When shareholder agreements can be classified as contracts in favor of third parties

The Italian Supreme Court recently ruled^[1] that, in order to classify a shareholder agreement as a contract in favor of a third party pursuant to Section 1411 of the Italian Civil Code, it is necessary to ascertain the specific intention of the shareholders to bind themselves toward a third party by granting the latter a subjective right.

The case submitted to the attention of the Supreme Court

At the end of 2007, several shareholders of two companies signed a voting syndicate agreement, based on which they undertook to vote in the companies’ shareholder meetings in accordance with decisions made by the majority of the members of the syndicate (the “Majority Shareholders”).

In November 2008, the Majority Shareholders agreed on the appointment of a person to the position of managing director for two three-year terms (from 2009 to 2011, and from 2012 to 2014), the “2008 Agreement.” In February 2009, they reached another agreement and decided to appoint the same person as managing director only for the first three-year term, the “2009 Agreement.” This latter agreement was implemented by the two companies through specific shareholder meeting resolutions.

Following his failure to be re-elected to a second term, the former managing director initiated a civil proceeding against the shareholders who signed the voting syndicate agreement. The former managing director sought payment of damages for breach of the 2008 Agreement and asserted that the 2008 Agreement granted him (as third party) a subjective right to be appointed for a second term, and that he expressed the intention to take advantage of such provision by accepting his appointment as managing director in accordance with applicable law.

The first instance court and the court of appeals ruled in favor of the former director. The shareholders appealed the latter decision to the Supreme Court, claiming mainly that (i) the 2008 Agreement was not a definitive agreement, (ii) it was binding only for the shareholders who signed it and, therefore, could not be considered a contract in favor of a third party, and (iii) it was revoked by the 2009 Agreement, which provided for the appointment of the managing director for only one term.

Brief analysis conducted by the Supreme Court

The Supreme Court preliminarily stated that a contract in favor of a third party is characterized by the fact that a person who is not a party to the contract itself under the contract takes advantage of certain rights vis-à-vis the other contracting parties, an exception to the general principle—established by Section 1372 of the Italian Civil Code—that a contract is effective between the contracting parties only.

The Supreme Court also ruled that a contract can be considered in favor of a third party when the clear and specific will of the contractual parties to assign a subjective right to the third party is established. Specifically, Section 1411 of the Italian Civil Code states that:

• a contract in favor of a third party is valid when there is an interest on the part of the stipulator in assigning a subjective right to a third party (in the case at issue, the court of appeals framed the interest of the Majority Shareholders in the management of the companies as such an interest on the part of the stipulator); and
• the contract cannot be revoked if the third party declares the intention to take advantage of it (in the case at issue, the court of appeals considered the director’s acceptance of the position for the first three years a declaration that rendered the contract irrevocable).

With respect to shareholder agreements, the Supreme Court upheld the opinion of the majority of case law, according to which shareholder agreements are binding only upon the shareholders who signed them, and do not wield any effect on the company or any other party. Indeed, the typical purpose of such voting syndicate agreements is to bind the shareholders to a given vote at shareholder meetings.

However, it is possible for a shareholder agreement to be structured as a contract in favor of a third party, pursuant to Section 1411 of the Italian Civil Code, when there is a clear and unequivocal intention on the part of the shareholders to grant a third party the right to have shareholders vote in favor of such third party at the meeting that will determine third party’s appointment as managing director.

In this regard, it is not sufficient for the shareholders to mention in the agreement the name, remuneration, and term of office of the new director to be appointed. Instead, the judge must ascertain that the shareholders did not simply intend to set out internal rules meant to apply only among themselves, but intended to grant the director the right to require that the shareholders vote in favor of the director’s appointment.

Only if the above intentions are established:

• the third party acquires a right in relation to the obligated shareholders and is entitled to take legal action against them in case of breach of their obligation; and
• the contract may no longer be revoked after the person appointed as director has stated the intention to accept the appointment.

Based on the above analysis, the Supreme Court reached the conclusion that the 2008 Agreement could not be considered a contract in favor of a third party, as the Majority Shareholders did not intend to assign any specific right to the new director with respect to his appointment for two three-year terms and, in any case, the 2008 Agreement was not in force anymore as it was overridden by the 2009 Agreement.

Conclusions

As confirmed by the decision in question, careful evaluation of the intentions of the shareholders expressed outside shareholder meetings is necessary to establish whether a shareholder agreement can be considered a contract in favor of a third party; for this reason, the parties should pay particular attention when drafting a shareholder agreement to ensure that their actual intentions are expressed in full.

[1] Italian Supreme Court, I Sec., decision No. 36092/2021 of November 23, 2021.