CONTENTS

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Directors’ and Officers’ liability in Italy

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Italian Law provides for different types of companies that can be divided into two main categories: partnerships (‘società di persone’) and corporations (‘società di capitali’). The two different forms of partnerships are general partnerships (‘società semplice’ and ‘società in nome collettivo’) and secondly, limited partnerships (‘società in accomandita semplice’). The different types of corporations in Italy are as follows: (i) limited partnerships with share capital (‘società in accomandita per azioni’); (ii) limited liability companies (‘società a responsabilità limitata!’ – ‘S.r.l.’); and (iii) joint stock corporations (‘società per azioni’ – ‘S.p.a.’). Recently, with Law no. 27 of March 24, 2012, a new form of limited liability company has been introduced, the simplified limited liability company (‘società a responsabilità limitata semplificata’). As opposed to the other corporations, a simplified limited liability company may be incorporated with a very low corporate capital (minimum capital requirement of EUR 1 up to a maximum of EUR 10,000) and only by individuals not older

than 35 years at the date of the incorporation. Specific rules on the functioning of simplified limited liability companies have yet to be issued and enacted by the ministerial decree.

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The structure of corporations in Italy

The most common corporate forms in the business market are the limited liability company largely because of its lighter corporate structure and lower minimum capital requirement of at least EUR 10,000. This is in addition to the joint stock corporation, usually incorporated when considerable capital is intended to be invested as the minimum capital requirement is at least EUR 120,000. Therefore, this report will focus on S.p.a.s and S.r.l.s, and also from the perspective of tailoring the analysis to D&O policies. Explanations generally refer to corporations established as S.p.a.s, unless explicitly stated differently. While the capital stock of a S.p.a. is divided into shares and the owners are referred to as shareholders, the participation in limited liability companies is divided into quotas and the owners are referred to as quotaholders. Italian corporations are governed by the following bodies: the shareholders’ meeting or the quotaholders’ meeting, and in case of an S.r.l. (‘assemblea dei soci’), the sole director (‘amministratore unico’) or the board of directors (‘consiglio di amministrazione’) and the board of 351

Management and control structure of joint stock corporations (S.p.a.) With regard to the structure of an S.p.a., Italian law provides for three different systems of corporate governance and control. (i) Ordinary System The company’s governance and control are entrusted to the following organs: Sole Director or Board of Directors The S.p.a. can be managed by a sole director or a board of directors composed of a variable number of directors (‘amministratori’) and presided by a chairman. Directors are appointed by shareholders’ resolution, regardless of whether the director may or may not be a shareholder of the company. Directors are granted broad, general powers over the government of the company in order to pursue the corporate purpose. Such powers include: •

making management decisions;

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preparing the financial statements; and

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executing resolutions taken during meetings, etc.

Unless otherwise limited by the bylaws or the corporate bodies’ resolution, the directors may represent the company in all dealings. The board of directors may delegate some of its functions and powers to certain selected directors (or to an executive committee), who are appointed as managing directors (‘amministratori delegati’), provided that the delegated functions and powers are clearly specified. However, certain activities cannot be delegated, such as drafting of the financial statements, preparing merger or de-merger projects, and calling the shareholders’ meeting in cases where losses exceed one third of the company’s share capital, to name a few.

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auditors (‘collegio sindacale’) or the sole auditor (‘sindaco unico’). The possibility of appointing a sole auditor instead of a board was introduced in March 2012 (Law no. 27 of March 24, 2012) and is permitted only for S.r.l.s, while, S.p.a.s are required to appoint a board of auditors.

Board of Auditors The board of auditors is responsible for ensuring compliance with applicable laws and regulations, and is charged with the supervision of the financial matters of the company. The board is composed of three or five regular members, who may or may not be shareholders of the company, and two alternate members. At least one regular and one alternate member shall be enrolled with the register of legal auditors, while the remaining members of the board of auditors, if not enrolled with the same register, shall be enrolled with other specific 352

(ii) Dualistic System The dualistic system is characterized by the presence of two different organs: a board of management (‘consiglio di gestione’) and an oversight board (‘consiglio di sorveglianza’). They are both collegial organs. The board of management is composed of at least two members who may or may not be shareholders of the company, and remain in office no longer than three years. The oversight board is composed of at least three members, who may or may not be shareholders and shall remain in office for three years. While the board of management is solely responsible for the management of the company, the oversight board is responsible for controlling the activities performed by the board of management and is vested with the same powers and duties as a board of auditors, as well as with certain functions belonging to the shareholders’ meeting in the ordinary system. Upon incorporation, the members of both the board of management and the oversight board are designated in the company’s articles of

incorporation. Later the members of the board of management are appointed by the oversight board, whereas the members of the oversight board are nominated by the shareholders’ meeting. In order to guarantee the independence between the two organs, the members of the board of management cannot be appointed to the oversight board and vice versa.

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registers selected by decree of the Minister of Justice or professors. The auditors shall remain in office for a period of three years. In order to be eligible, a potential auditor must possess special technical skills and adequate professional experience.

