The Application of Italian FDI Law to the Creation of Pledges: Monitoring the Reasonable Management of the Company.
by Andrea Gemmi, Associate, BonelliErede; PhD Candidate, University of Padova
and
Luca Perfetti, Partner, BonelliErede; Full Professor, Pegaso University
The article illustrates how the use of vague and indeterminate clauses in the Italian FDI screening law grounds an expansive and unpredictable practice by the FDI authority. In particular, the article addresses the example of the recent case-law concerning the application of the FDI screening law also to the creation of pledges on shares without transfer of voting rights. The Italian Court has upheld this practice on the grounds that the pledge would entail a degree of “availability” of the lender on the strategic assets of the company whose shares are pledged.
I. Introduction
The Italian FDI screening law (the so-called “golden power”, as established by Decree Law 15 March 2012, no. 21) is characterized by a broad and, in many cases, ambiguous scope of application. This affects the number of notifications received by the Authority (the Presidency of the Council of Ministers). In 2023, there were 727 notifications (577 notifications and 150 pre-notifications), exceeding those of other European countries that receive significantly larger inflows of incoming investments (257 in Germany and 309 in France). Given such a high number of filings, it is even more surprising that half of the notifications are decided by the Authority as out of scope (317 notifications and 93 pre-notifications), meaning these filings should not have been submitted.
Such a high percentage does not appear to be solely attributable to a precautionary approach by operators but rather to a broader climate of regulatory uncertainty and unpredictability. This stems, on the one hand, from the use of vague and indeterminate clauses in the language of the law and, on the other, from the Authority’s broad interpretations, often upheld by the courts. Along this line, contrary to the common interpretation of the law, an Italian court recently endorsed the Authority’s practice of applying the golden power to pledges on bank accounts, credits, and shares without the transfer of voting rights to the lender.
In the following contribution, we provide details on the Authority’s practice and case-law concerning pledges, and how this affects the purpose of the law to the control of the management of private companies.
II. Pledges under FDI screening law
Without going into details, it is worth to preface that the Italian FDI law, like many others, is grounded on filing obligations imposed on the operators, triggered when two requirements are met: (a) a material transaction, concerning (b) strategic companies or assets, all elements listed and defined by the law. In the first category are resolutions having the effect of modifying the “ownership, control or availability of the assets” defined as strategic by the law, and among these transactions are “the transfer of rights in rem”, of rights “of use related to tangible or intangible assets” and “the assignment of the same as collateral or the assumption of constraints that condition their use” as well as the acquisition in any way of voting rights in the strategic target company. Thus, the law certainly applies to the creation/transfer of rights in rem on strategic assets, and any agreement that involves the transfer of voting rights (when the thresholds are reached).
In this framework, the traditional opinion is that the discipline applies to (a) the establishment of rights in rem (pledges and mortgages) on strategic assets; (b) the assignment in payment of the pledged assets; (c) other securities that, based on the content agreed by the parties, are suitable to constrain the use of the assets or the activity; and (d) the establishment of pledges on shares with the transfer of voting rights.
The above already highlights a problem with the wording of the provision. It has been said that the law lists the assets (e.g., gas pipelines) and activities (e.g., “strategic” activities in the food sector) subject to the notification obligation. However, the provision on securities refers to certain assets. In this context, if the target company is relevant for its (overall) activity – e.g., because it is active in the food sector – the question arises whether the establishment of a security on any company’s property would be relevant – e.g., a mortgage on some offices. It does not seem that this latter would entail an influence of the mortgagee on the activity of the debtor company. From a literal interpretation of the legislation of the law, such securities would not be relevant under the FDI law.
Therefore, guarantees on assets not listed by the law and pledges on shares without the transfer of the related voting rights would be excluded from the scope of application of the golden power. These latter would trigger the filing obligation only in case the default event occurs, and the pledge is enforced, thus entailing the transfer of voting rights. However, as explained in the following paragraph, the judiciary has endorsed a different practice of the authority.
III. Authority’s practice and Cedacri case
Operators receive little guidance from the Authority’s practice because: (a) its decisions are only partially published, with minimal descriptions that exclude both the reasoning and details of the transaction; and (b) even the notifying operator is not informed of the rationale behind out-of-scope decisions, as these are issued without justification – despite administrative general principles requiring otherwise. In this context, before the Cedacri case, the Authority’s practice has been quite ambiguous. In a decision in 2017 (Open Fiber case), the Authority seemed to apply the FDI law to the mere creation of share pledges without transferring voting rights to the lender, even though the Authority reminded the legal obligation of an additional filing if and when the pledges would have been exercised. However, this interpretation was widely criticized, with the prevailing view among practitioners and scholars opposing such a reading of the law. In 2021, certain decisions appeared to support this interpretation. However, the absence of clear guidance on their context, coupled with other seemingly contradictory rulings, prevented any shift in market practice. Despite the cautious approach recommended by legal advisors familiar with the Authority’s practice – who identified an expansive interpretation of the law – finance agreements and pledges continued to be notified only within the broader context of financed transactions. Standalone financing was rarely reported unless it involved the transfer of voting rights or assets.
