The Shareholder Rights and Activism Review: Italy
The shareholder's role can be played in various ways: for example, abstaining from exercising corporate rights in full and just collecting dividends if and when available, or challenging the board or the management, thereby becoming a 'troublemaker' shareholder. In the end, activist funds are institutional troublemaker shareholders adopting sophisticated corporate strategies. These strategies may vary from time to time and from market to market and also evolve over time because, to quote Tolstoy, each unhappy shareholder is unhappy in his or her own way, but the general consensus is that activist shareholders will increase their role in Italian listed companies and will have an impact on the corporate governance of Italian corporations. As we shall see, there are many ways in which activist funds may improve the corporate governance of Italian listed corporations and Italian listed corporations should prepare for shareholders' activism.
The phenomenon is less common in Italy than on the US markets, but activist funds have been operating in Italy for some time, typically holding minority shareholdings ranging between 5 per cent and 10 per cent: they have promoted their strategy leveraging on the rules that protect corporate minorities, or directed the actions of the management bodies towards increasing liquidity and raising dividends. In a number of cases, shareholder activism has had a positive effect on the market (meaning, on all of the shareholders) and on target companies.
Legal and regulatory framework
The Italian legal system does not yet expressly regulate shareholders' activism. The main legal provisions that are relevant for shareholder activism contemplate general rules that apply to all companies and that are contained both in the Italian Civil Code and in the special regulations addressed to listed companies only. These provisions refer, on the one hand, to the shareholders' 'voice' rights for a more informed and conscious participation in the shareholders' meetings and, on the other hand, to the protections and remedies that allow minorities to oppose the choices of the controlling shareholders. Of course, in addition to legal provisions, corporate by-laws may include clauses that protect incumbent management or favour activist shareholders. Very briefly, as far as the law is concerned:
- calling of the shareholders' meeting at the shareholders' request (Article 2367 of the Italian Civil Code): in the case of companies that have access to capital markets, shareholders holding at least 5 per cent of the overall share capital have the right to request that the shareholders' meeting of the company is convened and to decide the items on the agenda (while 10 per cent shareholding is the threshold for unlisted companies); and
- postponement of the meeting (Article 2374 of the Italian Civil Code): shareholders who represent at least one-third of the overall share capital actually attending the shareholders' meeting have the right to request that the meeting is adjourned for up to a maximum of five days if they are not sufficiently informed on the items on the agenda. Historically, in listed companies it has proved difficult for minority shareholders to achieve such a high threshold.
As regards listed companies, the reforms adopted in recent years, such as the adoption of the European Directive on Shareholders' Rights 2017/828 amending the EU Directive 2007/36 (the SHRD II Directive), are aimed at strengthening the minorities' voice rights. In this area, all the new regulations have a common denominator, namely, the pre-eminence of information technology as a privileged communication channel, capable of speeding up proceedings and ensuring better participation at the shareholders' meeting: the symbol of this intention is the calling of the meeting by means of a public notice published on the company's website.
Additional legislative innovations include:
- strengthening of the pre-meeting information: Article 125 bis of the Consolidated Law on Finance (Legislative Decree 58/1998) provides for pre-meeting information, which has widened the compulsory content of the notice of call, in order to provide better information to potential attendees. The rule expressly provides that the shareholders have a right to ask questions before the meeting and to supplement the agenda and information on where to find the full text of the resolution proposals and the explanatory reports and other documents that will be submitted to the meeting;
- the right to ask questions before the meeting, and management duty to answer: the course of the shareholders' meetings may be influenced by the exercise of a further right granted to shareholders, irrespective of the percentage of share capital held by them. This is the right to ask questions on the items on the agenda before the meeting is held provided under Article 127 ter of Legislative Decree 58/1998. In addition, management must of course answer any questions asked by the shareholders regarding the items on the agenda; and
- the shareholders' right to supplement the items on the agenda and to submit resolution proposals: this may be deemed a fundamental right for the activist shareholders since it allows a proactive participation, which is no longer relegated to voting activities only, but includes proposing topics to be discussed at shareholders' meetings. Article 126 bis of Legislative Decree 58/1998 provides for the shareholders' right to insert additional items to the agenda. Only shareholders holding, individually or jointly, a certain minimum threshold (1/40 of the share capital) are vested with the right at issue. This requirement, de facto, restricts the minorities' activism: the efficient working of the corporation and the prerogatives of the majority need to be protected, and activism on the part of a shareholder with such an insignificant shareholding that he or she does not reach the participation level required by law is deemed to potentially damage efficient governance. In order to avoid undue interference in those matters that require the exercise of a power exclusively entrusted to the directors under the law, the right to amend the agenda is not allowed for those issues on which the shareholders' meeting resolves upon a proposal of the directors or on the basis of a project or a report prepared by them. In such a way, the rule maintains the power of impulse for the directors with regard to those resolutions that require specific managerial skills or entail their personal liability, such as, for example, the approval of financial statements.