(iii) Monistic System Under the monistic system, a board of directors (as a sole director is not allowed) is responsible for the management of the company. However, the peculiarity of this system is that control over management is not exercised by an external organ, but rather by a committee – the management control committee (‘comitato per il controllo sulla gestione’) – that is appointed within the board itself. Consequently, a distinction must be made between executive and non-executive directors and between independent and non-independent directors. Non-executive directors are those board members who are not vested with any powers pertaining to management, while executive directors are those board members that perform executive functions. Furthermore, independent board members are those directors that possess certain specific requirements set by the law that are necessary to be appointed as an auditor in the ordinary system, while directors that do not 353

Management and control structure of limited liability companies (S.r.l.) As opposed to S.p.a.s, the quotaholders of an S.r.l. are free to tailor management to fit the company’s particular needs in the deed of incorporation and bylaws. Absent any specific provisions, a S.r.l. is managed by a sole director or by two or more directors that are appointed by the quotaholders. If more than one director is appointed, they shall form a board of directors. If the company is managed by a board, decisions are usually adopted by way of a resolution although the deed of incorporation or bylaws also provides that decision may be taken upon consultation or in writing without holding a meeting. With regards to accounting control, the S.r.l. may have a sole auditor//board of auditors or an external auditor (‘revisore’). However, the appointment of an auditing organ is mandatory in the event the S.r.l.’s capital exceeds certain limits or if other specific conditions are met. Starting from April 2012 (Law no. 35 of 4 April 2012), the ordinary composition of the auditing organ of an S.r.l. is monocratic (i.e. sole auditor), whereas a board of auditors will be appointed only if the bylaws so provide.

Who are Directors and Officers? The officer structure An Italian corporation does not have ‘officers’ (e.g. CEO, CFO). Instead, in an Italian corporation there is no specific officers’ structure and the role of officers is exercised by directors, precisely directors having executive powers, such as the managing directors. Nonetheless, certain roles – which pertain to the typical functioning of an Italian corporation – may be compared to the ‘officers’ for the purpose of entering into D&O policies.

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possess such requirements are non-independent board members. Only independent nonexecutive directors can be appointed to the management control committee.

General Manager The most important role is that of the general manager (‘direttore generale’), who is usually appointed by the shareholders’ meeting in order to give effect to the resolutions adopted by the board of directors. General Managers are subject to the same rules governing the liability of directors, within the limits of the duties assigned to them. Other positions that are comparable to officers are de facto directors (‘amministratori di fatto’) – i.e. individuals actually managing the company, also in the absence of a formal appointment – and, in general, all individuals to whom the board of directors has delegated specific functions and who, therefore, have operational powers. 354

As mentioned above, the corporate structures under Italian law also provide for a board of auditors as well as, in case of dualistic or monistic systems, other additional organs. The members of the board of auditors and the members of the other organs can be found liable for violation of their obligation to ensure compliance with the law as outlined below. Therefore, not only the directors, but also the members of the board of auditors, the members of the board of management, the members of the oversight board and the members of the management control committee are potential clients for D&O policies. The following content of this document will consider this specific corporate structure provided by Italian law and will focus on directors and auditors. Contractual relation According to Italian employment laws and court decisions, the functions of directors and those of employees can only be held by the same person under certain conditions. Italian Supreme Court (‘Corte di Cassazione’) ruled that, inter alia, the status of director and employee can co-exist only if and when the director, in spite of his or her office, remains subject to the control and the authority of a supervisory organ. As a result, neither sole directors, nor managing directors

having wide executive powers can be simultaneously employees of the company.

Duties of the board

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Board of Auditors

Board of Directors The Italian Civil Code (‘C.C.’), the company’s articles of incorporation and its bylaws constitute the principal sources regarding the duties of directors. Such sources also define the liabilities of directors in the event of losses, including those relating to the preparation of the financial statements and the evaluation of its various components, as well as those relating to book keeping. In managing a company, directors shall carry out their duties according to law, articles of incorporation and bylaws with due diligence. In particular, some of the main duties of directors are to: •

act in an informed manner: decisions may only be taken after having obtained all the information usually required to take such decision and preventing injurious acts;

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take care of the necessary filing requirements (e.g. of documents and correspondence with the companies’ register);

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control payment of contributions of corporate capital either as contributions in cash or in kind; 355

Some of the above outlined activities do not only lead to criminal liability but also to administrative liability being sanctioned, inter alia, also with the prohibition to exercise a certain profession. However, not only directors, but also the company itself can be subject to administrative liability according to Legislative Decree no. 231 of 8 June 2001. Even though the liability introduced under the aforementioned decree is qualified as ‘administrative liability’, it rather has the features of a criminal liability. Indeed, under Legislative Decree no. 231/2001 a company can be held directly liability in case of crimes committed, inter alia, by their directors. In this case the company is contemporarily liable with the person committing the crime. The company’s liability arises only when crimes have been committed in the company’s interest and to its direct advantage. According to the decree, a company may be exempted from liability deriving from the actions of the management upon the concurrence of the following: •

the company had previously adopted an administration and management model, abstractly capable of preventing crimes;

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the company appointed an independent body with autonomous powers charged with the task of supervising compliance with and updating the model;

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the crime was committed by fraudulently eluding the model;

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there was no omitted or inadequate supervision by the independent body appointed by the company.

