The Supreme Court: when can shareholders or third parties directly claim compensation against BoD members

When does a breach of the BoD’s obligations or an illegitimate conduct of its members directly harm a shareholder or a third party? This matter has been discussed several times by the Supreme Court during the past last years.
With a recent ruling – no. 14778/2019 – the Supreme Court once again reaffirms the elements required by art. 2395 of the Italian civil code, referred to as “Individual action of the shareholder and third party“, in order to obtain a compensation by the shareholders and/or third parties directly harmed by a BoD activity/inactivity. Such recent ruling is the last of a well-established approach of case law and is significant because it highlights the confusion that still exists among professionals regarding the elements of such direct liability.
In order to understand the regulatory context of the mentioned ruling it is useful to present a brief overview of the duties and responsibilities of the BoD members.
The liability that could arise on BoD members is connected to their central role played in determining the corporate governance and is also influenced by the broad powers that they have. Since the legislator is aware of the impossibility of crystallising the activities carried out by the BoD, it identifies a general principle that has to be followed during all such activities: “The directors must fulfil the duties imposed on them by the law and by the articles of association with the diligence required by the nature of the task and by their specific skills […]”. (Article 2392 of the Italian Civil Code). This provision also establishes the degree of diligence required by directors.
On the other hand, the legislator provides for the BoD members a complex system of liability.
All the types of such liabilities have in common: i) the absence of a direct link with the company’s obligations – for which, except for special cases, only the company is liable with its own assets – and with inappropriate management choices; ii) the fact of being triggered by a breach or by the commission of an illegal activity. The liability is then falling within the usual schemes of contractual or extra-contractual liability, depending on the type of liability involved.
What helps to distinguish the three types of liability, in addition to its legal nature, is the way in which the illegality spoils the injured party: company, creditors, shareholders and third parties.
Among the three liability schemes, the one that can be directly claimed by a single shareholder or a third party pursuant to Article 2395 of the Italian Civil Code is characterised by the fact that, in order to claim its applicability, the illegal conduct of the director has to generate on the shareholder or on the third party a damage occurring in the legal sphere of the latter directly (i.e. direct damage), and not a mere indirect one. Therefore, the shareholder and the third party may act directly when the offence committed by the director directly affects their own right. It is precisely on the different concepts of direct and indirect damage that the recent ruling of the Supreme Court has focused.
With regard to the adverb “directly” used by Article 2395 of the Italian Civil Code to identify the subjects whom the protection refers to, the Supreme Courte specified that the rule does not refer to the protected interest, but refers to the causal link that exists between the illegal conduct and the harmful event, thus emphasising the direction of the harmful act (Supreme Court no. 2986/2016).
Following such interpretation, the field of application of Article 2395 of the Italian Civil Code could be determined thinking in reverse: the shareholders or third parties suffer indirect damage – not covered by the applicability of Article 2395 of the Italian Civil Code – in all those cases in which they suffer, for example, a decrease in profits or in the value of their own shares as a reflection of a damage generated to the company’s assets. A direct damage occurs, on the other hand, in all those cases in which the damage suffered by the third party or the shareholder is not a reflection of the damage suffered by the company’s assets, but immediately invests their assets.
The Supreme Court also pointed out that an excessively broad interpretation of the adverb “directly” would determine a distortion of the rule, so legitimizing the exercise of claims by all those who, for example, on the trust placed on an unfaithful financial statement have taken wrong decisions (Supreme Court no. 2685/1989).
From the above it is easy to imagine how, despite theory, in practice, the borderline between direct and indirect damage is not easy to mark.
A way for professionals to operate with more certainty is to analyse the case law, which for example shows that the mere breach of a contract by the company or the inactivity of the company’s bodies or the mere loss of share capital, in the absence of a direct causal link between the breach and the damage suffered by the shareholders and/or third parties, is not suitable to legitimize the latter to act in accordance with art. 2395 of the Italian Civil Code against the BoD members.

Similarly, with reference to untrue financial statement data, the case law shows that in order to be direct damaged, the shareholder and/or the third party has to prove that the accounting error was specific and determinant to mislead him. The case referred to in Article 2395 of the Italian Civil Code was considered integrated when the illegitimate representation of the company’s assets was decisive in order to determinate a shareholder to a particular transfer of the company’s shares or when the same was used to attract third parties’ investment or to induce shareholders to subscribe a capital increase.
In order to confirm the guidelines set forth by the judges, with the last sentence no. 14778/2019, the Supreme Court confirms that the shareholder is entitled to take action against the BoD directors pursuant to art. 2395 of the Italian Civil Code to obtain: “compensation for damages directly suffered […] only if these are the immediate and direct consequence of an illegal conduct and not the mere reflection of the company’s harm“.