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Shareholder Conflicts in Close Corporations between Theory and Practice: Evidence from Italian Private Limited Liability Companies

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Abstract

Shareholder conflicts are said to be the Achilles heel of close corporations. They materialize in different ways and shapes, mostly in the form of majority oppression, minority abuse or shareholder deadlocks. Different cognitive biases and heuristics, as shown by the behavioural law and economics movement currently so much in vogue, contribute to their emergence (such as over-optimism, strategic behaviour, availability and representativeness heuristics, information asymmetry). In international corporate law practice, depending on the concrete governance goal to be achieved, entrepreneurs employ various contractual safeguards to effectively prevent and resolve the above shareholder conflicts. The most common are restrictions on the transfer of shares (e.g., the right of first refusal, consent clauses), special prerogatives for minority shareholders (e.g., veto rights over management decisions, super-majorities for fundamental corporate actions) and expulsion clauses, while more experienced players also recur to drag-along or tag-along arrangements, as well as to shoot-out procedures. The present article builds upon this framework in order to conduct probably the first thoroughly comparative law in action research on a representative data set of Italian private limited liability companies (srl) incorporated in South Tyrol and Milan. The empirical findings, with some unexpected variations between the two places of incorporation, suggest that with reference to conventional safeguards (the right of first refusal, consent clauses, etc.) a more or less significant degree of contractual sophistication can be observed, while innovative clauses such as tag-along or drag-along provisions are generally lacking. The explanation likely lies in the fact that legal advisers path-dependently imitate standardized corporate charter terms widely acknowledged and tested among the legal community rather than investing considerable efforts in the drafting of optimal customized arrangements. The social and economic costs correlated to sub-optimal and status quo-biased contractual design might not be taken into due consideration. This article also provides useful policy suggestions for the legislator and practitioners for the drafting of the best-fitting corporate charter.

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Notes

  1. Kessler (1967), p 255.

  2. Exceptionally tax or accounting law contains definitional provisions, i.e. US Internal Revenue Code (IRC) of 1958 (subchapter 5, § 1371(a)) or Directive 2013/34/EU of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings (Art. 3 on SME). For this information, see Fleischer (2017), p 320.

  3. For comparative data evidence, see Wedemann (2013), pp 12–15.

  4. Cf. Fleischer (2018a), pp 681–683; id. (2017), pp 319–322; id. (2015a), pp 408–409; id. (2015b), Intro., marg. no. 33–49; Bachmann et al. (2014), pp 33–37; Easterbrook and Fischel (1985), pp 271 et seq. In the case law, see the iconic case Donahue v. Rodd Electrotype Co, 328 N.E.2d 505, 511 (Mass. 1975); Ebrahimi v. Westbourne Galleries Ltd [1973] AC 360, 379, where Lord Wilberforce affirms that a private company is normally ‘(1) an association formed or continued on the basis of a personal relationship, involving mutual confidence—this element will often be found where a pre-existing partnership has been converted into a limited company; (2) an agreement, or understanding, that all, or some (for there may be “sleeping” members), of the shareholders shall participate in the conduct of the business; (iii) restriction upon the transfer of the members’ interest in the company—so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere.’.

  5. Cf. Ribstein (2010), p 96; Armour and Whincop (2001), p 985.

  6. In this article, the expressions corporation and company are used as synonyms because in most continental European legislations the private limited liability company (or its equivalent) is structured as a corporation. Moreover, the shareholder’s stake in the company is generically called a share, although in various corporate laws (e.g. Italy, Germany) shares indicate multiple holdings in a joint-stock corporation, while with reference to the LLC the holding is called a quota.

  7. See Granovetter (1985), pp 481 et seq.; Arregle et al. (2007), pp 73 et seq.; Wedemann (2013), pp 89 et seq.

  8. On this distinction, see Faccio and Lang (2002), pp 365 et seq.; Weller (2012), pp 390–394.

  9. Sometimes legislators require a qualified majority for the approval of charter amendments or fundamental transactions, e.g. in Germany, where § 53 GmbHG fixes a threshold of 3/4 of the share capital.

