The 1919 American legal case of Dodge v. Ford Motor Company provides a lens through which an analysis of disputes between majority and minority shareholders can start to be conceived. After allowing the Dodge Brothers, already a supplier to Ford, to become minority shareholders within the company, majority shareholder and executive Henry Ford unilaterally decided to terminate special dividends for shareholders in order to maintain further investment in new plants. This measure served as a way to sustain the production of cars at lower prices, a feature of the car manufacturer that Ford saw as tantamount to the public good and, perhaps less ostensibly, represented the preservation of a business model seen by Ford as essential to the Ford Motor Company’s long-term success. The development spurred the Dodge brothers to bring civil action against the Ford Motor Company, citing it as an injustice that deprived them of deserved dividends. In 1919, the Supreme Court of Michigan, ruled in favor of the Dodge brothers and stated that the action of Ford was not justified under the rule of “shareholder primacy,” thereby awarding the Dodge Brothers of the dividends to which they were entitled. The Supreme Court simultaneously decided, however, that the case also shaped the “business judgement rule,” which reserves the right of final judgment to the executive or relevant directors.■ This example testifies to the unmediated conflict between the interests majority and minority shareholders that exists at the heart of a limited company and corporations: namely, the majority’s stronghold over the corporation’s operations and its preference to reinvest the corporation’s profits in the business itself, which fundamentally runs counter to the common desire of minority shareholders to obtain the maximum return on their capital. Further, the outcome in Dodge v. Ford illuminates how, in the case that the majority seeks to abuse its power and circumvent the minority, it is often necessary that the minority exercise its ability to react. ■ The minority shareholder’s “right to control,” which includes the right to be informed and the right to inspect certain documents of the corporation, along with the right to exit, typically serve as the chief devices at its disposal. This derives from the fact that such rights are, in the common practice of law, considered sovereign and do not fall under the majority shareholder’s umbrella right to exercise propriety and “good faith.” In simpler terms, this means that the minority shareholder possesses the principle rights to veto and to exit.
II. Pre-existing Realities of Minority Shareholder Participation
Beyond a situation in which majority and minority shareholders have an already established relationship within a corporation or enter into special arrangements before acquiring or selling an equity interest, this article seeks to approach first the circumstances under which such a relationship lacks clear definition, for example in a succession mortis causa i.e. where the shares are owned by the heirs of a common relative and new minorities are thereby created. This happening typically occurs in family owned corporations in which the rights reserved to the minority shareholders are, therefore, even more crucial. Further, it should be noted that in the absence of applicable provisions within the corporate charter (also known as articles of incorporation), the corporation’s bylaws, and shareholder agreements governing the majority – minority shareholder relationship, the rights protected under the Italian Civil Code (“Codice Civile,” abbreviated as “c.c.”) solely take jurisdiction. On the surface, this would seem to preclude any advantage on the part of the majority shareholder and constitute a neutral majority – minority shareholder relationship. It should be noted that the present examination solely regards the so-called “Società per azioni” (abbreviated “S.p.A.”) “chiuse,” to which the English term “closely held corporations” in the U.S.A. stands as an equivalent. The main feature of a S.p.A “chiusa” is that it does not possess recourse to the risk capital market. ■ Further, unlike “Società a responsabilità limitata” (abbreviated “S.r.l.”) akin to a limited liability company in the U.S.A., shareholders in S.p.A.s do not possess the right of direct supervision over operations of the company. In S.p.A.s, in fact, supervision over operations is reserved to the Board of Statutory Auditors, which oversees that the directors of the corporation act in uniformity and in respect of the law, the charter and the bylaws, thus safeguarding, inter alia, the interest of the minority shareholders. In any case, however, the law stipulates that certain rights on the part of the minority in a S.p.A. are first and foremost reserved, namely the right to inspect some corporate records and the general right to information. These rights are, above all, limited to particular cases such that the shareholders cannot intervene in the corporation’s management, which is exclusively reserved to its administrators. It is important to note that the right of inspection, as protected under Article 2422 c.c., recognizes the shareholder’s right to verify the book of shareholders, which contains the information of all shareholders, in addition to the minutes of shareholders’ meetings. Such verification can be carried out also by means of an agent and copy of said records can be obtained at his or her expense. This right, however, is limited exclusively to the aforementioned records without offering the possibility to examine the other corporate records indicated under Article 2421 c.c., which include the minutes of the Board of Directors, the Board of Statutory Auditors, etc. Such further records can only be inspected by the directors, the statutory auditors, and other subjects whose duty lies in the control of the corporation, thereby not possessing any limitation in the right of general access to them. This reality derives from the fact that such examination constitutes the necessary instrument by which they can exercise their supervision powers over the company’s administration, organization, and proper accounting in respect to the law, the articles of incorporation, the corporation’s bylaws, the principles of sound management, the administrative system, the accounting system, and the organizing structure of the corporation. That being said, the single shareholder does possess the following channels through which he or she can exercise control over operations within a privately held S.p.A. which the legislature explicitly places at his or her disposal:
(i) To file a petition within the Board of Statutory Auditors, denouncing in any shape or form deemed appropriate by the shareholder a behavior on the part of the directors considered outside of compliance related to not adequately addressing proper organizational, administrative, and accounting duties under Article 2408 c.c.. The said denounce must obligatorily be taken into account and relayed to the management by the Board of Statutory Auditors who, if the petition is filed by a proportion of one – twentieth of the equity (i.e. 5%) must, in a prompt fashion, investigate this claim and inform the shareholders’ meeting of the results of the subsequent investigation in the conclusions of its report in the course of the annual shareholder’s meeting. Statutory Auditors have the duty to convene a general shareholders’ meeting in the following cases (a) omission or unjustified delay of such action on the part of directors (b) the recognition of reproachable practices on the part of the directors whose seriousness and urgency recommends that a meeting should be convened as covered under the second section of Article 2406 c.c. (it should be noted that this latter described ability and duty is not necessarily limited to the petition of the shareholders, but instead to the aforementioned practices considered to be of serious weight that must be correspondingly addressed in an urgent manner).
