Corporate disputes often have a transnational dimension, including in connection with directors liability for wrongdoing. Italian courts are frequently called to decide claims against corporate directors with links with other legal systems, such as the company being incorporated under the laws of a foreign State. This poses relevant procedural issues.
The Court of Milan (decision no 4789/2023) provided valuable insights on the application of the criteria to determine jurisdiction and applicable law in case of a claim brought by a shareholder of a company incorporated outside Italy against the sole director (having his domicile in Italy).
The Dispute
The dispute originates from a complaint brought by the minority shareholder of a limited liability company incorporated under the laws of the United Republic of Tanzania, against the other shareholder and sole director of the company (an Italian resident), allegedly responsible for misappropriation of company’s funds. On these grounds the minority shareholder (assuming that Italian substantive law was applicable to the dispute) brought two actions against the sole director:
- a derivative claim under Article 2393-bis of the Italian Civil Code (ICC), according to which the minority shareholder is entitled to act against directors on behalf and in the interest of the company to recover the financial loss suffered by the latter; and, additionally,
- a second claim under Article 2395 of the ICC, entitling shareholder to claim for compensation of the damages directly suffered because of the sole director’s misappropriation, consisting in a depreciation in the value of the shares.
In particular, the plaintiff argued that, as far as jurisdiction and applicable law are concerned:
- Italian Court has jurisdiction according to Article 3, para 1, Law no 218 of 31 May 1995 (Italian Private International Law), which provides that Italian jurisdiction applies when the defendant is domiciled or resident in Italy, as is the case here;
- Italian law applies to the dispute, according to Article 25, para 2 of Italian Private International Law which states the so-called lex societatis criterion, clarifying that “Companies, associations, foundations, and any other entities (…) are governed by the law of the state in whose territory the process of incorporation was finalised. However, Italian law applies if the seat of administration is in Italy, or if the main object of such entities is in Italy”. Paragraph 2 then specifies that the lex societatis criterion applies, among others, to “e) the formation, powers and mode of operation of corporate bodies” and “i) to the effects and consequences of violations of the law or articles of association”, among which claims for damages against directors are included.
In this respect, the plaintiff argued that although the company has been established for the construction and management of a resort located in Tanzania, its administrative headquarters were exclusively located in Italy. Therefore, the corporate claims brought against the sole director of the company should have been regulated under Italian law.
The sole director and the company submitted their statements of appearance objecting, among others:
- the lack of jurisdiction of the Italian court based on the circumstances (i) that the company was incorporated (and had its registered office) in Tanzania, and (ii) that the sole director, despite having his residence in Italy, was sued only in his capacity as director of the foreign company. According to the defendants, to determine jurisdiction the Court should have taken into consideration the place where the company had its registered office being totally irrelevant the place where the company’s sole director had established his residence;
- the applicability of Italian substantive law based on Article 25, para 1 of the Italian Private International Law, according to which companies “are governed by the law of the state in whose territory the process of incorporation was finalised” unless proven that the company’s place of administration is in Italy. Since the company had established in Tanzania both the registered office and the seat of the administration of its interests, there is no doubt that the law of Tanzania would apply to the case.
The Decision of the Court of Milan
The Court of Milan rejected the arguments of the defendants based on lack of jurisdiction on the grounds that the residence of the sole director was in Italy. As a result, Italian jurisdiction was declared by applying the criterion set out in Article 3, para 1 of Italian Private International Law, which provides that Italian jurisdiction exists when the plaintiff has his own residence or domicile in Italy.
Having found that the Court of Milan (specialised business section) has jurisdiction to decide both the claims brought by the plaintiff, the Court then turned to the question of whether Italian substantive law was applicable to the case.
The Court applied Article 25 of para 1 of Italian Private International Law and found that the law of incorporation (e.g., the law of the United Republic of Tanzania, being undisputed that the company was incorporated there) would apply in the absence of proof that the company had its administrative seat in Italy or conducted its main business activity in Italy.
In this regard, the Court found that the company carried out its business activity (the management of the resort) in Tanzania along with all the administrative activity (e.g., drafting and keeping of accounting records, performance of tax and social security obligations).
Based on these elements, the Court concluded that the claims brought by the plaintiff against the company’s sole director were governed under the laws of Tanzania.
As to the merits of the dispute, the Court found the sole director liable for the violation of his corporate duties as set out in Articles 182, 183, and 185 of Tanzanian Companies Act 2002, which provides that directors must act in good faith in order to pursue the interests of the company and was satisfied by evidence that the defendant misappropriated company’s funds to achieve an unfair interest.
Accordingly, the Court upheld the derivative suit originally brought by the plaintiff under Article 2393-bis of the ICC, thus ordering the sole director to compensate the company for all the losses suffered as a result of his wrongdoing.
On the other hand, the Court rejected the second claim, brought under Article 2395 of the ICC on the basis that under the Tanzanian legal system there are no similar rules to be applied. Therefore, minority shareholders are prevented from bringing any claim for compensation of damages directly suffered.
The decision of the Court of Milan provides a straightforward example of the increasingly common interplay between domestic and foreign laws in case of liability claims brought against directors of foreign companies. Such an interplay may imply uncertainties in the application of conflict rules, but the parties may always consider opting for arbitration so that to have a neutral forum also for corporate disputes, to the extent that the dispute is arbitrable under the applicable law (for instance, in Italy, significant exceptions apply).
