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In January 2003, the Italian government approved a reform of the company law rules governing limited liability and joint-stock companies and cooperatives, which will come into force in 2004. Employers have generally welcomed the reform, while trade unions view it as a missed opportunity to enhance employee involvement.
On 10 January 2003, Italy's centre-right government approved a reform of Title V of the Civil Code (Codice Civile), dating from 1942, which regulates stock companies and cooperatives. The reform, which will come into force on 1 January 2004, redefines the characteristics of cooperatives and of the two main types of company - limited liability companies (Società a responsabilità limitata, Srl) and joint stock companies (Società per azioni, SpA). The reform was carried out because, over the years, company law has undergone many legislative changes due, in particular, to the need to adapt the national regulations to EU Directives. These changes have been unsystematic and led to a weak differentiation between the regulation of the various types of companies, and to vague and hard-to-apply rules which are thought to have hindered the development of many small and medium-sized enterprises (SMEs).
The need to implement a balanced and systematic framework of rules regulating companies has gone together with a perceived need to loosen regulatory and administrative constraints, especially for limited liability companies (Srls). Italy's productive structure, based mainly on SMEs, means that there are many companies of this kind (they represent 94% of all companies).
Limited liability companies (Srls) will in future be governed by separate regulations, different from those applying to joint-stock companies. Under the new rules, a limited liability company can be set up, for an unlimited period, on the basis of a contract (signed between two or more partners) or through a unilateral act. The stock capital may not be less than EUR 10,000. Participation in the company is proportional to the capital invested by each partner - known as the 'allotment' (conferimento). An allotment can be made up of anything capable of economic valuation, including assets in kind, credit, guaranteed supply of services etc.
According to the new rules on 'corporate governance', Srls have the structure of a partnership. This means that their management will become easier and more independent. This kind of company is more appropriate to the structure of SMEs, which are very often family-managed, and simplifies the management and decision-making procedures.
The organisational and management model of the Srl is set out in its memorandum of association (Atto Costitutivo). This must indicate the names of the partners, the company directors and, if necessary, the persons responsible for supervising accounts. The main structures of the Srl are the shareholders’ meeting and the sole director or, when the administration is entrusted to more than one person, the board of directors. The director(s), on the basis of the memorandum of association, can take decisions through written consultations or on the basis of consensus expressed by the other partners.
The shareholders’ meeting is the supervisory body. It approves the budget and the distribution of profits, appoints the directors and can modify the memorandum of association and therefore the management and organisational structure of the company. The board of directors, or the sole director, is entrusted with administration of the company assets.
Limited liability companies are able to issues shares or 'participating shares' of EUR 1 or multiples thereof. Accounts are checked by a board of auditors or by an external auditor. If the stock capital exceeds EUR 120,000, the shareholders’ meeting must, obligatorily, appoint a board of auditors.
Under the new regulations, joint-stock companies (SpAs) can be set up, for an unlimited period, through a contract between partners or through a unilateral act. A minimum stock capital of EUR 120,000 is required. Partners can contribute with 'allotments' both in cash and in kind. Allotments in kind must be accompanied by a sworn declaration attesting their value. At the time that the memorandum of association is signed, at least 25% of allotments in cash must be deposited in a bank.
Following the reform, more types of shares can be issued in SpAs, these being shares with full voting rights, shares with limited voting rights, shares with no voting rights. The last two type of shares are reserved for employees.
The main innovations introduced by the reform with regard to SpAs relate to their governance. Together with the traditional management and supervisory bodies (the board of directors or sole director and the board of auditors) the new rules provide for two other models; the 'single' model and the 'dual' model. There are therefore three models of governance which SpAs will be able to adopt:
Accounts supervision procedures are common to the three systems of governance: controls must be carried out by an auditor or by an auditing company listed in a register established by the Ministry of Justice. If the company makes recourse to the risk-capital market and issues shares and bonds, the use of an auditing company is obligatory.
The duration of 'shareholders’ pacts'- ie agreements between shareholders to form a majority within the shareholders’ meeting - shall be limited in time. Starting from 2009, shareholders’ pacts will have a maximum duration of five years and must be declared, in the case of companies making recourse to risk capital, at the beginning of each meeting.
Under the new rules, at least nine members are necessary in order to set up a cooperative company (but only three if the cooperative intends to adopt the rules for limited liability companies and if the partners are individuals). The reform identifies two main categories of cooperatives: those which operate a predominantly mutual system, which benefit from tax incentives; and all other cooperatives.
