Business Law - Companies (Prof. Smirne)

• A certain percentage of the share capital (“quorum”):

o Must be present for the assembly to be validly convened (e.g. at least 50% of share capital)

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Must vote in favour with the proposal, for the resolution to be passed

To allow the highest possible participation from shareholders, the law contemplates tools in order to make

up for the impossibility to be physically present at the time and location of the general meeting:

✓ Tele/video conference: shareholder can use technology to hear (tele = phone calls) and see (video =

skype) the general meeting’s work in order to participate both actively and passively.

✓ Mail vote: shareholders will send their voting decisions

✓ 17

Proxy vote: shareholders will delegate someone else to attend the meeting in their stead (=voto

per delega)

Directors and Management (Italian model):

We have to remember that in companies, contrary to what happens in partnerships, managers and

shareholders do not coincide; this is because a company is usually composed of more shareholders than

partners (in partnerships).

Directors: they are appointed by shareholders to monitor the company’s activities (role decisive)

administration.

Managers: they consist in paid employee in charge, generally, of a specific department (role executive)

management.

Moreover, shareholders are not always interested in running the company: If the business is big, they may

just want to be investors.

About this issue there is the theory of the “rationally apathetic shareholder”: shareholders do not care

about the management of the company, they only care about dividends (rationally because it is not their

business). This is a huge problem, as we have investors not caring about their investments and so decisions

are delegated to managers (that’s why in Italy managers cannot be delegated).

To deal with this very common problem for listed companies there are both INTERNAL and EXTERNAL

forms of control (to avoid that the shareholders “take over” in their own advantage or that they do not

check because they do not care); these forms of control can be for instance, auditors in PLCs, which,

however, are not present in LTDs.

Other Agency Problems are linked to the Stakeholders, which are everyone who has any sort of interest in

the company: Company Law is an attempt to try to solve these problems.

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There can be one DIRECTOR or a BOARD of DIRECTORS (=Consiglio di Amministrazione): the board

can delegate part of its powers to managers (similar to “Amministratori Delegati”).

• The Board decides through majority votes. The system is not good for quick decisions (because you

always need majority), however is good for debate and discussion. The real power of the Board of

Directors is that of taking back the power of delegation. However, the Board can still decide even if

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there is a delegated manager managers will act hiding his actions, for a matter of politeness and

then for a matter of sharing the responsibilities, liabilities and burden with the rest of the board.

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Managers usually act alone (once they are delegated from the Board of Directors) .

16 It is sufficient that the majority of share capital of the present shareholders is in favour with the proposal.

17 In US, managers can be delegated and can represent shareholders, while in Italy this cannot happen.

18 It is a general name different from managers/officers; they are delegated people inside the Board of Directors.

19 E.g. Marchionne has been delegated by all powers, so he does not have to wait for the Board of Directors.

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• Corporate Governance deals with “how to structure the managerial body” (refers to law 231 of

Italy, about organizational models).

• In PLCs, Board members can be elected for a period of time up to 3 years (and can be re-elected

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afterwards) .

• In LTDs, there is no limitation and they can be elected for as long as they are not removed from

office.

• Directors and Managers can cease to be such for a number of reasons:

o Expiration of the duration

o Removal from the office

o Death

o Resignation

• Except for death, however, it is difficult to establish when a manager stops to be a manager.

Auditors (Italian model):

This body is not always present in companies, its functions is to ensure a form of control that is internal to

the company.

• In LTDs (so SRL in Italy), the control bodies are only active, the control body is required by the law

only when the company is subject to a consolidated balance sheet (a group of companies = sign

that there’s something bigger), however, it occurs rarely that the LTD is inside a group.

o Can be present or not

o Can be a very monocratic organ (“Sindaco Unico”)

o Performs a control:

▪ Over the regularity of the management’s decisions

▪ On the regularity of the financial documents and procedures

o Can have a Board of Auditors, even if it is not compulsory, for two main reasons:

▪ To have all documents and financial reports checked

▪ To get investors, in order to draw investors into the company, it is mainly for a

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matter of attracting shareholders

• In PLCs (so SPA in Italy), the control organ:

o Must be always present

o Must have the form of Board of Auditors (“Collegio Sindacale”)

o The financial documents and procedures are often checked by a different body, the

external auditor (or the external Auditing Company)

But how does the control body actually control?

• It must participate to the general meetings and to the Board’s meetings, so that it is always

informed and can give its opinion.