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Administrative liability

Depending on the size of the company, an individual as well as a collegial organ may be appointed as the independent body. The decree also establishes that in small companies the functions of the independent body can be carried out by the managing organ. The members of the independent body usually enter into D&O policies. S.r.l. The liability of the directors of a S.r.l. basically follows the same structure and principles of the liability outlined above for a S.p.a. Differences especially arise due to the fact the law does not provide such a high density of regulation for the corporate structure of a S.r.l. as it does for the S.p.a.

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Criminal liability

Members of the board of auditors are liable for the intentional or negligent violation of an obligation deriving from their position as auditors which led to damage. Auditors are jointly liable with the directors for all damages caused by the misconduct of company’s directors, which could have been prevented if the auditors had exercised their supervision with due care. However, auditors are liable independently from any misconduct of the directors if they act in violation of their own supervision duty. Other than by violation of the due supervision obligation, auditors can also be liable if they breach an obligation which has been explicitly transferred to the board of auditors or a single auditor by law.

The members of the board of auditors may be held liable under criminal law either by aiding and abetting the directors committing a crime or by committing a criminal offence themselves. In the first case auditors are liable if they failed to impede directors from committing criminal offences even though they were informed or could have had knowledge of such activity.

Similarly to the directors, also auditors are liable vis-à-vis the company, its creditors as well as its shareholders and third parties. While liability visà-vis the company’s creditors requires that rules aimed at protecting the corporate capital have been violated, claims for damages by single shareholders and third parties are grounded on the auditors’ violation of their duty to supervise hence allowing the directors to cause damage directly to the shareholder and third party funds.

The criminal liabilities apply not only to the members of the board of auditors but also the members of the oversight board under a dualistic system of a S.p.a.

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Liability of the board of auditors

Independent criminal liability of auditors may occur when they make false representations regarding the company e.g. in information notices, are disloyal by providing or promising benefits to third parties, hinder public authorities exercising their supervision, disclose business secrets, exercise illegal influence of the shareholders meeting, or commit agiotage.

Sanctions imposed by criminal law include monetary penalties as well as imprisonment. Administrative liability Similarly to directors, auditors are subject to administrative liability arising from the violation of duties imposed by the law, such as the omission or delay of mandatory filings of 361

S.r.l. The above outlined liability of the auditors of a S.p.a. also applies to the auditors of a S.r.l., unless changes are introduced in connection with the recent modification regarding the possibility of the appointment of a sole auditor.

situations and the required in-depth knowledge of accounting principles, the final quantification of damages is often left to the opinion and recommendations of experts appointed by the court. If damages cannot be determined for reasonable arguments, the final assessment can also be left at the discretion of the court.

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corporate deeds with the competent registers. Similarly, the above outlined activities may lead to the imposition of administrative sanctions such as e.g. monetary sanctions and prohibitions to exercise a certain profession.

The institution of punitive damages or exemplar damage is generally considered incompatible with the Italian system of damages, as confirmed by a decision of the Italian Supreme Court dated 2007.

Damages for civil liability

Insolvency

If the directors are found liable vis-à-vis the company for the damages caused by the violation of their obligations, they are required to compensate for the damage suffered (‘danno emergente’) and as well as the loss of profits (‘lucro cessante’) arising from such breach. Precisely, the indemnification of ‘damages’ aims at the reparation of any loss suffered by the entitled subject whereas the indemnification of the ‘loss of profit’ aims at the compensation of the loss of earnings suffered by the interested party due to the directors’ failure to lawfully fulfill their obligations. Since the determination of the loss of profit is based on a hypothetical development of the situation, its occurrence has to be proven with reasonable certainty. However, considering the complexity of most

If a company facing a situation of financial distress is admitted to bankruptcy or other insolvency proceedings, certain prohibitions are imposed on directors under Bankruptcy Law (Royal Decree no. 267 of 16 March 1942 including its subsequent modifications). Directors remain in office but are no longer allowed to exercise their powers to the full extent. Breaching such prohibition might lead to disqualification from managing a commercial enterprise or even imprisonment. Apart from the prohibitions imposed by Bankruptcy Law, directors as well as auditors are also liable for their misconduct which has had an impact on the creation and/or worsening of the financial situation of the company. To this extent directors and auditors are liable for any 362

The Italian Bankruptcy Law provides that, if a company goes bankrupt, the receiver (‘curatore’) is entitled to exercise all the actions that the company or the company’s creditors would have been entitled to exercise against directors and auditors prior to the declaration of bankruptcy. The purpose of such action is to regain the loss suffered by the company due to the misconduct of its directors and auditors. For a successful claim the receiver has to prove the specific misconduct of the directors and/or auditors, the damages caused as well as the causal connection between both. Only damages directly caused by the misconduct shall be compensated. However, it is often difficult to clearly determine the facts that caused specific damage to the company. Therefore, court decisions have developed alternative argumentation methods appropriate to facilitate the required reasoning and adequate to overcome difficulties created by a bankruptcy scenario. By way of example, courts apply different calculations methods to overcome problems in quantifying damages. The amount

of damages suffered by the company can be assessed by comparing certain values of the financial statements at different occasions throughout the development of the company’s crisis or by determining the loss occurred after a specific violation. Also, there is the possibility that damage may be simply assessed on the basis of equity. Should there be problems in proving a specific amount – due to poor or even false book-keeping – the deficit created by the bankruptcy could be considered as the damage. The courts’ tendency to deviate from strict requirements of evidence in order to overcome the challenges imposed by bankruptcy not only facilitates the work of receivers in legal proceedings but also increases the risk for directors and auditors to be held liable irrespective of a clearly defined share of responsibility.

