The Italian Parliament is expected to approve and implement the so-called “DDL Capitali” or “Capital Markets Bill”, aimed at strengthening the Italian capital market, improving its competitiveness and attractiveness for new listings, and reforming the current corporate governance regulations and the Consolidated Law on Finance (TUF).

The proposed measures have raised concern in the corporate governance community, in Italy and abroad. Among others, ICGN issued a letter to the Chair of the Finance and Treasury Committee of the Italian Senate back in June 2023, and the Italian market regulator, Consob, also responded to the more controversial items of the bill in November 2023.

Given the timing, implementation of the bill is expected to affect the upcoming proxy season. In this post, we outline three main areas of focus that have raised investor concerns, and provide our perspective on the potential impact on Italian corporate governance practices.

Shareholder Loyalty Initiatives

Italian law allows companies to activate loyalty initiatives on their ordinary shares, subject to shareholder approval of amendments to their articles of association. Currently, up to two additional voting rights are assigned if the shares are held by the same owner for at least 24 months (3:1). Under the proposed bill, voting rights attributable to each share may increase progressively in 12-month intervals until a maximum of 10 voting rights for each share (10:1).

The measure was proposed to create an attractive alternative for Italian companies who are considering moving (or have already moved) their listings to other European markets that allow for more flexible multiple-voting structures.

Glass Lewis Perspective

Glass Lewis is generally opposed to measures that create different classes of shareholders or treat shareholders unequally. While we recognise that granting extra voting rights as loyalty incentives for shareholders may accomplish the intended effect of maintaining a stable shareholder structure and decreasing volatility, we remain concerned about the further misalignment of the one-share, one-vote principle. In this case, the proposed EU Listing Act may ultimately have the last word on the regulation of multi-voting procedures across national markets, which could serve to level the playing field across the continent.

Closed-Door General Meetings

Companies may request shareholder approval to amend their articles of association to state that general meetings may be convened and held with exclusive participation of a company-designated shareholder representative, which receives voting proxies by shareholders.

At a closed-door meeting, shareholders are generally not provided with the ability to vote live or follow the discussion online, unlike at a virtual-only meeting.

The closed-door meeting format was first introduced as a measure to safeguard public health during the insurgence of the COVID-19 pandemic – the emergency law that allowed companies to opt for closed-door meetings even absent statutory provisions will be prorogated until December 31, 2024.

Glass Lewis Perspective

We acknowledge that sole attendance of the shareholder representative was a useful measure to navigate the constraints imposed by the pandemic, however, we question if this is the best tool to hold general meetings going forward, considering its potential to limit the rights and voice of shareholders.

As discussed in Glass Lewis’ Benchmark Policy Guidelines, preventing shareholders from attending meetings in person or actively participating in a “virtual” format leads to a substantial reduction in the ability of shareholders to exercise their rights and enter into dialogue with company directors and other stakeholders. We have provided reasonable deference to companies incorporated in jurisdictions which maintained restrictions on in-person gatherings. However, we believe completely “closed-door” meetings without any form of virtual transmission or the formal ability for shareholders to ask questions and receive transparent answers before, during, and/or after the meeting should be avoided at all costs.

Board Slate for Director Elections

Italian law currently allows the outgoing board of directors to present a list of nominees for the renewal of the board (if allowed by the company’s articles of association). The draft bill is introducing a set of procedures for boards to follow, including but not limited to

  • providing an indication of how many nominees should be included in any slate proposed by a board,
  • quorums for board approval of the slate, and
  • a requirement for shareholders to cast a second, individual vote on every nominee on the slate in case the board slate was the one receiving the majority of votes at the AGM.

Further, the new bill introduces a threshold of 20% minimum representation for nominees on minority slates, even when minority slate(s) may receive less than aggregate 20% of votes.

Glass Lewis Perspective

Glass Lewis has traditionally viewed the presentation of a slate by the outgoing board as an alignment with international best practice, giving directors a greater role in board composition and long-term succession planning.

The practice of outgoing boards presenting slates has come under scrutiny by Consob, which advised having clearly communicated, transparent and timely processes in place to adequately inform shareholders. This is especially relevant when looking at the Italian voting system, where slates of nominees are traditionally presented by shareholders with little insight into selection processes and considerations on future board composition.

In this case, the procedures included in the proposed bill seem to further complicate voting for investors. For example, it is unclear how proxy voting cards will be structured to allow for the envisioned additional individual vote on board nominees if their slate receives the majority of votes — especially if meetings are convened closed-doors, as allowed under the draft bill. These measures would likely lead to a) complicated procedures to navigate for investors, b) greater uncertainty about the possible final composition of the board, and c) unequal requirements for directors – if a minority slate was to receive the majority of votes, it would not be subject to the same procedure of individual voting on nominees.

Conclusion

The draft bill also includes a delegation for the Government to reform the Consolidated Law of Finance and, if needed, the Italian Civil Code within 12 months from approval. This may lead to a scenario where the legal review overwrites the measures introduced by the Capital Markets Bill. And given the proposal for a EU Listing Act, the legal scenario may be further upturned by rapidly changing requirements for member states. This may realistically pose obstacles for companies to meet evolving requirements, and for investors to follow, which may ultimately discourage them from active participation.