The first type of cooperative must carry out its activities mainly in favour of its members and receive from them the majority of the goods and services necessary to carry out the business. These cooperatives will have to respect the following rules:
Cooperatives will be also given the possibility of making recourse to other models of governance. They will be allowed to issue bonds and be listed on the stock exchange.
All the members who have been listed for at least three months in the cooperative's partners’ register will have voting rights. Each member of the cooperative will be entitled to only one vote regardless of the value or number of shares they possess. Each member can represent up to a maximum of 10 members in the members’ meeting.
The company law reform also provides for a detailed regulation of groups of companies. Notably it makes the head of the group responsible for any violation of the rules regulating corporate management.
There have been mixed responses to the company law reform. The National League of Cooperatives (Lega nazionale cooperative e mutue, Lncm), the largest association of cooperatives, expressed its disagreement with the new 'possibility of turning cooperatives into profitable companies'. According to Lncm, 'the criteria used to assess the social merit of cooperative are inappropriate'.
Antonio D’Amato, the president of theConfindustria employers' confederation, welcomed the reform with satisfaction. He stated that 'it is important to endow Italy, on the legal plane, with rules and tools which are up to the economic challenges.'
Guido Rossi, a member of the 'high-level group of company law experts' which recently made proposals to the European Commission on modernising EU company law, voiced many criticisms of the Italian reform: 'this is a project which underestimates and disregards shareholders’ rights, takes away the few existing supervisory systems, and introduces outdated supervisory models'.
The company law reform can be assessed in terms of:
The objective of the legislator is to offer to the myriad of Italian SMEs, mainly family-managed and faced with difficulties in expansion, a means to achieve competitive growth through access to national and international markets. The opinion of the most prominent observers on the potential effect is not unanimous. The law presents some important possibilities but also some limits. The opportunities lie in the fact that the new law helps partnerships to become joint-stock companies, but at the same time leaves too much space for autonomy, in terms of fixing rules and negotiating relations between partners. This wide 'statutory autonomy' makes negotiations among partners expensive and possibly conflictual, because it does not supply them with sound legal guidelines to regulate their relations.
The law does not address the important problem of managing corporate crises and bankruptcy situations. The current rules allow judges wide powers and take a long time, which usually implies the end of the company concerned. In other countries, the bankruptcy legislation is aimed at preserving the continuity of companies rather than the situation of creditors. The Italian situation is worsened by the position of the judicial lobby (judges and lawyers) which has prevented the establishment of court sections specialised in corporate matters, resulting in lengthy procedures for the settlement of the conflicts among partners.
As regards its consistency with corporate governance rules at international and European level, the new law does not modify the rules in force on transparency, 'counterfeit' accounts and communications. These rules, recently introduced in Italian legislation, target fraudulent behaviour by directors only when this results in significant damage to the partners in the company and the partners themselves bring a penal and civil action against the directors. In other words, this is a major change which considers correct management as a 'private good', linked to the economic relations between the partners, and not as a 'public good' which legislation and the judiciary should defend. It is clear that, at least for the Italian legislator, the US Enron case and the other corporate scandals which followed it, have not had any effect.
As regards the impact of the company law reform on industrial relations, it is too early to express a definitive judgment. The new law tends to reduce public supervision of company governance, leaving a wide autonomy to company management, but does not entrust workers’ representatives with a supervisory role - a path suggested by the recent EU Directive (2001/86/EC) on employee involvement in the new European Company incorporated at EU level (EU0206202F). Furthermore, the law does not seek to encourage workers’ participation in other ways
The powers of the new supervisory board which may be set up in joint-stock companies cannot be compared with the similar structure which may be set up in the new European Company, on which workers may in some cases be represented. Furthermore, the new Italian rules provide no procedure for exercising the information and consultation rights characteristic of other European countries with 'dual' systems of company boards.
The forms of employee financial participation provided for by the new law are limited: workers are entitled to shares with no voting rights or limited voting rights. The most debated issue is that the law provides for no possibilities of expressing the collective will of employee shareholders, thus reducing the possibility of influencing corporate decisions. Overall, many prominent officials of the three main trade union confederations see the company law reform as a missed opportunity to take a definitive step forward towards a system of participative industrial relations.
The impression is that the new legislation will necessarily have to undergo profound changes during the implementation phase, especially in relation to EU regulations.
As Romano Prodi, the President of the European Commission, has said about the Italian company law situation 'we do not count shares, we weigh them.' The new law on corporate governance should reduce the clout of the big families and their capacity of control, and should launch a serious phase of democratisation and transparency in Italian capitalism. (Domenico Paparella and Vilma Rinolfi, Cesos)