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Bullettin


Warning notice no. 1/22 of 21 January 2022

SUBJECT: Warning notice - Submission of slates by the board of directors for renewal of the board of directors

1. Foreword - The appointment of boards of directors in Italian listed companies and the submission of slates by the board of directors

1.1 Article 147-ter of Legislative Decree no. 58 of 24 February 1998 (“Consolidated Law on Finance”), introduced by the so-called Reform on Savings[1], governs the procedures for electing the boards of directors of Italian listed companies,[2] setting out that any appointment must take place on the basis of slates (lists of candidates) submitted by shareholders holding a qualified shareholding identified also on the basis of Consob regulations[3]. Without prejudice to the possibility that the articles of association grant minorities a wider representation on the board, at least one of the members of the board of directors (hereinafter also "BoD") shall be elected from the minority shareholders’ list that obtained the highest number of votes and is not connected in any way, even indirectly, with the shareholders who submitted or voted on the slate that ranked first in terms of votes. The aim of this reform was to increase the monitoring of minorities over management of companies and to mitigate agency problems between majority and minority shareholders, allowing them to appoint at least one director of their choice.

The articles of association of some listed issuers set forth the possibility for the board of directors to submit a list of candidates for the renewal of the board, even though this option is not envisaged in the Consolidate Law on Finance[4]. The considerations below are independent of any assessment of the legitimacy, pursuant to Article 147-ter of the Consolidated Law on Finance, of the power possibly provided for by a company’s articles of association for the board of directors to submit a list of candidates for the renewal of the board of directors. In this regard, it should be noted that there are no specific jurisprudential decisions on the admissibility of this power pursuant to Article 147-ter of the Consolidated Law on Finance, while the Court of Cassation of 2007 declared it illegitimate with regard to Article 148 of the Consolidated Law governing the appointment of the board of statutory auditors, to incorporate clauses in the articles of association that allow the board of directors to submit its own list of candidate to the board of statutory auditors[5]; the reasoning for such illegitimacy arises from the danger that the Board’s list may prejudice the appointment of minority candidates, as well as from the “anomaly” of a management body appointing its own controlling body.

The doctrine allows companies to include a clause in their articles of association that enables the presentation of a list of directors submitted by the board of directors also in listed companies, insofar as it falls under their autonomy to design their own articles of association and provided that the submission of such slate does not prejudice the appointment of members voted by minority shareholders.

The Corporate Governance Code adopted in 2020, with reference to the possible presentation of a list of candidates for the renewal of the board of directors by the board of directors, sets out that it must "be implemented in a way that ensures transparency in its formation and presentation” and that the board of directors must be assisted by the nomination committee, the majority of whose members must be independent directors[6].

1.2 It should also be noted that the nomination of candidates for the appointment of the board of directors by outgoing directors has established itself in Anglo-Saxon governance systems with dispersed ownership[7], where, inter alia, the information asymmetries between shareholders and management are greater and the selection of candidates for the board by the dispersed shareholders is burdensome.

In Italy, following the introduction of the slate voting system with the Savings Reform, the submission of slates by the board of directors plays an essentially residual role with respect to the shareholders’ powers to present slates, offering a remedy to situations of shareholder inaction or in the case of absence of shareholders with qualified shareholdings. In recent years, a growing number of Italian companies have amended their articles of association to allow the management body to submit its own list of candidates for renewal of the same body, also with a view to international institutional investors’ familiarity with the presentation of candidacies by the board of directors[8].

2. Considerations on the submission of slates by the board of directors

2.1 Preliminary considerations on the purpose and nature of the reminder

It should be noted that this reminder is intended to highlight some critical aspects related to the presentation of slates by the board of directors (paragraph 2.2) and some steps to mitigate these critical issues (paragraph 2.3), without prejudice to the possibility for issuers to evaluate the measures they consider most appropriate, taking into account their own ownership and governance structures and without prejudice to the fact that Consob – in its supervisory activities – shall take into account the specificities of each individual case.

