Update | Tools to manage deadlock situations in Italian Joint Venture companies

A recent judgment of the Italian Supreme Court concerning shareholders’ agreements and the so-called “Russian roulette” clauses (also referred to as “cowboy” clauses) (No. 22375/2023, published on 25 July 2023) gives us the opportunity to delve into some practical and operational aspects of “deadlock” situations in the context of Italian corporations. Deadlocks may occur in companies with two shareholders each at 50 per cent or in which the quorums provided for in the articles of association confer a power of veto on one or more minority shareholders.  It is not uncommon to encounter situations in which the shareholders do not agree on strategic and managerial choices relating to the company’s business and are unable to formally adopt, due to the implicit or explicit power of veto granted to them by the articles of association, any resolutions at the shareholders’ meeting.

This situation may represent a cause for the dissolution of the company, pursuant to Article 2484, Paragraph I, Nos. 2 and 3 of the Italian Civil Code, due to the inability of the shareholders’ meeting to function and the impossibility of achieving the corporate purpose.

It is worth recalling that, in such circumstances, pursuant to Article 2485 of the Italia Civil Code, the directors are required – without delay – to ascertain the occurrence of a cause for dissolution and proceed to register the declaration of dissolution of the company with the company registry office. It will also be necessary to convene the shareholders’ meeting before the notary public for the appointment of one or more liquidators. In the event of delay or omission, the directors will be personally and jointly liable for damages suffered by the company, the shareholders, the company’s creditors and third parties (Article 2485 of the Italian Civil Code). When the directors omit to do so, moreover, the shareholders, individual directors or auditors may petition the court to ascertain the occurrence of the cause for dissolution and, if the shareholders’ meeting fails to act, to appoint one or more judicial liquidators.

In this regulatory context, the need for parasocial or statutory mechanisms aimed at overcoming an objective difficulty of corporate deadlock or deadlock that could lead to the company’s liquidation due to the impossibility of pursuing its statutory purposes and, above all, the risk of irretrievably dispersing the company’s goodwill with potential harm to all stakeholders (employees, creditors, shareholders, etc.) is often relevant. In fact, in view of a deadlock situation that seriously risks causing the company to be wound up/liquidated, the valuation of the company must take into account this eventuality and take place at liquidation value, rather than at going-concern value, since the hypothesis of dissolution of the company and atomistic sale of its assets must be considered concrete. Potential sale of the business en bloc is not always possible.

In light of these preliminary considerations, in situations of equal shares or statutory veto rights, it is indeed advisable to consider deadlock management tools inspired by principles of fair treatment of the shareholders and unpredictability of outcome, with the indirect aim of pushing the shareholders to overcome the disagreement that led to the deadlock and to cooperate in the pursuit of the common enterprise.

In its simplest schematic form, the Russian roulette clause provides that, upon the occurrence of an impasse that cannot otherwise be resolved, one or both shareholders are given the right to make the other shareholder an offer to purchase their shareholding, containing the price they are willing to pay for it. The shareholder to whom the offer is addressed is not, however, in a position of mere subjection to the offer, but has an alternative which he may freely pursue: (a) he/she may accept the offer, and thus sell his shareholding at the price indicated by the other party; (b) he/she may, on the other hand, completely “reverse” the offer and purchase the shareholding of the offeror for the price indicated by the latter.

The Italian Supreme Court confirmed that ‘deadlock’ clauses are capable of realising interests worthy of protection under the legal system, as they are intended to avoid a prejudicial impasse by safeguarding, through the relocation of the company’s shareholdings, the business project while also avoiding the costs and time-consuming nature of a complex company liquidation procedure.

In fact, the “Russian roulette” mechanism does not leave the determination of the object to the mere arbitrariness of one of the parties, since the unilateral determination of the price of the shareholding by the party activating the “anti-stall” mechanism is accompanied by the risk for the offeror of losing, for that same price, its shareholding. Thus, the other shareholder finds itself in the capability – on the one hand – to profit from a potential undervaluation of the offeror in order to purchase the latter’s shareholding at the same price or, in the case of overvaluation, to profit from the same, by profiting from the surplus through the sale of its own shares.

In conclusion, this type of clause is useful to adequately address the risk of management paralysis, in particular when it concerns companies in which two shareholders own, for equal shares, the entire share capital.

Recourse to the anti-stall clause may also be legitimately linked to the non-renewal of a shareholders’ agreement at the end of its term. Such a provision, according to the Italian Supreme Court, does not entail a breach of the rule that places duration limits on shareholders’ agreements (Article 2341-bis of the Italian Civil Code), since, on the one hand, non-renewal would be attributable to a stalemate hypothesis, while, on the other hand, the dual option between purchase and sale, left to the shareholder receiving the offer, would be such as to exclude an impact on the free formation of the will of the parties as to the renewal of the agreement.

A different issue concerns the anti-stall clauses provided for in the articles of association (rather than in a shareholders’ agreement). If included in the articles of association, such clauses would have to provide – so the Italian Supreme Court’s ruling seems to indicate – a price determination mechanism such as to give a result not inferior to that resulting from applying the criteria set forth in the Civil Code for shareholder withdrawal. Such a constraint, on the other hand, is not applicable to the anti-stall clauses provided for in shareholders’ agreements.