  10. In the Italian case law, see the leading case Cass., 26 October 1995, n° 11151, Giur. comm., 1996, II, 329; more recently, Trib. Milano, 28 May 2007, Giur. it., 2008, 130; Trib. Milano, 5 September 2016, Riv. dir. soc., 2016, 737 (a systematic refusal to distribute dividends). Not a very different approach is followed, for example, by German and English courts: cf. BGH, 12 April 2016—II ZR 275/14; Allen vs. Gold Reefs of West Africa Ltd [1900] 1 Ch 656; Citco Banking Corp NV vs. Pusser’s Ltd [2007] UKPC 13, which all deny that the controlling shareholder must exercise the voting power in the best interest of the non-controlling shareholder, so acting as a fiduciary, but nevertheless forbid unjust oppression of the minority. Still, for the invalidity of a shareholders’ resolution to issue shares below their full economic value, see OLG Stuttgart, 1 December 1999—20 U 38/99, NZG, 2000, 156, which assumed in such case a violation of the standard of good faith.

  11. Cf. Bachmann et al. (2014), pp 63–64; Davies and Worthington (2016), pp 636–638; Chivers et al. (2017), pp 4 et seq.; Hodge O’Neal (1987), p 126; Hodge O’Neal and Thompson (2015), § 9:20 [with reference also to the famous case Dodge v. Ford Motor Co.: 204 Mich. 459, 170 N.W. 668, 3 A.L.R. 413 (1919)].

  12. Fleischer (2015a), p 439: ‘Daher ist die Corporate Governance in der GmbH großenteils eine Governance von Gesellschafterkonflikten’; likewise, Godke Veiga and McCahery (2017), p 27 (‘the most important issue in a closely held company: the majority-minority conflict’).

  13. Nagar et al. (2011), p 944.

  14. An exception is the more general study on public and private corporations conducted by Figà-Talamanca (2010), pp 129 et seq.; before the 2003 corporate law reform, see Zuddas et al. (1988), p 898.

  15. Extensively, Hodge O’Neal and Thompson (2012), §§ 3:4, 3:6, 3:7; Hodge O’Neal (1987), pp 125 et seq.; Bachmann et al. (2014), pp 37–41; Wedemann (2013), pp 46 et seq.; Godke Veiga and McCahery (2017), pp 25 et seq.

  16. Nagar et al. (2011), p 943 (‘The main governance problem in close corporations is the majority shareholders’ expropriation of minority shareholders’).

  17. For a detailed account, see Moll (2003), pp 848 et seq.; Bonavita v. Corbo, 692 A.2d 119 (N.J. Super. Ch. 1996) (‘With no dividend and no employment (and no way to sell the shares), his investment was essentially worthless’).

  18. Cf. Bachmann et al. (2014), pp 71 et seq.; Wedemann (2013), pp 53 et seq.

  19. On this argument, see Bebchuk (1989), pp 1820 et seq.

  20. The first ground-breaking studies, highlighting the cognitive anomalies undermining the (comparable) REMM (resourceful, evaluating, maximizing man) hypothesis conceptualised by Brunner and Mackling, have been carried out by Daniel Kahneman and Amon Tversky, the former being awarded the Nobel Prize in economics in 2002 for his research results in the field of behavioural economics. Among many contributions, cf., more recently, Kahneman (2003), pp 1449 et seq.; id. (2013), pp 109 et seq. For an excellent overview, cf. Schmolke (2014a), pp 89 et seq., pp 174 et seq.; Englerth (2007), pp 60 et seq.; Vella (2018), pp 312 et seq.; Klöhn (2006), pp 80 et seq.

  21. See the seminal paper by Simon (1955), pp 99 et seq., where he developed the concept of bounded rationality, according to which decision makers are ‘intendedly rational, but only limitedly so’; correspondingly, Williamson (1985), pp 45 et seq.

  22. Generally on the limits of the rational choice model, see, e.g., Ulen (1989), pp 390 et seq.; Eisenberg (1995), pp 251 et seq.; Schmolke (2012), pp 410 et seq.; Lüdemann (2007), pp 12 et seq.

  23. On these cognitive imperfections cf. Loewenstein and Thaler (1989), pp 181 et seq.; Tversky and Kahneman (1982a), pp 84 et seq.; Tversky and Kahneman (1982b), pp 163 et seq.; Ulen (1989), pp 399 et seq.; Schmolke (2014a), pp 178 et seq., pp 626 et seq. (with specific regard also to the close corporation).