(ii) Shareholders further reserve the right to report to the Court in case of grounded suspicions that the Board of Directors and the Board of Statutory Auditors are in violation of their fiduciary duties and have committed serious mismanagement that could be the precursor to substantial damages for the corporation or for one or more controlled companies by such a S.p.A. In this case, shareholders who together constitute one-tenth (i.e. 10%) of equity interest have the ability to call for the procession of an investigation, while the cost of such investigation should be borne by the acting parties and as ordered by the Court. If such an investigation finds such a violation to be the case, the delivering of and appropriate decision follows. In the case that the responsible Board members or auditors resign, however, and/or are replaced with a new slate of duly proven professionals, the investigation can be avoided and suspended to a later determined date at the discretion of the Court. These professionals, however, have the obligation to address and eliminate in haste the practices of relevant mismanagement found in violation following the exclusion of their predecessors. The Court reserves the further right to convene a general shareholders’ meeting in the case that it believes the measures that have been undertaken failed to properly address the wrongdoing within the organization in an appropriate manner. In the most serious of cases, the Court can remove the directors and the statutory auditors, appointing a judicial administrator with envisioned powers for a duration deemed necessary. This individual, as appointed by the Court, therefore, has legal standing and is entitled to exercise the so called “azione di responsabilità” (the “liability action”) namely an action against the directors for their liability for breach of fiduciary duties, as stipulated in the last provision in Article 2393 c.c.
(iii) Shareholders also reserve the right to exercise the liability action in case of breach of fiduciary duties, namely the breach of the duty of loyalty and the duty of care and in case of mismanagement, on the part of the directors or the Statutory Board of Auditors, as provided in Article 2393 bis c.c.. This action requires the shareholders together composing at least one – fifth (i.e. 20%) of shared capital ownership; it should be noted that the bylaws might otherwise stipulate a greater threshold than one – fifth, but such can never exceed one-third ownership (i.e. approximately 33%). Article 2393 further specifies that the exercising of the liability action shall not be carried out if shareholders constituting one- fifth (i.e. 20%) of total capital vote to the contrary. If, however, shareholders constituting one – fifth of ownership approve such a measure, Italian law dictates that the incumbent directors are automatically removed.
(iv) The right is reserved to challenge and vacate shareholders’ meeting resolutions (including that relative to the approval of the financial statement as protected under Article 2434 bis c.c.) which are considered contrary to the law or the corporation’s bylaws as by Article 2377 c.c. In order to exercise this right, there must be a number of shareholders comprising one – twentieth (i.e. 5%) of shared capital. Further, acting upon this right can be accompanied by the commensurate action of the shareholders aimed at recovering the damages produced through the resolution undertaken. (v) As by Article 2429 c.c., the right to examine, during office hours, the companies’ project of financial statement in addition to the report of the directors, the report of the Board of Auditors, the report of the supervising auditing firm, on top of a summary of the data essential to the last financial statement of associated companies, in the fifteen day period preceding the general shareholders’ meeting scheduled for the approval of the corporate financial statement.
(v) The right to participate in the deliberations of the shareholders’ meeting and exercise the right of “veto” in the so called case of an extraordinary Shareholders’ Meeting, on second call, involving “modifications of the bylaws, corporation’s name, substitution of its liquidators, and other matters expressly attributed to the extraordinary meeting by law,” as stipulated in Article 2365 c.c. in the case that there exist shareholders who hold a quorum of one – third (i.e. approximately 33%) of the shared capital only in the second meeting.
