How to appoint and remove officers in an Italian Italia

Under Italian Law there are two different business entities providing full limited liability for their equity holders.

The first one is the “Srl” akin to a limited liability company under U.S. law, the second is the “S.p.A.” roughly corresponding to a U.S. corporation.

There exists a third / hybrid type combining the features of the partnership and the limited liability company, the “Accomandita”, where only limited liability partners are fully protected from responsibility, while managing partners are entirely liable (it being understood that if limited liability partners manage nonetheless the company, they lose the limited liability protection). This third type of company (similar to an LLP under U.S. law) will not be taken into account in the present Q&A form. Companies that resort to the risk capital markets will not be covered either.

Srl

Unless otherwise established by the charter or the bylaws, directors or a sole director (depending on the model and system adopted) are chosen among the equity holders (in an Srl, defined as “quota holders”); nonetheless the corporate documents may entrust third parties with the management of the company.

Causes of ineligibility are the same as for the S.p.A. (see art. 2382 of the Italian Civil Code).

Are not eligible for appointment:

• legally incapacitated individuals;
• individuals with restricted legal capacity;
• individuals declared bankrupt;
• individuals banned by virtue of a decision rendered by the competent court from holding a public office or from carrying on managerial duties.

The corporate documents may establish further requirements in order to be appointed such as respectability, competence and independence.

As indicated above, the management of the company is entrusted either to a sole director or to a plurality of directors. In the latter case, the directors can act as a board of directors in a collegial manner or they may manage the company directly, their powers being considered to be exercised severally and jointly.

Therefore, at least a sole director being the legal representative of the company must be appointed.

S.p.A.

The Italian legislator has conceived three different forms of corporate governance:

• the traditional system;
• the dualistic (two tiers) system;
• the monistic (one tier) system.

The traditional system (by far the most common one, so the dualistic and monistic ones will not be covered herein) is characterized by the presence of a) a management body and b) a supervisory body, i.e., the board of statutory auditors, it being understood that the management body may consist of a sole director or several members constituting the board of directors.

The bylaws usually establish the number of directors to be appointed or simply state a minimum and a maximum (in this latter case it is up to the shareholders’ meeting to set the number of directors).

Even non-shareholders may be appointed as directors and the grounds for ineligibility are the same put forward previously for the Srl type company. Moreover, special laws may provide for grounds of incompatibility for certain categories of Individuals to be appointed as directors, e.g., public servants, members of parliament, lawyers, etc.

In companies operating in specific sectors, such as banks or insurance companies, further requirements are requested in order to be appointed, such as respectability, competence and independence are requested.

Please also note that in the S.p.A., article 2396 of the Italian civil conde mentions the figure of General Manager (Direttore Generale). Nevertheless, the legislator does not define it.

Traditionally the General Manager carries out the top management activities, being at the top of the corporate structure immediately below the directors.

To some extent the General Manager can be considered very similar to the CEO under US law, and as other top managers such as CFO and COO under US Law, is an employee of the company and can also represent it in court if this has been provided by the bylaws.

The General Manager is a corporate body different from the directors and can also assume a collective structure, as in the case of a management committee.

The General Manager, if appointed by the shareholders' meeting or by a provision of the charter, may be subject, regarding the tasks entrusted to him/her, to the liability regime provided for directors.

The liability of the General Manager under company law may be cumulated with actions, both compensatory and non-compensatory, arising from the employment relationship; this circumstance occurs when a director holds both roles.

If there are no overlapping roles, the General Manager’s appointment is solely regulated by labour law rules for top employees.

Srl

The initial directors are chosen in the charter and subsequently they are appointed through a quota holder’s deliberation according to art. 2479 of the Italian Civil Code.

The power to appoint directors’ rests exclusively within the quota holders therefore any clause providing such a power as belonging to a third party is null and void; contrarywise the bylaws may bestow the power to appoint one or more directors as a specific right pursuant to art. 2468 of Italian Civil Code to individual quota holders.

S.p.A.

Likewise, the first directors are appointed through the charter and afterwards they are appointed through a shareholders’ decision adopted during the annual shareholders’ meeting.

The bylaws may grant to the holders of financial instruments pursuant to the last paragraph of article 2346 of the Italian Civil Code the right to appoint an independent director.

Generally speaking, the right of directors to resign from their duties at any time has no legal restriction. However, a director who resigns from his or her office shall give written notice to the board of directors and the chairman of the board of auditors, if any. The resignation shall take effect immediately, if a majority of the board members remains in office, or, if not, from the time the majority of the board’s members has been re-formed following the acceptance of new directors.

The Italian legislator applies the principle of continuity of the management body and provides for the extension (in Latin prorogatio) of the administrative function for the period between the natural end of the term of office and the acceptance of the appointment by the directors who follow. Expired directors during the extension period retain their powers prior to expiry.

According to the case law, the existence of a just cause is not included among the prerequisites for resignation and this exclusion does not imply any serious violation of general principles, nor any unjustified lack of protection for the company, whose interest in the continuity of management activities can easily be satisfied with the immediate replacement of the director. Nevertheless, the respect for the common principle of good faith, as well as the need to avoid claims for damages from the company, may require the director to hold office until the appointment of a new director to replace him or her, or in any case for such period as may be deemed appropriate for his or her replacement.

Quota holders and shareholders respectively in the Srl type and Spa type companies may pass a resolution at any time aimed at terminating directors’ office before the expiration of the natural term (usually 3 financial years but it can be shorter) with or without just cause.

As stated above, directors can be removed by the quota holders’s or shareholders' meeting at any time, even if appointed in the charter; nonetheless if removal occurs without just cause directors have the right to seek compensation for damages. The just cause must be specifically stated in the meeting's resolution, without it being possible to subsequently provide additional grounds for removal in court. Just cause may be both subjective and objective, provided that it concerns circumstances or facts that have arisen that are capable of negatively influencing the continuation of the relationship; it follows that the mere reasons of economic convenience do not integrate the notion of just cause.

In this context, the company has the burden to demonstrate the existence of a just cause for removal.

The absence of just cause, in fact, determines only the possible duty to pay damages but does not affect the effectiveness of the removal which is to be considered a lawful act and a manifestation of the rights of the equity holders.

The removal of directors, which may give rise to compensation for damages if it takes place without just cause, does not necessarily have to be formalized in an explicit resolution, but may also take place implicitly, as in the case where a reduction in the number of the Board members is decided by the equity holders.

Typically, in order to quantify the damages, one has to take into account the economic and social sacrifice of the director as a result of the removal, the remuneration loss as a consequence of the removal and also the possible damage to the professional reputation.

While in the S.p.A. company the term of office cannot exceed three years, in the Srl company, if no limits are specified, directors shall hold the office permanently until removed. In this latter case, in the absence of just cause, the removal may give the right to compensation for damages if it has not been communicated with suitable notice.

According to the case law, the main parameter to be adopted to quantify the compensation, for a removal without just cause, can thus be traced back to the remuneration that the director would have earned from his functions if removal had not occurred or that the director would have earned during the notice period.