  24. Means (2010), p 1196 (‘close corporations are quintessential relational contracts’).

  25. On relational contracts, see the ground-breaking work by Williamson (1979), pp 233 et seq.; id. (1985), pp 68 et seq. For a good summary, cf. Winter (2018), pp 159 et seq.; Schmolke (2014a), pp 399 et seq., pp 605 et seq.; Doralt (2018), pp 154 et seq.

  26. For this definition of opportunism, see Williamson (1979), p 234.

  27. Cf. Williamson (1979), pp 240 et seq., 254; Schmolke (2014a), pp 607–612.

  28. See on this behalf, Molitor (2009), p 491; Hodge O’Neal (1987), p 124.

  29. Cf. Eisenberg (1998), pp 819 et seq.; Strine Jr. and Travis Laster (2015), pp 11 et seq.

  30. Cf. Bainbridge (2002), p 830; Easterbrook and Fischel (1991), p 229; Ribstein (1999), pp 407 et seq.

  31. For a good (and critical) summary, cf. Klausner (2006), pp 779 et seq.; id. (2018), pp 84 et seq.

  32. See, e.g., Thaler and Sunstein (2003), pp 175–179; Sunstein and Thaler (2003), pp 1159 et seq.

  33. The distinction between soft and hard paternalism was first traced by the political philosopher Joel Feinberg. See Feinberg (1983), pp 3 et seq.

  34. See Jolls and Sunstein (2006), pp 199 et seq.

  35. For an excellent overview, also with regard to the criticisms voiced against this behavioural-based ‘new paternalism’, see Schmolke (2014a), pp 215 et seq.; id. (2012), pp 406 et seq.; Eidenmüller (2011), pp 814 et seq.

  36. On this topic, for a first good overview see the recent empirical contribution by Molk (2017), pp 522 et seq.

  37. See for a detailed account, Wedemann (2013), pp 85 et seq.; more concisely, Hodge O’Neal (1987), pp 143 et seq.

  38. In the present perspective, no supplementary focus needs to be placed on the special statutes recently elaborated by the legislator for the simplified private limited liability company (srls: see Art. 2463-bis c.c., introduced by Law 24 March 2012, n° 27, and subsequently variously amended) and for innovative start-ups and SMEs (see Law 17 December 2012, n° 221, Law 24 March 2015, n° 33, and Law 21 June 2017, n° 96). The reasons are diverse: in the case of an srls, the founders must adopt standard model articles, which cannot be modified by the parties, thereby substantially nullifying their freedom of contract; in the case of innovative start-ups and SMEs incorporated as srl, the regulatory framework, principally aiming to attract venture capitalists, shows peculiarities in comparison to the traditional srl statute mostly on the financing side (i.e. allowing the issuance of shares without voting rights or with multiple voting rights, the raising of public funds through equity crowdfunding, the purchase of its own shares by the company in execution of an employee stock option plan). Thus, the considerations herein are extendable also to such innovative firms. In the legal literature on these new ‘corporate forms’ cf., e.g., Benazzo (2017), pp 467 et seq.; Cian (2015), pp 969 et seq. Actually, also the innovative start-ups incorporated in South Tyrol, amounting to a total number of 89 (source: http://www.registroimprese.it/start-up-innovative), do not contain additional specific contractual protection mechanisms of the investor (e.g., inspection and information rights, drag or tag-along clauses, special veto or exit rights). Standard contracts and boilerplate provisions are the rule. This is mostly because the investor is not an ‘authentic’ venture capitalist, but more simply a family member committed to the entrepreneurial idea of the start-up company. Obviously, it cannot be excluded that similar covenants are included in side agreements, not known to the public. In any case, a broader investigation would be necessary in order to allow a generalization of the above assertion.

  39. On these arguments, cf. Campobasso (2015), p 556; Zanarone (2010), Introduction, pp 53 et seq.; Buonocore (2003), p 170 (‘new era of the shareholder rights’).

  40. See extensively, Campobasso (2015), pp 555 et seq.

  41. See Bachmann et al. (2014), pp 33 et seq.

  42. See Wedemann (2013), p 101; in the economic literature, Coeurderoy and Lwango (2012), pp 415 et seq.

  43. Cf. Hodge O’Neal and Thompson (2015), § 7:2; Sund and Bjuggren (2007), p 274.

  44. For a good overview of the range of potential transfer restrictions, cf. Hewitt et al. (2016), pp 279 et seq.; Hodge O’Neal (1952), pp 776 et seq.; Hodge O’Neal and Thompson (2015) § 7:4; Fleischer (2018a), pp 696–700.

