The solutions now recommended and the fair value of share participation

In Italy, about 10% of the limited liability companies has a share capital equally divided between shareholders: an impressive number, if we consider that – from a technical point of view – there is no reason to take such choice; on the contrary, there are different reasons to avoid an equal share participation.

It seems to be that everyone agrees on this magic number (fifty/fifty), since no one wins, as a sort of tug-of-war, where the competitors lay the rope on the ground, both giving up.

Through this choice, shareholders modify one of the basic principles of the legal framework concerning the decisions to be taken by companies, renouncing to the majority principle and choosing, on the contrary, the unanimity one; one more consequence, too often ignored, of such choice, is that the impossibility of functioning and the prolonged lack of activity of the shareholders meeting, after the 2003 reform of company law, is one of the grounds for the dissolution of the company (art. 2484, par. 1, n. 3 of the Italian civil code); thus, in case of deadlock situation due to the unanimity principle, the only possible exit path is represented by the dissolution of the company, proposed, depending on the case, by the shareholders or by the directors (as court decisions affirmed; see recently Court of Milan, Business Section, sentence no. 1752 of June 21st, 2019). Therefore, discussing on the solutions that, in case of deadlock, may solve the crisis of governance without resorting to the winding-up (and, sometimes, to the bankruptcy) of the company seems to be fundamental.

One of the solutions that may be adopted to face such circumstance is the Russian roulette clause, even called Texas shoo-out clause or Savoy clause, back in vogue due to a sentence issued by the Court of Rome in 2017 and, at the end of July 2019, due to a recommendation by the Notary Council of Milan.

Through the Russian roulette clause, shareholders set that in case of particular events occur (deadlock situation, lack of renewal of shareholders agreement, etc.) one of the parties may propose to the other one to sell its shares at a fixed price, or reverse the offer and buy the offering party shares at the same price. There are a number of versions of such clause; among them, the most well-known is that according to which both shareholders have the possibility to trigger the clause, therefore occurring a sort of fight at the “OK Corral”: the first of the shareholders that, occurring the condition precedent necessary to activate the clause, sends to the other its proposal, indicates the price at which the other party may buy the shares or sell its shares.

The clause, originating from the Anglo-Saxon experience, finds its reasonableness in the notorious sentence pronounced by judge Easterbook, according to whom “The possibility that the person naming the price can be forced either to buy or to sell keeps the first mover honest” (United States Court of Appeals, Seventh Circuit,  Valinote vs. Ballis, June 26th, 2002). However, a number of problems arose when such clause has been introduced in our legal framework (both in shareholders agreements or by-laws), not different from those arisen in evaluating the more known drag along and tag along clauses.

What needs to be stressed herein, is that the conclusion to which the aforementioned sentence by the Court of Rome has arrived is indeed complex: if it is true that company law does not prevent to recourse to an anti-deadlock situation clause such as the Russian roulette clause, even if the party determining the price is not bound to meet any objective criterion, it is also true that such clause shall not structured in a way that necessarily determines an unfair price.

The Notary Council of Milan adopted a more careful approach (Recommendation no. 181/2019), even not different from that adopted by the Court of Rome, since it faced the same problem but considering to put this clause in the by-laws of companies (and not in the shareholders agreements). The conclusion, therefore, has been that the principle of fair value of share participation is an impassable limit in any case of forced exit; thus, the statuary autonomy is strictly bound to the respect, towards the outgoing shareholder, of the norms set in case of legal withdrawal.

Coming back to our starting question, that means how to not break the striving rope in case of crisis of governance, an answer that may be given is that, in case the charm of the magic number 50/50 is irresistible, may shareholders find remedy to the risks of dissolution of the company and enact all the tools that now exist and that doctrine, case law and professional associations analysed.


Marco Carlizzi