• The balance sheet and many major operations concerning the company are approved only after the

Control Body has expressed its (non-binding) opinion over them.

And its independence is preserved as:

• It can only be removed for just cause (like it happens in labour law) and a Court’s supervision.

• Its fees are decided once and for all the time of its appointment.

20 The more we move to a listed company, the more there is a need for extra control because shareholders tend to be

more apathetic.

21 Like when companies invest in something sustainable and eco-friendly or like when there are many bylaws that

guarantee an extra protection to shareholders: all mainly to attract new investors.

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Dualistic Model (German Inspiration):

It consists in a two-tier system inspired by German Model, but not exactly the same. It was previously

chosen by Intesa Sanpaolo (PLCs): Intesa (based in Milan) and Sanpaolo (based in Turin). These two banking

companies had many differences.

• Two Boards (two-tier):

o Board of Directors: takes decisions

o Supervisory Board: it is nominated by the shareholders, oversees the work of the board of

directors and nominated its members (it is different from the Auditors’ Board, which does

not nominate its managers). This board also has managerial competence (general guideline

of a company). It is a very important body: very representative, they chose better the

managers and they check better (give voice to employees).

• This model is a system with a logical sense: there is an intermediate body (supervisory Board) that

does most of the job (choosing, checking etc.), however they do not always directly work as

managers.

• As long as the supervisory board is nominated, there will be some form of control.

• It is very representative and allows for technical managers to be chosen.

Monistic Model (British Inspiration):

It consists in a one-tier system inspired by British Model. It has been recently adopted by Intesa Sanpaolo

SPA.

• There is one board, which includes:

o Independent managers perform control duties (so-called Management Control Committee)

o Managers who run the company

• It is a very efficient model (because it is the same body doing both tasks of managing and

checking/controlling) and allows information sharing, because the controllers sit in the same

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position (quick/efficient like American Style)

22 Cultural parenthesis: Aristoteles’s idea of the best way to govern (according to him is the monarchy). Montesquieu’s

division of power’s idea. 12

Lecture Four

Share Capital and Loans – different ways to finance the company:

Here we talk about how we finance a company; there are several ways for a company to be financed:

1. Capital and Reserves: they constitute the company’s resources (capital is what makes the company

works)

2. Securities: the other way to finance the company is borrowing money from people, that is to issue

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certificates (securities ) attesting the ownership of:

a. Stocks

b. Bonds

Stocks:

Also called shares or equity securities, they are the counterpart to shareholders’ contribution

(consideration) to the company’s capital (allotted shares).

The general rule is that they provide a patrimonial and personal right:

✓ Dividend

✓ Vote and pre-emption

Bonds:

Also called debt securities, they are the counterpart to creditors’ loans to the company, which is the debtor.

The most famous bonds are the US treasury bond in the United States, BOT or BTP in Italy, BUND in

Germany. 24

The general rule is that they provide just the patrimonial rights, no voting or pre-emption right is provided

for creditors:

✓ Interest

Differences between the two:

One of the main differences is that the debtor (the company), even if has not the money to pay off the loan

(economically incapable), is still liable and obliged to pay the debt. On the contrary, the company can also

decide not to distribute dividends that year, so the patrimonial right of the bond is always there, while the

one of the share is not.

Hybrid between Shares and Bonds:

Distinction has become blurred, for instance:

1) Saving Shares (no voting rights): they have no voting rights, so they keep only the patrimonial right

(dividends). There are some bylaws that allow you to get super patrimonial right, to compensate

for the fact that you cannot vote. It is typical for someone that wants to invest and not manage. If I

have a saving share, I will be shareholder, but similar to a bondholder because I do not have the

right to vote.

2) Convertible Bonds: it is a bond that can be converted into a share. Why would I want to convert my

bond into a share? Surely, not for patrimonial reason, as shareholder do not always get dividends

while bondholders always get interest. Therefore, it is a matter of voting: it is probably riskier, but

at least I will have a voice that will be heard (hopefully) and I can prevent some troubles in the

23 Different from security, which means a guarantee, a collateral.

24 In this context, the pre-emption right is the right for already existing shareholder, to subscribing new capital in case

of capital increase. 13

company to happen (maybe). However, dividends are based on that profit year, while interest is

not; so, there can be a strategy in becoming a shareholder.

cannot be redeemed until all other

3) Perpetual Subordinated Bonds: it is a very risky security;

creditors have been paid off. So, you are the last getting paid (if there is the remaining

money). It is a hybrid because it is the closest situation between a shareholder and

bondholder. It is similar to having a share, but you get periodical interest.