  45. E.g., Delaware (§ 202 DGCL); Germany (§ 15(5) GmbHG); Austria (§ 76(2) GmbHG); Denmark (Arts. 48, 68 Companies Act); Sweden (Ch. 4, sec. 7 Companies Act).

  46. E.g., Switzerland (Art. 786(1) OR: consent by the shareholder meeting); UK (Art. 26(1) model articles for private companies: consent by the directors); Spain [Art. 107(1) LSC: consent by the shareholder meeting, save for share transfers between spouses, direct relatives (ascendant or descendent), or companies within a group].

  47. Speranzin and Bortoluz (2015), Art. 2469, p 334 (‘considerable amount of freedom of contract’).

  48. In the case of a mere temporary inalienability of the shares, the withdrawal right under Art. 2469 c.c. will not operate: see Zanarone (2010), Art. 2469, p 580.

  49. For further details, cf. Olivieri (2011), Art. 2469, pp 324–328; Speranzin and Bortoluz (2015), Art. 2469, p 344.

  50. Extensively on this argument, Ghionni Crivelli Visconti (2011), pp 49 et seq.

  51. On this, see the important indications provided by the Notary Bar of the Three Venetian Regions, Guideline n° I.I.5. Italian scholars have long used the above-mentioned expression, which was initially borrowed from the similar binding rule contained in Art. L. 223-14 Code de commerce, but has now also found its way into the Italian stock corporation law pursuant to Art. 2355-bis c.c. (buyback by the corporation or other shareholders or, alternatively, withdrawal right). For further details, cf. Zanarone (2010), Art. 2469, pp 586 et seq.; Giampaolino (2008), pp 148 et seq.; Speranzin and Bortoluz (2015), Art. 2469, p 344.

  52. Convincingly, Zanarone (2010), Art. 2469, pp 555 et seq.; Wedemann (2013), pp 136 et seq.; similarly, Notary Bar of Milan, Guideline n° 33 (19 November 2004).

  53. Suggesting such a contractual option, Zanarone (2010), Art. 2471-bis, p 725.

  54. Ghionni Crivelli Visconti (2016), Art. 2355 bis, pp 674–675; Cian (2004), pp 715 et seq.; Speranzin and Bortoluz (2015), Art. 2469, p 352; Notary Bar of Milan, Guideline n° 86 (15 November 2005). For a different opinion in US case law see, e.g., B & H Warehouse, Inc. v. Atlas Van Lines, Inc., 490 F.2d 818 (5th Cir. 1974) (exercising the right of first refusal at book value).

  55. Cf. supra 2.1.

  56. In continental European legal systems the typical redress is represented by the right to bring an action to set aside shareholders’ resolutions violating the law or the articles of incorporation, normally also on the grounds of a violation of the fiduciary duty owed by the majority shareholder. In common law jurisdictions the oppressed shareholder benefits from the flexible unfair prejudice remedy, which allows the court to make such an order as it thinks fit for giving relief in respect of the matters complained of (i.e. winding-up of the corporation, buyout of the shares by other members or the company itself). Common to both legal systems is granting individual shareholders the right to be informed on the company’s affairs and/or the right to inspect the corporate books and records (e.g. Art. 2476(2) c.c.; § 51a GmbHG; sec. 423(1) CA 2006). For comparative references cf. Fleischer (2018a), p 710; Bachmann et al. (2014), pp 63–64. On the limits of ex post judicial enforcement and gap filling, see McCahery and Vermeulen (2008), pp 47–48.

  57. Wedemann (2013), 228, speaks of ‘contractual conflict prevention’ (translation).

  58. Cf. supra 2.2.

  59. For a similar illustration, see Fleischer (2018a), pp 706–707; Wedemann (2013), pp 209 et seq.; Hewitt et al. (2016), pp 221 et seq.

