John I. Sanders, Yiran Jiang and Italian counsel co-author article: Foreign Institutional Investors Await Italian Government Action on Corporate Governance Reforms
MVA Finance Associates John I. Sanders and Yiran Jiang and Italian Counsel Francesco Ferrini co-authored article titled, “Foreign Institutional Investors Await Italian Government Action on Corporate Governance Reforms.”
The article
On March 27, 2024, the Italian legislature enacted reforms to attract new investors to the Italian capital markets and improve corporate governance following guidelines issued by former Prime Minister Mario Draghi’s government in 2022.[1]
The Draghi guidelines were focused on resolving long-term issues that made the Italian capital markets uncompetitive relative to their European peers and had a material effect on the ability of Italian companies to raise capital in their domestic markets. These long-term issues are one reason that, as of the end of 2023, Euronext reported that Euronext Milan’s market capitalization was a mere €762 billion compared to €1.4 trillion for Euronext Amsterdam and €3.6 trillion for Euronext Paris. In addition to its relatively weak market capitalization, there were embarrassing developments in the Italian capital markets, such as Euronext Milan losing out to the NYSE on the listing of Ermenegildo Zegna Group shares when the group went public in 2021[2] and Exor moving its listing from Milan to Amsterdam in 2022[3]. The Draghi government worried about these trends and developments as we spoke to an increasing number of Italian issuers who were interested in U.S., Amsterdam, and dual listings.
One of the issues the Draghi guidelines aimed to address was the process of nominating and renewing board members for Italian listed companies. While laws in competing jurisdictions allow for outgoing boards to present lists of candidates for the next term to the shareholders, the Italian approach has generally been for shareholders to propose candidates for board membership.[4] International investors naturally prefer alignment across jurisdictions where they hold investments, but they had come to understand and manage the peculiarities of the Italian process.
The reforms enacted earlier this year introduced a unique process for listed companies whose by-laws already permit the outgoing directors to propose a list or who amend their by-laws to permit it beginning with the first shareholders’ meetings convened after January 1, 2025. The by-laws of those listed companies can provide that the outgoing board may propose a slate of candidates, provided that (i) the slate is approved by at least 2/3 of the outgoing directors; (ii) the slate includes a number of directors at least 1/3 greater than the number of board member positions; and (iii) the slate is published at least 40 days in advance of the shareholders’ meeting at which board members will be elected. If the slate is approved in its entirety at the shareholders’ meeting, a separate vote must be taken with respect to each candidate, who must then be approved by a majority of votes at the shareholders’ meeting. However, should the slate proposed by the outgoing board obtain the majority of votes at the shareholders’ meeting, minority shareholders have the right to appoint at least 20% of the board members even if such nominees are approved by 20% or less of the votes at the shareholders’ meeting.[5]
Taking into consideration the peculiarity of the Italian system requiring that the shareholders’ meeting vote on lists in their entirety (“voto di lista”) and not on individual candidates, the most sensitive aspect of the system introduced by the reforms is the risk of unfair competition between the directors’ list and any shareholders’ list. The latter is subject to being sanctioned by Consob, the Italian securities regulator, pursuant to rules against concerted actions and mandatory takeover bids. In light of this risk, powerful shareholders, which are often present even in listed companies with broad shareholder bases, could choose to focus on the directors’ list, potentially attempting to influence its constitution. In this context, the legislature has attempted to even the playing field by introducing the referendum system on individual candidates in a separate second vote.
The complicated two-step process is further complicated by the interplay between it and a separate measure permitting the by-laws of a listed company to provide that shareholders can only vote at the meetings through a designated representative who has a proxy with voting instructions on all or some of the proposals on the meeting agenda. The designated representative role was introduced as a temporary health and safety measure during the Covid-19 pandemic, but it has now become a limitation on the ability of shareholders to actively engage with the board and the company’s managers as they have traditionally done at shareholders’ meetings. This by-laws provision preventing in-person attendance or active virtual participation, if adopted, could materially limit the ability of shareholders to exercise their rights and enter into a dialogue with company directors and other stakeholders. The utilization of a designated representative at shareholders’ meetings, combined with the board list reforms, puts foreign institutional investors at a disadvantage, the consequence being that the board of directors of Italian listed companies will probably never present their own lists despite the relevant by-laws granting them the right to do so. Of course, this would mean the Italian capital markets would remain out of line with competing jurisdictions.
