Piercing the Corporate Veil in Itália

With the expression 'piercing the corporate veil', Italian law regulates those situations that arise in connection with the problem of abuse of legal personality. An abuse of legal personality occurs when a subject benefits from a discipline favourable to him in cases other than those that would justify its application. This principle is applicable to the figure of the hidden entrepreneur, the managing partner and hidden or de facto companies. In this general context, Article 2086, paragraph II of the Italian Civil Code, as amended by Legislative Decree 14/2019 extends to the shareholders part of the duties incumbent on the directors in matters of corporate governance, such as the duty to establish an administrative and accounting structure appropriate to the nature and size of the business, also for the purpose of a timely detection of the business crisis and the loss of business continuity and the consequent activation of the appropriate tools aimed at avoiding and overcoming these situations.

What happens if the formalities are not complied with?

As regards compliance with the formal requirements and disclosure obligations associated with the incorporation of a company, in the Italian legal system a distinction must be made between partnerships (in particular, società semplice and società in nome collettivo) and corporations (società per azioni and società a responsabilità limitata). The società semplice contract is not subject to special forms, except for those required by the nature of the assets conferred, and its incorporation remains characterised by the utmost simplicity in form and substance, since its registration in the register of companies does not affect its existence, nor does it affect its rules. With regard to the general partnership i.e. società in nome collettivo, the content of the deed of incorporation which is governed by Article 2295 of the Civil Code, with the notarised signature of the contracting parties, registration in the commercial register is a condition of its regularity, but not of its existence. Hence the distinction between regular and irregular general partnership; the former is the legal entity registered in the commercial register, while the latter is not. Thus, the articles of incorporation of the general partnership must be drawn up by public deed or notarised private deed for the sole purpose of the registration and regularity of the company. On the other hand, in the case of joint-stock companies namely S.p.A., incorporation consists of two main steps: (i) stipulation of deed of incorporation by public deed; (ii) registration of deed of incorporation in the commercial register. The deed of incorporation, the requirements of which are set forth in Article 2328 of the Italian Civil Code, must be encompassed into a public deed under penalty of nullity pursuant to Article 2332, 1 of the Italian Civil Code, and the preliminary contract itself will also be null and void if not drawn up by public deed. The drawing up of the deed binds the parties to the declaration to incorporate the company, unless the non-incorporation is caused by facts beyond their control, but it is not sufficient for the incorporation of the company. In fact, it is only with the registration in the commercial register that the company comes into existence and acquires legal personality, highlighting a clear difference from the issue of registration in partnerships. Limited liability companies namely Srl follow the rules dictated for public limited companies (Art. 2463, para. III of the Civil Code), with the exception of a few changes regarding the content of the deed of incorporation.

The abuse of legal personality, which is part of the broader context of abuse of rights, consists in enjoying favourable rules in cases other than those that justify their application. The concept of abuse of legal personality arises when a person benefits from the limitation of liability beyond the limits within which the law had decided to contain it, for instance by 'hiding' behind the screen of a company in order to circumvent legal provisions. On a concrete level, the case of the “tyrant shareholder” ( a notion elaborated by the scholars), who by his conduct generates the so-called 'confusion of assets', is a case on point. A tyrant shareholder is a shareholder who abuses the company by using it as his own property by virtue of a majority shareholding; such conduct often generates a confusion of assets between the company's assets and the tyrant shareholder's personal assets. Another consequence may be that of a confusion of legal spheres, creating a situation of appearance regarding the presumed existence of a sole proprietorship, due to the absence of subjective distinction between partner and company.

The abuse of legal personality, as outlined in the answer in paragraph 3 above, leads as a natural consequence to the piercing of the corporate veil. In order to repress the abuse of the subjective alterity between the shareholder and the company, the Italian legal system proposes to go beyond the form through the doctrinally created instrument of overcoming the screen of legal personality, which consists of a disapplication of the special rules dictated for corporations in favour of a return to the rules of common law. The Court of Cassation itself adhered to this scholarly delineated position with judgement No. 804 of 25.01.2000 in which it states:" The so-called "sovereign shareholder", to whom Article 2362 of the Civil Code is inapplicable unless the fictitious or fraudulent nature of minority shareholdings is demonstrated (cf. Cass, 29 November 1983, No. 7152), when it uses the corporate structure as a screen (thus transforming itself into a "tyrant shareholder") in order to manage its own affairs with limited patrimonial liability, it may incur the phenomenon defined as abuse of legal personality, which can be recognised when the corporate form corresponds to a fully individual management. It has been argued that the individual must in such a case also be liable without limitation with his own assets, and forms of civil and criminal liability are also conceivable, having regard to the role played by the majority shareholder. But the corporation remains with all its features, also and above all to protect the minority shareholdings that are not fictitious or fraudulent."

The corporate shield is lacking in those situations in which there is a disassociation between a person who is formally imputed with the status of entrepreneur - known as an 'overt' entrepreneur - and another person who provides the means necessary to carry out the business activity, directs it and takes its profits - known as a 'hidden' entrepreneur. The Italian legal system to protect the company's creditors, who will never be able to satisfy themselves on the assets, in most cases meagre, of the 'front' person, allows, through the theory of the 'hidden' entrepreneur, not only the dominus to answer for the debts of the company formally belonging to the 'front' person, but also to go bankrupt should the latter go bankrupt, thanks to the overcoming of the principle of the spending of the name present in the institution of the mandate without representation. Corporate shield that is also lacking in the case of the formation of a concealed company, i.e., a company formed by the partners with the intention of not revealing its existence to the outside world; in practice, the company exists only in the internal relations between the partners, without being externalised. The purpose pursued by the partners is to limit liability towards third parties to the assets of the fictitious manager, thus avoiding liability for the company's obligations and any bankruptcy of the company. However, the failure to externalise the status of the partners and the existence of the company does not prevent third parties from invoking their liability if they prove even a posteriori the existence of the corporate contract and the referability to the company of the acts performed by the ostensible manager. The discipline of the bankruptcy of the hidden partners will apply to them, and they will therefore also go bankrupt in the same way as the sole proprietor.