This reminder is not a regulatory act nor does it contain binding information requests pursuant to Article 114 of the Consolidated Law on Finance nor recommendations, but it intends to draw the attention of listed companies and their shareholders to certain transparency and conduct measures, including those arising from the application practice.

2.2. Critical aspects related to the submission of slates by the board of directors

The considerations set out below are formulated taking into account the current provisions of the Consolidated Law on Finance and the Issuers' Regulation and in light of the tasks assigned to Consob regarding the transparency of corporate disclosures. In particular, with regard to the slate voting system, both for the election of the internal control bodies and the board of directors, Consob has regulatory and information supervisory powers and carries out indirect supervision of compliance with the regulations of the Consolidated Law on Finance and the Issuers' Regulation through supervision of the behaviour of the internal control bodies , which in turn supervises compliance with the law and the articles of association.

The presentation of slates by the board of directors – in addition to the risks of self-serving conduct and self-perpetuation also highlighted in the Anglo-Saxon governance systems with dispersed ownership – may in fact present some risks, more evident in companies with concentrated ownership and especially in the presence of controlling shareholders, owing to the poor transparency of the candidate selection process and the formation of the slate, which may consequently interfere with the mechanisms of fair competition between different slates.

There may also be risks of incorrect identification of persons acting in concert – taking into account the definition provided for by art. 101-bis of the ConsolidatedLaw on Finance and the relevant regulations adopted by Consob[9] for the purposes of rules on mandatory takeover bids provided for by articles 106 and 109 of the Consolidated Law on Finance.

Connections between lists could also be possible pursuant to the aforementioned art. 147-ter of the Consolidated Law on Finance. For example, reference is made to the risk of connection existing in the event of simultaneous submission of slates by the board of directors and by individual shareholders who are present on the same board in office (directly or through their representatives such as, for example, corporate representatives of companies of their own group or close family members) and participate in the process of forming the Board’s slate or are candidates on the slate approved by the Board.

Finally, the possible non-transparent nature of the process of identifying the candidates to be included in the board's list could affect the correct identification of the related parties of the listed companies.

2.3 Reminders

In light of the risks indicated in the previous paragraph, attention of the board of directors and internal control bodies of listed companies as well as their shareholders is drawn towards certain aspects that are considered relevant to manage the formation and presentation process of slates submitted by the board of directors more transparently and to mitigate the risks highlighted in the previous paragraph. In particular:

a) first of all, it’s emphasized the importance of ensuring the greatest transparency and traceability of the candidate selection process also through appropriate minute-taking of the meetings of the board of directors and of any involved committees, thereby guaranteeing that the candidate selection process is clear and justified, also with respect to the previously identified selection criteria.

To ensure a more transparent submission of slates, also taking into account the recommendations of the Corporate Governance Code[10], the boards of directors of some companies are adopting a specific procedure aimed at regulating ex ante the process of identifying candidates in their various phases and regulating the contribution made by each of the various parties involved. The adoption and prior publication of these procedures, before the start of the candidate selection process, contribute to the accountability of the entire process, providing useful information on its articulation towards the shareholders and other stakeholders of the company;

b) attention is drawn towards to the desirability of exploiting the full potential of the role of independent members of the board of directors in the process of forming and presenting the slate submitted by the board of directors. According to the aforementioned recommendations of the self-discipline, this process involves the nomination committee, the majority of which is composed of independent directors, who – following the contribution already provided in the self-assessment of the board and in the formulation to the shareholders of the guidelines on the qualitative-quantitative composition deemed optimal[11] – also supports the board of directors in expressing specific recommendations on the professional profiles necessary for the best composition of the board and in examining the candidacies.

Given this, it is up to the concerned companies to define the most appropriate process for the possible formation and presentation of the slate submitted of the board of directors, identifying the related phases and the contribution of the various parties involved. Taking into account the specificities of the ownership and governance structures, the companies, even if they adhere to the Corporate Governance Code, could consider whether to involve, instead of the nomination committee, ad hoc committees or the nomination committee with modified composition, in the slate submission process.

