were recently reformed by Legislative Decree No. 6/2003.

• After the Reform of 2003 the S.r.l. is no longer regulated along the lines of the joint stock company (S.p.A.), being rather characterized as a company in between corporations and partnerships

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MAIN ISSUES

• Incorporation• Contributions• Quotas (Anteile)• Corporate governance• Quota-holders' loans• Invalidity of Quota-holders’ resolutions• Right of withdrawal of the Quota-holders • Issuance of bonds• Direction and coordination - Group

companies

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INCORPORATION

• Minimum corporate capital: Euro 10,000.00

• Minimum capital to be paid in upon incorporation: 25% of the capital→ but if there is a sole shareholder the entire amount shall be paid in

• Payment in cash of the corporate capital can be replaced by an insurance policy for an equal amount or by an equivalent bank guarantee

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CONTRIBUTIONS

• Contributions are generally made in cash;• however, any asset financially valuable

may be also contributed (Art. 2464 of the Civil Code): e.g. claims, tangible assets, know-how, services.

• In case of contributions in kind the quota-holders shall file an expert evaluation specifying the applied evaluation criteria and containing the certification that the value of the contributed assets is equal to the value of the relevant quota.

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QUOTAS• Each quota-holder holds a participation in the corporate

capital in proportion to its contribution: the corporate capital is divided in as many quotas as are the quota-holders (unlike joint stock companies, i.e. S.p.A.);

• Unlike shares, quotas are not incorporated in negotiable instruments.

• Quotas as transferred by notarial deed →but a recent reform (Law no. 133/2008) abolished the

requirement of the notarial deed introducing as alternative form an accountant certification.

• The transfer of the quotas is fully effective from the time of registration in the Quota-holders ledger. The deed of transfer must be then deposited within 30 days with the Companies Registry.

• If the same quotas are sold with subsequent contracts to more persons, the good faith purchaser who was firstly entered in the Quota-holders ledger prevails against subsequent purchasers.

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TRANSFER OF QUOTAS • Quotas can be transferred inter vivos o by

succession at death• Unlike in S.p.A.s, in S.r.l.s limitations to the free

transferability of quotas are admitted to a greater extent.

• However, if the Deed of Incorporation sets out the non-transferability of the quotas or conditions the transfer to the preapproval of certain corporate bodies, quota-holders or third parties without specifying further conditions and limits to the said non-transferability, or totally preventing the transfer in case of death, the quota-holder or his heirs may exercise a right of withdrawal.

• In such case the Deed of Incorporation may set out an initial lock-up term, no longer than 2 years from the incorporation of the company or the underwriting of the quota.

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CORPORATE GOVERNANCE

• The main bodies of the S.r.l. are:(i) the Quota-holders’ Meeting;(ii) the Sole director (single person), or more directors with disjoint and several powers, or the Board of Directors (as a collective body);(iii) internal board of auditors (collegio sindacale)

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CORPORATE DECISIONS AND QUOTA-HOLDERS’

MEETINGS• The Deed of Incorporation contains the rules for

the calling the Quota-holders' Meeting and the conduction of the same.

• The Deed of Incorporation may provide that the Quota-holders' resolutions may be taken also outside of the Quota-holders Meeting (decisions by written consultation or written consent): there are no specific formalities for the adoption of a corporate decisions outside of Quota-holders’ meetings but the decisions must be in writing and adequately describe the matter of the decision and give evidence of the consent of the Quota-holders.

• Quota-holders’ decisions shall be reported in the Book of Quota-holders’ Decisions.

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QUOTA-HOLDERS' MEETING

• A Quota-holders’ meeting must be called when the following circumstances occur:– The Deed of Incorporation does not allow the written

consultation or written consent– One or more directors or quota-holders representing at

least 1/3 of the company capital, request that resolutions be taken by the Quota-holders' Meeting

• In any event the Quota-holders meeting decides on the following matters: – Balance sheet approval and dividend distribution – Appointment of Directors – Election of Board of Auditors and/or external Auditor – Amendments to the Deed of Incorporation– substantial modification to the corporate purpose or to

the rights of the Quota-holders

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QUOTA-HOLDERS RIGHTS

• The Quota-holders have the power to control and instruct the management

• Quota-holders who are not directors shall have a right to be informed about the business of the company: they have the right to inspect, even through professionals appointed by them, corporate books and accounting documents.

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MANAGEMENT OF THE COMPANY

• The Law Reform establishes a great degree of internal flexibility in terms of management and control

• The By-laws set out the management rules for the company. • Unless the By- laws provide otherwise, directors shall be also

Quota-holders. Usually, in practice, companies have the option to appoint also non Quota-holders.

• Any limitations to the directors’ power to act are not enforceable against third parties, unless there is evidence that the directors acted intentionally ultra vires in order to harm the interest of the company.

• The management may be entrusted to a: – Sole Director – Board of Directors, whose members exercise their actions

jointly. In this case statutory rules regulating the management of the S.p.A. apply.

– Several Directors, each of them with individual and several powers. In this case each Director may exercise her/his office individually.

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DIRECTORS’ DUTIES AND CONFLICT OF INTEREST

• The transactions concluded by directors with a conflict of interest with the company may be voided upon request of the company only in the event the conflict was known or ought to be known by the third party.

• Resolutions taken by the Board of Directors with the determining vote of the director in conflict of interest may be challenged if the resolutions cause damage to the company. In any case, this shall not affect bona fide third party’s rights based on the resolution.