While some prominent Italian corporate leaders objected to the board list reforms, with the CEO of Generali claiming they would make large, listed groups unmanageable, the Italian government initially stood firm by arguing that the reforms would address the practice of board members getting reappointed indefinitely with little regard for shareholder input. However, a recently published letter from a group representing not only investors, but the very foreign institutional investors the reforms were meant to attract, has the government reconsidering its position.
The International Corporate Governance Network (the “IGCN”), a group of global investors with assets under management of €77 trillion and including Amundi and Blackrock among its members, which generally appreciates slate voting because it allows minority shareholders to nominate directors, sent a letter to the Meloni government asking how the process could work and how foreign investors could participate in a meeting closed to the shareholders except through the designated representative. Contrary to the goals of the reforms, the IGCN wrote that the new rules “may undermine the Italian market’s competitiveness and reduce its attractiveness for institutional investors.”[6] The attractiveness of the Italian market to foreign investors is paramount to the efficacy of the reforms because it is foreign institutional investors, through Rule 144A and Regulation S offerings, who acquire a large portion of the shares sold in initial public offerings listed on Euronext Milan or Euronext Growth Milan.
In light of the criticism from investors, the Treasury under-secretary Federico Freni stated that the government would consider amendments to the reforms, which could be incorporated into legislation now under consideration. Freni called that legislation “an opportunity we cannot miss to fix problematic aspects of the market regulation.”[7] He has promised that all stakeholders will be heard before the new legislation is enacted and disclosed that a comparative study to understand best practices across European markets has been commissioned.
While it is unknown precisely what amendments will be made, amendments that bring Italian board renewals and shareholders’ meeting processes further in line with those of leading European markets, like Paris and Amsterdam, seem likely based on government statements. If that is the case, we believe the reforms taken as a whole will have the intended effect of making the Italian markets more competitive and attractive to foreign institutional investors.
This article is a summary prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice with respect to the laws of Italy, the United States, or any other jurisdiction.
For further information about the participation in U.S. institutional investors in the Italian capital markets or the use of U.S. law to facilitate securities offerings by Italian companies, contact the U.S. qualified team at Moore & Van Allen PLLC.
For further information about the reforms described in the article and Italian corporate law more generally, contact Avv. Francesco Ferrini on EuroLegalNet in Milan.
[2] Our Road to Tomorrow, Ermenegildo Zegna Group (Dec. 20, 2021), https://www.zegnagroup.com/en/news/39-our-road-to-tomorrow/#:~:text=Our%20road%20has%20led%20us,new%20chapter%20in%20our%20history.
[3] Agnelli's Exor to move listing to Amsterdam from Milan, Reuters (July 29, 2022), https://www.reuters.com/markets/stocks/agnellis-exor-move-listing-amsterdam-milan-2022-07-29/
[4] In a few cases, the by-laws of Italian listed companies already permitted the board to propose a list of the candidates even though Italian law did not address this specific matter. There are approximately 50 Italian listed companies whose by-laws permit proposing a list. This is approximately 21.0% of the companies listed on Euronext Milan (i.e., the main Italian exchange) and approximately 11.7% if companies listed on Euronext Growth Milan are also included. However, of this group, there are 15 companies, approximately 6.5% of the companies listed on the main market that have used this list mechanism. The group, which is principally made up of financial companies, includes well-known issuers such as Generali, Avio, Banco BPM, Fineco Bank, Illimity, Mediobanca, Ovs, Unicredit, Unieuro.
[5] Gianluca Antipasqua, Italy’s Proposed “Capital Markets Bill” Expected to Reshape Corporate Governance Landscape, ISS Insights (Jan 11, 2024), https://insights.issgovernance.com/posts/italys-proposed-capital-markets-bill-expected-to-reshape-corporate-governance-landscape/#6.
[6] Letter from Jen Sisson, CEO, ICGN, to Federico Freni (Aug. 16, 2024), https://www.icgn.org/media/4673/download?attachment.
[7] Silvia Sciorilli Borrelli, Italy to Review Corporate Governance Rules after Shareholder Pressure, Financial Times (Sept. 10, 2024), https://www.ft.com/content/ba71fb96-4e39-481c-aa91-3c53078bbf1c.