In order to assign a coordinating role of the entire process to an independent figure, with a view to guaranteeing the transparency and objectivity of the process and in the absence of an independent chairman, attention is drawn to the desirability of supporting this figure with an independent director, such as the chairman of the nomination committee or any lead independent director, or more independent directors.

If the policy for managing dialogue with all the shareholders adopted in accordance with the Corporate Governance Code[12] envisages a coordinating role for the chairman, even if not independent, nothing excludes that the chairman, in the preparatory engagement phase for the definition of the slate by the board of directors, is accompanied by the lead independent director or any other independent director identified as the coordinator of the entire process;

c) in the observed practice, one of the most important aspects of the process is the management of the phase consisting of the dialogue with the shareholders, which generally follows the formulation of the guidelines on the optimal qualitative-quantitative composition and precedes the more specific phases of definition of the concrete criteria for selecting the directors and examining the candidacies.

Also for this phase, attention is drawn to the importance of a transparent and documented process, with succinct minutes of the meetings with the shareholders, which also take into account any policy for managing dialogue with all the shareholders adopted in compliance with the Corporate Governance Code.

Furthermore, given the risk that, in some cases, consultation with shareholders, also in light of the specific ownership and governance structures of the issuer, may be relevant in terms of non-compliance with the rules on mandatory takeover bids, attention is drawn to the desirability of consultation with shareholders having as its object the qualitative and quantitative criteria to be followed for the identification of the overall optimal composition of the board of directors and the most suitable profiles for holding the position of director;

d) a further important aspect concerns the behaviour of the directors during the meetings at which the composition of the board of directors' slate is voted on. In this regard, attention is drawn to the wording of art. 2391 of the Italian Civil Code pursuant to which it is deemed that there is an obligation of transparency of the interests of the directors who have, if applicable, declared their willingness to be reappointed, and an obligation of strengthened justification of the decision of the board of directors[13]. As is known, the aforementioned discipline does not require, however, the obligation to abstain from resolutions in which the director is the bearer of an interest and, therefore, in the event the slate on which the board of directors must vote features the name of one or more serving directors, the latter could take part in the vote;

e) in addition, it is necessary to consider any relevant connections pursuant to the regulation on the slate voting system between the slate submitted by the board of directors and slates that may be submitted by shareholders of the issuer who are present directly or indirectly (for example through corporate representatives of companies of their own group) in the same board of directors[14].

With specific regard to the role that the directors who are, for example, shareholders of the issuer[15] could play in the process of forming the slate of the board of directors and the consequences in terms of suitability of a connection between any slate of the aforementioned shareholders and that of the board of directors, attention is drawn to the following specific scenarios:

i) on the one hand, it is not deemed inappropriate if these directors participate in the preparatory phases of the board's self-assessment and the formulation of guidelines for shareholders on the optimal qualitative-quantitative composition: in fact, these are activities that are recommended by the Corporate Governance Code and are aimed at assessing the effectiveness of the board's work and identifying the abstract professional profiles whose presence is considered necessary, which does not imply the specific identification of individual candidates but a more general definition of the skills required to ensure the best composition of the board of directors;

ii) on the other hand, having regard to connections between slates, it is deemed inappropriate if such directors, who are shareholders of the issuer, or corporate representatives of companies of the groups of the aforementioned shareholders of the issuer participate in the phases of specific identification of candidates to be included in the slate of the board of directors. In particular, reference is made to those activities that lead to the identification of individual candidates to be included in a “long” or “short” list, and potentially to the immediately preceding activities of identifying the specific selection criteria of the candidates, the latter criteria which, unlike the guidelines provided for shareholders, not only qualify "abstract" characteristics of the professional skills required but outline the concrete selection criteria, being able in fact to condition the choice of individual candidates. In this regard, it may be in general considered a “participant” to the phases referred to in this point (ii) any director who expresses his/her dissent, by voting against the related resolutions (of the board of directors or of the committees involved) or by expressing a justified abstention, provided that said director has not indicated names actually included in the slate of the board of directors;

iii) it could finally be considered that there is a connection between any shareholder’s slate with the slate of the board in the light of the candidates included in the latter list where, for example, the shareholder himself/herself or a company representative of companies of his/her group is present on the slate approved by the board. In this case, the participation or non-participation of said shareholder (or the corporate representative of companies in his/her group) in the process of forming and approving the board of directors' list is irrelevant;

f) the correct and complete information on the slate submitted by the board of directors and on the methods of forming this list is an essential requirement to allow an adequate assessment of it by the market (investors, proxy advisors) and, ultimately, to encourage shareholders to take their voting decisions (and, where appropriate, to submit an alternative slate of their own).

