None of your business: the board of directors is not liable if it proves its due diligence in the course of action – but what happens if the company is a bank?

Thursday 21 July 2022

Giovanni Gigliotti
Pavia e Ansaldo Studio Legale, Rome
giovanni.gigliotti@pavia-ansaldo.it

Giada Russo
Pavia e Ansaldo Studio Legale, Rome
giada.russo@pavia-ansaldo.it

Silvia Bisceglia
Pavia e Ansaldo Studio Legale, Rome
silvia.bisceglia@pavia-ansaldo.it

Business judgement rule and its limitations

According to the business judgement rule (BJR), directors' management choices are unquestionable by the court because such corporate business decisions pertain to entrepreneurial discretion.

As a result, the BJR precludes the court from assessing the suitability of management acts performed by the director.

The principle of the unquestionability of management choices and, therefore, the applicability of the BJR is not absolute, but is limited by the director's mandatory duties to act: (1) not in conflict of interest; (2) in accordance with the law and by-laws; and (3) diligently and on an informed basis.

In other words, the judge's assessment cannot concern whether managers' decisions are appropriate, even if they later turned out to be economically inconvenient, but only the regularity of the related decision-making process.

Such regularity implies that the directors adopted the precautions, carried out the checks, disclosed any potential conflict of interest to the management and supervisory bodies, and gathered information from time to time required to adopt the decision under the specific circumstances, in compliance with the provisions set forth in Article 2381 of the Italian Civil Code.

Duty to act on an informed basis

Under Article 2381 of the Italian Civil Code, directors must act on an informed basis. Each director may request the executive directors to provide the board with information relating to the management of the company.

The obligation of directors to 'act on an informed basis' is twofold.

On the one hand, it implies the directors' obligation to exercise all the powers related with their office in order to prevent, eliminate or limit any critical situation in which they have (or should have) knowledge. This obligation entails the duty for directors to take action in situations, known or knowable, that require their positive intervention.

On the other hand, the duty to act on an informed basis obliges the directors to acquire information and act with the due diligence required by the nature of the office and their specific skills.[1]

For banking companies' directors

The duty of companies' directors to act on an informed basis in making business decisions is particularly strong for banking companies' directors: the nature of the activity carried out in the interest of savers requires specific expertise from such directors.

The violation of the duty to act on an informed basis entails, for banking companies' directors, both contractual liability to shareholders and public liability to the supervisory authority, that is, the Italian National Commission for Companies and the Stock Exchange (Commissione Nazionale per le Società e la Borsa or CONSOB).

Judgment of the Corte di Cassazione

With its recent judgment No 5347 of 18 February 2022, the Italian Corte di Cassazione affirmed that all directors of banking companies, including non-executive directors, must act in an informed and diligent manner when making business decisions, regardless of the existence of delegated bodies within the company.

Non-executive directors are not merely 'recipients of information'[2] but required to take action and acquire all the information needed to make relevant business decisions, as well as to assess the adequacy of the organisational and accounting structure and the general management performance of the company.

In the same manner as executive directors, non-executive directors participate in corporate decisions and therefore have a duty to monitor the choices of executive bodies and prevent any risks. Therefore, the duty of non-executive directors of banking companies to act on an informed basis goes beyond the 'mere' information reported by executive directors.

Consequently, according to the Corte di Cassazione, non-executive directors are jointly and severally liable with executive directors for any violation committed if they fail to take action to prevent misconduct, or to eliminate or limit its harmful consequences. Therefore, failure to report by the company's managing directors or corporate supervisory bodies does not exclude the joint and several liability of the non-executive directors.

The specific features of the banking sector and the need to protect the proper functioning of the market entail a type of 'presumption of guilt' by all directors, including non-executive and non-delegated directors, in the event of negligence or misconduct.

As a consequence, a plaintiff claiming for directors' (including non-executive directors) liability has the burden of proving the existence of a warning sign that should have caused the directors to take action. In order to escape liability, directors must prove that they 'acted without fault', meaning that they diligently performed their duties and behaved dutifully to avoid and eliminate the damage.

Conclusions

Pursuant to the BJR, directors are liable for damages caused to the company by their management decisions only where it is proven that they failed to take appropriate precautions, perform checks and acquire information in the relevant decision-making process.

For banking companies' directors, however, a reversal of the burden of proof operates: such directors (including non-executive directors) are 'presumed to be guilty' in the event of damaging events or misconduct.

It is thus essential that banking companies that intend to operate in Italy implement specific internal procedures for verifying and exchanging information for the adoption of prudent management choices.

 

[1] Corte di Cassazione, 12 October 2021, No 27710.

[2] Corte di Cassazione, 19 April 2022, No 12436.