Directors’ Liability in Italie

The directors of companies, including those of S.p.A. - namely “società per azioni” a business entity corresponding to a corporation under U.S. law and S.r.l. – namely “società a responsabilità limitata” corresponding to a limited liability company under U.S. law - are subject to civil and criminal liability (for sake of clearness, it should be understood that the present paper is mainly devoted to S.p.A.).

In the first sphere i.e., the civil one, liability is postulated towards various subjects: the corporate entity itself, the equity holders, the creditors of the business entity and third parties. The goal of the liability action is twofold: it aims both at preserving and maintaining the assets and at being an instrument of control over the directors’ activities.

In particular, the responsibility foreseen by article 2392 of the Italian Civil Code - Responsibility towards the corporation- can be qualified as liability in contract, since this is the nature of the relationship between the directors and the corporation; therefore, the latter will only be required to prove the damages occurred and the fact that they are attributable to a breach of the duties of the directors, not their fault.

Director’s liability is linked to a so called “obligation of means” as opposed to the “obligation of result” and it is based on the duty of care that should inspire the conduct of the individual directors. It does not imply, therefore, an obligation relating to the overall results of the management process. The legal system, envisages, as a parameter of the duties owed by the directors, specific criteria of diligence identified on a case-by-case basis, taking into account the nature of the assignment (objective criterion) and the specific skills (subjective criterion). Some scholars maintain that, in addition to a duty of care or under Italian law “duty of diligence”, an obligation of having qualified expertise might arise. For example, the case law requires particular and accentuated competence and diligence for the directors sitting on the board of banks (article 26 tub “testo unico bancario” i.e. the piece of regulation governing financial institutions) or of for wealth management companies.

The board typically undertakes it resolutions as collegial body. The collegiality of the administrative body means that the individual members are jointly and severally liable for any damage caused to the company through non-compliance with their duties. Moreover, the director who, knowingly, has done nothing to prevent the occurrence of damages, will be liable for “culpa in vigilando” i.e. fault in supervising, while if he has displayed his dissent and his opposition at the board meeting or by reporting the fact to the Board of Auditors (the supervising body) will not be liable.

The liability action against the directors can be, first of all, brought by the corporation itself pursuant to article 2393 of the Italian Civil Code. The so called “azione sociale di responsibility” or in English “corporate liability action”. The right to bring a corporate liability action lies with the Shareholders’ who have the right to undertake a specific resolution in this regard during ordinary meetings even if the corporation is enduring a process of liquidation. The decision to initiate a liability action can be adopted also by the supervisory body i.e. the so called Board of Auditors with a 2/3 majority.

The corporation can renounce to the action and can settle it provided that there is an express shareholders’ resolution. The adoption of this resolution is subject to both the consent of the majority and the lack of veto by a qualified minority of one fifth of the shareholders. The action can also be proposed by minority shareholders, pursuant to article 2393 bis of the Italian Civil Code, in order to overcome the inertia of the leading group of shareholders. However, in order to avoid frivolous actions, it can only be initiated by a qualified minority corresponding to 20% of the share capital in the so closely held corporations and to one fortieth in those corporations that make recourse to the capital market. The liability minority’s action “azione di responsabilità della minoranza” represents an instrument of control and pressure exercised by well-organized minorities.

The resolution aimed at bringing the liability action entails the automatic removal from office of the directors against whom it is proposed only if the resolution is approved with the favorable vote of at least one fifth of the share capital.

The other category of persons entitled to bring liability actions are the corporate creditors for failure on the part of directors to comply with the obligations concerning the safeguard of the assets’ integrity pursuant to article 2394 of the Italian Civil Code. The creditors might bring the said action when they are not been able to recover their credit. According to the prevailing scholars, this is an extra-contractual responsibility akin to a liability in tort under U.S. law. In this respect directors are treated as third parties in the corporation-creditors relationship and the action under discussion would be construed as an autonomous action with respect to the one brought by the corporation itself.

Further parties entitled to bring the liability action are individual shareholders and third parties, who, pursuant to article 2395 of the Italian Civil Code, can always assert their right to compensation for damages, when they have been directly harmed by director’s misconduct. The prevailing opinion among scholars is that, given the lack of contractual relation between the directors and the shareholders or third parties exercising the action, the responsibility of the directors towards these parties is of an extra-contractual nature.

Finally, article 2394 bis of the Italian Civil Code provides that, in the event of bankruptcy, mandatory administrative liquidation and extraordinary administration, only the bankruptcy trustee, the liquidator or the extraordinary commissioner has legal standing to bring against the directors the liability actions above mentioned with the only exception of the action of the individual shareholders and third parties.

From a criminal point of view, the directors are liable for any wrongdoing committed during the period in which they held office. Resignation from office does not exempt them from previous liabilities. Criminal offences are typically inherent in the director's position and are generally committed in order to gain personal advantage for instance fraudulent conveyances aimed at embezzling or diverting corporate assets. The discipline of such offences is contained, exceptionally, within the Italian Civil Code from article 2621 to article 2642, with penalties ranging from administrative fines in the mildest cases to imprisonment for the most serious wrongdoings. The criminal liability of the directors is recognized not only when they formally act on behalf of the corporate bodies or thorough them, but also every time they actually carry out activities of administration of the company's assets.