For these reasons, attention of companies is drawn towards the importance that in the context of the information that is provided on the slate of the board in view of the Assembly of appointment of the board of directors:

i) the concretely followed process for the formation of the slate is exhaustively portrayed, illustrating its timeline and the contribution of the parties who participated in it (directors/committees/consultants to whom specific roles are assigned in the process), also in connection with the procedure that may have been defined ex ante;

ii) the majorities with which the resolutions of the board of directors have been adopted at the different stages of the process, starting from the adoption of any procedure, with an indication of the number of directors who voted against it or abstained.

In addition, in order to facilitate the information of shareholders and enable them to assess the proposed candidacies and take, if necessary, decisions on the possible submission of a slate on their own, attention is drawn to the desirability of timely publication of the board’s slate at the same time as the publication of the notice convening the Shareholders' Meeting, or, if not possible, well in advance of the deadline for the submission of the slates of shareholders (at least 25 days before the date of the Shareholders' Meeting, pursuant to Article 147-ter, paragraph 1-bis, of the Consolidated Law on Finance[16]) stating any indication of the candidates for the offices of Chairman and Chief Executive Officer;

g) it is considered important that the shareholders who submit a slate declare the absence of connections with the slate submitted by the board of directors, as well as specify the significant relationships that may exist and the reasons why these relationships have not been considered relevant for the existence of a connection, or the absence of the aforementioned relationships[17].

It is also considered important, for the purposes of complete and appropriate pre-meeting information and for the proper conduct of the shareholders’ meeting itself, that the companies themselves clarify in advance what the possible scenarios are depending on the results of the shareholders' meeting votes;

h) finally, the fact that the directors are elected on the basis of a list of candidates presented by the board of directors does not exclude a shareholder from being qualified as a related party. In fact, for example, "representation on the board of directors" of the investee is one of the circumstances to be taken into account, pursuant to international accounting standards[18], in order to assess whether or not a shareholder can exercise a significant influence on the investee company; therefore, if a shareholder had a representation on the BoD (directly or indirectly, for example, through corporate representatives of companies in his/her group), this circumstance should be taken into account even if the aforementioned directors had been elected from the slate presented by the BoD and not from the slate presented by the shareholders themselves.

2.4 These reminders do not exhaust the assessments that Consob may make as part of its supervisory activity following the examination of concrete conduct and their relevance in the perspective of the correct application of the reference legislation.

THE CHAIRMAN
Paolo Savona


[1] See Law no. 262 of 28 December 2005 ("Provisions for investor protection and the regulation of financial markets") and Legislative Decree no. 303 of 29 December 2006 ("Coordination with Law no. 262 of 28 December 2005, of the Consolidated Law on Banking and Credit (T.U.B.) and the Consolidated Law on Financial Intermediation (T.U.F.)"). Law no. 262/2005 expressly introduced the slate voting system for the appointment of the board of statutory auditors (and for the appointment of the supervisory board in the two-tier system) in the Consolidated Law on Finance, providing for a broad regulatory delegation to Consob to establish "methods for the election, with slate voting, of a regular member of the board of statutory auditors by minority shareholders who are not connected, even indirectly, with the shareholders who submitted or voted for the slate that ranked first in terms of votes” (see art. 148 of the Consolidated Law on Finance). Art. 144-sexies ("Election of minority auditors with the slate voting system") of Regulation no. 11971 of 1999 ("Issuers' Regulation") regulates in detail the procedure for applying of the slate voting system for the appointment of the Board of Statutory Auditors, making exclusive reference to the submission of slates by shareholders. In the previous legislation, on the other hand, listed companies were required to integrate specific clauses in the Articles of Association with a view to ensuring that a regular member of the Board of Statutory Auditors (or at least two in boards with more than three members) was elected by the minority; the Articles of Association opted for the slate voting system as the means to implement this rule, but with very heterogeneous clauses, also with reference to the qualified participation necessary for the submission of slates.