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violation of legal requirements set forth by law. Directors are furthermore liable for any violation of obligations provided by the company’s articles of incorporation regarding the company’s management or the required due diligence.

In this context, it has to be emphasized that nowadays it has become common practice to commence legal proceedings against directors and auditors in case of bankruptcy without a definitive prior assessment of the evidence available and the specific liability of the sued directors/officers.

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Action of the company In case of an unlawful conduct of directors, auditors, etc. the company may bring an action against them upon the prior approval by the shareholders’ meeting or the board of auditors by way of a resolution. The shareholders’ meeting shall approve such a resolution by a number of votes representing the majority of the corporate capital (unless the bylaws require a higher quorum), while the board of auditors shall approve it with the favorable vote of two thirds of its members. The resolution to bring an action for liability results in the removal from office of the interested director(s), provided that such resolution is passed by shareholders holding at least one fifth of the company’s share capital. The action against the directors can also be resolved by a ‘qualified minority’ of shareholders, of at least one fifth of the share capital (a lower majority of 1/40 is required for venture capital companies with a large number of shareholders). The shareholders’ meeting may also decide to waive any action or settle a claim even after it is brought before a court, unless one fifth of the share capital of non-venture capital companies or 1/20 of the share capital of venture capital companies votes against the waiver or

settlement. The company’s right to bring an action is subject to a five-year statute of limitation running from the date of the director’s termination from office.

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Who can sue the Directors and Auditors?

Action of company’s creditors Company’s creditors may bring action against directors for breach of their duties to preserve the company’s assets and secure its financial soundness if the company’s assets prove insufficient for the payment of their claims. The action must be brought within five years from the time the creditors could reasonably have become aware of the inadequacy of the company’s assets. The waiver by the company to file a legal action against the directors does not preclude the possibility for the creditors to file their action. Action of individual shareholders/ third parties If individual shareholders or third parties can prove that they have been ‘directly damaged’ by the directors, they have a right to seek damages, regardless of any action that the company or its creditors may be pursuing. Therefore, this action may not be brought if the individual shareholder or the third party only suffered an indirect damage resulting from a direct damage to the company; in the latter case, the action against the directors may be brought only by the 364

Action of receivers/liquidators/ administrators In case of bankruptcy or any other insolvency procedures, the action against directors may be brought by the receiver or liquidator. S.r.l. Similar actions can be also brought against the directors of a S.r.l. by several parties. There are no specific rules governing actions that a company may bring against its directors, therefore this matter is demanded to court decisions and legal doctrine. The prevailing opinion leads to the conclusion that in case the S.r.l. suffered damages, the action against its directors is not filed by the company itself, but by the individual quotaholder. In case such an action is filed, the directors are not automatically removed from office; their removal shall be specifically remitted to the judge. This action can be waived or settled, provided that the relevant resolution is passed by quotaholders holding at least two thirds of the company’s quota capital and not objected by quotaholders holding at least one tenth of the company’s capital. There are some doubts regarding the date of

expiration of the quotaholders’ right to bring such an action (whether the five-year-term starts running from the date of the director’s termination from office or from the date on which damages to the company’s assets caused by the directors are definitely assessed).

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company, in compliance with the above outlined requirements. The action must be filed within five years from the date when the prejudicial act took place.

Further, in case individual quotaholders/third parties/company’s creditors suffered damages, they can sue directors, as for the S.p.a. The action of the individual quotaholder shall be brought within five years from the date when the prejudicial act took place. In case of bankruptcy, absent specific rules, the prevailing court decisions and legal doctrine admits the receiver of the S.r.l. to bring an action against the directors. Requirement for bringing a derivative action against directors and auditors Under English law, derivative actions are claims brought by individual shareholders, acting on behalf of a company, against the company’s directors. They are brought in respect of wrongdoings committed against the company that, for whatever reason, the company is not willing to pursue in its own right. Under Italian law, there is no action precisely corresponding to the derivative action. Absent a direct action by the company, the individual shareholder cannot step-in the right of the company to sue the directors. 365

Class actions have been recently enacted in Italy and have been amended in March 2012 (Law no. 27 of 24 March, 2012) by the introduction of the requirement of the ‘uniformity’ of the rights claimed through the class action. At this date, Italian class actions aim at the protection of consumer rights through the assessment of the manufacturer’s liability and the condemnation of the latter to compensation for damages. Precisely, the class action protects: •

contractual rights of consumers that share the same position towards one company;

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alike rights of consumers of a certain product or service towards the relevant producer, regardless of a contractual relation;

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alike rights of consumers to compensation for damages caused by unfair trade practices or anti-competition practices.

