Thanks to Gianmarco Casciotta for collaborating on this article
The Italian Court of Cassation issued its first decision on the Russian roulette clause, a subject of intense debate in Italy. The decision made it clear that the clause may be included in a shareholder agreement as a lawful tool used to break corporate deadlock. Let’s analyze the decision, offering a few practical tips for mitigating litigation risk related to potential abuse of the clause.
Definition of the clause and Court of Cassation findings
A shareholder agreement is used to facilitate pragmatic, effective, and efficient corporate management, ensuring the long-term success and stability of a business. One of the clauses used for this purpose is known as the “Russian roulette clause.”
The Russian roulette clause aims to break corporate deadlock, usually by providing that:
- one party (the offeror) can make an offer to buy the shares of the party involved in the deadlock[1];
- the other party has the choice to
a. accept the offer, or
b. buy the offeror’s shares for the same price (“Right of Choice”).
Thus, once the clause is set in motion, the Right of Choice creates a take-it-or-leave-it option for the other party, which may reverse the offer.
In a previous article we discussed the legal implications of this clause and how an Italian local court deemed the clause valid[2].
The decision’s tenets
In its recent decision, the Italian Supreme Court upheld this and gave its green light to using the Russian roulette clause in shareholder agreements. Notably, the court held that the Right of Choice and the possibility for the party to reverse the offeror’s initiative creates a balanced mechanism that makes the clause fair per se[3].
Of note, according to the court, if the clause is incorporated into a shareholder agreement, it is not even necessary to set a fair share price (i.e., a reasonable minimum price)[4]. That said, if abuse occurs, while the clause continues to produce its effects, the affected parties are entitled to contractual remedies, such as damages, restitution, and so on[5].
The plaintiff filed suit, arguing that Russian roulette clauses are void in Italy, as they infringe the laws prohibiting the following:
- arbitrarily determining price, because doing so would allow an offeror to do so at its own will[6];
- executing contracts whose object can’t be determined because the price is unclear and unilaterally determined[7];
- fully blocking a shareholder from sharing in an entity’s profits and losses, which would be the case for the “losing” party once the Right of Choice is exercised;
- forcing the exit of a shareholder without setting a fair share price[8].
The Italian Court of Cassation rejected all the arguments because:
- The determination of the price in the Russian roulette clause is not a random and arbitrary choice at all. Indeed, the offeror risks backfire because the other party can reverse the initiative. This risk rules out the arbitrary nature of the choice;
- The object of the contract is not impossible to determine. It consists of the opportunity for the offeror to set a price and the subsequent Right of Choice. And, in any case, Italian law allows a party to determine unilaterally the object of a contract as long as the determination is fair;
- The prohibition against a “leonine pact” applies only to a clause that causes steady, consistent, and permanent exclusion so that the stakeholder is kept out of any corporate process (it faces an “isolation”). In this case, the sale of the shareholding is potential (and requires deadlock and activation of the clause to occur), and it eventually depends on how the Right of Choice is exercised;
- A fair share price is not required because shareholder agreements are contracts. As a general principle of law, parties can freely determine the prices in contracts. Also, the exit is not forced, given that the Right of Choice is granted. Thus, in any case a fair share price would not be required.
Conclusions and drafting tips
The decision is particularly relevant because for the first time the validity of the Russian roulette clause was recognized by the Italian Court of Cassation. However, there is a real risk that the clause will be abused. This sets the stage for triggering contractual remedies and a high risk of escalating litigation.
To mitigate this risk, it may be appropriate to:
- Identify very specifically the facts triggering activation of the roulette mechanics (i.e., establish the definition of deadlock), so that the option to activate the clause is not left to the parties’ full discretion;
- Provide for a fair price of the share (even if not required by law). This is to avoid a scenario in which a party, for instance, takes advantage of asymmetric information on the counterparty’s financial conditions and sets the share price below market value. Arguably, this could amount to abuse;
- Grant a reasonable deadline for exercising the Right of Choice, thus offering an opportunity to acquire liquidity and further mitigating the risk that a party might abuse another party’s financial situation.
However, these measures may prove inconvenient in practice (e.g., a deadline may extend the deadlock, and while a minimum price protects the weaker party from the abuse mentioned above, it also keeps it from taking advantage of a below-market price). Therefore, case-by-case assessment is essential.
The decision from the Italian Court of Cassation is available at this link.
[1] In the most frequent scenario, there are two parties (shareholders), each holding the 50% of the shares.
[2] For example, see Decision no. 19708/2017 of the Court of Rome and Decision no. 782/2020 of the Court of Appeals of Rome.
[3] A case-by-case assessment is in any case recommended because the clause may be drafted in various ways.
[4] The same applies to joint venture agreements. However, the court has not taken a stand on clauses incorporated into bylaws. Most Italian commentators argue that the only difference is that the clause in the bylaws should set a fair minimum guaranteed price (see below).
[5] The price of the at-issue shares may be set below market value, willfully exploiting the fact that the counterparty cannot afford it.
[6] Section 1355 of the Italian Civil Code states that contractual clauses that depend on the mere will of one of the parties are null and void.
[7] Section 1349 of the Italian Civil Code.
[8] Section 2437-ter of the Italian Civil Code, according to a few commentators, would oblige the parties to set a fair share price in case of forced exit.
