Does corporate purpose limit exercise of the power of representation?

24 Febbraio 2020

The Italian Supreme Court[1] confirmed the principle whereby management can validly enter into agreements not directly aimed at pursuing the company’s corporate purpose, provided that a resolution passed by an equity-holders’ meeting authorizes management to do so.

This judgment refers to a mortgage agreement entered into by a director in the name of and on behalf of the company as a third-party mortgage guarantor. The company asked the court to declare the agreement null and void, since the company’s corporate purpose at the time did not include the possibility of entering into mortgage agreements to guarantee third-party debt. This agreement was dated November 19, 2003 (i.e., before the Italian corporate law reform of 2004) and, therefore, the principle confirmed by the Supreme Court cites the pre-reform law.

However, this judgment is useful as an example to retrace the various opinions prospected on this subject. In particular, the following are notable:

  • In terms of internal organization, management may only carry out activities in compliance with the company’s corporate purpose or, at the very least, should obtain approval from the equity-holders’ meeting. Otherwise, directors may be deemed liable toward the company and they may have their offices revoked for cause.
  • With respect to third parties, the principle is that directors are company representatives and, therefore, the company cannot argue that the agreement entered into by a director that does not fall under its corporate purpose is null and void due to a lack of powers. As a result, such agreements are effective and binding for the company (unless the third party acted with willful misconduct).

You can find the judgment of the Supreme Court at this link.

[1] Judgment No. 31663/2019

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