As class actions are a recent novelty to the Italian judicial system, no significant decisions have been handed down at this date and therefore it is not possible to assess the actual implications of class actions on directors’ and officers’ liabilities vis-à-vis consumers.

Scope of liability/indemnification Board of directors Directors can be held liable vis-à-vis the company, the shareholders, the company’s creditors and third parties as shown above. As a general rule, if the company (S.p.a. or S.r.l.) is managed by a sole director, he or she is individually liable; if the company is managed by a board of directors, all of the board members are jointly liable for the actions or violations committed by an individual director, unless the violation falls within the scope of functions and powers specifically delegated to the director(s) (or to an executive committee). As a result, absent any delegation of functions among the board members, each director is deemed equally liable and, therefore, if the company seeks compensation from a single director, the latter can bring a recourse action against the others.

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Are class actions permissible under local law?

Instead, if powers and functions are delegated to a board member who causes the damages while exercising such powers or functions, the managing director is held individually liable although the other directors’ liability is not excluded. Indeed, the other directors are or should be constantly informed of the activities performed by the managing director and are under the obligation to supervise these activities; consequently the other directors can be held 366

allegedly harmful act/resolution (however, in this case no specific duty to record the dissent in the minutes or to inform the chairman of the board of auditors is provided by the law).

Board of auditors

If the company intends to limit the potential liability of its director’s vis-à-vis the company itself, it may resolve, inter alia, to waive its right to bring a recourse action against the directors found liable. Another opportunity for the company to handle this issue is to enter into an insurance contract in favor of the director, such as a D&O policy. In this regard, it is important to clarify that there are certain limitations for the public companies which shall be explained here below.

The scope of liability of the members of the board of auditors depends on the specific obligation violated by them. If the violation concerns an obligation of the entire board of auditors, all auditors shall be jointly liable, whereas, if the violation concerns an obligation of a selected auditor, this auditor shall be individually liable. Is there unlimited liability for each director and auditor?

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jointly liable with the managing director if they fail to not prevent the managing director from committing harmful actions or do not cure or minimize the consequences of such actions.

Indemnification

Liability arising from actions or omissions of the board of directors shall not be extended to directors who dissented from the resolution he or she deemed potentially harmful. Indeed, the director – provided that he or she has not acted with negligence – can be exempted from the liability provided that his or her dissent was recorded in the minutes of the relevant board meeting and written notice of such dissent was immediately given to the chairman of the board of auditors.

As anticipated, the company may resolve to limit the liability of its director’s vis-à-vis the company itself by adopting one of the following possible resolutions:

Also directors of a S.r.l. can be exempted from liability by declaring their dissent against the

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to indemnify its directors for the defense costs related to legal proceedings brought against them for activities performed during their office;

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to indemnify its directors for any other cost related to damages caused to third parties during their office;

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to waive any potential recourse action against the directors, also in the event the 367

Finally, it is advisable to clarify that the company cannot resolve: •

•

to indemnify a director from any potential liability arising from their future actions, even committed with malice, gross negligence or against public policy before a claim and/or petition is actually filed against them;

Specifically, the enforcement of judgments in civil and commercial matters rendered in EU countries – with the exception of Denmark – is governed by the EC Regulation no. 44/2001. According to Art. 34 of this Regulation, a judgment shall not be recognized in Italy: •

if such recognition is in apparent contrast with Italian public policy (‘ordine pubblico’), i.e. the fundamental principles grounding the juridical, ethical and social structure of the Italian society. These principles may vary throughout the years, depending on the historical evolution of moral; for example what was considered contrary to public policy in the nineteen twenties is nowadays acceptable;

•

where it rendered in default of appearance if the defendant was not served with the petition instituting the proceedings or with an equivalent document in sufficient time and in such a way as to enable him or her to arrange for his or her defense, unless the defendant failed to commence proceedings to challenge the judgment when it was possible for him or her to do so;

•

if it is irreconcilable with a judgment given in a dispute between the same parties in Italy;

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if it is irreconcilable with an earlier judgment given in another Member State or in a third

to automatically step-in the payment of administrative sanctions imposed on its directors.

Any such resolution would be void.

Procedural Issues Enforceability of foreign judgments The enforcement of foreign judgments on directors and officers is subject to the same rules that apply to the enforcement of any foreign judgment. As a general rule, decisions adopted by foreign authorities are recognized in Italy without the need for any specific action, provided that it meets certain requirements set forth by Law no. 218 of 31 May 1995. In addition to this law, the recognition of foreign decisions is also regulated by regulations of the European Union (EU) and bilateral/multilateral agreements and treaties entered into by Italy.

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damages have been caused by the director with malice or gross negligence.

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Civil and commercial matters also fall within the scope of the European Enforcement Order governed by EC Regulation no. 805/2004. Under this regulation, a creditor who obtained a favorable judgment, settled a claim, or entered into a public deed in a Member State can enforce such judgment, settlement or deed in another Member State without the need of any recognition proceedings.

in compliance with the laws of the country where the proceedings were held; •

it is final and binding pursuant to the laws of the country where it was rendered;

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it is not irreconcilable with a final judgment handed down by an Italian court;

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no other proceedings are pending before an Italian court which involve the same cause of action and the same parties and which commenced before the foreign proceedings; and

•

its contents are not contrary to Italian public policy. For instance, the concept of punitive damages, as above outlined, is conflicting with the Italian public policy and, therefore, the Italian Supreme Court denied the enforcement of punitive damages recognized by an American judgment.

