Under the American “business judgment rule,” there is “a presumption that in making a business decision, the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.” It is so well established that you can find statements of this principle in many places even outside of the legal websites. See here.
In Italy, there is a similar principle for directors, and it was recently applied by the Court of Rome (Tribunale di Roma) in a malpractice lawsuit brought by the bankruptcy trustee of Alitalia Linee Aeree Italiane S.p.A. (the Italian main airline now owned by Etihad) against directors. Alitalia Linee Aeree Italiane S.p.A. in Amministrazione Straordinaria vs. Cimoli, Mengozzi, Zanichelli, Steve, Ulissi, Tribunale di Roma n. 16839/2015 (July 30, 2015).
While refusing to hold the directors liable for several bad management decisions that triggered negative financial consequences, the Court held responsible some of the defendant directors that voted for a specific clause dealing with remuneration of the CEO and Chairman Mr. Cimoli. The remuneration consisted of a fixed amount and a variable part that was dependent on the achievement of goals, which were to be discretionally set by the board – the clause provided that those goals were considered achieved also in the case the board did not verify their accomplishment. The allegation was that this mechanism would basically leave to the directors’ unfettered discretion in the determination of the CEO’s compensation and would untie the variable amount from any rewarding function, without any benefit for the company.
The court explained that the decision concerning the amount of the directors’ remuneration could not be re-examined as such. The Court specified that directors cannot be held responsible for unsound financial decisions: bad business choices may lead to directors’ discharge but cannot be the basis of breach of contract to the company. Said in other words: the directors’ business judgment principle applies.
However, the directors’ conduct could be examined for their lack of diligence in ascertaining the possible risks, their lack of precautions, and their failure to collect information necessary for that type of choice, as considered in light of the circumstances.
Here the specific mechanism of remuneration could be questioned under a due diligence profile and under a conflict of interest perspective. The Court found that the directors were liable: the director who drafted the remuneration clause lacked any minimal and basic precautions; the same was the case for the directors who voted for it and for the CEO who accepted it. Because of this total deprivation of precautions and diligence that affected the decision of drafting, voting and accepting that remuneration clause, the directors’ remuneration decision – held the Court – was “not an ordinary decision concerning the management of the company” and for that decision the directors could be found liable.
In conclusion, both in the US and in Italy it is not the management decisions that can be questioned but the amount of diligence used in taking and implementing those decisions.
The full decision of Tribunale di Roma n. 16839/2015 can be read (in Italian) here
For more information, Francesca Giannoni-Crystal