  60. Easterbrook and Fischel (1991), p 238.

  61. For a general account cf., ex multis, Santagata (2011), Art. 2468, pp 284 et seq.; Maugeri (2004), pp 1483 et seq.

  62. Blandini (2009), pp 96 et seq.

  63. Bianchi and Feller (2008), Art. 2468, p 331.

  64. Santagata (2011), Art. 2468, p 293.

  65. Generally on this conflict-preventing mechanism, cf. Wedemann (2013), pp 228 et seq. (examining the topic with regard to some specific agenda items, such as share capital increase, distribution of dividends); Hodge O’Neal and Thompson (2012), §§ 9:6, 9:8.

  66. Cf. Zanarone (2010), Art. 2479-bis, pp 1362 et seq.; Sanfilippo (2011), Art. 2479-bis, p 833 (excluding the validity of the unanimity criterion with regard to resolutions essential for the viability of the company, such as the appointment of directors or the approval of annual accounts); Cass., 14 March 2016, n° 4967, Società, 2016, 683, with comment by De Luca and Napolitano.

  67. Hewitt et al. (2016), p 239 (‘the existence of strong minority rights (especially veto rights) can, however, lead to a greater risk of a potential “deadlock” between the parties’).

  68. For more details see below 3.3. For useful comparative references, Fleischer and Schneider (2012a), pp 961 et seq.

  69. For a detailed account, see De Luca and Ferrante (2016), pp 683 et seq. From a law and economics perspective, Sáez Lacave and Bermejo Gutiérrez (2010), pp 430, 450 (‘tag-along arrangements are anti-expropriation contractual mechanisms whereby a minority holder can protect his specific investments against transfer of the controlling package’).

  70. Cf., with diverging opinions, Zanarone (2010), Art. 2473, pp 773 et seq.; Gatti (2017), pp 607 et seq.

  71. See, recently, Gatti (2017), p 607; Cass., 22 April 2013, n° 9662.

  72. An exit ad nutum cannot be provided by the articles of incorporation if the srl has a definite lifespan or is simply made dependent upon the occurrence of a just cause. See Zanarone (2010), Art. 2473, pp 781–782.

  73. For legitimate criticism voiced against that provision, cf. Enriques et al. (2004), pp 769 et seq.; Rock and Wachter (1999), p 915; Wedemann (2013), pp 475 et seq., all evidencing that an exit right ‘at will’ may be used opportunistically and, thus, put at risk the viability of the corporation itself.

  74. For the pros and cons of such an exit right as a means of minority protection, see Goette (2014), pp 38 et seq., pp 245 et seq.

  75. It is worth mentioning that Italian case law now allows combining the action to set aside the ‘negative’ shareholder resolution with the request for a positive declaratory judgment that the decision has validly been adopted: cf. Arbitral Award, 2 July 2009, Giur. comm., 2010, II, 911, 917 et seq.; Trib. Milano, 28 November 2014, Giur. comm., 2016, II, 200. Similarly in German case law, BGH, 12 April 2016—II ZR 275/14; OLG München, 23 June 2016—23 U 4531/15.

  76. E.g., Switzerland (Art. 823 OR); Spain (Artt. 350, 351 LSC). Under German law, for the expulsion of a shareholder for good cause by a legal action, reference has to be made, because of the absence of any statutory provision, to the relevant case law: cf. BGH, 1 April 1953—II ZR 235/52, BGHZ 9, 157; OLG Stuttgart, 13 May 2013—14 U 12/13, NZG, 2013, 1146. In Austria, on the contrary, neither written law nor case law allows for the expulsion of a shareholder even if a good cause exists: cf. OGH, 25 November 1953, 1 Ob 600/53, SZ 26/285; OGH, 14 September 2011, 6 Ob 80/11z, GesRZ 2012, 129. For further comparative details, see Fleischer (2018a), pp 704–706.

  77. Explicitly Cian (2011), Art. 2473-bis, pp 501–505; Trib. Treviso, 17 June 2005, Società, 2006, 1273; Trib. Milano, 31 January 2006, Società, 2006, 1403.

  78. See Zanarone (2010), Art. 2473-bis, p 861; Annunziata (2008), Art. 2473-bis, p 538.

  79. Cf. Sáez Lacave and Bermejo Gutiérrez (2010), pp 433, 438 et seq.; Fleischer and Schneider (2012a), p 963; Wedemann (2013), p 502.