The discipline of the hidden partner is only applicable in partnerships providing for unlimited liability of the partnership. The equity holder of a corporation cannot be held personally liable for the obligations assumed by the corporation, since it is the very rationale on which corporations are based that provides for the separation of the assets of the corporation and the assets of the individual equity holder. This is why the above rules can only apply to partnerships. An exception to this principle applies to sole equity holders in corporations; in this case, in fact, the Italian legislature provides that the sole shareholder of a corporation may be jointly and severally liable to the promoters for those transactions realised in the name and on behalf of the corporation prior to its registration in the commercial register, and once it has acquired legal personality, when it fails to observe the specific discipline of the full release of contributions to the share capital (the sole shareholder is required to pay in full at the time of subscription the contributions), and when it fails to observe the specific disclosure pursuant to Article 2362 of the Italian Civil Code.

In the case of corporations with a sole shareholder, non-compliance with the conditions listed in paragraph 6 entails the sole shareholder's unlimited liability for corporate obligations. In corporations, and in particular in joint stock corporations, with a plurality of shareholders, the exercise of voting rights in the shareholders' meeting is left to the discretion of the single shareholder, who must exercise them without causing financial damage to the company. Pursuant to Article 2373 of the Italian Civil Code, the Italian legislature provides that a shareholders' meeting resolution may be annulled when it causes financial damage to the company and that such resolution has been approved thanks to the decisive vote of one or more shareholders with a conflict of interest. The institute of conflict of interest in corporations makes it possible to repress abuses of the corporate majority against the company and its assets. The doctrine and jurisprudence have extended the same principles even in the presence of resolutions intended to harm minority shareholders, applying the principles of good faith and fairness in the execution of the company contract. It is necessary to emphasise that the control over the resolution cannot be resolved into a mere review of the merits of the appropriateness and convenience of the decision approved by the majority and that it must be arbitrarily aimed at damaging the other shareholders.

In joint-stock companies (S.p.A.), the shareholders are liable for the company's obligations only to the extent of the share conferred, and therefore the action of social creditors under Italian law can be brought against the company's directors under Article 2394 of the Civil Code.  These rules also apply, in principle, to limited liability companies (Srls), except that the provision of Article 2476, number 8, of the Italian Civil Code provides for the joint and several liability of a quota holder who has intentionally decided on or authorized acts harmful to the company, other quota holders, or third parties.  The fact that in joint-stock companies there is no provision for shareholder liability is a direct consequence of the lack of a similar rule to Article 2479 of the Civil Code, which provides for the possibility that the articles of incorporation of limited liability companies reserve management powers to the holders of the quotas. Such liability exists even in cases where, in the absence of a formal grant of management powers to the quota holder, the latter has in fact "consented" to the transaction undertaken by the director or the quota holder has expressed approval in terms of authorization. As for the subjective element required by the rule, namely "wilful misconduct," it introduces a limit to the liability of the quota holder; in fact, it is necessary to prove the wilful misconduct of the quota holder, who should have foreseen and deliberated or intentionally authorized an act harmful to the company.

In the Italian legal system, de facto directors are defined as those individuals who, despite not having been formally appointed as directors by the shareholders' meeting, perform company management functions. Generally, this role is held by the company's controlling shareholders. Pursuant to Article 2639 of the Italian Civil Code, de facto directors are equated with officially appointed directors as far as regulations regarding criminal liability are concerned, while as far as the issue of civil liability is concerned, if the position of de facto director is held by a shareholder and there is malicious conduct by the latter, he or she is equally liable jointly and severally with the other corporate directors.

The group of companies in the Italian legal system cannot be configured as a new and distinct legal entity, and the principle of the distinct legal subjectivity and formal independence of the group companies remains in place. The independence of the group members leads to the exclusion that the parent company is liable for the obligations assumed by the subsidiaries in implementation of the group policy. In cases where, despite the formal independence of the subsidiaries, the parent company abuses its power and influence, the general remedies provided by the Italian Legislature regarding conflicts of interest of shareholders and directors and the action of liability against directors for damages caused to the corporate assets of the subsidiary remain actionable. Although it is not possible to speak, as in the cases analysed in the previous points, properly of a piercing of the corporate veil, since the group of companies is not an autonomous entity with respect to the corporate structures that are part of it, pursuant to Article 2497 of the Italian Civil Code, the parent company is directly liable when it exercises its management and coordination activities in violation of the principles of proper corporate management towards the shareholders and creditors of the subsidiary company that has complied with directives that are detrimental to its own patrimonial integrity.

In conclusion, there is in the Italian legal system the concept of the” piercing the corporate veil”, and this basically happens in conjunction with abuse of right, violation of the rules of good governance or good administration, or fraudulent acts, whether they are carried out by hidden shareholders, or tyrannical shareholders, de facto directors or parent companies.