ANDREA FUSARO Transferring Business Ownership in Italian ...

ANDREA FUSARO
(Full professor of Comparative Legal Systems in The Faculty of Law of Genova- Italy )
Transferring Business Ownership in Italian Family Enterprises*
*[paper delivered at the Workshop "Der Generationenuebergang in Familienunternehmen. Vergleichende
Perspektiven", held at the University of Zurich on 21-23 june 2009]
1.In Italy "the idea that a company is a personal or family domain seems to materialise as a persistent
culture" 1 , as family firm" dominates the national industrial structures, proving also to be very
efficient, perhaps the most efficient model, particularly in the case of medium sized, specialised,
and internationalised companies".
It is worth noting that " large family firms had obtained the resources necessary to finance their
growth both through financial institutions and also via the stock market. However, this did not mean
they became public company strictu sensu; the founders and their families were able to mantain
control over the firms in question, influencing their policies and strategies by means of various instruments":
i.e stocks with limited or no voting rights, shareholders agreements, pyramidal groups 2 .
In last decades researchers have shifted their attention to the internal organization, and particular
emphasis has been placed on leadership transition and insider succession 3 . There is historical evidence
that "the economic backwardness of the country and the will to industrialise during the second
half of the nineteenth century encouraged the first enterpreneurs to manage the training of their
heirs...Also today in medium and large family firms, the issue of successionn is a key issue..." 4 . Research
shows that sometimes small and micro enterprises close due to lack of successors, and persisting
gender discrimination and negative stereotypes 5 .
In Italian law there is no definition of family owned firm and our literature uses the general notion
"encompassing all cases in which the family mantains a share of the capital sufficient to appoint
top management and influence the firm's strategies, thereby limiting the set of choices available to
management" 6 .
2. We don't have special rules for the succession in family business: neither for succession of leadership,
nor for succession of ownership 7 .
Italian law has not adopted any solution in order to protect the firm where several heirs claim their
share in the enterprise and require that it be paid in cash. In our Civil Code there is no pre-emption
right or any other form of preferential attribution of shares in a business to one of the heirs working
in it, coupled with the obligation to compensate the other heirs, such as a number of other European
states have introduced 8 .
In case of intestate inheritance, if the deceased has not written a will, the heirs inherit a quota of the
estate of the deceased, including the shares.
Unwanted acquisition of shares or firm in the case of death can pose a threat to a successfull business.
The problems relate to paying the heirs who have no interest in the firm in cash and who will
1
AMATORI, Italy: the Tormented Rise of Organisational capabilities between government and families, in CHAN-
DLER, AMATORI, HIKINO, 1997, ch. 8
2
A.COLLI, The History of Family Business 1850-2000, Cambridge Univ. Press, 2003, p. 65.
3
G. CORBETTA, Family Business, in NEIL J. SMELSER , PAUL B.BALTES(eds.), International Encyclopaedia of
the Social and Behavioural Science, Pergamon Press, Oxford, 2001, par. 3
4
A.COLLI, The History of Family Business 1850-2000, p. 68
5
J.P.ROSA, Continuity, Entrepreneurship and Family Business, Inaugural Lecture, Edimburgh, May 2006;
C.VALLONE, Italian family agreements and business continuity, Giuffré, Milano, 2008, p.VI
6
A.COLLI, The History of Family Business 1850-2000, p.74
7
Distinction drawn by L.-G. SUND, H.RUNHEDE, K.HAAG, Divorce and death in the Family Firm-A Business Law
Perspective, in E.B.L.R., 2009
8
Only exception is article 230 bis civil code, in order to (small)firms managed (not in the form of a company)with the
cooperation of a relative, according which he has a pre-emption right during the division of the joint ownership
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sell the shares, or settling disputes among the heirs who take active part in the business and disturb
the balance.
Companions cannot only rely on a family agreement or a will, since the member can amend it or
withdraw.To strengthen their position, they can insert transfer restrictions in the article of association
or make shareholders' agreements which hamper the possibilities for heirs to acquire shares 9 .
