Health emergency and evidence of virtuous legislative policy: From obligation to nudge

The health emergency has forced the legislators of the main European legal systems to intervene on some key principles of corporate regulation. As far as the Italian legal system is concerned, the reference rules are represented by Articles 6, 7 and 8 of the Liquidity Decree (Legislative Decree no. 23 of April 8, 2020, converted into Law no. 40 of June 5, 2020), which have suspended, respectively:

• the so-called recapitalization or liquidation mechanism, which traditionally characterizes the regulation of the companies in question, and the related cause for dissolution, which would have otherwise limited the directors' operations;
• the effects of any loss of a going concern on the financial statements, which may continue to be drawn up on a going concern basis if this assumption existed before the health emergency; and
• lastly, the regulation of shareholder and intercompany loans, which can be disbursed in this emergency phase without running the risk of legal deferment.

The first provision has as its object the strict mechanisms provided by the Italian Civil Code to protect the permanence in the shareholders' equity of values at least equal to the minimum capital required by law (Articles 2446 and 2447 of the Italian Civil Code, for s.p.a. and 2482-bis and 2482-ter, for s.r.l.), suspending the recapitalization obligations until the end of 2020. The provision replicates the provision already provided by the bankruptcy law in favor of companies that have requested access to a preventive procedure (composition with creditors or restructuring agreement: art. 182-sexies of the bankruptcy law), thus extending the relative protection to the directors of all performing companies, regardless of the impact of the pandemic on them and the origin of the loss.

If the directors are still obliged to ascertain the occurrence of any losses likely to erode the share capital, the corollaries of the erosion are “hibernated” by the directors and statutory auditors of the company. Although the interpretation of the rule is not unambiguous, it must be considered that the suspension of the reduction and consequent increase in share capital obligations operates automatically from the date of entry into force of the decree (April 9, 2020), regardless of when the losses occurred and their connection to the pandemic. This conclusion seems to be suggested first of all by the letter of the provision that also suspends, from April 9, paragraphs 2 and 3 of Article 2446 of the Italian Civil Code, which demand the reduction of capital in the event of a loss of more than one-third of the capital deferred at the time of its emergence, if it is not reabsorbed in the meantime. It is clear that these losses by definition (since they were carried forward from previous years) can only have occurred before the entry into force of the Decree. Moreover, all the legislative interventions that suspended the obligations to intervene on capital in the presence of significant losses – whether of a “general” (art. 182-sexies of the bankruptcy law) or “exceptional” nature (art. 26, legislative decree no. 179 of October 18, 2012, converted into law no. 221 of December 17, 2012) – have always referred to the exemption at the time when those resolutions should have been taken. Finally, the law assigns importance to the “cases that occurred” by December 31, 2020, alluding in this way to the moment at which the obligation arises to immediately reduce the share capital and possibly reconstitute it to the legal minimum. According to a consolidated view, these cases are perfected after the corresponding accounting assessment.

These considerations generate a possible limitation, not just “retrospective” (that is suggested by the thesis that excludes the losses occurred before the pandemic from the normative suspension), but “prospective,” since the considered rule would not encompass losses resulting from events occurred in 2020, but that have been made the object of assessment in the first months of 2021. This is because, from New Year's Eve on, all provisions suspended will be resumed, unless extensions are established, or a radical rethinking of the mechanism based on nominal capital is performed. This could be required by emergency regulations.

The suggested interpretation is, moreover, the most efficient from the standpoint of the pursued legislative policy objectives. In fact, this suspension was intended to avoid the administrators – called to climb a demanding Pordoi step for the survival of companies – finding the sticks of recapitalization rules of dubious efficiency between their wheels, all the more so in this phase of great uncertainty, allowing a regular continuation of business activity. For this reason, companies have been left to identify the instruments necessary to acquire the liquidity needed to ensure continuity. This may be represented by risk capital, where shareholders or external parties willing to make contributions or contributions to assets, or by debt capital, using the “liquidity bridge” resulting from the exceptional measures provided for the granting of debts with state guarantee by the emergency regulations, but also with loans provided by shareholders or other companies belonging to the same group. And it is always in this logic that the receivables deriving from such loans, if made in the period from April 9 to December 31, 2020, are exempted from the rule of legal subordination. There is a new exceptional derogation that aims to overcome a potential disincentive to their disbursement, but is also justified by the greater difficulties induced by the new scenario in ascertaining the assumption of the excessive imbalance and reasonableness of the contribution to which the Civil Code links the subordination.

