GOVERNMENT CONTROL IN A COMPANY AND EU LAW
Infringement of EU principle of free movement of capital
AEM SpA (Azienda Elettrica Milanese SpA) is a company limited by shares set up by the Commune of Milan operating in the public service sector as distributor of gas and electricity, the management of which it was granted by that commune. In 1998 its shares were listed on the stock exchange and a first tranche of shares were sold, after which the Comune di Milano held 51% of the company’s capital. Continuing the company’s privatization, by Decision of 17 February 2004 the municipal council of the Comune di Milano (‘the municipal council’) decided to reduce its shareholding in AEM to 33.4%. However, it made that transfer of shares conditional on the prior amendment of AEM’s articles of association.
On 29 April 2004, at an extraordinary general meeting AEM’s shareholders adopted the measures necessary to amend the articles of association of that company by inserting, in particular, the exclusive right for the Comune di Milano to appoint directly, in proportion to its shareholding, directors pursuant to Article 2449 of the Italian Civil Code, not exceeding one quarter of the members of the board of directors of that company. In addition, based on other Italian legislation, the articles of association of AEM confer on the Comune di Milano the right to participate in the election on the basis of lists of directors not directly appointed by it.
The combined effect of the right of direct appointment of directors and the right to participate in the election of the other members of the board of directors of AEM by voting on the basis of lists enables the Comune di Milano to retain an absolute majority of appointments to the board of directors, even though it may hold, subsequent to the transfer of shares, only a relative majority in the capital of that company.
Several other shareholders complain – in particular – that the machinery described above discourages investors from purchasing shares in AEM or indeed from controlling it, such deterrent effect having inevitable negative repercussions on their own holdings in that company, which necessarily depreciate as a result. They initiated legal proceedings to challenge the Italian legislation that enables such machinery.
Article 2449 of the Italian Civil Code (Companies in which the State or public bodies participate as shareholders) provides:
“If the State or public bodies hold shares in a company limited by shares, the articles of association may confer on them the power to appoint one or more directors or auditors or members of the supervisory board.
The directors and the auditors or the members of the supervisory board appointed in accordance with the preceding paragraph can be removed only by the bodies by which they have been appointed.
They shall have the same rights and duties as the persons appointed by the company in general meeting. The provisions of special laws shall prevail.”
The question is whether Article 56 EC must be interpreted as precluding a national provision, such as Article 2449 of the Italian Civil Code, under which the articles of association of a company limited by shares may confer on the State or a public body with a shareholding in that company the power to appoint directly one or more directors which, on its own or, in conjunction with another provision, which grants that State or body the right to participate in the election on the basis of lists of the directors it has not appointed directly, is such as to enable that State or body to obtain a power of control which is disproportionate to its shareholding in that company.
According to the Court of Justice of the European Communities (decision of 6 December 2007 in Case C-463/04 and C-464/04; source), the Italian legislation is in violation with the EU principle of the free movement of capital. According to settled case-law, Article 56(1) EC lays down a general prohibition on restrictions on movements of capital between Member States. Movements of capital within the meaning of Article 56(1) EC include direct investments, that is to say, investments of any kind undertaken by natural or legal persons and which serve to establish or maintain lasting and direct links between the person providing the capital and the undertaking to which that capital is made available in order to carry on an economic activity. Concerning that form of investment, the Court of Justice has stated previously that national measures must be regarded as ‘restrictions’ within the meaning of Article 56(1) EC if they are liable to prevent or limit the acquisition of shares in the undertakings concerned or to deter investors of other Member States from investing in their capital.
A national provision such as Article 2449 of the Italian Civil Code is clearly such a restriction. Article 2449 enables public shareholders to participate in a more significant manner in the activity of the board of directors of a company limited by shares than their status as shareholders would normally allow. Those public shareholders thereby have an instrument which gives them the possibility of exercising influence which exceeds their levels of investment.
This decision is of importance to other EU countries as well, including The Netherlands. Please note that the Netherlands Antilles is not subject to EU legislation and is therefore not affected by it.
Karel Frielink
Curacao-based Attorney (lawyer) / Partner
