Option agreements in private equity transactions in Italy




Put option agreements normally play a significant role in private equity transactions. In Italy, foreign investment funds frequently invest in companies and receive, as guarantee of their investment, put options at a fixed price, allowing them to put back their shares and to be paid back the entire investment in the relevant company with full protection from any losses that a target company might have suffered during the period of the investment.

Recently, Italian courts have issued several decisions concerning put options at fixed price and have declared these agreements null and void in several cases. The nullity has been declared in particular for the violation of the Italian corporate law principles in relation to the so called ‘patto leonino’ doctrine. Consequently, it is important to understand how to structure a put option agreement, without violating this Italian corporate law doctrine.

The ‘patto leonino’ doctrine

According to Section 2265 of the Italian Civil Code, “an agreement through which one or more shareholders are excluded from governing participations to dividends or losses is null and void”.

The fundamental rationale of the patto leonino doctrine is that the exclusion of the risk of losses can have an impact on how the company is managed, since the shareholder-manager (who hypothetically would not suffer any losses) might run excessive risks in managing the company in order to maximise the potential of the investment. Conversely, the exclusion of the right to enjoy any dividends might have the opposite effect in leading the company without an appropriate view to profit.

Initially, the patto leonino doctrine has been considered applicable only to partnerships, but, over the years, Italian Courts have ruled that Section 2265 of the Italian Civil Code expresses a legal principle generally applicable to all legal types of commercial companies in Italy.

The analysis of the most important decisions of Italian case law can be useful to bring more clarity to this delicate topic.

Italian case law

The fundamental decision is Supreme Court, Division I, Oct. 29th, 1994, No. 8927. The Supreme Court listed three keys principles with a view to ascertain whether a put option agreement violates the patto leonino doctrine. Firstly, for the agreement to be declared void, the exclusion of dividends or losses must be included in the articles by-laws of the target company and has to be unconditional and total. Secondly, shareholders’ agreements assigning to shareholders dividends or losses in a not proportional quota are valid. Thirdly, the violation of patto leonino doctrine must be substantial and not only formal.

However, even if the ‘exclusion’ clause (i.e., exclusion of dividends or losses) is contained in an agreement between a shareholder and a third party (i.e., the investment fund) or if it is included in an agreement among shareholders (and not in the article of association), the Supreme Court stated that the judge must carry out a thorough evaluation of the nature and purposes of such agreement.

A recent case ruled by the Tribunal of Milan in December 2011 is also relevant. The case has become well known since the judge applied the Supreme Court principles in a very rigorous and strict way. By its order dated 30 December 2011, the Tribunal of Milan, Companies Division, was required to verify the legitimacy of a clause, contained in a shareholders’ agreement, which provided the right, with an indefinite duration, for a shareholder (i.e., a foreign investment fund) to sell back its own shares to the vendor (i.e., the original shareholder of the target company) at a strike price equal to the price paid plus any other financing provided to the company during the investment period, plus interest at a conventional rate.

In this case, the Tribunal of Milan declared this agreement void, construing it as a fixed price put option pact violating the patto leonino doctrine. Briefly, the Tribunal stated that: (i) the principles contained in Section 2265 of the Italian Civil Code are general and clearly applicable to any legal types of Italian commercial company and not only to a partnership; and (ii) the total and unconditional exclusion of one shareholder from the risk of losses cannot be validated in the Italian legal system and, thus, has to be considered unlawful for the reason stated by the Supreme Court. In other words, the exclusion of losses amounts to an unlimited (and, for that reason, prohibited) guarantee by the original shareholder (i.e., the vendor) in favour of the investor (e.g., the investment fund).

Only few months earlier (i.e., in September 2011), the same Tribunal of Milan (Companies Division, but a different judge) ruled in a totally different way in a very similar case. The Tribunal decision of September 2011 has been overruled by the Court of Appeal and, subsequently, has been challenged before the Italian Supreme Court.

The case is still pending and the decision has yet to be issued. This decision will obviously have a very important impact on the private equity market.

This brief analysis of the case law emphasises the need to be very careful in drafting a put option agreement at a fixed price, making due reference to the patto leonino doctrine.

Our view is that the benefits of put option agreements are more to encourage the investment of new potential shareholders, rather than allowing them to run the company in a risky and reckless way. In fact in the real world, no investor is interested in running a company in a way which is potentially damaging to the company and their own interests.

We hope that the Italian Supreme Court will share this view in ruling the case currently pending. In any case, for the time being, it is important to be very careful in drafting put option agreements in order to avoid violating the patto leonino doctrine. In this respect, put option agreements must not provide an unconditional and total exclusion from dividends or losses, whether contained in articles of association or in shareholders’ agreements.


Davide Contini and Guido Motti are partners at Grimaldi Studio Legale. They can be contacted on +39 02 30309325 or by email: dcontini@grimladilex.com and gmotti@grimaldilex.com.

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Davide Contini and Guido Motti

Grimaldi Studio Legale

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