The turning point came with the Cedacri case ruling. Cedacri S.p.A. is a company that offers IT services to the banking and finance sector, and in 2023 it had notified, out of caution, the mere extension of existing pledges to a new financing contract. The pledges were constituted (a) on bank accounts of the company; (b) on the parent company’s credits towards the company; and (c) on the shares held by the parent company. The voting, administrative, and economic rights linked to the pledged shares remained with the parent company until the event of default. Nevertheless, the Authority deemed the law applicable, and even imposed conditions. Among others, the authority imposed (i) to use the bond loan guaranteed by the pledges to make the investments provided for in the industrial plan or other investments necessary to ensure the continuity, development, and strengthening of the strategic assets; and (ii) to send a quarterly report on the state of implementation of the industrial plan.
Cedacri challenged the authority’s decision before the Administrative Court of Rome (the competent judge of first instance), arguing, among other things, that the operation was not subject to the law since there was no transfer of voting rights or assets, and no change in the control of the company. Therefore, none of the trigger events provided by the law would have occurred. The Court, however, confirmed the decision of the Authority. According to the Court, the pledges, even without the transfer of voting rights, would still allow the lender to indirectly influence the company, due to the rights of the creditor, thus triggering the event defined by law as “modification of availability of the strategic asset of the Company” and “undertaking constraints affecting the use of the assets”. As found by the Court, this statement is supported by several factors, which, however, do raise some doubts.
Firstly, the Court emphasizes that the lender can request the forced sale or assignment of the pledged shares. In response to the easy objection that the filing obligation applies precisely to the subsequent transfer event, the Court replied that shifting the filing obligation to the transfer moment (forced sale/assignment) would empty the pledge of its “practical content” because the pledge presupposes that the lender can satisfy the credit without a further dispositive act. Thus, the exercise of screening powers at that stage would be late. However, it seems undisputed that a filing obligation applies to that transfer event, both because it is expressly provided by the law and it is in line with its rationale. It is, in fact, a transfer of shares to a potential new operator unknown at the time of the pledge’s constitution (forced sale) or, in any case, a transfer to the creditor at a future and uncertain moment, for which it is necessary to evaluate the geopolitical and industrial conditions at the time it occurs (assignment as payment). The Authority itself had previously confirmed the obligation to notify the enforcement of the pledge on shares (Open Fiber case). It is therefore unclear whether the Court intended to exclude a filing obligation at the enforcement stage or to duplicate the obligation both at the creation and enforcement stages. The market and Authority’s practice seems to go in this latter direction.
Secondly, the Court also refers to the fact that the agreement excluding the transfer of voting rights to the lender can always be modified by a subsequent agreement between the parties. This reasoning also seems unclear, given that a subsequent agreement in this sense would be independently subject to filing obligation and screened.
Thirdly, there would also be other powers, besides the exercise of voting rights, that would entail an influence of the lender on the control of the company. These include the right to exercise the director’s liability action, challenge the shareholders’ meeting resolutions, exercise precautionary actions to revoke the director, and the right to perceive profits. In this case, too, the soundness of the arguments underlying the decision may be challenged. Those listed are, in fact, rights also belonging to a minority shareholder of a company, and therefore the lender would be in the same position as this the minority shareholder. It is therefore unclear how the lender, with the same rights, can be considered as affecting the availability of the assets of the company. The acquisition of a minority shareholding may per se be subject to the filing obligation, but under specific circumstances (e.g., non-EU investor) and different provisions than those applied in the case at hand, and without the need to detect an influence over the activity of the target company.
The Court does not decide on whether the golden power applies to pledges on bank accounts and credits towards the parent company. The reason for this could be that the application of the FDI law to the pledge on shares is sufficient to justify the exercise of screening powers. Alternatively, the judge may have considered that even the pledge on credits and bank accounts is capable of “modifying the availability” of the company’s activities or assets. This issue is not ancillary, given the Authority’s practice of applying the golden power screening even to mere pledges on bank accounts. The Italian Court thus legitimizes the extensive application of the law by emphasizing the indetermined clause relating to the “modification of availability and control” of the strategic company’s assets, and therefore confirming the law applies to the pledges on shares without the transfer of voting rights to the creditor, and even to pledges on credits and bank accounts. As will be seen in the next paragraph, this raises a question of compliance with the principle of legality and issues related to the law’s objectives.
Following this ruling, practitioners have witnessed an increase in the attention of banks and financial entities to the golden power law, even in the case of mere financing operations without the transfer of voting rights – and often in cases of mere extension to new financings of already established pledges. In these cases, the Authority has confirmed its extensive practice.
IV. The legality principle and purposes of the screening
Under Italian FDI law, all the transaction subject to the screening are also subject to a filing obligation imposed on the operators. The provisions setting the filing obligations are subject to the legality principle and strict interpretation, for three main reasons. First, they provide sanctions, meeting the so-called Engel or Bonda criteria and therefore “criminal in nature”. Under CJEU and ECHR case-law, they must comply with principles of criminal law, and therefore with the principle of legal certainty and void-for-vagueness doctrine, according to which a criminal provision is invalid because it is not sufficiently clear. Secondly, the provisions grounds public coercive powers. Lastly, under CJEU case-law, the provisions are subject to strict interpretation since they derogate the European economic freedoms and must clearly provide the limits and criteria of the screening procedure to comply with the proportionality principle.