In this way, a sort of safe harbor is set up for directors who continue to remain firmly on the ship during the pandemic storm, protecting them, under company law, from the risk of a future imputation of that responsibility for not merely conservative management, which is the club traditionally brandished by curators in the actions exercised in bankruptcy. This is a liability that the new Article 2486 (which came into force in March 2019) has made even stricter, but whose assumption is still the occurrence of a cause for dissolution, which the legislator has appropriately sterilized.

The emergency suspension of capital intervention obligations was followed by the recapitalization incentive measures implemented with the Relaunch Decree for medium-sized companies that have suffered significant reductions in turnover due to the epidemiological emergency. Article 26 of Legislative Decree no. 34/2020 offers a dual opportunity to companies with a turnover between EUR5 million and EUR50 million and their shareholders. The first one is allowed to issue subordinated debt financial instruments that can be subscribed by the Fondo Patrimonio PMI to the extent of 3:1 with respect to the value of the contributions, even beyond the limits set out in Article 2412 of the Italian Civil Code. The latter are guaranteed a tax credit of 20% of the amount invested, with a maximum ceiling of EUR2 million. The assumption is that the transferee company has:

• suffered, in the months of March and April 2020, a decrease in revenues of at least 33% compared to the same period of 2019; and
• deliberated and paid the capital increase in the period from the approval of the Decree to December 31, 2020, and the investor holds the investment until December 31, 2023.

Until that date, moreover, no reserves may be distributed, on pain of losing the benefit, with repayment of the amount deducted, together with legal interest.

The new rules are to be welcomed for the successful evolution from the obligation/sanction mechanism of articles 2446, 2447 and 2486 of the Italian Civil Code to that of the prodding/incentive/prize, which characterizes the nudge suggested by well-known economic policy studies and all the more so in the perspective of favoring the restart of the entrepreneurial fabric on an adequately solid basis. In fact, it is a question of preventing a possible “evaporation” effect: that is, the risk that the (re)invigorating injection of liquidity, which will hopefully be introduced into the system in the coming weeks, will end up determining a future dissolution; with an evaporation, precisely, due to an accentuation of the financial leverage, which in our country is on average already higher than European standards, with a capitalization that is less than 20% and tends to fluctuate around 15%. It is hardly appropriate to add that the leverage effect is destined to be further aggravated by the extraordinary losses suffered by the economic system during the year and by the aforementioned suspension of recapitalization obligations and the rule of subordination of loans made by shareholders and companies of the same group. The obligations were laid down by the emergency regulations with the intent, in itself commendable, to strengthen the propensity of shareholders and holding companies to financially support the investee companies.

At operational level, the joint application of the rules examined could, moreover, make it possible to approve capital increases without necessarily making prior reductions, and regardless of whether the increase is sufficient to restore the minimum capital requirements. A company with a capital of EUR50,000 and a negative shareholders' equity of EUR300,000 may therefore resolve to issue new shares or quotas for EUR250,000, with a consequent increase in capital from EUR50,000 to EUR300,000. The novelty is clear: not only is it not necessary to proceed with the traditional “accordion” mechanism, as already made clear by the Milan notary public in the wake of the Juventus case, but until the end of the year the increase may take place, with or without prior reduction, even if the company finds itself after the operation with assets more than a third less than the new capital (or even, as in the example, negative). All of this, if the conditions are met, with the mentioned tax advantages.

The new rules could also raise the issue of unequal treatment. For example, take an S.p.A. whose two equal partners have provided for a recapitalization for EUR2 million, together with a shareholders' loan of the same amount. If this operation had been carried out on May 20, the company could issue subordinated debt instruments ex lege destined to the SME Fund for EUR6 million and the two partners would benefit from the tax credit for 20% and would remain protected from the risk of subordination of the credit deriving from their financing. If the operation had been carried out on May 18, only the latter would be protected, whereas if it had been carried out on April 8, none of the above benefits would be available. However, it is clear that even in the latter situation the company could have recorded a reduction in revenue due to the epidemiological emergency, which the same law refers to the “months of March and April 2020,” to justify the intervention of support and incentives. A company that has intervened immediately to meet the conversion needs imposed by the emergency or in any case required by the need to achieve the objectives of the business plan, risks being placed in a less competitive situation compared to companies that only provide recapitalization in the coming weeks. Beyond the tax benefits granted to shareholders, the point is that while the latter may receive substantial financial support from the Fund, a more diligent company could go to the bottom.