THE SO-CALLED BUSINESS JUDGMENT RULE AND ITS IMPLICATIONS IN THE ITALIAN LEGAL SYSTEM - ITALIAN SUPREME COURT, CIVIL SECTION II, ORDER NO. 25260/2024

According to Article 2476 of the Italian Civil Code, directors are jointly and severally liable to the company for damages resulting from the failure to comply with the duties imposed on them by law and by the articles of association for the administration of the company. The diligence required by the nature of the position and the specific competencies in relation to the activity carried out requires them to fulfill their duties under the law and the statute with diligence, striving to align the management activity with the principles of proper administration. This also means refraining from engaging in any action that could be detrimental to the company or harmful to the interests of the shareholders.

The case law of legitimacy, referring to and adopting the principle of the so-called Business Judgement Rule of U.S. origin, which asserts the non-reviewability of management choices made by corporate directors, deemed it appropriate to prevent the judicial body from evaluating the merit of decisions made by directors, even when such decisions present profiles of significant economic risk. Instead, the focus is placed on evaluating the correctness of the decision-making process involved in the operation to be undertaken, in relation to the required standards of diligence. The basis of this principle is that the role directors of capital companies are called to perform, while still representing an obligation of means, inevitably involves a series of decisions that are presumed to be made in the interest of the company. For this reason, a certain level of discretion must be tolerated in their actions: making economically inappropriate choices cannot, therefore, be a reason for contractual liability for the director, though it may at most be a just cause for dismissal. The next step for the judges of legitimacy was to delineate the boundaries of such non-reviewability, to avoid arbitrary misuse of the institute by the directors and indiscriminate abuse of their decision-making autonomy. The threshold of demarcation was therefore identified by the Italian Supreme Court as the characteristic of "unreasonableness, imprudence, or blatant arbitrariness" that must necessarily distinguish the managerial initiative of the director in order to be considered illegitimate and, even more, to be the subject of actual assessment by the judiciary (Cass. No. 8069/2023).

With the recent Order No. 25260/2024, the Italian Supreme Court fully aligned with this interpretation, in line with the need to specify and delineate the scope of liability attributable to directors for the damage caused to the company they manage. In the case at hand, the company claimed mismanagement by the director for failing to economically exploit the properties owned by the company, resulting in a financial loss due to the failure to collect rental income. The evidence of the damage was further emphasized by the fact that the company was a ‘real estate’ company, whose corporate purpose was precisely the profitability of its properties. Contrary to the erroneous decision made by the appellate court, the Supreme Court pointed out that the company, in line with the typically contractual nature of the action for social responsibility brought against directors and auditors of capital companies, had correctly fulfilled its burden of proving both the existence of violations by the director (who had failed to adequately protect the company’s interests entrusted to him) and the causal link between these violations and the resulting damage. On the other hand, the director, instead of proving that the damaging act was not attributable to him and that he had properly fulfilled his duties, merely argued the absolute non-reviewability of his management decisions, despite their unreasonableness, imprudence, and arbitrariness.

The Court thus accepted the appeal, stating the following principle of law: ‘If the alleged unlawful conduct of the directors is not prohibited by law or by the statute, the conduct of the director is unlawful if he fails to adopt all the necessary measures to safeguard the company’s interests entrusted to him; in such cases, the plaintiff has the burden of proving all the factual elements from which the violation of the duty of loyalty and diligence can be inferred.

Authors: Avv. Gianfilippo Chiricozzi and Sofia De Paolis