The Cedacri case did not concern a sanction for failure to comply with the filing obligation. It is doubtful that, in such a case, the Authority could have imposed a sanction for failure to notify the pledge. Moreover, it seems that that the vast majority of pledges constituted in Italy were not notified at all, at least before 2023, and yet no sanction has ever been imposed. More generally, in Italy, actual sanctions for violation of filing obligations are extremely rare. There is only one known case, dating back to 2017, which is still under judicial review. Since the lack of clarity undermines the imposing of sanctions, an issue of clarity is an issue of effectiveness. However, Italian case-law does not denounce the vagueness of the law. On the contrary, the Italian court emphasizes the necessary “vagueness and broadness” of the law to “monitor, in a preventive perspective, any operation capable of affecting the assets identified as strategic, […] aiming at the concrete effect of the same in terms of potential impact on the control of the company and its assets”.
On the one hand, the Court declares to consider that the powers are “exceptional” and of “strict interpretation”, but, on the other hand, that “reducing their scope solely to effectively translative operations would nullify their effectiveness”. Essentially, the Court provides the interpretation most suitable for achieving the useful purpose of monitoring as many operations as possible, as the rules must be “interpreted in light of the purpose of the regulation”. It therefore seems that the objective of the rule, of utmost importance and gravity, becomes the tool to overcome the wording of the provisions. One might wonder what purpose the monitoring of financing contracts can concretely pursue. Since the lender lacks effective control over the financed company’s activities, it is unclear how the screening can aim to prevent strategic activities from falling into unreliable hands. It is worth taking again into account the Cedacri case, which instructs on the purpose pursued by the Authority.
As mentioned, the Authority imposed condition on the use of the funds provided by the lender, requiring the company to use them to finance the industrial plan and not to distribute dividends. To confirm this obligation complies with the proportionality principle, the Court argues that “it seems to contrast with reasonable management of the company to stipulate financing with the granting of guarantees in order to achieve the distribution of profits even in the absence of revenues”. Given the purpose of imposing a “reasonable management of the company”, the screening extends to the control over the use the funds. While the concept of “public policy and public order” is progressively expanding, recently even including “economic security”, one might question whether the control over the “reasonable management” of private companies can fall within national security, and whether acts of “reasonable management” can be subject to FDI screening.
V. Conclusions: monitoring the companies’ management
To summarize, the Authority’s practice, endorsed by the first-instance Court, has extended Italian FDI screening to the mere establishment of pledges on shares without the transfer of voting rights to the lender, as well as on credits and bank accounts, on the assumption that, in this way, the lender would acquire indirect control over the financed company. The Court’s decision has been appealed before the Council of State, and the hearing is scheduled for 6 February 2025. After the hearing, a decision of the second-instance court may be expected. In the meanwhile, the Court’s decision confirms the refrainment of administrative judges, both of first and second instance, in reviewing screening decisions.
Indeed, Italian case-law exercises a weak judicial review of the Authority’s application of undetermined clauses, leaving wide room for Authority’s unchallenged discretion. Among these clauses, there is also the purpose of FDI law, which is, under EU law, the protection of public security and public policy (essential national interests). However, Member States decide which interests are to be considered essential based on a political discretion. The rise of the new concept of economic security has shown how variable the essential national interests are, and it undermined the line between security and economy interests, core feature of the CJEU case law since the famous Eglise de Scientology decision.
In this shifting framework, the screening of pledges to ensure the reasonable management of the strategic companies may entail further consequences. If the financial soundness of a company is a matter of essential national interest, the screening law may also apply to decision affecting such financial soundness, such as decision to turn to the market to raise funds, make certain investments, distribute dividends. The focus on the purpose of the law to extend its scope of application may therefore entail the screening of such decisions. As long as the company is strategic, its reasonable management is a matter of public security, and FDI screening must ensure such purpose. However, such use of FDI screening powers do not concern FDI at all. On one hand, it rather seems a tool to control the management of a specific private company, carried out without investment in such companies.
In case the aim is to ensure the financial soundness of certain companies due to the relevance of their activity, public law offers some models. Certain sector includes requirements of financial soundness, such as the gaming sector and tax warehouse sector. Defining such ex ante conditions to exercise certain activities would be more proportionate and compliant with the non-discrimination principle than assessing on a case-by-case basis, and with the utmost discretion, the financial decisions of certain companies.
In conclusion, the Italian case-law over the screening of pledges seems to concern the progressive reconsideration of the idea on which FDI screening law is based on, which is that private management of strategic companies, under markets dynamics, pursues public interests, and they must be protected from investment driven by geo-political agendas. The use of FDI screening law to ensure the reasonable management of private companies entails a different perspective over the market, and the continuing control of the State over management decisions. In this perspective, FDI screening law may be used as a tool to interfere in the financial decisions and management of many private companies deemed strategic.
