Contribution by attorney Niccolò Medica published in N&T Plus Diritto – Il Sole 24ORE.

Article 2265 of the Italian Civil Code establishes that the so-called “leonine clause”, namely the clause that excludes one or more partners from participation in the profits or losses of the company, is void.

Case law holds that the prohibition of leonine clauses, although expressly provided only for simple partnerships, is applicable to all types of companies, as it constitutes a cardinal principle of the entire corporate system.

Over the years, a debate has emerged, at both doctrinal and case law levels, regarding the possibility of extending the prohibition of Article 2265 of the Italian Civil Code to parasocial agreements.

Indeed, according to a line of case law that prevailed until 2018, the prohibition of Article 2265 of the Italian Civil Code may also apply to parasocial agreements: this approach relies on the principle expressed by the Court of Cassation in its judgment of October 29, 1994, No. 8927, according to which “the prohibition of exclusion from participation in profits or losses must be regarded in a substantive sense, and not a formal one, so that it exists even when the conditions of participation in profits or losses are, in the original intention of the parties, impossible to achieve, and in practice determine an actual total exclusion from such participations“.

In recent times, the issue of the validity of put clauses contained in contracts concerning the sale and purchase of corporate shareholdings, by virtue of which a partner has the right to sell his or her shareholding at a pre-agreed price, thereby making the partner immune, in fact, from the company’s performance, has become highly topical again.

It is indeed quite common that, in equity investment transactions, the party entering the company’s capital is given the possibility of exercising a sale option in order to allow it to divest should it be dissatisfied with the transaction concluded.

With its judgment of July 4, 2018, No. 17498, the Court of Cassation, departing from its previous ruling of 1994, held that it is “lawful and worthy of protection the contractual agreement concluded between the partners of a joint-stock company, by which one, on the occasion of the participatory financing thus carried out, undertakes to indemnify the other from any negative consequences of the contribution made to the company, by granting the right of sale (so-called “put”) within a given term and the corresponding obligation to purchase the corporate shareholding at a predetermined price, equal to that of the purchase, albeit with the addition of interest on the amount due and reimbursement of payments made in the meantime in favor of the company“.

The Court of Cassation limits the applicability of the leonine clause prohibition to cases of agreements directly conflicting with Article 2265 of the Italian Civil Code, distinct from contractual transactions consisting of mechanisms of “risk transfer purely internal between one partner and another partner or a third party“, which, as such, lack relevance with respect to the corporate entity.

In substance, therefore, the judgment in question broadens the scope for structuring complex transactions that can be classified as so-called “participatory financing”, qualified by the judges of legitimacy as, a priori, worthy of protection pursuant to Article 1322 of the Italian Civil Code, as they represent a form of business participation that entails, for the financing partner, remuneration of the contribution, certainty of exit values and, sometimes, control powers, while, for the entrepreneur, the possibility of obtaining financial resources.

Despite the ruling of legitimacy of 2018, lower courts (in particular those in Milan) have, even recently, adopted the earlier line of reasoning of the Court of Cassation.

In particular, the Milan Court, Special Section for Business, with judgment of July 23, 2020, No. 4628, held that “the option to sell (so-called put option) a corporate shareholding with a predetermined consideration, inclusive of the disbursements made in the meantime by the partner holding the put option in favor of the company, and moreover of an amount in any case higher than the capital increase payment made by the holder of the option at the time of entry into the company, achieves, indirectly, the result prohibited by the so-called leonine clause. Consequently, the put option thus structured is affected by the sanction of nullity pursuant to Article 2265 of the Italian Civil Code“.

The Milan judges expressly depart from the 2018 precedent of the Court of Cassation, holding that a put option, such as the one outlined above, is not consistent with the ratio of the prohibition of leonine clauses, which aims at the proper management of the business and does not tolerate situations of absolute and constant misalignment between an equity investment and the best possible management of the business. This principle, according to the Milan Court, is also confirmed by Article 2467 of the Italian Civil Code, relating to the subordination of partner financing, which would suggest the legislator’s intention to give relevance to the “position of partner as to the assumption of business risk“.

On this matter, the First Section of the Court of Cassation has again – and recently – ruled with judgment of October 7, 2021, No. 27227: the Supreme Court recalled its previous ruling of 2018, reiterating the principle according to which “it is lawful and worthy of protection the contractual agreement concluded between the partners of a joint-stock company, by which one, on the occasion of the participatory financing thus carried out, undertakes to indemnify the other from any negative consequences of the contribution made to the company, by granting the right of sale (so-called put) within a given term and the corresponding obligation to purchase the corporate shareholding at a predetermined price, equal to that of the purchase, albeit with the addition of interest on the amount due and reimbursement of payments made in the meantime in favor of the company“.

In conclusion, according to the most recent ruling of the Court of Cassation, it is lawful, in investment transactions, to grant an exit right to the party entering the company through a put option.