[2] Understood as, pursuant to Article 119 of the Consolidated Law on Finance, "Italian companies with shares listed on regulated Italian markets or in other countries of the European Union".

[3] Pursuant to the aforementioned art. 147-ter, paragraphs 1 and 3, of the Consolidated Law on Finance, “1. The Articles of Association set forth that the members of the Board of Directors shall be elected on the basis of lists of candidates and determine the minimum shareholding required for the submission of such slates, with an upper limit of one fortieth of the share capital or a different value established by a Consob regulation, taking into account the capitalization, the floating and the ownership structures of the listed companies... 3. Except as provided for in Article 2409-septiesdecies of the Italian Civil Code, at least one of the members of the Board of Directors shall be expressed by the minority shareholders’ list that obtained the highest number of votes and that is not connected in any way, even indirectly, with the shareholders that submitted or voted for the list that was first in terms of number of votes". These provisions are also applicable in the single-tier management and control system, where the director drawn from the minority shareholders’ list joins the management control committee and chairs that body pursuant to Art. 148, paragraph 4-ter, of the Consolidated Law on Finance; the provisions do not apply in the two-tier system, where the representative of the minority is elected to the supervisory board pursuant to the rules governing the appointment of statutory auditors, pursuant to paragraph 4-bis of Art. 148.

[4] The right for outgoing directors to submit a list of candidates was instead regulated in the so-called Privatisation Law (Legislative Decree no. 332 of 31 May 1994, converted into Law no. 474 of 30 July 1994) only for companies to be privatised whose articles of association set out limits to shareholding ownership, in order to facilitate the dissemination of shares. In such cases, the appointment of the board of directors takes place according to the slate voting system – initially enacted for privatized companies in order to attract private investors – with the express indication that "outgoing directors or [i] shareholders representing at least 1 percent of the shares with voting rights in the ordinary shareholders' meeting" can submit a slate. The Law on Privatisation is in any case without prejudice to the regulation on the slate voting system for companies with shares listed on the markets regulated by art. 147-ter of the Consolidated Law on Finance, whereby the reserve for minorities of at least one fifth of the corporate body remains unaffected (see art. 4, "Slate voting”).

[5] See Civil Cassation Section I, 13 September 2007, no. 19160 relating to a listed company subject to the control of a shareholder, which states, inter alia: "Apart from the anomaly of a controlled body appointing its own controlling body, such a provision certainly violates article 148 of Legislative Decree no. 58 of 24 February 1998, enacted to protect minorities, insofar as it would entail the danger appointing only persons desired by the majority and by the representative body (board of directors) and would therefore not ensure the presence of members voted by the minority".

[6] See Article 4, Recommendations 19-20, of the Code.

[7] This also seems to be the spirit of the Privatisation Act of 1994 which sets out the right for outgoing directors to submit a slate in companies whose articles of association set forth limits to share ownership, in order to encourage the diffusion of ownership and the creation of so-called public companies.

[8] As at the end of 2020, 52 companies have adopted a clause in their articles of association allowing the board of directors to propose its own list of candidates for the renewal of the board. The concrete use of such provision was observed in a more limited number of cases in which - in the absence of a controlling shareholder or of more shareholders linked by a shareholders' agreement relevant to Art. 122 of the Consolidated Law on Finance, which binds a shareholder that could potentially control the investee – the board in practice played a supplementary role with respect to the shareholders, mainly due to the dispersion of the shareholding or as a result of very significant changes in the shareholding. Specifically, for the boards of directors in office at the end of 2020, this provision was used by 11 companies characterised by the absence of concentrated ownership structures and a large free float: on average the shareholder with the highest shareholding held 10% of the share capital (in two cases it was a shareholding of more than 20% held by a shareholder who had not appointed a majority of the board in office), while 82% of the capital was attributable to shareholders with shareholdings below the thresholds of ownership transparency of 3%, or 5% for companies defined as SMEs pursuant to Article 1, paragraph 1, letter w-quater.1, of the Consolidated Law on Finance. In these cases, the list presented by the board of directors was the only "complete" list, i.e., with a number of candidates equal to the total number of directors to be elected.