Equity Securities:

Private Limited Company (LTDs):

✓ Same word (share) has a different system compared to a public company (PLCs); in Italian we can

call it “quota”. Since my “quota” can be greater than another one, my vote can count more than

another person with the other (more personal than PLC).

✓ Special economic or administrative rights can be attributed to a shareholder, for instance one

shareholder could count more in the voting or one shareholder could be give the “veto” power. For

example, I can write your name in the bylaw and your power (even if maybe you have a small

quota): personalistic kind of power. These kind of rules, that can be changed, are called default

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rules; you will not find them in the civil code as you have personalized them . N.B. there is a limit,

you cannot break them as a rule.

✓ It is possible to contribute work or services to the company. Remember consideration in kind (to

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contribute to company’s capital with something that is not cash ). So, it is a contract, I am

contributing with my work in exchange for some shares: in order for the contract to work, there

should be a balance:

o Independent valuer’s report: a document made by a person who is in charge to evaluate

the service/work.

o Personal guarantee (bank or insurance)

First problem is because it is not easy to evaluate (hence, independent valuer’s report). The second

problem is that services/works are not enforceable (so, there must be a monetary equivalent, i.e. the

guarantee). Once I give my contribution, the company just take it; how does the company protect itself if I

do not provide my service? I am not obliged to go to work, so they stipulate a guarantee.

Public Limited Company (PLCs):

Here you can have several kinds of shares, where the personalistic rights that we’ve found in the s.r.l, are

now applied to shares themselves and are not linked to the shareholders’ names anymore.

• It is NOT possible to contribute work or services to the company.

• Classes of shares: equal treatment of shareholders with each class.

o A special resolution of the general meeting (or the company’s bylaws) decides upon their

introduction.

o A class meeting must approve resolutions affecting rights of the said class.

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Normally, no multiple voting rights .

• It is possible to have shares with no voting rights (e.g. saving shares).

25 On the other hand, we’ve mandatory rules, that cannot be changed (like in criminal law).

26 Cash is easy to evaluate, while kind is not easy to (first problem).

27 Recently Italy has introduced multiple voting, which is a typical Anglo-Saxon feature. N.B. FCA moved to Netherland,

which has a Business Law partly Anglo-Saxon and so multiple voting, that allows to control better your company.

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Lecture Five

Increase and Reduction of Capital – Capital Maintenance:

Capital maintenance is not easy, is technical, but gives you a deep view of the heart of your company which

is capital. Share capital is the resources you keep in the company; however, you can increase or decrease it.

Contrary to reserves, share capital require a very rigid process to be changed.

Real/Nominal modifications: are we changing (increasing or decreasing) only the company’s capital or also

its assets?

• Nominal modification of Share Capital: I am not changing the company’s assets, even if I am

increasing the capital, the company remain as rich as before, I am just playing with the balance

sheet (I move resources from one side of the balance sheet to the other); so, normally I am moving

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resources form reserves to capital and vice versa .

• Real modification of Share Capital: I am changing the company’s assets, so if I am increasing it I am

making the company richer.

If I want to change (increase or decrease) the share capital, I have to change the bylaw, because it is there

where it is written the amount in the capital; so, as when we want to create new classes of shares, we0ve

to go to a notary and then change bylaws (internal rules of the company) following the 3 steps.

Increase of Capital:

All shares need to be fully paid in before a new capital increase can be enacted (no shares outstanding).

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Both nominal and real increase can be delegated to Management ; limitations:

• For a maximum of 5 years

• Within a maximum amount

Nominal Increase of Capital:

It is the capitalization of reserves: so, when you transform reserves into capital.

Quality has changed, quantity not and the purpose is that I am promising to keep more higher value in the

company.

Here new shares are given to old shareholders, not to new ones; they are given to the owners of reserves.

How does this reflect itself on shares? (PLC hypothesis)

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A. Issue of new shares (bonus shares) , with the same characteristic as the old ones.

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B. No issue of new shares but increase of par value of existing ones (no increase needed if the shares

have no par value).

28 So, the quantity has no changed, it has changed just the quality.

29 Remember that in Italy managers are forbidden to be a shareholder; in US it is not, there are super-power

managers. In Italy, however you can delegate something, like in this case (linked to financing the company).

