According to decision no. 17441, of 31 August 2016, of the First Division of the Supreme Civil Court, the liability of directors without management power cannot originate from a general failure to supervise – that would be identified in the facts as a strict liability – but must be attributed to the breach of the duty to act in an informed way, on the basis of both information to be released by executive directors and information that non-executive directors can gather on their own initiative. Therefore, the determination of the prerequisites for the liability of delegating directors fits in a context accentuating the distinction between the duties imposed on managing directors and those typical of non-executive directors.
1. The case
The case at issue concerns the liability claimed pursuant to Article 164 of Bankruptcy Law by the Receivership of a company limited by shares against its directors for their imprudent management, which resulted in the dispersal of the company’s assets and, consequently, in its bankruptcy. Among others, the most harmful transaction that caused the depletion of the company’s assets, consisted in the purchase of the shares of another company at an exorbitant price compared to the assets of the acquired company; such a transaction was implemented in a clear conflict of interest of the sole director of the purchasing company, who was also majority shareholder, through another company, of the selling company. About one year after the conclusion of the agreement for the purchase of the aforesaid shares, the controlling shareholder of the purchasing company sold part of the shares of such company to other three shareholders, who had also hold, for a limited period of time, the office of directors of the same company; indeed the latters had ceased to hold the office of directors before the approval of the financial statements for the financial year in which they had been appointed as directors. As regards the payment of the purchase price of the abovementioned shares, the purchasing company paid only a small quota thereof as down payment upon completion of the purchase agreement and the remaining part during the office of its new directors.
2. Decision of the Supreme Civil Court, First Division, no. 17441 of 31 August 2016
In the first instance decision the Court of Rome had established the liability of all directors, including those appointed after the completion of the agreement for the purchase of the shares. Indeed, the Court of Appeal of Rome had confirmed the liability of the latters, overturning the judgement only as to the quantum of the damages charged to the directors appointed after the conclusion of the transaction. Instead, the Supreme Court of Appeal reversed and remanded the appeal decision, confirming the principle according to which non-executive directors are liable for the behaviour of directors who performed the action only if they are aware of facts that would demand their intervention, or have failed to diligently take care to act in an informed way. In order to meet the company’s internal organisational requirements and to favour its operational management, administrative and managing functions are often set on two different levels: a first “operating” level is entrusted to managing directors, while a different “evaluation” level is entrusted to delegating directors. Therefore, the formers will take care of the appropriateness of structures and variety of entrepreneurial activities, while delegating directors will mainly have the obligation to evaluate the functioning of managerial structures and to examine their effectiveness. The Court, considering the directors’ liability towards the company as a contractual liability, analysed the issue applying the principle of the so-called “business judgement rule” – that is the absolute immunity of managerial decisions, unless with regard to the ways in which they have been adopted (the so-called “decision making process”) – dwelling, in particular, on the duty to act in an informed way incumbent on non-executive directors and which is functional for the latters to gain knowledge of prejudicial facts committed by executive directors. A further element highlighted by the Supreme Court of Appeal is represented by the causal link that must exist between the inertia of non- executive directors and the detriment caused to the company, taking into account the legal instruments actually available to the latters to react to the “mala gestio” (acts of maladministration) of executive directors. Non-executive directors have the duty to intervene pursuant to Article 2392, second paragraph, of the Italian Civil Code, to prevent the occurrence of harmful events of which they have become aware and such duty results in the control of the activity carried out by managing directors. Therefore, for such purpose, the exchange of information between managing directors and board of directors has a central importance: the so-called information flows are aimed at correcting information asymmetry between directors without management power and managing directors and enable the formers to act in an informed way pursuant to Article 2381, sixth paragraph, of the Italian Civil Code.
3. The duty to act in an informed way
The duty of directors without management power to act in an informed way results in the activation of instruments aimed at gathering additional information to those already received by them through the information flows coming from managing directors. The question springs to mind: when does such prerogative become binding, with the result that the failure to exercise it may become a source of liability? According to the view accepted by the decision at issue, this happens when information coming from managing directors contain gaps, inconsistencies and elements of criticality. Therefore, there is no general supervisory obligation incumbent on non-executive directors that may expose them to strict liability. Hence, according to such view, directors without management power will be exempted from the duty to ask for additional information only should the following conditions apply: (i) the organisational structures evaluated by the board of directors were deemed appropriate; (ii) the information provided by managing directors are complete, plausible and do not arouse, per se, alarm and – in light of the principle of the “business judgement rule” – are not unreasonable from the economic point of view.
4. The structure of non-executive directors’ liability: ultimate interpretation
The joint liability of non-executive directors for harmful transactions carried out by managing directors, provided for by Article 2392, second paragraph, of the Italian Civil Code has, therefore, the characteristics of a subsidiary liability that implies the existence of the following elements: (i) a detriment attributable to the breach of a managing rule ascribable to the managing directors; (ii) the, breach, by non-executive directors, of the duties pertaining to the supervisory function (please note that the burden of proof of such breach lies with the party that takes legal steps bringing the liability action); (iii) the causal link between the breach of the obligations incumbent on non-executive directors and the detriment caused by the harmful transactions carried out by the managing directors. In this particular case, with reference to the required evidence of the causal link, a crucial role – in the sense of excluding the liability of non-executive directors – was played by some factual elements and, in particular, by the fact that the appointment as non-executive directors was subsequent to the completion of the harmful transaction.