by Federico Urbani
The spread of Covid-19, its consequences and the multi-level and cross-sectoral measures implemented to fight the epidemy have an impact not only on individual behavior and society as a whole, but also on companies, which , in many cases, have been forced to suspend abruptly their activities.
Beyond the impact on business, companies have witnessed severe disruptions also on corporate structure and governance, considering also that spring is traditionally a season of corporate appointments and events.
An overview of the main emergency measures in the field of Italian corporate law
Within the fast-growing Covid-related legislation, the Italian lawmaker supplemented the national legal framework with a number of emergency measures in the field of corporate law (Law Decree no. 18/2020, known as ‘Cure for Italy’, and Law Decree no. 23/2020, known as ‘Liquidity Decree’).1 So far, they may be divided into two main groups.
The first category concerns the suspension of mandatory rules, which aims at enhancing corporate endurance and providing incentives to private capital support. In that respect, the following measures emerge:
- shareholder loans paid within year-end shall not be subject to the equitable subordination rule;
- the so-called “recapitalize or liquidate” rule when the corporate capital falls below the statutory minimum will not apply until year-end (thus, even if said minimum amount is impaired, the directors may continue to run the business and shall not be under the duty to initiate the winding-up process);
- the directors have the possibility to state that the company will continue conducting its business in the foreseeable future (the well-known ‘going concern’ principle), if such statement was true as of the latest financial statements approved before 23 February 2020 (when the first anti-Covid measures were taken).
It is intuitive – if not obvious – that this first set of measures will not have a permanent effect: they will apply only during the pandemic times.
The second group concerns the statutory exercise of opt-in instruments, which also become available to companies whose by-laws do not include the relevant opt-in clauses. The aim is to simplify corporate actions and make meetings possible even in the current context, through the provision of the following measures:
- the possibility of convening the shareholders meeting for the approval of the financial statements within 180 days from the end of the financial year, even if the company does not consolidate the accounts of other entities, nor has other objective grounds to do so;
- the introduction of remote corporate meetings of joint stock companies (società per azioni) by means of virtual (audio or video) meeting or post/electronic systems for vote casting (also, the chair and the secretary are not required to be physically in the same place);
- the introduction of written consultation and consent for shareholders resolutions of limited liability companies (società a responsabilità limitata);
- the possibility for companies with shares traded on a regulated market or on a multilateral trading facility (and for widely-held ones) to appoint a ‘designated proxy holder’ who will be the only shareholder representative admitted to the meeting; in this way, only one person will attend the meeting as a proxy for all shareholders interested in casting their votes, thus avoiding massive unsafe gatherings).
Under ordinary circumstances, these instruments would be available only for companies whose by-laws include the necessary opt-in clauses, even though with certain limitations. Now, they can be used even if such clauses are absent. Whether these measures will remain in place only for a short or mid-term period – depending on our ability to step out of the emergency – or will be extended further, is yet to be understood.
Remote meetings and corporate facilitations in other EU countries
It is worth noting that the delay of financial statements approval, remote (audio or video) meetings, written consultation or consent and suspension of equitable subordination of shareholder loans have been introduced or strengthened also in other EU countries, within broader extraordinary legislative packages. This is for instance the case of Germany, France, Spain (where the measures were subsequently supplemented and integrated with mitigations to the ‘recapitalize or liquidate’ and equitable subordination rules), the Netherlands, Belgium, Portugal, Austria, and Luxembourg. While in some cases said Member States have introduced brand new legal instruments, in others they have statutorily exercised already existing opt-ins, similarly to what occurred in Italy: the approach and the aims are often comparable, if not identical.
Similar emergency legislation has been proposed at EU-level for European companies and cooperative societies, as well as enacted in the United States (as reported by Freedman, Berenblat and Ward) and, in a variety of forms and degrees, in many other countries.
A wake-up call for the modernization of corporate law
The current circumstances force not only governments and authorities, companies and businesses, workers, and society in general, but also legal scholars and practitioners to rethink the basic rules we are well accustomed to. Corporate law is not an exception: this should be a wake-up call for the modernization of corporate law, if not the starting point for a potential further step in corporate law harmonization within the European Union.