The second area of rules that can benefit activist shareholders contains rights that allow them to oppose the activities of the controlling group outside the shareholders' meeting, allowing an active role for minority shareholders. These remedies, unlikely the ones described above, are not designed to encourage greater information and collaboration between majority and minority shareholders, but, rather, to respond to a conflict situation by granting special powers to minorities who wish to maintain an active role:
- right of withdrawal (Article 2437 and Article 2473 of the Italian Civil Code): shareholders who are subject to majority's tyranny are granted a right to withdraw from the company at market conditions when the majority squeezes them out by imposing decisions on certain key issues;
- annulment of shareholders' meeting resolutions (Article 2377 of the Italian Civil Code): shareholders who represent 0.1 per cent at least of the voting shares (5 per cent in the case of unlisted companies) may always challenge a shareholders' resolution in court;
- general compliance (Article 2409 of the Italian Civil Code): shareholders who own 5 per cent at least of the overall corporate capital (10 per cent in the case of unlisted companies) have the right to report to the court any grounded suspicions about serious irregularities regarding the management of the company and may eventually apply for the appointment of a judicial commissioner;
- complaints to the board of statutory auditors (Article 2408 of the Italian Civil Code): the statutory auditors are an instrument for the protection of minority shareholders which is unusual outside of Italy. These are three professionals who are appointed by the shareholders, attend board meetings, and must look after various profiles of corporate compliance. Any shareholder has the right to complain to the board of statutory auditors for any alleged misconduct of the board of directors, and they have a duty to follow up and report. When the complaint is submitted by shareholders holding 2 per cent at least of the overall corporate capital (or 5 per cent in the case of unlisted companies), the board of statutory auditors is required to promptly investigate the matter and report its findings and conclusions at the following shareholders' meeting; and
- liability of directors (Article 2393 bis of the Italian Civil Code): shareholders who represent at least 2.5 per cent of the overall share capital (or 20 per cent in unlisted companies) can directly sue any directors.
There also general guidelines, and these are dealt with in Section IV.
Key trends in shareholder activism
Against the assault of activist shareholders there are, in theory, a number of techniques to defend the company, including poison pills, which may alter the corporate governance and other characteristics of the target company, so as to render ineffective or delay the timing of the entry of the hostile fund. Of course, the best antidote that companies naturally have against shareholder activism seems to be good reputation, adoption of best practices, the ability to generate high returns for shareholders and the capacity to establish positive relationships between shareholders and management.
Typically, in Italy activist funds have tried to push board members to take decisions aimed at increasing profitability, contain costs or reconsider the terms on which a division was purchased or dismissed and contribute to improving poor governance in the name of greater efficiency. In the future, ESG (i.e., environmental, social and governance factors) is expected to become more of an issue. In the past such activism was typically founded on the exercise of rights vested with minority shareholders with the aim of increasing fairness or the long-term value of the company (including controlled entities). Recently, the SHRD II Directive – on the assumption that shareholders' apathy was one of the factors behind the 2007/2008 financial crisis, as it would have favoured management' speculative behaviour – has enhanced long-term shareholder engagement and the promotion of sustainable success through the integration of the ESG, and assigned institutional investors the task of monitoring the conduct of directors and exercising their rights (i.e., 'engagement'), in order to ensure balanced and sustainable growth in share value over the long term.