• The director who has acted in conflict of interest is personally liable for the damage suffered by the company as a consequence thereof.

• Directors in breach of their duties are jointly liable towards the company (except for dissenting directors).

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CLAIMS AGAINST DIRECTORS

• Claims may be raised against the directors (and internal auditors) in breach of their duties by individual Quota-holders, by the company or by third parties (e.g. creditors).

• The approval of the annual financial statements does not release the Directors and Auditors from their responsibilities.

• The Quota-holders who have expressly authorized certain corporate actions by the directors shall be jointly liable with the directors (and internal auditors).

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ACCOUNTING SUPERVISION

• The compliance and accounting supervision may be entrusted to external auditors and/or to an internal Board of Auditors (Collegio Sindacale)

• A Collegio Sindacale is mandatory whenever: – the corporate capital exceeds Euro 120,000.00 and– if two of the following limits are exceeded for two

subsequent fiscal years: (i) the net assets exceed Euro 3.125.000,00; (ii) the proceeds of the sales and services exceed Euro 6.250.000; (iii) there is an average of more than 50 employees.

• The Collegio Sindacale is regulated by way of analogy by the rules applicable to the S.p.A.

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UPSTREAM LOANS AND SECURITY

• In order to protect the minority Quota-holders and creditors of companies receiving up stream loans from the controlling entity or from other group companies, especially in case of insolvency of the company, Italian law provides that the reimbursement of these loans shall be postponed to the payment of other creditors and, if the reimbursement is made in the year preceding the bankruptcy of the company, it must be paid back to the company.

• This principle is extended to loans/financings in any form, including the granting of security.

• The rule above applies to S.r.l. and to corporate groups of companies, provided that the loans were made at a time when the financial conditions of the company would have required a capital contribution instead of a Quota-holders’ loan.

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INVALIDITY OF QUOTA-HOLDERS’ DECISIONS

• The following decisions may be challenged within 3 months by the dissenting Quota-holders, Directors and Auditors: – Decisions adopted in breach of the law or the by-laws– Decisions adopted with the determinant vote of those Quota-

holders having, on their own or on behalf of third parties, an interest in conflict with the interest of the company, if those decisions may harm the company

• Any party may challenge the following decisions within 3 years:– Decisions on impossible or unlawful matters– Decisions adopted in total absence of information

• Resolutions amending the company’s purpose setting out impossible or unlawful purposes may be challenged without any time limitations

• Rights of third parties in good faith arising out of company’s decisions which are subsequently challenged shall be unaffected

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RIGHT OF WITHDRAWAL

• The by-laws set forth when Quota-holders may withdraw from the company

• The Quota-holders may withdraw when they dissented to any of the following resolutions:– Modification of corporate purpose– Modification of the form of business association (i.e from limited liability

company to corporation)– Revocation of winding-up procedure– Merger or de-merger– Transfer of the registered office of the company abroad– Abolition of one or more causes for withdrawing from the company’s by-

laws– Undertaking of company’s action that involves a substantial modification

of the company’s purpose– Relevant modification of the Quota-holders’ rights, regarding distribution

of dividends or management and control• The right of withdrawal cannot be exercised, and if exercised has no

effect, in two cases:– if the resolution that gives rise to the right of withdrawal has been

revoked – if a resolution for the winding-up of the company has been adopted

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WITHDRAWAL: VALUE OF THE QUOTA

• In case of withdrawal the value of the Quota shall be equivalent to its market value at the time of exercise of the right of withdrawal.

• In case of disagreement between the parties, the value of the Quota shall be determined by an expert appointed by the Tribunal.

• The right of withdrawal may be exercised through (a) purchase of the Quota proportionally by other Quota-

holders(b) purchase by a third party(c) repayment from company’s reserves or by way of

reduction of the corporate capital. If the company is unable to repay the Quota, the company shall wind-up.

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ISSUANCE OF BONDS

• The by-laws may set forth the possibility for the S.r.l. to issue bonds.

• Limits, terms and conditions of the bonds shall be specified in the decision of issuance that has to be filed with the Companies Registry.

• Bonds may only be traded by professional investors, who, in any event, guarantee for the solvency of the company if they decide to transfer the bonds to third parties, other than professional investors

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AMENDMENTS OF THE BY-LAWS

• All amendments to the by-laws require the intervention of a notary

• If provided by the by-laws resolutions concerning capital increases may be also adopted by way of resolutions of the Board of Directors. The minutes of their decision must be also drafted by a notary.

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DIRECTION AND COORDINATION

• The 2003 Reform introduced special rules applicable to group companies, in particular regulating the liability of the controlling entity.

• Direction and coordination – are presumed to be exercised by controlling companies

or those group companies that prepare the consolidated financial statements.

– shall be exercised in accordance with principles of proper corporate and business management, and in a way that does not impair the profitability of the controlled company and the value of its assets.

• The existence of a direction and coordination by a controlling entity must be expressly indicated in the company's letterhead and corporate documents, including the financial statements and the management report of the directors. Publicity is also required in the Companies' Registry.

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DIRECTION AND COORDINATION

• The minority Quota-holders of the controlled company and the company's creditors are entitled to bring a claim against the controlling entity, provided they received no satisfaction from the controlled company, if:– the direction and coordination infringed

the principles of proper management; and – it harmed the profitability and corporate

value of the controlled entity,provided that no reparatory action was

undertaken and that there is no compensation at group level.