With regards to judgments issued by the authorities of non-EU countries, the provisions of Law no. 218/95 shall apply. According to Art. 64 lett. a foreign judgment is recognized in Italy without the need for any enforcement procedure when: •

the judge who issued it was competent according to the principles of Italian law on jurisdiction;

Instead, a specific procedure for the recognition of a foreign judgment issued by a non-EU country is required:

•

the defendant was duly informed of the petition instituting the proceedings according to the local laws and his or her fundamental rights of defense had not been infringed;

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in case a dispute on the recognition of the judgment arises;

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if a party intends to use the judgment as a measure of enforcement; and

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if a party fails to voluntarily execute the judgment.

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the parties appeared before the court or one of the party’s default was duly declared

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State involving the same cause of action and between the same parties, provided that the earlier judgment fulfils the conditions necessary for its recognition in Italy.

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Overview of local insurance law In Italy, D&O policies are admitted and generally cover company directors, auditors, etc. to protect them against economic losses arising as a result of the civil liability in the case of their unlawful conduct. Indeed managing a company implies a certain degree of risk and therefore directors, auditors, etc. are often exposed to civil liability since they are at all times accountable for proper management. As a result, they may highly benefit from an insurance policy, such as a D&O policy, that mitigates the economic losses that may derive from their conduct. There is no specific law on D&O insurance policies in Italy. Applicable principles on D&O policies are provided by laws generally applicable to insurance matters. The local insurance law is mainly governed by the Insurance Code enacted under Legislative Decree no. 209 of 7 September 2005, Regulation no. 35 of 26 May 2010 as well as other Regulations issued by ISVAP (‘Istituto per la vigilanza sulle assicurazioni private e di interesse collettivo’). Depending on the case additional requirements can be imposed by general laws such as e.g. the C.C., Anti-moneylaundering Laws, the Consumer Code, the Personal Data Protection Code, etc.

ISVAP In Italy supervision functions over the insurance sector are carried out by ISVAP, a special national authority. ISVAP is an independent authority which acts in full autonomy in the juridical, financial, accounting, organization and management field. The supervision exercised by ISVAP is aimed at ensuring correct management of insurance and reinsurance companies as well as intermediaries and other insurance sector participants in compliance with Italian law. ISVAP is competent of issuing binding regulations for the insurance sector and has, inter alia, the power to enforce precautionary measures and sanctions.

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Insurance of Directors’ and Officers’ liability

Are there limitations in law to what can and cannot be covered under a D&O insurance policy? Rules and regulations contained in the C.C. and in other laws, as well as certain court decisions affect D&O policies and the scope of their coverage. First of all, Art. 1900 of the C.C. establishes a general rule: the insurer is not obliged to cover losses arising from willful conduct or gross negligence of the insured or the beneficiary. The parties may derogate from such principle to the extent that they may expressly agree to cover gross negligence. This derogation, 370

Another important provision is Art. 3, section 59, of Law no. 244/2007 (Budgetary Law for 2008 – ‘Legge Finanziaria 2008’) which contains significant limitations to D&O insurance contracts issued in favor of public administrations. In particular, starting from 30 June 2008, it is not possible to cover the directors and officers of public entities (i.e. public companies or private companies which are subject to public influence) if they concern damages caused directly to the State (including public entities) and derive from gross negligence or willful conduct of the directors. Any insurance policy issued or renewed in breach of this prohibition is null and void and severe sanctions may apply to the directors and officers and the beneficiaries of the policy. In particular, the aforesaid insured persons and/or beneficiaries would be obliged to pay a sum equal to ten times the amount of the premium

paid. Due to the voidness of the contract also the insurer would be requested to return the premium collected for the void policy and to pay the potential damages the insured has incurred into.

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however, does not apply for losses arising from willful conduct. This rule is expressly confirmed by Art. 1917, section 1, of the C.C. which clarifies that damages caused by willful conduct of the insured are not covered by civil liability insurances. Since D&O policies belong to such group, above named provisions entail a limitation to D&O policies. Loss arising from willful conduct can never be covered and further, loss arising from gross negligence is also not covered (unless the parties expressively agree differently).