Back in 2019, the pre-covid era, about a dozen Italian listed companies were expected to face the challenge of activist funds.2 The phenomenon has clearly been growing for some time. This is due to the initiatives of institutional investors, especially private and public hedge funds from the United States and occasionally the United Kingdom, which over time strengthened their presence in the share capital of large and medium-sized Italian companies.
A report of a few months ago by Consob, the Italian supervisory authority responsible for regulating the Italian financial markets,3 showed that at the end of 2019 institutional funds were present in 67 Italian listed companies (62 in 2018) with a significant shareholding, out of which the number of foreign investors, in particular, asset managers, has increased. Providing precise statistics on shareholder activism towards Italian companies is difficult. No doubt, not all of the shareholders' activism was made public. In 2017 the average share capital attending the shareholders' meetings of listed companies and belonging to institutional investors was 19.4 per cent (1.2 per cent represented by Italian investors and the rest by foreign investors). Taking into consideration the 100 largest Italian listed companies, 2020 records a larger participation than in previous years by institutional investors (on average 22.2 per cent of the share capital). Attendance of Italian institutional investors remained almost stable whereas that of foreign institutional investors slightly increased over the previous year (1.9 per cent and 20.3 per cent of the share capital, respectively). Across sectors, shareholders' attendance rates are the highest among industrial and utilities firms, whereas financial firms show the highest presence of institutional investors (24.4 per cent of the share capital). In 2020, Italian investment funds, banks and insurance companies attended 86 shareholders' meetings (the highest number of meetings since 2012, up from 38 in 2013) and cast votes for 3 per cent of the shareholders' meetings. Foreign institutional investors attended 98 meetings and cast on average about 29.3 per cent of the votes (thus recording an increase with respect to the previous year, when the figure was equal to 27.6 per cent).4
Examples of this category include Paul Singer's Elliott Fund,5 which has a 6.9 per cent shareholding in Tim (a telecoms company) and a 99.93 per cent stake in AC Milan (a soccer team), and the Anglo-Saxon Amber Fund, which has a 5 per cent stake in Banca Popolare di Sondrio (a bank).
It has not always been so: in the past Italian companies were not considered fertile ground for funds, and institutional investors and Italy were not an attractive target for shareholder activists for a number of reasons.
The first obstacle was the strength and success of a model based on the family-owned companies, which are still the economic backbone of the country, while truly public companies are relatively few. Typically, the floating stock of family-controlled companies is not high enough to attract the attention of institutional investors. Limited liquidity of the shares, of course, results in a significant entry barrier to an activist fund and may limit their ability to eventually dispose of the financial investment. Also, it may have unpleasant side-effects for the development of the business, such as limited ability to expand internationally or adequately invest in R&D. Limited liquidity may also become an issue for companies listed on certain unregulated markets such as AIM (a segment of the Italian Stock Exchange with the lowest capitalisation), which in fact has not attracted, so far, much attention by the activist investors.
Given the high level of control exercised by the family in family-controlled listed corporations, in Italy minority shareholders' attendance and influence at shareholders' meetings used to be low even when compared to the rest of Europe, whose corporate fabric is generally more similar to the Italian than to the Anglo-Saxon model. Over time, the low level of participation at the listed companies' shareholders' meetings resulted in Italian shareholders opting for exit over voice whenever they were dissatisfied with management, which, of course, is the opposite course of action of activist shareholders. Hence, in Italy a corporate culture of shareholders' activism has been slow to emerge.
As stressed by Consob,6 institutional investors have not been incentivised to monitor closely and on a continuous basis the management choices of portfolio companies. The diversification of the portfolio and the reduced size of the participation held in each single company could in principle make the exit option more efficient than the voice option, since the latter indeed requires an expensive activity of acquiring and processing information on the items on the agenda of the various shareholders' meetings.
