Shareholders or Board of Directors, who is entitled to resolve the transfer of the unique business unit owned by a limited liability company?

With the recent ruling no. 1722/2020, dated 27 January 2020, the section specialized in business matters of the Court of Rome disposed the nullity, due to the contrariety of mandatory rules which fix the shareholder’s powers, of the contribution in kind of the unique company’s business unit in favour of a newly incorporated company carried out by a BoD member.

The Court specified that the principles applied in the ruling also apply to cases in which all of the company’s assets are transferred, as well as to certain kind of business lease. Indeed, the contribution of a business unit in favour of a company is compared by the Judges to the sale/transfer of such a business unit (Supreme Court ruling no. 2536/2016).

First of all, in the analysed case the Judges verified when the revocation and new appointment of the BoD members is completely carried out. It has been stated that the fact that the resolution to revoke the old director and appoint the new one had been filed with the Company register, but not yet processed and therefore publicly available, does not affect the management and representative powers of the director who – on the date on which the contribution has been made – appears to be formally as a director of the company.

On the one side, the Judges stated that the incorporation of a company entirely owned by the incorporating company could not be considered as a transaction capable of determining a substantial change in the By-Laws scope. Therefore, such a resolution shall not be the exclusive competence of the Shareholders.

On the other side, the Judges stated that the BoD or its members cannot transfer itself the unique  company’s business unit because such an operation leads to a substantial change in the company’s scope, thus shifting from an operational to a financial one. Such an activity carried out by the BoD or its members shall be considered null.

The Court also clarified that the nullity of the transfer and the nullity of the newly incorporated company are two separated issues. Indeed, the circumstances for which a newly incorporated company can be deemed invalid, pursuant to and according with article 2332 of the Italian Civil Code, are fixed by the law and no extensive interpretation is allowed. In such circumstances the nullity of the contributions is not mentioned. Therefore, if the contribution is declared null, such nullity only affects the assets of the newly incorporated company but not its incorporation/existence.

It is also stated that the rules governing the general representation powers of BoD members, pursuant to  and according with article 2475 bis, co. 2 of the Italian Civil Code, does not apply in all those cases in which the BoD or its members act in violation of mandatory rules. Indeed, the provision regulates ultra vires deeds carried out by the BoD or its members that do not violate mandatory corporate governance rules which are fixed by the law. The transaction analysed by the Judges has been carried out by the BoD breaching art. 2479, co. 2, of the Italian Civil Code which gives exclusively to the shareholders the power to take any decision which may substantially change the company’s scope of a company in the form of an Italian limited liability company (i.e. S.r.l.).

The analysed ruling is particularly interesting because although it shares the arguments of another ruling on the same issue (Court of Piacenza dated 14.03.2016), it differs substantially from the latter in the part in which it provides that the excess of the director’s representative powers in violation of mandatory law rules is not merely voidable as stated by the judges of Piacenza, but void. This different legal qualification can increase or restrict the protection of the company and/or shareholders. Indeed, far from being a theoretical matter, such a different legal qualification has a concrete value because it affects the effects of the act declared invalid, the persons entitled to challenge it and the period within such a claim can be filed.

Until the Supreme Court will clearly regulates such issue it will be interesting to monitor the future leanings of the Courts decisions.