Italian law allows company transfer restrictions to be included in the articles , clauses generally
used to protect ownership in small and medium family-owned entreprises.
A recent article describes four main types 10 . Two are in no way related to inheritance 11 . Other
clauses work with inheritance. Prohibitive clause forbids all transfer of ownership, for a certain period;
it covers sales and gifts, even inheritance, on condition that the heir receives compensation.
Post- sale purchase right provides the same rule of "first refusal", but after a person has acquired
shares, giving the other shareholders an option to buy the shares, for a price settled according to
stipulations or determined after negotiations. Further types of transfer restrictions are buy-sell
clauses, mandatory for the heirs or for other shareholders. In the first case, other shareholders are
obliged to buy the shares of the deceased, if the heirs want to sell. To protect ownership, the opposite
is better suited , i.e. the clause according to which the heirs are obliged to sell if other shareholders
want to buy. This clause is common in Italy, even in the articles of association, providing
mechanisms to determine the price.
The problem is that the heirs must be compensated, and this often happens through drainage of
capital from the company, such as in the case of withdrawal; sometimes the partnership is dissolved
and the business ceases.
Some tools are used to plan successions and counteract drawbacks.
3. Like everywhere else - quoting Roland Krause- "family entrepreneurs face an unavoidable succession
dilemma: they must make strategic decisions about transitioning ownership of the family
business. The main alternatives are to sell the company to someone outside the family or to make
arrangements for an interfamily succession. In the latter case, there are many transition modes, e.g.,
through a gift of shares, a will....". In Germany even a "mixed marriage/succession contract" is
available, but in Italy succession agreements are prohibited. It fits that "the choice of succession
mode is the outcome of an interaction process between generations, with civil and tax laws determining
the transactions costs of the different succession alternatives", and that "although succession
problems are universal, transition methods adopted vary around the world as each country has its
own tax system" 12 .
The tools have been divided between those devoted to careful succession planning and emergency
measures.
4. Among emergency measures one finds the power of attorney post mortem, acknowledged before
a public notary, that does not cease upon death of principal. This effect in Germany is stated by par.
9
L.-G. SUND, H.RUNHEDE, K.HAAG, Divorce and death in the Family Firm- A Business Law Perspective, quoted
above
10
L.-G. SUND, P.-O. BJUGGREN, Protection of Ownership in Family Firms. The Owner and management Perspective,
paper delivered at 1 st Bangkok International Forum on Indigenous Management Practice(BIFIM). 8-12 December
2008, Kaesesart University, Bangkok, Thailand
11
Consent clause according which" a shareholder who wishes to transfer his or her shares or a part of them, is obliged
to ask for permission from the other shareholders, the board or the annual meeting"; where the answer is negative, "the
shareholder may be entitled to require the board to appoint another buyer or make an appeal". Right of first refusal obligates
the shareholder, who intends to transfer the shares to inform other shareholders, or the board which will inform
them. The others have an option to purchase the shares, for a price determined in the clause or negotiated.
12 th
"Planning Succesion in International Family Business-Recent Developments in Germany", paper for the 13 World
Conference of the International Society of Family Law. Vienna 16 – 20 September 2008; Section: Finances and Freedom
of Testation- Legitimate portion- Protection of surviving spouses and children
2

672 BGB. In Italy the same result comes from the special rule set for entrepreneurs (which doesn't
require notarisation) 13 , but this tool is very seldom used.
5.Ordinary ways to transfer firms to children are gifts and wills, but in Italy- like in most European
countries- the transfer of busines ownership among generations must comply with the"legittima"
and the proibition of succession agreements.
