Arbitration and companies financial statements

Roberto Oliva

The Court of first instance of Milan went back to analyse the relationship between Courts’ jurisdiction and the jurisdiction of Arbitral Tribunals, with respect to the challenge of the resolution approving the company’s financial statements (in this case, a limited liability company whose Articles of association included an arbitration clause). The Italian full text of the decision (decision no. 9115 of 28 July 2015 of the Court of first instance of Milan) is available here.

In my point of view, this ruling is interesting in two different ways.

First, the Corporate Chamber of the Court of first instance of Milan ruled that the challenge of the resolution approving the financial statements could be referred to an Arbitral Tribunal if the parties claim that the resolution is void due to a procedural defect. However, the Court retains its exclusive jurisdiction on disputes in which the claimant claims that the financial statements are void due to their wrongful content. More specifically: “the principle of non-arbitrability of resolutions approving financial statements (…) concerns (strictly and exclusively) the compulsory nature of the law rules governing the financial statements as mandatory documents addressed, not only to quotaholders but to all and any third parties. Consequently, the Courts’ exclusive jurisdiction does not concern the procedural errors by the general meeting. It concerns (…) properly and exclusively (substantial) errors regarding clarity and accuracy of the financial statements.

The same Corporate Chamber, in the past, gave a different construction of the scope of arbitrability of corporate disputes, which was considered broader, to the point that it included the breaches of the rules governing the content of the financial statements (see, for example, decision no. 6595 of 10 May 2013 of the Court of first instance of Milan, available here, in the website of Giurisprudenza delle Imprese).

However, the Supreme Court found that the construction of the Court of first instance of Milan was wrong and reversed the above mentioned decision. In that case, the Supreme Court affirmed the jurisdiction of the Court, noting that a dispute concerning the validity of a resolution approving the financial statements is not capable of arbitration, if the alleged grounds for the resolution challenge concern the content of the financial statements (decision no. 13031 of 10 June 2014 of the VI Chamber of the Supreme Court, also referred to by the decision at hand – the Italian text is available here).

This decision could be intended to resolve the contradictions among the constructions of certain lower Courts (among them, the Court of first instance of Milan) and the Supreme Court. These contradictions hindered the corporate arbitration. In any case – amicus Plato sed magis amica veritas – the previous construction of the Court of first instance of Milan was preferable.

In the ruling of 2013, the Court of first instance affirmed the arbitrability of disputes concerning the challenge of resolutions approving the financial statements, ruling that the concept of the non negotiability of rights should not be mistaken with the imperative nature of the relevant law rules. More specifically, it stated that “the imperative nature of the rules, such as those concerning the financial statements, should not be mistaken with the non-negotiable nature of certain rights that arise from these rules. The imperative nature of certain rules means that the law prevents the parties’ autonomy (…) The non-negotiability of certain rights means that the parties may not create or waive a right by contract (…) However, even if the rule is imperative, the rights arising from this rule may be negotiable. This happens with consumer protection rules, which are imperative, despite the purchase being an agreement. Indeed, the imperative nature of these rules aims at protecting the agreement. In corporate matters, there are also imperative and non-negotiable matters: for example, Articles of association providing for an unlawful corporate scope of activities are null and void. However, this is not the case of the financial statements, where the share/quotaholder is requested to accept or reject the draft prepared by the directors.

The fact that the share/quotaholders are required to grant or deny their consent on the financial statements suggests the negotiable nature of this dispute. Therefore, I do not agree with the reasoning followed by the Supreme Court to get the opposite result.

The Supreme Court followed its own line of cases, started before the reform of the Italian corporate law. The Supreme Court explicitly enumerated the reasons supporting its construction, stating that “this line does not impact upon the existing procedural instruments available for the protection of the interests of the share/quotaholders and third parties.

This is due to the idea according to which non-negotiable rights concern “all substantive situations excluded from the regulation of private autonomy, which are governed by a legal regime that excludes any autonomy of the parties. Consequently, the parties may not derogate them, give them up or otherwise modify them.” In other words, the old theory (that I consider wrong) according to which non-negotiable rights and imperative rules are two sides of the same coin.

The Supreme Court then goes on to say that “the share/quotaholder or the third party may waive their claim concerning the resolution approving the financial statements drafted in breach of the principles of clarity, truth and fairness. However, the parties may not agree with the director on whether and to what extent those principles should be applied, nor waive those principles being followed. Conversely, they would be liable for that breach.” The reasoning of the Supreme court on this point is not particularly clear. Indeed, I do not understand how this liability may exclude that a shareholder, approving non clear financial statements, waives its right to have clear financial statements.  And that waiver does not amount to a tort nor to a breach.

Back to the ruling of the Court of first instance of Milan, another interesting point is that this ruling implement the principle of the so-called parallel paths, as per articles. 817 and 819/ter of the Italian Code of Civil Procedure. Indeed, the same resolution had been challenged both in arbitration proceedings and in proceedings pending before the Court (the two challenges are due to the uncertain case-law concerning the arbitrability of that kind of disputes). The two proceedings continued in parallel and reached complementary results. On the one hand, the Arbitral Tribunal ruled on the procedural defects of the challenged resolution. On the other hand, the Court of first instance of Milan ruled on the defects that concerned the content of the financial statements.

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