In the past, the Italian corporate and financial regulations did not provide for strong remedies and support for shareholder activism, with majority shareholders enjoying almost unlimited rights to the detriment of other shareholders. In general, the engagement policies face certain legal constraints that would prevent activist investors from adopting forms of coordination aimed at challenging management decisions which are deemed inefficient, or from activating privileged information channels with the issuer's board of directors to initiate a dialogue on the strategies the latter intends to pursue in the management of the business. In general, while aiming at ensuring the efficient functioning of capital markets, Italian and European regulations on takeover bids and transparency of shareholdings are suspicious of forms of coordination between shareholders (which are suspected of being veiled forms of control). The situation has been evolving for some time.
Legislative Decree 58/1998 focuses on the behaviour of shareholders 'acting in concert' in order to (1) ensure transparency of information to the market on the existence of significant shareholdings in the share capital of listed companies held by several persons who are deemed to be acting in concert as a result of the existence of a shareholders' agreements; (2) neutralise any circumvention of the rules on takeover bids, thus considering as one and the same unit a shareholding held by several persons acting in concert, hence, subject to the obligation to launch a public takeover.7 On the other hand, Consob has in past years also identified a number of hypotheses where the cooperation of several persons does not constitute 'an action in concert' (e.g., Article 44 quater, Paragraph 2, Issuers Regulation).
Another example is that exceeding the initial minimum threshold of 3 per cent (or 5 per cent in the case of small or medium-sized companies) of voting capital requires the acquirer to notify both Consob and the issuing company. If the 10 per cent threshold is exceeded, the acquirer is obliged to disclose the objectives he or she intends to pursue in the following months, in particular the existence of agreements with third parties and his or her intentions regarding the appointment and removal of the target's corporate bodies. Such transparency obligations allow the target company to set up reaction measures if the campaign is hostile. Moreover, they lead to an immediate increase in the share price, which may have an impact on the activist's consolidation of the participation in the target.
Besides the rules on insider trading, in Italy there are no rules governing the flow of information between individual shareholders (or certain shareholders) and the board of directors of public companies in order to initiate a dialogue on the strategies that the issuer intends to pursue in the operation of the company. In fact, shareholders do not have a right to obtain information from the directors except at the shareholders' meeting or prior to the shareholders' meeting (in this case limitedly to the access to the shareholders' ledger and to the books of the shareholders' resolutions). Assonime, the association of Italian joint stock companies, mentions among the expected solutions for direct dialogue: meetings with management and investment relation structures and submission of minority slates for the appointment of directors.
Recent shareholder activism campaigns
Historically, episodes of corporate activism by institutional investors are more numerous in the United States, United Kingdom and also Japan. However, in relative terms, namely in relation to the number of listed companies present on the respective regulated markets, activism in the USA or the UK used to be less frequent than in other countries, where the number of companies listed on the regulated markets is significantly lower.
In Italy, according to Consob, 'stewardship' activities are mainly carried out by foreign institutional investors, typically from the United States, while Italian institutional investors seem to prefer 'exit' over 'voice'.
In the following paragraphs we provide some examples of Italian activism campaigns.
The first Italian 'engagement' activity of an institutional investor with a listed company seems to have taken place in 1986, when Arca, an Italian investment manager fund, decided to express its disapproval of a transaction aimed at consolidating the position of the then managing director of Montedison, a chemical company listed on the Milan stock exchange, and abstained from voting on the proposal to recapitalise the company.
In more recent times Elliott, a US fund, appeared to be most active. One of the largest conductors of activist shareholder campaigns in the world, in recent years Elliott completed a number of investments in Italian listed companies. In March 2018, Elliott invested in TIM, Italy's largest mobile telecommunications group, offering telephony, internet services and cable television in Italy and abroad, at that time controlled by the French group Vivendi, holding around 20 per cent. Elliott initially entered with a stake of less than 3 per cent and then increased its participation to approximately 9 per cent of the company's shares. Since its entry into the company, Elliott has criticised the company's top management on shortcomings in administration, stock valuation and strategic relations with the Italian authorities, arguing that each of these elements could be improved to the benefit of all stakeholders.
