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CORPORATE GOVERNANCE in ITALY and the System of DIRECTORS' LIABILITY: a PROPOSAL for REFORM A

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CORPORATE GOVERNANCE in ITALY and the System of DIRECTORS' LIABILITY: a PROPOSAL for REFORM A CORPORATE GOVERNANCE INITALY: STRONG OWNERS, FAIFUL MANAGERS. AN ASSESSMENT AND A PROPOSAL FOR REFORM Lorenzo Stanghellini" I. INTRODUCTION II. THE ITALIAN SYSTEM OF CORPORATE GOVERNANCE: THE LEGAL FRAMEWORK A. The Legal Sources of Italian Private Law: The Civil Code. B. The Legal Sources of Italian Corporate Law. The Different Role of the Civil Code and the Relevance of Special Laws. C. Corporate Governance Rules: The Absence of Significant Changes Since the Enactment of the Civil Code. D. The SocietA per Azioni as the Model of Italian CorporateLaw: The Reasonsfor a Choice. E. The Protagonistsof the Governance of the SociethL per Azioni. 1. The Shareholders. 2. The Board of Directors. 3. The Board of Auditors. F. Summary of Part II. III. THE SYSTEM OF CORPORATE DIRECrORS' LIABILITY: THE LAW A. The "Tortious Interference" Liability of Directors to Creditors. B. The General Tort Law Liability of Directors to Shareholders and Third Parties. C. The Liability of Directors to the Company. 1. The Grounds. 2. The Procedure. D. Summary of PartIII. IV. LAW AND SOCIETY: THE ITALIAN INDUSTRIAL SYSTEM AND THE OWNERSHIP STRUCTURE OF ITALIAN COMPANIES. * Lorenzo StanghellinJ is Assistant Professor of Law, University of Florence, Italy. J.D., University of Florence (1987); LL.M. Columbia University (1995). I am grateful to Professors Ronald J. Gilson and Francesco Corsi for helpful comments. The paper benefited also from colloquia with Professors John C. Coffee, Jr., Harvey J. Goldschmid, Jeffrey N. Gordon and Henry Hansmann. I am particularly indebted to Bernard Alter and Leeanne T. Sharp for helping me edit the text. Invaluable support during my stay at Columbia University came from Professor Walter Gellhom. The Italian Academy for Advanced Studies in America at Columbia University gave me precious logistic assistance and allowed me to present an earlier draft of this paper at a seminar on April 13, 1995. Helpful comments came from the participants, and particularly from Bal Gopas Das, Lorenzo Borgogni, Pierre-Henry Conac, Gabor Molnar, Bruno Louis Ranger, Laura Ristori, Efrat Safran, and Leeanne T. Sharp. My stay in the United States was partially supported by a grant from the Italian National Research Council. The opinions expressed in the paper are solely my own. IND. INT'L & COMP. L REV. [Vol. 6:1 A. An IndustrialSystem Based on Small Firms. B. A Follow-up: The Insufficiency of Data on Industrial Size in Assessing the Efficiency of the Italian Industrial System as a Whole. C. The Important Role of the Public Enterprise System. D. The Ownership Structure of Unlisted Companies. E. The Ownership Structure of Listed Companies. F. Expanding the View: The Structure of the Control Group in Listed Companies. G. Shareholders'Agreements as Non-legal, or At least Only Partly Legal, Institutions of Governance of Italian Companies. H. The Nature and the Structure of the Control Group of Italian Companies. I. Factors Determining the Concentrated Italian Ownership Structure. J. Completing the View. Factors Determining the Ownership Structure as a Whole: Long-term Entrepreneurs and Short- term Companions. K. Italian Corporate Governance: Some Final Remarks. The Majority Stake as the Most Important Institution of Italian Capitalism. L. The Way Ahead: The ForeseeableDevelopments. M. The Need to Reform the System to Provide Strong Minority Monitoring. N. Summary of PartIV. V. CORPORATE GOVERNANCE IN ITALY AND THE SYsTEM OF DIRECTORS' LIABILITY: A PROPOSAL FOR REFORM A. Directors' Accountability: Who are the Plaintiffs in Liability Suits against Directors? B. Minority Shareholders' and Directors' Liability: How Many Explicit Attempts? How Many "Undercover" Liability Suits against Directors? C. Directors' Liability Legal Framework in Action: Who is Protected against Whom? D. Concentrated Ownership Structure and Majority Vote: Spontaneous Incentives versus Optimal Deterrence. The Different Situations of the Duty of Care and of the Duty of Loyalty. E. The Consequences of the Problematic Enforcement of the Duty of Loyalty. F. What Role for Derivative Actions based on Violations of the Duty of Loyalty in Italian CorporateGovernance? A Possible Contribution to the Implementation of the "Mutability Principle"? 