[9] In this regard, it is recalled that in the second consultation paper of 18 February 2011 concerning the transposition into the Issuers' Regulation of Directive 2004/25/EC on takeover bids, Consob stated that cooperation between the parties submitting a slate aimed at electing a majority of the members of the board of directors "may constitute a useful indication for the purposes of ascertaining whether parties are acting in concert. This also in the light of the consideration that... [the] presumption that persons have not acted in concert when the slate is aimed at the election of the minority of directors [provided for by article 44-quater, paragraph 2, letter b) of the Issuers' Regulation] could indicate, on the contrary, that collaborative activity for the presentation of a slate aimed at the election of the majority, although not constituting a relative presumption, still represents a sign that, together with other elements, may be indicative of concerted action ".

[10] As stated in the Corporate Governance Code (see art. 4 "Appointment of directors and self-assessment of the management body") it is provided for that "The board of directors entrusts the nomination committee to support it on [...] d) the possible submission of a slate by the outgoing board, ensuring the transparency of the process that led to the slate’s structure and proposition".

[11] See Corporate Governance Code, art. 4, Principles XIII-XIV, Recommendations 19, 21-23.

[12] See Art. 1 ("Role of the board of directors"), Principle IV ("The board of directors promotes dialogue with the shareholders and other stakeholders which are relevant for the company, in the most appropriate way ") and Recommendation no. 3 ("Upon proposal of the chair in agreement with the chief executive officer, the board of directors adopts and describes in the corporate governance report a policy for managing dialogue with the generality of shareholders, taking also into account the engagement policies adopted by institutional investors and asset managers. The chair ensures that the board of directors is in any case informed, within the first suitable meeting, of the development and the significant contents of the dialogue that has taken place with all the shareholders").

[13] In particular, art. 2391, paragraphs 1 and 2 of the Italian Civil Code set forth that: "The director must notify the other directors and the board of statutory auditors of any interest that, on his/her own behalf or on behalf of third parties, he/she has in a given operation of the company, specifying the nature, terms, origin and scope; if it is a CEO, he/she must also refrain from carrying out the operation, deferring such operation towards the board of directors, if it is a sole director, he/she must also inform the first possible shareholders’ meeting. In the cases provided for in the preceding paragraph, the resolution of the Board of Directors must appropriately justify the reasons and convenience for the company of the operation. [...]".

[14] As mentioned, through the slate voting system, the legislator provided for the possibility for minorities to appoint at least one member of the board of directors and internal control bodies of their choice, through the selection of at least one candidate from the minority shareholders’ list that obtained the highest number of votes in the shareholders' meeting and "is not connected in any way, even indirectly, with the shareholders who submitted or voted for the list that ranked first in terms of votes" (Article 147-ter, paragraph 3, of the Consolidated Law on Finance). The aforementioned provision intended to identify a notion of "connection", including "indirect" connection, with a broad and substantial meaning, with the aim of guaranteeing the effective alienation of candidates voted by minorities from the majority structure (the purpose thereof was expressly indicated for the appointment of the minority auditor in the accompanying report to Legislative Decree no. 303/2006).

[15] That is to say, corporate representatives of companies in the groups of the aforementioned shareholders.

[16] These lists shall be published at least twenty-one days before the date of the Shareholders' Meeting pursuant to Article 147-ter, paragraph 1-bis, of the Consolidated Law on Finance.

[17] See Communication No. DEM-9017893 of 26 February 2009.

[18] See IAS 28 paragraph 6.