(vi) The right to call a summons for a general meeting convened without any delay, under Article 2367 c.c., which can be exercised by any quorum of shareholders constituting one – tenth (i.e. 10%) of shared capital.
(vii) The right to call for the postponement of the meeting if not sufficiently informed prior, in the case that shareholders holding a third (i.e. approximately 33%) of shared capital vote for such a measure, pursuant to Article 2374 c.c.
■ An analysis of the aforementioned critical percentage thresholds necessary for such shareholders’ participation within a closely held S.p.A, in fact, demonstrates that the relevant legal infrastructure provides a meagre pathway to minority representation. Beyond the 5% provision in Article 2377 c.c., which concerns the extenuating circumstance of challenging decisions made by the Board, minority shareholders remain relatively powerless in a private, closely held limited company and without the possibility to challenge decisions made by the majority shareholders (S.p.A. chiusa). Therefore, in order for a minority to be considered “qualified” and have its voice heard within the corporate governance of a closely held Italian corporation, it is necessary for it to hold a) the 5% shareholder ownership, which allows it to petition for the investigation of the Board of Directors or the Board of Statutory Auditors for behavior considered out of compliance (as by Article 2408 c.c.), and to vacate the decisions made in shareholders’ meetings (as by Article 2377 c.c.). b) the 10% quorum for a petition to the Court of the above cited serious wrongdoings on the part of the Board of Statutory Auditors and the Board of Directors, as by Article 2409 c.c., and to convene without hesitation the shareholder’s meeting, as by Article 2367 c.c.; c) the 20% threshold in total shared capital to bring about action of liability against the Board of Directors or the Board of Statutory Auditors, as by Article 2393 bis. c.c., or to oppose the resolution as by Article 2393 c.c. d) the 33% (+1%) quorum for the exercising of a veto in an extraordinary shareholders’ meetings on second call and for the request for the postponement of the shareholders’ meeting as by Article 2374 c.c.
■ Exit (withdrawal). The right to exit is the right of the minority to exit from the group of shareholders. The natural modality of exit is the sale of equity. Standing as the principal alternative to selling shares, in case of external events that place a significant change on the conditions of risk, the shareholder who cannot control such changes within the corporate scheme can employ the prospect of divesting, in full or in part, by means of this right of withdrawal. It is necessary for the shareholder to cite the exact cause, which prompts his or her exercising shareholder’s right to exit by means of withdrawal: namely, on one hand, such that the majority is able, in an informed manner, to influence managerial decisions regarding the corporation’s vitality and, on the other hand, the minority, in the case of feeling as a “prisoner” to the corporation, has a mechanism at its disposal to, in plain terms, get out. The withdrawal becomes, therefore, a powerful instrument of influence to be executed on the majority by the minority shareholder in addition to serving as a bargaining chip, which changes the premise of negotiation initially established by the shareholders, with the induction of specific motives of withdrawal. The right of withdrawal is disciplined by Article 2438 c.c. withdrawal and is exercisable in the case verified by the following circumstances: a) modification of the corporate purpose that influences in a significant manner the activity of the corporation; b) the transformation of the corporation; c) the transferring of corporate headquarters abroad; d) the revocation of its state of liquidation; e) the elimination of one or more of the causes for withdrawal stipulated within the bylaws; f) the modification of the bylaws that has bearing on the value of the equity interest of the shareholder in the case of his or her exit; g) modifications of the bylaws concerning the rights of voting and administration; h) postponement of its terms; i) introduction or removal of obligations or legal limitation regarding the circulation of shares; l) if the corporation is acknowledged for an indeterminate period of time, the shareholder can exercise withdrawal with a notice of 180 days in advance; m) in the case that the corporation is subject to direction and coordination in the sense of Article 2497 c.c. Relative to the circumstances above cited, it is of fundamental importance to remember how some of these cases, most precisely those indicated by letters a) through g), are causes of withdrawal considered mandatory, that is to say, which are not susceptible to modification even in the case of voluntary compliance on the part of the relevant shareholders, while those indicated by letters h) and i) are subject to change and might be derogated in the case of the approval of the shareholders. The first part of Article 2437 c.c., second section, in fact, explicated, “unless the bylaws stipulate differently,” these causes, referring to those belonging to the first group (a through g), are recognized implicitly as much as independently sustained. One might therefore, configure a partition of the causes for exit into three categories: those legally mandatory, those legally non-binding and subject to change, and those stipulated in the corporate bylaws. For the exercising of the right of withdrawal, it is necessary to respect the modalities foreseen in Article 2437 bis c.c.; further, it should be noted that the exercising of this right involves the liquidation of the equity interest according to the relevant criteria of determination disclosed in Article 2437 part 3 c.c.