The applicability of the Italian Business Judgement Rule to directors’ organisational choices
IBA Corporate and M&A Law Committee
26 April 2021
The ‘adequacy of the organisational structure’ duty under the Italian Civil Code
According to Article 2086 of the Italian Civil Code, the enterpriser operating as a company (or as a group) must set up an organisational, administrative and accounting structure adequate to the nature and size of the enterprise. Such adequate organisational structure must also be set up in order to detect – in a timely fashion – a crisis at an enterprise, and to take immediate action to adopt and implement any available legal instrument to overcome the crisis and recover business continuity.
In other words, according to the Italian legal system, the directors of a company have the duty to set up an internal structure that must be adequate to the characteristics of the company and aimed at preventing a crisis.
The directors are accountable for any damage caused to the company by their failure to perform the duties under Article 2086 of the Italian Civil Code.
The Business Judgement Rule
The Business Judgment Rule (BJR) is a legal principle that implies the presumption that, in making business decisions, company directors act on an informed basis, in good faith and in the honest belief that the action was in the best interest of the company.
Absent the proof of abuse of discretion, the presumption shall be respected by the courts. The burden is on the party challenging the decision to establish facts rebutting the presumption.
The BJR has been transposed into the Italian legal system by the application of case law.
According to the Corte di Cassazione, when assessing the liability of directors, the judge cannot verify the appropriateness, advisability and profitability of their decisions, but only the regularity of the relevant decision-making process.
Such regularity implies that the directors adopted precautions, carried out checks and gathered the information required to adopt a decision under the specific circumstances in question – and that they also disclosed any potential conflict of interest to management and supervisory bodies.
If the directors have followed the appropriate decision-making process, they will not be liable for their own management decisions, even if they turn out to be wrong, inappropriate or harmful to the company.
In short, the BJR limits the risk of directors being held liable for making business decisions that turn out to be wrong and implies that such decisions are not subject to judicial review.
The application of the Business Judgement Rule to the ‘adequacy of the organisational structure’ duty
The organisational function is part of the corporate strategy, which must be adopted with a certain margin of freedom. Therefore, the decisions relating to the structure and organisation of the company fall under the guarantee provided for by the BJR.
In this respect, the BJR may clash with the general principle that implies the accountability of the directors that have not provided the company with an adequate organisational structure under Article 2086 of the Italian Civil Code.
The decision of the Court of Rome
In a judgment on 9 September 2020, the Court of Rome addressed the issue of the applicability of the BJR to choices relating to the company’s organisational structure in the light of Article 2086 of the Italian Civil Code. On one hand, the Court of Rome confirmed the application of the BJR to the directors’ organisational choices but, on the other hand, the Court set limits to the principle.
According to the Court, directors clearly have a duty to manage the company and, more generally, to act with due diligence, but they are not obliged to manage the company with economic success. If the directors acted with due diligence and, in spite of this, the operations turned out to be inappropriate, the BJR implies that the directors are not liable for the damages thus caused to the company even if it is a damage that another, more competent, prudent and capable director would have avoided. The organisational choices pertain to managerial discretion, which fall under the BJR application.
However, such application of the BJR shall not be deemed absolute. As the Court of Rome pointed out, the BJR applies to the extent that such organisational choices are not unreasonable or imprudent, and have been taken with the due diligence required by the nature of the task of the directors. Consequently, the directors are liable in the event of total omission of a reasonable and adequate organisational structure under Article 2086 of the Italian Civil Code.
On the contrary, the directors cannot be held liable if the organisational structure they set up based on their knowledge and on the available information is deemed adequate and reasonable, even if such structure turned out to be insufficient to prevent the crisis or the loss of business continuity.
In the light of the judgement of the Court of Rome, the application tout court of the BJR may not be sufficient to exclude the directors’ liability in case of breach of the duty to provide the company with an adequate organisational structure according to Italian law.
It is thus essential that foreign companies with a branch in Italy combine their corporate global decision-making process and organisational structure with the reasonability and adequacy required by Article 2086 of the Italian Civil Code, as construed by the Court of Rome in relation to the Business Judgement Rule.
This article was first published in the IBA Corporate and M&A Law Committee newsletter in April 2021, and is reproduced by kind permission of the International Bar Association, London, UK. © International Bar Association.
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