30 Because you are getting new shares without paying: resources were already in the company.

31 Par value is the nominal value, the one written on the share, but the market value can be different.

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Real Increase of Capital:

There is a contribution in cash or in kind, with usual rules.

Shareholders (and holders of convertible bonds) have preferential rights of subscription (pre-emption

rights): ratio of pre-emption rights, to keep the balance of power unaltered inside the company.

That’s because otherwise, the old shareholders (maybe interested) will find that they have less power and

less percentage of capital, because the company took money before from other people and not from its

shareholders.

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Pre-emption rights:

• Can be suppressed with special majority (it is a default rule, but since it is an important right, you

need a special majority to change it).

• Don’t exist in case of contributions in kind (because it is not cash, we should ask the same condition

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to the other shareholders, but in kind is something maybe unique) .

• Can more easily be suppressed if shares are allotted to employees.

We’ve talked also about crowdfunding, so collecting money from the crowd; however, after that, you can

choose to let people become lenders or shareholders. If they are supposed to become shareholders, you

probably will go trough a real increase of share capital.

Real Reduction of Capital:

The company is becoming poorer. Normally originated by optional reasons (I can choose to reduce it,

normally).

Typically, shareholders think that the company’s assets exceed what is required by the company to achieve

its objects.

E.g. my company produce earrings and cosmetics, once become obsolete, I cannot pursue the second

anymore, but I’ve pumped in the company money to pursue both; so, I can act a real reduction of capital,

because can be not so efficient to have more money there. I can allocate them in a place where they can

create more wealth.

Can take place in 2 ways:

A. Return of capital to shareholders;

B. Release of shareholders from obligation to make further consideration;

So, it is the operation opposite to the one we saw during the creation:

1. In a company’s creation shareholders give consideration and are allotted shares in return;

2. Here they give back shares and receive part of the share capital (i.e. normally the original

consideration) back;

Mind that:

• Minimum capital requirements must still be met (50.000 EUR for PLC, 1 EUR for LTD).

• There is a problem: creditors’ protection

32 It means the right to buy before.



33 Vergine delle Rocce (Leonardo) contribution in kind. 16

Your creditors must agree with the real capital reduction (so the bank that lent money to the company,

should give its consent). The resolution may be implemented only 90 days after its registration in the

Register of Enterprises, assuming that no creditor has notified opposition. It is the creditor’s job to check on

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the Business Register (cheap, reliable and can be reached by everybody) .

Nominal Decrease of Capital:

In this case, because of the reduction of the capital the company is nor becoming richer nor poorer, but it is

becoming poorer because things are going bad, it is a reflection!

It is normally originated by compulsory reasons; the typical example is losses. It means that the company

has already used other kind of reserves, so it is in trouble.

When the company starts losing money, in truth you have no money in bank account, you do not pay you

suppliers and so on, in the balance sheet you reflect these causes by reducing the company’s reserves.

Realizing that the company Is incurring in losses is a process; you can see it officially with the release of the

balance sheet (prepared by managers but approved by shareholders from 4 to 6 months after the financial

year).

So, after you have realized it, the law forces us to show in the balance sheet that we do not have as much

money we used to have.

Moreover, you do not need the creditors’ consent, also because sometimes you are obliged to nominally

reduce it.

If the share capital goes down to zero (so not 1) because you have already used all the reserves, the

company is too poorer, we should make it richer so, we will go trough a real increase of capital.

Two situations possible:

1. Losses exceed 1/3 of issued capital but resulting capital would still respect minimum requirements:

capital reduction can be postponed for a year. If after a year, losses haven’t been compensated by

new resources, capital must be reduced.

2. Losses exceed 1/3 of issued capital and resulting capital wouldn’t respect minimum capital

requirements: a shareholders‘ meeting must be convened immediately, in order to (with a special

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resolution) :

a. Reduce the capital and increase it to minimum level (economically= the shareholders

believe in that company)

b. Or transform the company into a model with lower minimum capital requirements or with



no such requirements partnerships (economically= the shareholders do not believe too

much in that company).

c. Or wind up the company (economically= the shareholders do not believe at all in the

company, therefore they terminate it).

34 In US, they have many registers, not amended and checked, not reliable so they are a mess.

35 It is important for the company to act quickly, managers can be sued for damages if not by creditors.

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