Directors of listed joint stock companies between conflict of interest and obligation to abstain. What solutions?
In order to ensure adequate protection of both the interests of the company and shareholders and provide clarifications on the management of conflicts of interest of directors of listed joint stock companies, Consob has published a document that establishes an obligation for the “directors involved in the transaction” to abstain from voting on the related resolution, in addition to the disclosure obligation under the civil code. Will such forced protection be able to fill gaps and correct anomalies that have emerged in practice?
The management of directors’ conflicts of interest is an issue which any legal system has to deal with. In the Italian legal system, the rules on the management of conflicts of interest of joint stock company directors are provided for under article 2391 of the civil code. Additional obligations are provided for under the Consolidated Law on Finance (TUF) for listed company directors.
Pursuant to article 2391, paragraph 1, of the civil code, any director having an interest in a company transaction, either on his own behalf or of a third party, must inform the other directors and statutory auditors of such interest, highlighting its nature, terms, origin and relevance.
In order to comply with such article, directors must disclose any interest they have in a company transaction, even if convergent with that of the company, since its rationale is to prevent the company from carrying out transactions that (i) are in the exclusive interest of a director (rather than of the company) or (ii) bear unfavourable terms unbeknownst to the company and the other corporate body members.
It should be noted that the scope of such provision does not encompass an obligation on directors having an interest to abstain from voting on the relevant resolution, but poses an obligation on the board of directors to adequately motivate in the resolution the reasons and convenience of the transaction for the company. A breach of the above obligations may lead to challenging the relevant resolution pursuant to the provisions of article 2391, paragraph 3, of the civil code.
The above construction of the commented provisions of article 2391 of the civil code has been the subject of two recent “twin” Supreme Court decisions, respectively no. 32573/2018 and 33047/2018. On such occasion, the Supreme Court took the chance to reiterate the principle that, pursuant to paragraph 1 of such article, the disclosure of any interest directors may have in a transaction amounts to a general and preventive obligation, unrelated to the actual impact of such interest on the resolutions adopted by the board of directors.
In the case at stake, two standing statutory auditors of a listed company challenged the administrative penalty inflicted by Consob for, inter alia, failing to detect that one of the directors did not disclose at board of directors’ meetings the relationship he had in the past with the company’s counterparty (as the former chairman of such counterparty).
The case described above proves once again that the disclosure obligation on directors does not always offer an adequate and effective protection to the interests of companies and their shareholders, thus exposing the company to a risk of misappropriation, by such directors, of values belonging to the company. This concern gains even wider proportions and importance when it comes to related party transactions carried out by listed companies.
The need to provide for adequate safeguard to the interests of both the company and shareholders constitutes one of the main drivers of EU directive no. 2017/828 (the so-called “Shareholder Rights Directive II” or “SHRD II”) and of the most recent Legislative Decree no. 49/2019.
In order to implement in the relevant regulation the principles expressed by SHRD II and the abovementioned Legislative Decree, on October 31, 2019 Consob – empowered by newly introduced paragraph 3 of article 2391-bis of the civil code (which now empowers Consob to identify, inter alia, the cases in which directors are required to abstain from voting on the resolution concerning a related party transaction) – issued a consultation paper which sets forth, inter alia, certain amendments to Regulation no. 17221/2010 (the so-called “Regulation on Related Party Transactions”) (the “Consultation Paper”).
One of the most significant innovations included in the Consultation Paper, in compliance with SHRD II, along with the introduction of a new (!) definition of related party (indeed, unlike the current version of the Regulation on Related Party Transactions, the Consultation Paper now makes direct reference to IAS 24, hence introducing a moving reference to international accounting principles and, consequently, a variable perimeter of related parties), is the introduction of an obligation on directors involved in the transaction (which, in the construction favored by Consob, should refer to directors who are the counterparty in the transaction or a related party thereto) to abstain from voting on the relevant resolution, in addition to the disclosure obligation set out under article 2391, paragraph 1, of the civil code.
Leaving aside the way in which such abstention is set to work in the day-to-day practice – does this obligation extend to the participation in the meeting where the related party transaction is resolved upon, thus having an impact on the quorum required to validly hold the meeting? Or does it just limit to the relevant voting phase? How is the abstention obligation set to interact and operate in respect of transactions on which managing directors or different corporate bodies, rather than boards of directors, are competent to decide? – at a first glance, it looks like the introduction of an obligation on directors involved in the transaction to abstain from voting represents some sort of dirigiste attempt to protect the interests of both the company and shareholders by taking away from directors – and, as a matter of fact, from the other directors and statutory auditors – the responsibility (and power, sometimes) to manage their own conflicts of interest in the hard balance with the company’s welfare.
Only time (as well as a final version of the amended Regulation on Related Party Transactions) will tell if such forced protection will be able to fill the gaps and correct the anomalies that have emerged in Consob’s nearly ten-year experience on related party transactions.