1. The drag along clause: applications and problems

The so-called drag along clause regulates the right of the selling shareholder (for the sake of simplicity, hereinafter defined as majority shareholder) to “drag along”, when selling its own shares to a buyer, also the other shareholders (for the sake of simplicity, hereinafter defined as minority shareholders), who will be forced to sell their holding or shares on the same terms as the selling shareholder.

The direct effect of the drag along clause is that to create, on the one hand, the majority shareholder’s right to demand the sale of the shares of the minority shareholders along with its own shares, and on the other hand, a condition of subjection of the minority shareholders, who will be forced to undergo the “drag along” imposed by the majority shareholder.

The rationale for such a mechanism is based on the strengthening of the majority shareholder’s position in negotiations for the sale of its shares so that it may offer the buyer the possibility to purchase the entire corporate capital of the company with the assurance of a more stable investment.

Without prejudice to the benefits brought also to minority shareholders[1], the application of the drag along clause implies certain shrinkage of the latters’ right to freely dispose of their shares. In particular there is problem of compatibility with some key principles of the internal company organisation, among which the so-called individual right to the status of shareholder.

2. Insertion of the drag along clause in the by-laws. The situation before Maxim H.I.19

Having highlighted the aforesaid problems arising out of the application of the drag along clause, especially with reference to the rights of minority shareholders, it is necessary to carefully verify one of the most discussed aspects, exactly the one affected by the latest maxim of the Notarial Board of Triveneto, consisting in the methods to introduce the clause in the by-laws.

To that effect, the decision of the Court of Milan of 25 March 2011[2] was particularly relevant, which, by decree, dismissed the appeal filed pursuant to Article 2436 of the Italian Civil Code by the Chairman of the Board of Directors of a company limited by shares, whereby it was requested to register with the Register of Enterprises the shareholders’ meeting resolution ordering the inclusion by majority of the drag along clause in the by-laws.

In such respect, the Milanese court rested on an interpretation of the clause, so to speak, “oriented to the consequences”: considering that the judicial effect arising out of the application of the drag along clause implies the deprivation, for the minority shareholders, of the right to dispose of their shares in case of exercise of the “drag along” right by the majority shareholder, the inclusion in the by-laws of said mechanism is only possible with the consent of the persons suffering said alteration of their subjective rights[3], which ultimately consists in a real limitation of the property right. Therefore, the insertion of the drag along clause in the by-laws is not at the discretion of the majority but requires the consent of the unanimity of shareholders.

The “unanimity” theory expressed by the decree of the Court of Milan commented above was accepted by a part of scholars[4], but also disagreed by some legal authors[5] who, although not ignoring the need to protect minority shareholders subject to the “drag along”, deem that such requests for protection can be satisfied granting said minority shareholders the right to fair valuation of the shares. In other words, according to such authors’ opinion, the drag along clause may be inserted in the by-laws with the majorities required for the amendments to the by-laws, provided that minority shareholders are guaranteed a purchase price at least equal to that determined pursuant to the rules on liquidation of withdrawing shareholders (Article 2437-ter of the Italian Civil Code for companies limited by shares, Article 2473 of the Italian Civil Code for limited liability companies).

Finally, it is necessary to pay attention to the decision of the Court of Milan (Court of Milan, VIII division, decree of 22 December 2014), mentioned also in Maxim H.I.19 of the Notarial Board of Triveneto, whereby the inclusion of the drag along clause by majority was deemed admissible since it implies an acceptable shrinkage of the minority shareholders’ rights to dispose of their shares. Indeed, according to the Milanese court the rationale underlying the “drag along” mechanism is to be found in the protection of the best interest of the company in the divestiture. In this respect, the effect of the drag along clause to obtain better profit conditions from the investment made, thus the satisfaction of a specific corporate interest, mitigates the sacrifice of the interest of the single shareholder.

3. Maxim H.I.19 of the Notarial Board of Triveneto

The notaries of Triveneto, moving from the starting points offered by the decision of the Milanese court lastly mentioned and agreeing with the conclusions reached (inclusion of the drag along clause by majority) have provided an interpretation of the case at issue form a different point of view.

According to the Notarial Board, the drag along clause does not grant majority shareholders an atypical individual right, but regulates a peculiar form of liquidation that, pursuant to the Italian Civil Code, can be enforced at any time by the majority of the shareholders by resolving the early dissolution pursuant to Article 2484, paragraph 1, no. 6 of the Italian Civil Code. Both in this latter case and in the event of exercise of the drag along clause, the minority shareholders’ right to their holding would be converted in the right to the liquidation of their holding.

In other words, the mechanism underlying the drag along clause represents an atypical expression of a typical right of the majority, that is to say the right to decide the dissolution of the company causing a variation in the subjective rights of dissenting shareholders (the so-called conversion).

So, the Notarial Board has followed the conclusions reached by the Milanese court by decree of 22 December 2014, being favourable to the insertion of the drag along clause by majority, provided that certain conditions were met:

  • the clause shall necessarily provide for the joint and simultaneous sale of all shareholdings, lacking otherwise the key element of the collective divestment;
  • still considering the drag along clause as shareholders’ agreement aimed at regulating a form of collective divestment, it will be necessary to provide the right for minority shareholders to receive, for the sale of their shares, an amount at least equal to the relevant liquidation value determined according to the applicable rules (Article 2437-ter of the Italian Civil Code for companies limited by shares, Article 2473 of the Italian Civil Code for limited liability companies).
  • consistently with the two previous points, shareholders shall be granted equal treatment. Enforcing the clause at the time of the divestment, any advantage for single shareholders with respect to the sale of shares shall be excluded and all shareholders shall be allowed to benefit proportionally from the majority premium.

All that remains to do now is to wait for the reactions of case law in the light of the principles expressed by the notaries of Triveneto.