Elliott also accused Vivendi of having serious conflicts of interest, especially regarding the clash with another large player in the Italian communication market, Mediaset. The dispute also attracted significant political attention: the Italian government, was (and is) the concessionaire of TIM's telecoms business, and intended to pursue a strategy involving the separation of TIM's telecoms services from TIM's actual telecoms network, which would have resulted in the establishment of two companies, one specialising in telecoms and one in charge of the network. The latter was then to probably merge with Open Fiber, a telecom network company controlled by Enel, a large Italian electricity utility with a minority stake of Cassa Depositi e Prestiti (CDP), a company controlled by the Italian Treasury.
Vivendi, at the time the controlling shareholder of TIM with a stake just short of 25 per cent, disagreed with the strategy. In the end, Elliott was able to leverage on Vivendi's conflicts of interest for its shareholding in Mediaset and its conflict with the government and achieve its goals: it married the cause of CDP regarding the separation between the network and the services, and with the assistance of a number of other financial investors managed to achieve its goal to change TIM's governance in order to control and improve the group strategy and returns.
In 2015, well before the TIM case, Elliott entered the Italian market by buying shares in Ansaldo STS, an Italian company specialising in railway signalling. At the time the majority shareholder, Japan's Hitachi, held 60 per cent of the company, having purchased its shares from the Italian group Finmeccanica (currently named Leonardo) as part of an operation that included, in addition to the purchase of Ansaldo STS, that of Ansaldo Breda by Hitachi itself. Ansaldo Breda was also active in the railway supply system but, contrary to Ansaldo STS, had been making losses for years. Hitachi, with the aim of launching a mandatory tender offer, eventually delisted Ansaldo STS from the Italian stock exchange and merged it into its own group, launched an offer at €9.50 per share, a price that was in line with the requirements for mandatory tender offers under Legislative Decree 58/1998. This price, however, was based on the price agreed with Finmeccanica, which was considered by Elliott unreasonably low and the result of collusion between Finmeccanica and Hitachi to also transfer Ansaldo Breda and therefore sell Ansaldo STS at a lower price. Elliott alleged that Finmeccanica and Hitachi conspired to cause detriment to Ansaldo STS' shareholders. In the opinion of Elliott, the price allocation resulted in the shareholders of Ansaldo STS being penalised to the benefit of Finmeccanica, which, alone, took advantage of the sale of a controlling stake in STS to get rid of the loss making Ansaldo Breda. In the opinion of Elliott, had Hitachi paid a price for Ansaldo STS based on a fair valuation of the business, the shareholders would have received a higher price. The matter was discussed both at Ansaldo STS' shareholders' meeting and before the Italian and European courts until Consob, the Italian regulator of financial markets, decided to investigate.
Consob ascertained that Elliott's allegations were correct and obliged the Japanese company to raise the offer up to 10.50 per share. Elliott therefore put in place an energetic activism in every possible venue, even creating a special website where it explained to minority shareholders the improprieties put in place by Hitachi. Thanks to this activity, notwithstanding the higher price imposed by Consob, Hitachi's public offer proved to be a flop: only 6.4 per cent of the capital adhered to it, which resulted in the victory of the fund, who prevented Hitachi from taking over the company and merging. Only in the fall of 2018 Hitachi, thanks to an out-of-court settlement with the activist fund, finally first took over the 31.8 per cent of Ansaldo STS in Elliott's hands at €12.70 and then launched, at the same price paid for Elliott's shares, a public offer on the remaining 17.4 per cent.