However, on several occasions Italian Courts of Auditors (‘Corte dei Conti’) clarified that there is an opportunity to execute valid D&O policies providing compensation for damages caused by directors of public entities. These Court rulings specified that a D&O insurance contract can be executed in favor of a director if he or she personally provides for the payment of the entire premium. Can an insurer write D&O insurance on a non-admitted basis? Italian Law does not allow non-admitted insurances. Insurance companies with a head office in Italy operating on the Italian insurance market are subject to a precedent permission of ISVAP. Insurance companies have to communicate whether they intend to pursue life insurance business or non-life insurance business. Both categories are divided into different classes further specifying the activities of the respective categories. Offering D&O policies would be an activity to be registered under class 13 general civil liability (‘Responsabilità civile generale’). Insurance companies which are based in another 371

The principles of freedom of services and freedom of establishment provide that the insurance activity which is carried out in compliance with the applicable laws of a member state may be carried out with the same modalities and at the same conditions in another member state, provided that – and this is the only exception to this general principle – the aforementioned modalities and conditions do not conflict with the compulsory rules of the member state where the activity should be performed. Therefore, insurers operating under either principle remain subject to requirements imposed by their home country and are contemporarily subject to provisions providing fundamental principles of Italian law. Under both

principles the insurance company is only allowed to sell its insurance products to persons or judicial persons that have either their domicile or their residency in Italy when signing the contract.

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member state of the EU or a state belonging to the European Economic Area are allowed to pursue their business in Italy either under the principle of freedom of establishment or under the principle of freedom of services. In both cases the activities are subject to a previous notification to ISVAP which has to be performed by the competent home country authority. ISVAP shall, within 30 days, inform the competent home authority about general laws and provisions which must apply when conducting business in Italy. Upon the receipt of such notification, or the expiration of the deadline, the insurer may commence its business.

Insurance companies with head office in a nonEU member state which is not belonging to the European Economic Area are not allowed to act under the principle of freedom of services. Any insurance business pursued by such an insurance company is subject to a previous authorization by ISVAP. Natural or judicial persons are not allowed to conclude contracts with such a company in violation of the above prohibition. Insurance contracts concluded with unauthorized insurance companies are void. However, only the policyholder or the insured party may invoke the voidness of the contract. The voidness shall result in the reimbursement of premiums paid. Any damages or amounts paid by the insurer to insured parties and other parties entitled to insurance benefits may not be claimed back. Insurance companies that issued policies without a specific authorization are shown on the ISVAP website in order to provide a certain transparency and consumer protection.

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In Italy civil liability insurances are usually offered on a claims made basis meaning that the insurer has to indemnify the insured for any claim that is made by a third party against the insured within the period of validity of the policy. Depending on when the loss occurred, three different types of claims made clauses can be distinguished. Provided that the claim is made within the insured period, some clauses cover all losses regardless of when they occurred (‘unlimited retroactive period’) while others provide coverage only if the loss occurred within a defined retroactive period or even within the insured period itself. Although it is common practice in Italy to offer D&O policies on a claims made basis, court rulings have not fully clarified the legal situation regarding the validity and prerequisites of such clauses as of yet. With regards to civil liability insurances, Italian C.C. sets forth the ‘loss occurrence principle’ according to which the insured event is the unlawful act or the event that affects a third party and it must occur within the duration of the policy. In the context of the loss occurrence principle, no importance shall be given to the

date on which the third party that was affected by the insured event notifies his or her claim. Consequently, the insurer may be liable for claims made by the third party even many years after the termination of the policy as long as the loss occurred during the effectiveness of the policy.

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Are claims made and reported policies permissible under local law or does the law require occurrence?

Even though used regularly, there are conflicting rulings handed down by Italian courts concerning the validity of claims made clauses in civil liability insurance policies. Precisely, some courts argue that claims made clauses, as opposed to loss occurrence clauses, may excessively penalize the insured who will not be entitled to coverage for claims reported many years after the event that triggered the insurance took place. This is why claims made clauses are often construed as a limitation of liability of the insurers against the insured. Therefore a part of Italian Courts holds that policyholders may validly agree to limitations of coverage under a claims made clause, subject to the policyholder’s specific approval of the clause as an ‘unfair term’. Other judgments consider claims made clauses as null and void since they contradict the loss occurrence principle provided by Italian C.C. However, in a recent judgment an Italian court considered a claims made clause valid under the condition that claims are covered regardless of when the event that triggered the insurance took place (‘unlimited retroactive period’). 373

Can defense costs be covered inside the limit of liability? According to Art. 1917 section 3 of the C.C., the insurer shall pay the defense costs sustained by the insured persons in an amount equal to 25% out of the insured amount. If the loss to be paid by the insured to the claimant(s) exceeds the insured amount, defense costs will be shared between the insured and the insurer. Therefore, defense costs can be covered by a D&O policy in accordance with the terms set forth by Art. 1917 section 3 of the C.C. These terms, however, can be derogated by the parties, but only in the insured’s favor. Therefore, the parties can expressly agree to increase the percentage of the defense costs payable out of the insured amount.

Claims brought directly against the insurer A third party claim cannot be brought against the insurer unless proceedings to assess the director’s/ officer’s liability are not brought first. Differently, a director or officer insured under a D&O policy who is being sued by a third party claimant can directly call the insurer to join in the proceedings in order to be held harmless from any economic consequence arising out of their potential liability as well as of the proceedings. This is due to a general principle of the Italian Civil Procedure Code according to which a party can request a third party to join in the proceedings if they deem that this third party can hold them harmless.

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Even though the most recent decision upheld the validity of certain type of claims made clause, such decision will not bind other judges who will be free to take another standpoint on the matter. This is due to the fact that Italy, contrary to Common Law countries, does not have a binding case law. Italian judges are only limited by legal provision but are free to make their decisions independently from precedent judgments.