  80. Cf. Trib. Milan, 1 April 2008, Giur. comm., 2009, II, 1029; Notary Bar of Milan, Guideline n° 88 (22 November 2005); Notary Bar of the Three Venetian Regions, Guideline n° I.I.25. For a slightly different view, see Arbitral award, 29 July 2008, BBTC, 2009, II, 493, 505, which excludes the requirement of a fair value assessment if the minority shareholder holds the right of first refusal to acquire the majority shareholding; Wedemann (2013), p 503, uses for this contractual variant the expression ‘combined’ drag-along clause (translation).

  81. Cf. De Luca (2009), pp 174 et seq.; De Luca and Ferrante (2016), pp 690 et seq.; Giampaolino (2009), pp 534 et seq.; for a different view, see Divizia (2013), pp 221 et seq.

  82. See De Luca (2009), p 186.

  83. See Bachmann et al. (2014), pp 71 et seq.

  84. Cf. Schmolke (2014b), p 122; Hewitt et al. (2016), pp 243 et seq.; Bachmann et al. (2014), p 77.

  85. See Bonelli (2004), p 33. In Switzerland, the legislator has even transformed this provision into a default rule (see Art. 808a OR).

  86. Cf., e.g., Wedemann (2013), pp 312 et seq., 453 et seq.; Dauner-Lieb and Winnen (2011), pp 45 et seq.

  87. Cf. Zanarone (2010), Art. 2475, pp 986 et seq. With reference to conflicts between shareholders, the mentioned arbitration is possible only if the management decision is not within the competence of the general meeting by law, but reserved to the latter according to the bylaws or claimed by a minority pursuant to Art. 2479(1) c.c.

  88. Generally on these buy-sell procedures, cf. Schmolke (2014b), pp 118 et seq.; Hewitt et al. (2016), pp 240 et seq.; Fleischer and Schneider (2012b), pp 35 et seq.; Del Pozo (2017), pp 219 et seq.

  89. Cf. Barcellona (2004), p 77; Divizia (2017), pp 350 et seq.; Cass., 29 October 1994, n° 8927; Trib. Milano, 3 October 2013, n° 12213; App. Milano, 19 February 2016, n° 636; Trib. Trieste, 8 May 2017. Still, the mentioned case law sometimes assumes that a put option at a fixed price breaches the pactum leonina in Art. 2265 c.c., i.e. the rule according to which every shareholder has to participate in the gains and losses of the company. For a contrary view, Cass., 4 July 2018, n° 17498.

  90. See Fleischer and Schneider (2012b), p 38; Hewitt et al. (2016), pp 248–249.

  91. Trib. Roma, 19 October 2017, n° 19708, Società, 2018, 434. For comparative references on the relevant case law, see Fleischer and Schneider (2012b), pp 43 et seq.; recently also OLG Nürnberg, 20 December 2013—12 U 49/13, ZIP 2014, 171 (stating the validity of a Russian-roulette clause).

  92. For a good overview see, Fleischer and Schneider (2012b), pp 41, 49 et seq. Extremely critical towards Russian roulette clauses in general, Wedemann (2013), pp 497 et seq.

  93. Trib. Roma, 19 October 2017, n° 19708, pp 20–21. Equally in US case law, Valinote v. Ballis, 295 F.3d 666, 667 (7th Cir. 2000), where Judge Easterbrook plastically stated that ‘the possibility that the person naming the price can be forced either to buy or sell keeps the first mover honest’.

  94. Trib. Roma, 19 October 2017, n° 19708, p 28. For a similar conclusion in German literature and case law, cf. Schmolke (2014b), pp 130, 133; OLG Nürnberg, 20 December 2013—12 U 49/13, ZIP 2014, 171, 173 (espousing a rigid contractarian approach); more critical are Fleischer and Schneider (2012b), pp 46 et seq., 50 (a breach of the principle of good faith and fair dealing pursuant to § 242 BGB).

  95. On the methodology of legal empirical research, see generally Coupette and Fleckner (2018), pp 379 et seq.

  96. According to Eurostat statistics (source: IER, Chamber of Commerce Bozen), starting from 2007 until 2017 in South Tyrol there was an increase in real GDP of 12.25%, while in Italy the figures show a decrease of 5.49% in the same period. South Tyrol’s economy is also growing much more rapidly than other countries of the Eurozone (EU 28: + 8.44%).