Generally, the criminal liability action against directors can be brought by anyone who has suffered damage as a result of the offence committed. For example, in the case of false corporate communications pursuant to article 2621 of the Italian Civil Code, the crime can be prosecuted on the basis of a complaint brought by the company, the shareholders, the creditors and/o other recipients of corporate communications. It is worth noting that the liability (civil) action can be brought within the criminal proceedings if this is the case. The bankruptcy trustee, the liquidator or the extraordinary commissioner may bring the civil action within criminal proceedings for the offences committed by directors in case of bankruptcy, mandatory administrative liquidation and extraordinary administration. Creditors may bring the civil action within criminal proceedings for fraudulent bankruptcy when the bankruptcy trustee, the liquidator or the extraordinary commissioner have not brought the civil action or when they intend to assert their own right of action.

The corporate liability action can be commenced within 5 years from directors’ termination of office as provided for by article 2393, third paragraph, of the Italian Civil Code. According to article 2941, paragraph 7, of the Italian Civil Code, the statute of limitation period is stayed while the director is still in office.

The action brought by the corporate creditors is time-barred in 5 years in the same way as that of the one initiated by the corporation; however, the term for the action does not necessarily start from the day that coincides with that of the action exercised by the corporation, but from the moment in which the assets are insufficient to satisfy the creditors themselves. A five-years statute of limitation period also applies to actions brought by third parties or individual shareholders, which run from the day on which the prejudicial act is carried out against them.

It must, however, be considered that in any case, article 2947, paragraph 3 of the Italian Civil Code provides that if the fact is considered by the law to be a criminal offence, and a longer period of statute of limitation is established for the said crime, this is also applied to the civil action. In criminal matters this term is different according to the offence committed by the director; for example, the statute of limitation period for the offence relating to false corporate communications is 8 years.

There are no major provisions in the Civil Code relating to directors’ liability insurance, other than article 1917 of the Italian Civil Code, which deals with the subject in a general way, while more rules can be found in the field of insurance law. The policies covering directors’ liability notoriously has developed in the Anglo-Saxon experience - it is not by chance that these policies are called “D&O” or “directors and officers” - and only later entered the Italian legal system where they are currently frequent.

Having said that, it is worthy to highlight some features.

The importance of the subjective element must be taken into account (willful misconduct). The risk of moral hazard is in fact limited by the fact that D&O insurances, like all other liability insurances, cannot protect the director in the presence of willful misconduct: in our legal system, damages deriving from willful misconduct are expressly excluded from liability insurance (article 1917 paragraph 1 Italian Civil Code).

As far as gross negligence is concerned, there is no certain practice in directors’ liability insurance contracts: sometimes the policy also covers damages resulting from gross negligence, in other cases it does not.

Where the policy does not cover gross negligence, there is no realistic incentive for the directors in engaging in highly risky behavior or to neglect their fiduciaries duties or the duty of care.

Moreover, against the “moral hazard” it is also very common the presence of the so called “deductible clause” i.e a clause stipulating that the insured will be liable for a specified initial amount of each loss, injury, etc., and that the insurance company will be liable for any additional costs in excess of the initial amount.

The liability of the officers is governed by article 2396 of the Italian Civil Code and is the same as that of the directors analyzed above; this has also been settled by the case law of the Court of Cassation (see Cass. n. 12108/2018). An officer also has the same criminal liability as the directors. With regard to the liability of non-executive directors, the Italian Supreme Court has established the liability of non-executive directors in case of repeated inaction with respect to conduct that they should not only have detected, but also prevent. Therefore, a non-executive director is not automatically liable for every damage occurred, but only in case of lack of diligence/care, either for not having negligently perceived signals of the unlawful misconduct of others or for not having taken any action in order to avoid the said conduct and the ensuing damage. According to the relevant case law, from a combination of the provisos of articles 2392 and 2381 of the Italian Civil Code, directors have an obligation to inform themselves, especially if alarming signals arise, such as a compromised economic and financial situation, anomalous transactions, etc.

The notion of the so called “independent director”, was initially recognized in Anglo-Saxon legal systems. Independent directors, in general terms, exercise a control function or a supervising role over the activities of other directors. Regarding their liability, articles 2392-2395 of the Italian Civil Code apply to them as well although they are not in charge of the direct management of the business.

The cornerstone of the holding company’s liability (namely exercising direction and coordination) is article 2497 of the Italian Civil Code, in particular, a parent company shall be held liable and shall indemnify directly the shareholders and creditors of the controlled companies for the damages suffered due to the fact that the owned company has passively complied with group directives to the detriment of its own assets. With regard to the joint and several liability of the holding companies, it should be noted that the shareholder and the social creditor of the controlled company may bring an action against the parent company only if they have not been previously satisfied by the controlled company. Any other subject who has taken part in the conduct which has injured the shareholder or third party through his behavior will also be jointly and severally liable with the holding company. For example, the liability will extend to the director of the holding company whose conduct has directly generated the damage or who has breached the obligation that requires to supervise the activities of the directors of the controlled company.