1995] CORPORATE GOVERNANCE IN ITALY G. Summary of PartV. VI. CONCLUSION: WHAT PART FOR THE OWNERS OF THE FIRM IN A MATURE ECONOMY? I. INTRODUCTION The goal of this paper is to provide some insight into the Italian corporate governance system. It has been said that "[i]n an overall economic perspective two main models of control have emerged: systems which utilize the market as a monitor (for example, the market for corporate control as particularly in the United States and Great Britain), and systems of control in which banks and fellow corporations function as monitors (as in Germany and Japan)." This is doubtful. I think Italy represents a third model in which entrepreneurs as shareholders have remained in control and influence the corporate policy rather than simply monitor more or less independent managers. Even though important changes in the Italian corporate landscape are now taking place, and more are to be expected in the future, the present governance pattern will remain the same for several years to come. Is Italy an anomaly, thus not worthy to be studied? I do not think so. Italy could be a useful subject of study for corporate governance specialists, to be added to the much studied countries of the former Communist Bloc. The lesson is that, when certain conditions are met, the owners of the enterprises may retain a part-indeed, an important one-even in a mature economy. Therefore, separation of ownership and control must be explained in a historical perspective, and cannot simply be taken for granted once the economy develops. In order to familiarize the reader with corporate governance in Italy, Part II gives the reader a general background of Italian corporate law and structure, providing information on what is strictly necessary for the correct understanding of the paper's main theme. It is not intended to be a substitute for direct knowledge of the matter, which can be acquired only through 2 a reading of the various manuals and treatises on the subject. 1. Klaus J.Hopt, Preface to INSTITUTIONAL INVESTORS AND CORPORATE GOVERNANCE 1, 2 (Theodor Baums et al. eds., 1994). 2. A selective bibliography includes the following texts (listed in alphabetical order): (a) Manuals (1) GIuSEPPEAULETrA &NiccoLo'SALANITRO, DIRrOCOMMERCIALE (9th ed. 1994). (2) GIAN FRANCO CAMPOBASSO, DiRrro COMMERCIALE, in three volumes: I DmIRTro DELL'IMPRESA (2d ed. 1993); 2 DIRiTrO DFL.E sOCIETA (2d ed. 1992); 3 CONTRATi - TITOLI DI cREDrro - PROCEDURE CONCORSUALI (1992). (3) GASTONE COrrINO, CORSO DI DiFrrro COMMERCIALE, in two volumes: I (3d ed. 1993); and 2 (3d ed. 1994). (4) FRANCODISABATO,MANUALEDELLESOCErA (4th ed. 1992). IND. INT'L & COMP. L REV. (Vol. 6:1I Details, often important ones, sometimes have been passed over or simply have been referred to in the footnotes, with an indication of sources where they are appropriately discussed. Those familiar with the subject may simply skip Part II, and those who are interested in its conclusions can find them in Section II.F. Part III explores the legal framework of directors' liability under the particular prism of the balance of power between majority and minority. Particular focus is on the Civil Code rule requiring a majority vote for an action against directors to be brought by the company and its significance as a governance tool. Conclusions can be found in Section III.D. Part IV analyzes the structure of the Italian industrial system and the ownership pattern of Italian companies. The result of this analysis is that the dominant institution of Italian corporate governance is direct involvement of large shareholders, either alone or associated in a structured control group. Synthetic conclusions are drawn in Section IV.N. Part V, starting from the analysis of the existing "case law" concerning directors' liability, suggests a change in the legal rules of corporate governance concerning minority suits against directors. Such change is necessary to pave the way for new organizational forms, in which the role of particular kinds of minority shareholders-namely, institutional investors-will be of critical importance. Findings and proposals are summarized in Section V.G. II. THE ITALIAN SYSTEM OF CORPORATE GOVERNANCE: THE LEGAL FRAMEWORK A. The Legal Sources of Italian Private Law: the Civil Code. The Italian Codice Civile [hereinafter Civil Code] was enacted on March 16, 1942. At that time, Italy had been ruled by the Fascist government for almost twenty years and was at war. Badly equipped Italian armies had recently joined the armies of Germany in the invasion of Soviet Union, which later proved to be one of the turning points of World War II. (5) FANcEsco FERRARA & FRANCESCO CoRsi, GLI IMPRENDITORI E LE SOcIETA (9th ed. 1994). (6) GIUSEPPE FERRI, MANUALE DI DIRrI-ro COMMERCiALE (9th ed. 1993). (7) FRANCESCO GALGANO, DiRIro cOMMERCIALE, in two volumes: I DiRfIrro DELL'IMPRESA (4th ed. 1991); 2 DIRrrrO DELIE SOCIETA (4th ed. 1991). (8) PiERGIUSTOJAEGE ,&FRANCEscODENozzA, APPUNTI DI DIRiTIO COMMERCIALE (3d ed. 1994). (b) Treatises T"ATrATO DE3 IE sOCIETA PER AzioNt, (Giovanni E. Colombo & Giuseppe B. Portale eds.) (Eight volumes of a scheduled ten have been published). 1995] CORPORATE GOVERNANCE IN ITALY Notwithstanding the tragic circumstances in which it was passed, the Civil Code is a fairly sophisticated
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