Another important case involved Parmalat, a company operating in the milk and dairy sector, and the Amber Capital fund. After the corporate restructuring in 2005, the company's shareholders included the French company Lactalis and the activist fund Amber Capital. At the end of 2016, the French company, which held approximately 87 per cent of the capital, wanted to acquire all of the Parmalat shares through a tender offer and delist the company. Amber firmly opposed, considering the offer of €2.80 per share too low, and at the same time denounced some activities of the controlling shareholder: in fact Lactalis, the majority shareholder, through certain subsidiaries, had one of Parmalat subsidiaries acquire some subsidiaries of Lactalis in Brazil, Mexico and the United States. As a result, Parmalat had indirectly transferred significant liquidity to the controlling shareholder Lactalis, which was the ultimate owner of the companies acquired by Parmalat. The allegation was that this transaction with a related party was carried out to the detriment of the minority shareholders, including Amber, and with the sole purpose, according to the fund, of transferring Parmalat's liquidity to Lactalis (which had assumed significant debt to buy the majority of Parmalat). Thanks to the fund's initiative, Parmalat was not delisted as originally envisaged by the controlling shareholder. The delisting was accomplished a couple of years later, at a higher price. Thus, the obstructionist approach of the activist fund eventually resulted in all shareholders benefiting from a higher price.
As indicated above, in recent years the initiatives of active funds and shareholders in Italian companies has increased. This circumstance is linked to a plurality of causes which, together, have allowed minority shareholders to play a more incisive role. The following are some of the elements that have contributed to the phenomenon.
The increased number of public companies seeking equity: opening the doors to outside investments makes it easier to ensure that the shareholder base is more fragmented so that the importance of the controlling family is less pronounced.
A new legislative framework, partly of EU origin, has emerged and laid the foundations for greater involvement in the management of the company and for a better protection of minority shareholders. These changes began at the end of the last century, with the introduction of Legislative Decree 58/1998, which stressed the importance of transparency in listed companies and continued with the 2003 corporate law general reform, as well as after the financial crisis of 2008. Further evolution is to be expected.
Codes of conduct for institutional investors have been developed worldwide. Borsa Italiana, the Euronext-controlled entity taking care of organisation and management of the Italian stock exchange, has announced the entry into force of the new code of corporate governance, which is to come into force in 2021. According to the Corporate Governance Code of Borsa Italiana, it is in the legitimate interest of the issuer and it is therefore allowed to establish, also through the creation of an investor relations function, a profitable dialogue with shareholders in general and with institutional investors in particular.
In 2013, Assogestioni (the association of the investment managers operating in Italy) adopted the Italian Principles of Stewardship for the Exercise of Administrative and Voting Rights in Listed Companies, providing a set of high-level best practices to stimulate comparison and cooperation between the investment companies and the listed issuers in which they have invested.
Currently, as a result of the covid-2019 emergency, many companies have become more vulnerable and the share prices are lower: in consideration of their limited resources some companies might not oppose, or may actually welcome, the entry of hedge funds in their capital. This is going to have an impact on corporate governance.
According to the Chairman of Assogestioni, the activism of institutional investors will increase in the coming years as the importance of ESG criteria in investment policies grows.8 The governance of listed companies is an increasingly important issue for institutional investors when carrying out analyses and evaluations of potential targets. S&P confirms expectations that in the near future there will be room for growth in activist campaigns on ESG issues. In the post-pandemic world these campaigns, originally socially and environmentally oriented, may indeed turn into broader calls for a strategic and governance review of how companies adapt their business model to a new world order.
In this scenario, the challenge that the Italian system of corporate governance will face in the coming months and years will be to find the right balance between proper governance and the pursuit of broader goals, which may sometimes be independent or even in conflict with the pursuit of profits for the benefit of the shareholders, while also striking the right balance of power between management and investors.
1 Maurizio Delfino is a partner and Anna Laura Pettoello is a counsel at Delfino e Associati Willkie Farr & Gallagher LLP Studio Legale.
2 Reference here is to a survey carried out in 2019 by AlixPartners, a global consultancy: out of more than 1,700 companies surveyed in Europe, the prediction was that 156 will be targeted by activists in the following 12–18 months, of which 12 are in Italy.
3 Consob, IX Report on corporate governance of Italian listed companies, 2021.
4 Consob, IX Report on corporate governance of Italian listed companies, 2021.
5 See Section IV.
6 Consob, Investitori istituzionali, governo societario e codici di stewardship, 2019.
7 Article 109 of Legislative Decree 58/1998.