  97. Of the 5837 registered srl, 4680 companies have filed a declaration of commencement of activities. It is not certain, however, that the latter data reflects all operative LLCs, as some firms may simply not have made the requested communication to the Companies Register.

  98. Of the 5837 registered srl, 4680 companies have filed a declaration of the commencement of activities. However, it is not certain that the latter data reflects all operative LLCs, being perfectly possible that some firms simply did not make the requested communication to the Companies Register.

  99. Bachmann et al. (2014), p 76: ‘As the two-member corporation is considered particularly prone to conflict […], the inclusion of appropriate safeguards against any disputes in the articles of association or in contractual side agreements become particularly relevant’.

  100. According to data from the Italian Chambers of Commerce InfoCamere, on 1 July 2018 45.3% (or 695,176) of all srl incorporated in Italy had two shareholders (compared, e.g., to 27.3% with one member and 15% with three members). In South Tyrol, 33.78% of all 5837 srl are formed by two shareholders. For similar findings with regard to the German limited liability company, see Wedemann (2013), p 13 (26.3% of the investigated GmbHs with a number of shareholders between 2 and 5 are two-member corporations).

  101. See Ray (2007), pp 23 et seq.; and the ground-breaking work of Axelrod (1984), pp 3 et seq.

  102. A similar methodological approach was adopted by Wedemann (2013), pp 11 et seq, which examined in her habilitation thesis 200 articles of incorporation of German two or more-member GmbHs incorporated in 2011 in four Bavarian cities.

  103. For further details, see above n. 38.

  104. On the importance of the contractual practice for the development of modern private law, see Fleischer (2018b), pp 239 et seq.

  105. For a similar notation, see Wedemann (2013), pp 110 et seq.

  106. Incomprehensibly, in the majority of the cases also the vote of the selling shareholder is cast (9 out of 12 cases). On the problematics related to this vote-counting mechanism see in more detail below.

  107. A permanent lock-in of the selling shareholder is obviously not possible. In the event of the refusal of consent or an inability to find a willing purchaser, the shareholder can always exit the corporation at fair value (Art. 2469 c.c.).

  108. Noteworthy are some provisions which, to preserve the ‘thickness’ amongst shareholders of an LLC belonging to a group of companies, grant a call option to acquire the holding of the shareholder-legal person if a change of control occurs in the ownership of the latter.

  109. On this provision, see Zanarone (2010), Art. 2471, pp 693 et seq.

  110. Cf. Easterbrook and Fischel (1991), p 15; Ayres and Gertner (1989), pp 87 et seq. For a good summary, see Fleischer (2004), pp 692 et seq.

  111. Cf. Ben-Shahar and Pottow (2006), pp 651 et seq.; Ayres and Gertner (1999), p 1598 (default inertia).

  112. Cf. Wedemann (2013), pp 379 et seq.; Möslein (2011), pp 89, 102 et seq.

  113. On network externalities, see Klausner (1995), pp 757 et seq.; Kahan and Klausner (1996), pp 347 et seq. (also evidencing the phenomenon of suboptimal uniformity correlated to the path-dependent standardization of contract terms); Whincop (2003), pp 288–297. For a good overview, Lemley and McGowan (1998), pp 562 et seq.

  114. Only in one case do the corporate charters make use of the two-year period within which the withdrawal right pursuant to Art. 2469(2) c.c. cannot be exercised.

  115. Also critical towards pure consent clauses, Wedemann (2013), pp 113 et seq.

  116. Wedemann (2013), pp 108 et seq.

  117. In many corporate charters, the subordinate right of first refusal often does not operate in the event of an intrafamily transfer of shares or transfers to a trustee.

  118. In two out of the four cases, the enterprise concerned carries out agricultural activities.

  119. It is interesting to observe that different results have been obtained in the empirical study conducted by Wedemann (2013), p 145, who critically evidences that 37.1% and 43.4% of the clauses containing some form of restrictions on the mortis causa transfer of shares allow, respectively, the free transferability of shares to relatives and to co-shareholders.

  120. The shareholders’ decision must be taken unanimously or by a qualified majority (e.g. 70% of the share capital).

  121. In three cases, a right of first refusal is given if the voting right is attributed not to the shareholder, but to the pledgee or the usufructuary pursuant to the default rule in Art. 2352 c.c.

