Ultra vires doctrine, corporate purpose and business resilience: Corporate social responsibility beyond the health emergency in Italy

Among the positive news that illuminated, like sparks in the dark, the most acute phase of the pandemic emergency, there have been extraordinary reactions from some important businesses, which have dedicated production lines to medical products needed to fight the pandemic emergency.

These products include lung ventilators that Ferrari designed with the Italian Institute of Technology, sanitizing gel produced by Campari, and Armani’s masks.

This is just the tip of the iceberg of a series of highly meritorious initiatives, to which the media have given appropriate emphasis, and which confirm not only the resilience of our national champions, but also the ability of many Italian companies to react.

Through these initiatives, businesses have demonstrated their ability to combine social responsibility, business opportunities and reputational advantages. At the same time, however, these activities trigger additional considerations regarding their appropriateness in respect to the corporate purpose established in the relevant statutes.

The production of non-medical masks could be included in the object of companies in the textile sector; as could the production of sanitizing gel in that of companies producing alcoholic (and soft drinks). Less evident is the traceability of the production of real medical devices, such as surgical masks and ventilators to the activity indicated in the articles of association. The problem only concerns initiatives which are not occasional and which are intended to have a not insignificant impact on companies' turnover. Also, a legal system that considers these initiatives as not included in the corporate purpose would lead to unreasonable and even harmful outcomes. It could indeed affect the liability of managers, who may not benefit from the business judgment rule if the ultra vires investment turns out to be unprofitable. Moreover, it could lead to opportunistic initiatives undertaken by speculative funds holding percentages, which legitimize the exercise of the corresponding action or the request to convene the assembly while evoking a formalistic just cause of revocation.

On the other hand, a prior modification of the clause of the company's object would not only be incompatible with the timescales required by the emergency, but would also entail some shortcomings if the integration was considered likely to bring about “a significant change in the company's activities” (Article 2437, paragraph 1, letter a). In this way, all investors would be offered a legal put in relation to the average quotation of the last six months prior to the convocation of the meeting, taking resources away from the company that are all the more vital in this exceptional situation.

Beyond the possible operational solutions, which can be achieved through first-or second-level operating companies wholly owned or newly established, in which to entrust the new production lines (in compliance with art. 2361 of the Italian Civil Code), the issue leads to a reconsideration of two totems of company law: the corporate purpose and the corporate interest. It suggests the evaluation of their mutual interference in accordance with a line of reasoning, which is already entailed in the previous case law and in the most recent legislative developments.

On the first front, it is enough to think of the precedents regarding the ineffectiveness of intra-group sureties due to their alleged incompatibility with the corporate purpose, based on the lack of conformity of the guarantee with the interest of the subsidiaries that have granted it in compliance with the directives of the holding company. On the second front, it is useful to recall the legal framework regarding benefit companies, which requires indication, in the corporate purpose, of the “specific purposes of common benefit” that are intended to be pursued.

More generally, these initiatives offer the opportunity to rethink the issue of the general capacity of limited liability companies, along the lines initiated by the First Directive on corporate matters and which are now worthy of being developed in the perspective of corporate social responsibility. In this direction, other aspects of our company law should be rethought; from the function of share capital to the very notion of business continuity.

As far as share capital is concerned, an extension well beyond December 31, 2020, of the transitional rules suspending the strict obligations to reduce and reconstitute share capital in the event of significant losses under Article 6 of the Liquidity Decree could be suggested. On the contrary, with regards to the limited liability company, a definitive overcoming of the “recapitalization or liquidation” mechanism could be envisaged, which is one of the few fragments of the rules substantially coinciding with the share model (articles 2482-bis and 2482-ter of the Italian Civil Code). In the S.p.A. it is not possible to achieve the same result in virtue of the Euro-community constraint imposed by Article 19 of Directive 2012/30/EU (in the wake of what was already provided for by the Second Directive no. 77/91/EEC). However, the scope of the current Articles 2446 and 2447 could be mitigated by bringing from one-third to one-half the threshold of deviation between equity and capital allowed by law and allowing a longer period for recapitalization even in the event of capital reduction below the legal minimum. In order to reconcile this evolution, and mitigate the risks of opportunistic behavior by shareholders, the extension to this type of company of the rule of subordination of loans from shareholders' loans granted in a situation of excessive imbalance (or in which it is reasonable to make contributions), already operated by the most recent jurisprudence for companies that do not make use of the risk capital market, could be incorporated at regulatory level.

Also, with reference to a going concern, it would be possible to make the most of the emergency regulations that anchor the assumption of a going concern to the situation before the outbreak of the pandemic (art. 7 of the Liquidity Decree) and overturn the traditional approach, pointing to the business as a going concern as an objective to be pursued in terms of lasting, reasonable expectations during and despite the lockdown, while waiting to define the scenario that will unfold at the end of the pandemic. In this perspective, the organizational structure, rather than preventing the “loss of business continuity” and, therefore, the crisis, should be functional in monitoring the sustainability of the business in the medium term, considering the instability resulting from the systemic crisis as intrinsic. Beyond this “teleological torsion” imposed by the exceptional nature of the current emergency, the crisis could offer an opportunity to rethink the very notion of business continuity in an economic system that is increasingly characterized by innovation, discontinuity and disruption. And lead to verify if the time has not come to overcome the paradigm of “homeostatic continuity,” to consider also a “heterostatic continuity,” challenging and innovative, more appropriate to an economic system characterized by disruption and continuous technological innovation.

These are some of the emerging twists of the conceptual horizon solicited by the health emergency and accelerating the transition towards a sustainable corporate law paradigm. This is one of the possible evolutionary lines that the current crisis may hopefully initiate in a new normal that we hope to reach soon. The ultimate goal should be that of a new, more inclusive and cooperative dimension, capable of translating into concrete facts statements on “sustainable success” that the new Code of Corporate Governance for Listed Companies for the first time points out as “an objective that guides the actions of the Board of Directors" and that “is substantiated by the creation of long-term value for the benefit of shareholders, taking into account the interests of other stakeholders relevant to society.”