Exclusions In certain cases expressly provided for under the C.C. insurance coverage could be denied. An important exclusion is provided in case of false or omitted information and representations given by the prospective insured. Prior to the conclusion of the contract the insurer usually requires the prospective insured to answer a questionnaire which mostly contains questions regarding the activity of the insured as well as a claim history. The prospective insured has the duty to answer the questions truthfully. However, this duty only exists to the extent that the questionnaire is explicitly inquiring about certain specific circumstances. There is no 374

Coverage may be also denied upon the applicability of exclusion clauses contained in the insurance contract. It is common practice under Italian law that the parties agree on clauses defining conditions which lead to the exclusion of coverage. However, such clauses need to be drafted carefully since they may be considered as ‘unfair terms’ against the insured and require double signing in order to be valid. Common clauses exclude coverage in case of false or omitted information especially with regard to circumstances that could give rise to a claim in the future as well as any misconduct of the insured.

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obligation for the prospective insured to disclose any circumstances which could give rise to a future claim without a specific query of the insurer. If the information provided in the questionnaire later proves to be false or incomplete, Italian law provides for different legal consequences. In case the insured acted with wrongful intent or gross negligence, the insurer may claim the voidness of the entire insurance agreement to the extent that he or she would not have concluded the contract under the same conditions had accurate information been made available. Due to the voidness of the entire contract the insurer is not liable for the payment of losses. In case the insured acted without intent or gross negligence, the insured has the right to withdraw from the entire contract. In case the loss occurs before the insurer can withdraw from the contract the insurer is entitled to reduce the insured sum in the same proportion in which the premium would have been reduced knowing the actual situation. The insurer is further entitled to withdraw from the agreement in the event the insured risk increases to an extent which would have not been insured under the same conditions. Apart from provisions specifically aiming at insurance matters, the insurance contract is also subject to general provisions provided by the general civil law which could also give rise to the voidness of the contract.

In this context, however, it should also be mentioned that there is the possibility that coverage has to be granted irrespective of the maximum sum insured which has been agreed upon between the parties. In case the insurer is found guilty of mismanagement when handling the claim (e.g. in case of an unjustified denial of coverage) the judge may rule that the stipulated limitation of coverage is null and void. Severability Should a contractual clause be considered invalid due to its incompatibility with Italian law the rest of the agreement remains valid unless the invalid clause is of such importance that the parties would not have concluded the contract under the same conditions without the invalid clause. 375

Worldwide D&O policy Whether a worldwide D&O policy which covers a subsidiary located in Italy is compliant with Italian Law depends on the specific content of the stipulated contract. However, it is common practice that companies which execute a world wide D&O policy also stipulate a local D&O policy for their Italian directors and auditors. Influence of foreign law Italian Law in general and the Italian Insurance Law in particular are hardly influenced by any other country’s law, but have their own unique structure build throughout a long history. Its law is, however, influenced to the extent that Italy as an EU Member is subject to EU Law. Italy is therefore subject to market harmonization measures within the EU and required to implement EU Directives into national law as well as to directly apply EU Regulations. Extended reporting period According to Art. 1913 C.C., the insured shall inform the insurer of a claim within three days from the date of occurrence of the claim or the date in which he or she became aware of the claim. This three-day term is usually extended

by the parties; indeed insurance contracts usually provide longer terms in the insured’s favor for communicating the claim to the insurer.

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This fundamental concept of severability is explicitly provided by Italian law but often also stated again in the insurance contract.

Recent and Expected Developments Recently enacted laws introduced the above mentioned changes to Italian corporate structure, e.g. the simplified limited liability company and the ordinary rule of the sole auditor for S.r.l. These changes show the intention of the Italian legislator to simplify the functioning of corporations in Italy. This is in line with the latest tendency of Italian politics and it will probably lead to the enactment of further additional measures simplifying corporations and removing bureaucracy in general. Furthermore, the claims made clauses and their validity have been again subject of a judgment of an Italian Court (Court of Genoa of 23 January 2012). In its ruling the court was again elaborating on the conditions for a valid claims made clause. To this extent the judge came to the conclusion that a claims made clause not providing a retroactive period (so-called ‘pure’ claims made clause) shall be considered valid without any further requirement (such as e.g. a double signature). However, in this context it is important to emphasize that Italian judges 376

CONTENTS

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are only limited by legal provision, but are free to make their decisions independently from precedent judgments. Therefore judgments derogating from the opinion of the Court of Genoa may be issued in the future. For this purpose a decision on the matter by the unified divisions of the Italian Supreme Court would be welcomed in order to set a common standard for lower courts to follow in the future. However, a decision of the unified division would be rendered only upon prior contradicting rulings of different division of the Supreme Court. Such contradicting rulings have not been adopted yet, so that a decision of the unified division of the Supreme Court can not be expected in the near future.

Gianfranco Puopolo – [email protected] Giovanna Aucone – [email protected] PG Legal Via Sant’Andrea, 3-20121 Milan, Italy www.pglegal.it Information accurate as at April 2012 when contribution was drafted 377