Italian Civil Code protects spouses and children(ascendants too, in absence of descendants) by
granting them the legitimate portion: they are entitled to a fixed portion of the deceased’s net estate;
the law gives them the automatic right, apart from their wealth or need, irrespective of will or
gifts.The following are entitled to this statutory fixed share of the deceased’s estate. The spouse
(husband or wife); the separated partner has the same right to the share of “legittima” of the non –
separated partner, provided that the judge has not declared him/her responsible for the separation; a
divorced partner does not have any right to the “legittima”. The children (legitimate, legitimated,
illegitimate, or adopted). The ascendants: when no children (or their ascendants) are alive at the
time of the deceased’s death.
If one has willed property whose value exceeds the value of the disposable portion, the rights of the
forced heirs are regarded as violated 14 . Italian law therefore allows the forced heirs to reduce the
dispositions (and life donations) made in favour of third parties in a sufficient amount to guarantee
the value of the so called “forced heirshp”. Donations are reduced after legacies, and"before asking
for the reduction of donations, persons with a right to a reserved share must account for the value of
the property given to the by the will. Donations are reduced starting with the most recent and then
working back to those made previously" 15 .
In Germany-it has been pointed out by Roland Krause- a peril to the family business is the risk of
forced sale in the event of death, due to the compulsory portion of a testator's estate, if only one of
the children of the businessman wishes to join the family business, and the others insist on payment
of the inheritance 16 .
In Italy the situation is even worse, because compulsory portion is not only a credit, as it is Germany
17 . Like in France before 2007 18 , and the other systems influenced by the French civil code, in
Italy the legitimate portion is the right to a share of the deceased’s estate. This solution hinders the
circulation of assets which are left by will or intestate succession, or by gift, because of the risk of
claims on them by the members of the family who are protected through the rules on the legitimate
portion.
6.Italian Inheritance Tax - which is due also for gifts- was abolished in 2001 and re-introduced in
2006 19 . It is levied at three different flat rates: 4% to the deceased'spouse and children; 6% to brothers
and sisters; 8% to unrelated parties.
For descendants and spouses, sisters and brothers we have a nil rate, the so calleed "franchigia". Inheritances
of spouses and direct descendants are taxed on the amount exceeding one million euros
per beneficiary. Transfers to brothers and sisters on the amount exceeding one hundred euros per
beneficiary.
13
Article 1722, first paragraph, number four, civil code
14
Articles 743 and 564, V th par. civil code exclude profits gained by a company of wich were members the heir and
the deceised
15
F.SALERNO CARDILLO, Italy, in International Succession, Kluwer, 2004, 364
16
"Planning Succesion in International Family Business-Recent Developments in Germany", quoted above
17 R. FRANK, Erbrecht, Verlag C.H. Beck, Muenchen, 2007, 255 ss.
18 Y.-H. LELEU, La Réserve héreditaire en droit francaise et en droit luxembourgeois,in Examen critique de la reserve
successorale, Tome II Droit Belge, Bruylant – Bruxelles, 1997, 81.
19 Art. 2, par.42, d.l. 3.10.2006, n. 206, conv. by l. 24. 11. 2006, n. 286
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In 2006 fiscal treatment of transfers of firms was modified, through the abolition or reduction of inheritance
and gift taxes. Business and substancial shareholding in a company, whatever the amount,
is not taxed if they pass to the descendants of the deceased and if they undertake to continue the
business or control the company for at least five years 20 .Otherwise, in the value of shares and firms
goodwill is not included 21
7.Our succession law reserves a dominant role to the will: article 458 of Civil Code denies the validity
of succession agreements. The will must be personal, individual: article 589 prohibits joint
and mutual wills.
This makes proper estate planning difficult. In order to mitigate the consequences of these proibitions
business or family agreements are used, so as to mantain a certain number of management rules
throughout the change of generations. To protect ownership in family firms some of the clauses
above described are used. In the articles of the company whose members are the parent and only
the child involved in the business -not his/her sisters and brothers- we often include the buy-sell
clause, mandatory for the heirs, that allows the child who is already a member (in the quality of
shareholder) to buy all the shares of the deceased, paying full price.