  122. According to the empirical study conducted by Wedemann (2013), p 267, only one GmbH gives the minority shareholder the right to designate a member of the board of directors.

  123. In this regard, an alternative safeguard could consist of the introduction of a supermajority requirement for decisions on the structure of the management body. None of the articles of incorporation here examined have adopted such a voting rule.

  124. As already mentioned above, under the Italian law on srl some management decisions (i.e. operations that determine a significant modification of the company’s object or the members’ rights, such as the sale of all or substantially all assets with a transformation into a holding company) are ex lege assigned to the general meeting of shareholders (see Art. 2479(2), n° 5, c.c.). Furthermore, Art. 2479(1) gives shareholders the right to delineate freely their own area of decisional competence.

  125. In one case, shareholders are also allowed to veto ordinary management decisions exceeding the value of € 1000. Doubtless, such a provision limits excessively the governance power of the board.

  126. For example, if the majority holds 90% and the minority 10% of the share capital, even a qualified majority requirement of 75% of the share capital for all shareholder decisions will not be sufficient to veto the management decision.

  127. Cf. Hodge O’Neal and Thompson (2012), § 9:9; Bachmann et al. (2014), pp 44–45.

  128. See above n. 80.

  129. See Wedemann (2013), pp 119–120.

  130. In one case, the duration is established until 2080, which presumably corresponds to the average lifespan of a person. Not exceeding this term, the provision was not included in the above category.

  131. See above n. 71.

  132. It is interesting to note that all of the articles of incorporation containing such a provision were stipulated by two notaries, which are both part of the same firm. This fact also contributes to the suspicion that the expulsion clauses here surveyed are not tailor-made.

  133. For further references, see above nn. 77–78.

  134. See for analogous empirical evidence referred to German GmbHs, Wedemann (2013), p 503.

  135. Although probably not so relevant from a statistical point of view, I can personally testify that recently (2018) a highly-qualified notary from Milan amended the articles of incorporation of a South Tyrolean srl (!) by introducing drag-along and tag-along clauses, as well as an arbitration clause (arbitrato economico) which gives the tie-breaking decisional power over management disputes among shareholders to an outside arbitrator.

  136. However, see for an extremely interesting finding the precedent n. 135.

  137. See Wedemann (2013), p 453 (the allocation of decisional power to an outside arbitrator: 0%), p 493 (Russian-roulette clauses: 0%).

  138. See extensively on these issues, Wedemann (2013), pp 275 et seq., pp 453 et seq.

  139. See, e.g., Financial Times, 11 November, 2016, p. 17 (online edition).

  140. With reference to the data contained in the tables CC, RFR, expulsion for good cause, and veto rights over management decisions, the representation followed for the respective sub-cases (e.g. CC or RFR w/exceptions, boilerplate expulsion clauses, veto right only w/sole director) the same calculation method adopted in Sect. 4.

  141. On this point, see McCahery et al. (2010), p 93.

  142. Generally critical towards such an exemption, Wedemann (2013), p 112.

  143. In two such cases, the non-donating shareholders hold a call option to buy back the donated shares.

  144. If there is a consent requirement (16%), the latter has to be given either by the shareholders or in three cases also by the directors.

  145. Normally these special rights, according to the statutory provision in Art. 2468 c.c., are not transferrable to other persons and terminate with the transfer of the shareholding. However, one corporate charter allows transferability without the limitations of the mentioned nomination right to the shareholder’s spouse.

  146. In two cases the duration is fixed until 2100 and 2099.

  147. But see the statement in n. 135.

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Acknowledgements

This research was supported by the EGTC European Region Tyrol-South Tyrol-Trentino, Science Fund IPN 3-G16, which financed the general project ‘The law of close corporations in the broader European regulatory competition: A View from the Euregio’. I am grateful to Paolo Giudici, Stefano Lombardo, Giuseppe Rescio and Marco Speranzin for valuable comments on a previous draft of this paper. Special thanks for support in data collection to Martin Ferrari and Mattias Martini from the Institute of Economic Research (IER) of the Chamber of Commerce, Bozen. The usual disclaimers apply.

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Agstner, P. Shareholder Conflicts in Close Corporations between Theory and Practice: Evidence from Italian Private Limited Liability Companies. Eur Bus Org Law Rev 21, 505–543 (2020). https://doi.org/10.1007/s40804-019-00165-9

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