Fortunately, especially in the past decade, we have witnessed disruptive tech innovations, which are now widely used to enable companies to maintain, in the most efficient and effective manner, their ordinary course of business and reduce to the maximum extent the negative impacts of the pandemic.
Of course, we are well aware that legal acts pushing for modernization and digitalization have been proposed, discussed and eventually passed in the past years. For example, the Shareholder Rights Directive provides that Member States shall permit listed companies to offer to their shareholders any form of participation in the general meeting by electronic means.2 More recently, the Company Law Digital Tools and Processes Directive harmonised rules, among others, on online formation of companies and registration of branches, online filings and disclosures, as well as digitalization and interconnection of public registers.
Nonetheless, we can surely do more and should act fast. However, we should not rush thoughtlessly, as both the introduction of new rules and the extension of emergency ones ought to be duly pondered (as stressed by Enriques) and based on empirical evidence and careful assessment of the current experience. The necessary tools are now (finally) available for a complete paradigm shift: from opt-in modernization/digitalization instruments to opt-out or (even better) default rules.
Why should the directors of a company – in 2020, in a widely digitalized environment – not be allowed to meet via audio/video call, unless the shareholders have provided so in the by-laws? Why should shareholders not be in the position to cast their votes remotely, on a voluntary basis, as a default rule?
It is not the first time that a call for further digitalization is made – see, for example, the Report on digitalisation in company law , which remarkably noted that ‘it is evident that there is no need to gather shareholders in one single physical location’, or the Assessment of the impacts of using digital tools in the context of cross-border company operations, which eventually led to the enactment of the Company Law Digital Tools and Processes Directive. However, only now we have the chance of basing our policy line on a unique experiment, as we have empirical proof that companies may be actually prepared to embrace and sustain a similar disruption.
It seems that the time has come for the ‘prudent innovation of the virtual shareholders meeting’ and other opt-in instruments to become default rules in corporate law.3 However, we should seek an orderly, common, and shared approach. Therefore, EU-harmonized company law would be desirable.4
Let’s hope – as distinguished legal scholars believe5 – that certain emergency measures will last longer than the pandemic. It remains to be seen whether 2020 is indeed a ‘year zero’ for corporate law.6
1 Insolvency, securities and markets measures have been also introduced (e.g. the strengthening of golden power mechanisms in relation to investments in ‘strategic’ national companies, the enhancement of transparency rules for listed companies, etc.), which however fall outside the scope of this post.
2 See Article 8 regulating real-time transmission of the meeting, real-time two-way communication from a remote location and mechanisms for casting votes without the need to appoint a proxy holder. In the Italian legal framework, this matter is regulated as an opt-in for the by-laws (articles 127 CLF and 140 seq. IR).
3 Marchetti, La “prudente innovazione” dell’assemblea virtuale, Società, 2001.
4 Ventoruzzo, interview with Bocconi Knowledge, where he notes that “since there has been a lack of European direction some disorder, if not some form of competition between the systems, could follow”; de Luca, La costituzione online delle società. Riflessioni sulla Direttiva 2019/1159/EU (Direttiva CorpTech), working paper available online.
5 Marchetti-Ventoruzzo, L’assemblea virtuale? Qualcosa resterà, Corriere della Sera, 30 March 2020.
6 Sacco Ginevri, Coronavirus e digitalizzazione: è l’anno zero del diritto societario, Il Sole 24 Ore, 17 April 2020.
Federico Urbani, a second-year PhD Student in Legal Studies (curriculum in Business & Social Law) at Bocconi University, is interested in various aspects of corporate and financial markets law, banking and financial institutions regulation. His research focuses on the governance of credit institutions and the liability of their board members. A major research question which Federico will address is whether and to what extent the business judgment rule may apply to board members’ failures in carrying out their duties and functions. He graduated from Bocconi University in 2014 and he is enrolled at the Milan Bar.