8. Italian law doesn't consider suitable family foundation. It is deemed to be invalid if it has no
other object apart from keeping assets for the benefit of a family, even though there is no esplicit
legal prohibition, but only a doctrinal opinion and an old case of our Supreme Court 22 , based on the
rule against Fidei-commissum, that family foundation would violate.
9. Hereditary business ownership transfers have been studied deeply in Italy in last years, in relation
to the use of legal instruments alternative to gifts and wills.
It is well known that according the 1994 Recommendation of the European Commission on the
transfer of small and medium- sized enterprises 23 the Member States should consider allowing the
conclusion of future succession pacts.
Italian scholars have incouraged the legislator to introduce a new legal instrument, following the
model of family agreement used in practice to transmit ownership and management to one or more
heirs, shaped in a way to avoid the risk of "azione di riduzione", the proceeding that those with a
right to a reserved share can bring to have legacies or donations reduced.
Italian legal tradition knows some similar patterns, especially "division by the testator", where the
testator directs the division, specifing how the portions are to be made; he can also state that the division
be carried out according to a valuation drawn up by a disinterested third party 24 . But it takes
effect under the provisions of a properly executed will, so that the transfer of the firm is postponed,
it happens after death; on the contrary, often one wishes an immediate transfer, like a gift, under
which title passes immediately to the transferee.
Anther similar pattern wold be "donatio mortis causa" 25 : a gift made during the life of the donor
which is conditional upon, and takes effect upon, death. But it was verified in consistency with article
458 civil code and the risults have usually been uncertain.
10. In order to facilitate the transfer of enterprises, succession rules have been reformed 26 , introducing
family agreements 27 .
20
Art. 3, par. 4-ter, d.lgs. 31.10.1990, n. 346, as amended by d.l. 3.10.2006, n. 206, conv. by l. 24. 11. 2006, n. 286
21
Art.8, par. 1-bis, d.lgs. 346/1990
22
Cass. 10. 7. 1979, n. 3969
23
OJ L385, 31. 12. 1994, p. 14(see also the communication containing the motivations of the recommendation:OJ C
400, 31.12.1994, p.1), followed by the Communication from the Commission on the transfer of small and medium- sized
enterprises(98/C 93/02)
24
F.SALERNO CARDILLO, Italy, p. 371
25
Latin, meaning "gift on the occasion of death"
26 Through law nr.55, February 14 2006
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Under new articles of the Civil Code, "family agreement" is a contract through which, compatibly
with the rules governing family firms and in obedience to the different company types, the entrepreneur
transfers the firm, wholly or partially, and the stakeholder transfers, wholly or partially, his
stakes to one or more descendants. It must be acknowledged before a public notary.
All legitimate heirs and the spouse of the entrepreneur must partecipate in it, to consent to the
assignment of ownership. They receive an equal value through the transfer of apartments or other
assets as compensation, or they must waive any attribution in their favour (it is what the wife often
does). They loose the chance to bring later "azione di riduzione".
Payment to other legitimates is made by the recipient of the firm or by the entrepreneur(making another
gift to the transferee of the firm).
The entrepreneur cannot revoke the transfer, untill he is entitled to withdraw by the contract. The
family agreement can entitle even the recipient of the firm to withdraw, i.e. if the business activity
should not reach an average income in the following years.
The entrepreneur can retain the right of life usufruct. The transfer of title is normally immediate, but
according a doctrinal opinion it is possible to postpone it, introducing conditions or dates; i.e.
providing that conditiona upon, and takes effect upon, death 28 .
27 And adding paragraph V-bis to Tiltle IV of the 2 volume of the Civil Code: articles 768 -bis and ff.
28 A"Draft of a Family Agreement adapted from: I patti di famiglia e il trust, Le guide del professionista, Il sole 24 ore,
30/03/06, pp. 15 e 16. (Family Agreements and Trust), has been translated in english by C.VALLONE,
Italian Family Agreements and Business Continuity, quoted above
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