ANDREA FUSARO
(Full professor of Comparative Legal Systems in The Faculty of Law of Genova- Italy )
Transferring Business Ownership in Italian Family Enterprises*
*[paper delivered at the Workshop "Der Generationenuebergang in Familienunternehmen. Vergleichende Perspektiven", held at the University of Zurich on 21-23 june 2009]
1.In Italy "the idea that a company is a personal or family domain seems to materialise as a persistent culture"[1], as family firm" dominates the national industrial structures, proving also to be very efficient, perhaps the most efficient model, particularly in the case of medium sized, specialised, and internationalised companies".
It is worth noting that " large family firms had obtained the resources necessary to finance their growth both through financial institutions and also via the stock market. However, this did not mean they became public company strictu sensu; the founders and their families were able to mantain control over the firms in question, influencing their policies and strategies by means of various instruments": i.e stocks with limited or no voting rights, shareholders agreements, pyramidal groups [2].
In last decades researchers have shifted their attention to the internal organization, and particular emphasis has been placed on leadership transition and insider succession[3]. There is historical evidence that "the economic backwardness of the country and the will to industrialise during the second half of the nineteenth century encouraged the first enterpreneurs to manage the training of their heirs...Also today in medium and large family firms, the issue of successionn is a key issue..."[4]. Research shows that sometimes small and micro enterprises close due to lack of successors, and persisting gender discrimination and negative stereotypes[5].
In Italian law there is no definition of family owned firm and our literature uses the general notion "encompassing all cases in which the family mantains a share of the capital sufficient to appoint top management and influence the firm's strategies, thereby limiting the set of choices available to management"[6].
2. We don't have special rules for the succession in family business: neither for succession of leadership, nor for succession of ownership[7].
Italian law has not adopted any solution in order to protect the firm where several heirs claim their share in the enterprise and require that it be paid in cash. In our Civil Code there is no pre-emption right or any other form of preferential attribution of shares in a business to one of the heirs working in it, coupled with the obligation to compensate the other heirs, such as a number of other European states have introduced[8].
In case of intestate inheritance, if the deceased has not written a will, the heirs inherit a quota of the estate of the deceased, including the shares.
Unwanted acquisition of shares or firm in the case of death can pose a threat to a successfull business. The problems relate to paying the heirs who have no interest in the firm in cash and who will sell the shares, or settling disputes among the heirs who take active part in the business and disturb the balance.
Companions cannot only rely on a family agreement or a will, since the member can amend it or withdraw.To strengthen their position, they can insert transfer restrictions in the article of association or make shareholders' agreements which hamper the possibilities for heirs to acquire shares[9]. Italian law allows company transfer restrictions to be included in the articles , clauses generally used to protect ownership in small and medium family-owned entreprises.
A recent article describes four main types [10]. Two are in no way related to inheritance[11]. Other clauses work with inheritance. Prohibitive clause forbids all transfer of ownership, for a certain period; it covers sales and gifts, even inheritance, on condition that the heir receives compensation. Post- sale purchase right provides the same rule of "first refusal", but after a person has acquired shares, giving the other shareholders an option to buy the shares, for a price settled according to stipulations or determined after negotiations. Further types of transfer restrictions are buy-sell clauses, mandatory for the heirs or for other shareholders. In the first case, other shareholders are obliged to buy the shares of the deceased, if the heirs want to sell. To protect ownership, the opposite is better suited , i.e. the clause according to which the heirs are obliged to sell if other shareholders want to buy. This clause is common in Italy, even in the articles of association, providing mechanisms to determine the price.
The problem is that the heirs must be compensated, and this often happens through drainage of capital from the company, such as in the case of withdrawal; sometimes the partnership is dissolved and the business ceases.
Some tools are used to plan successions and counteract drawbacks.
3. Like everywhere else - quoting Roland Krause- "family entrepreneurs face an unavoidable succession dilemma: they must make strategic decisions about transitioning ownership of the family business. The main alternatives are to sell the company to someone outside the family or to make arrangements for an interfamily succession. In the latter case, there are many transition modes, e.g., through a gift of shares, a will....". In Germany even a "mixed marriage/succession contract" is available, but in Italy succession agreements are prohibited. It fits that "the choice of succession mode is the outcome of an interaction process between generations, with civil and tax laws determining the transactions costs of the different succession alternatives", and that "although succession problems are universal, transition methods adopted vary around the world as each country has its own tax system"[12].
The tools have been divided between those devoted to careful succession planning and emergency measures.
4. Among emergency measures one finds the power of attorney post mortem, acknowledged before a public notary, that does not cease upon death of principal. This effect in Germany is stated by par. 672 BGB. In Italy the same result comes from the special rule set for entrepreneurs (which doesn't require notarisation)[13], but this tool is very seldom used.
5.Ordinary ways to transfer firms to children are gifts and wills, but in Italy- like in most European countries- the transfer of busines ownership among generations must comply with the"legittima" and the proibition of succession agreements.
Italian Civil Code protects spouses and children(ascendants too, in absence of descendants) by granting them the legitimate portion: they are entitled to a fixed portion of the deceased’s net estate; the law gives them the automatic right, apart from their wealth or need, irrespective of will or gifts.The following are entitled to this statutory fixed share of the deceased’s estate. The spouse (husband or wife); the separated partner has the same right to the share of “legittima” of the non –separated partner, provided that the judge has not declared him/her responsible for the separation; a divorced partner does not have any right to the “legittima”. The children (legitimate, legitimated, illegitimate, or adopted). The ascendants: when no children (or their ascendants) are alive at the time of the deceased’s death.
If one has willed property whose value exceeds the value of the disposable portion, the rights of the forced heirs are regarded as violated[14]. Italian law therefore allows the forced heirs to reduce the dispositions (and life donations) made in favour of third parties in a sufficient amount to guarantee the value of the so called “forced heirshp”. Donations are reduced after legacies, and"before asking for the reduction of donations, persons with a right to a reserved share must account for the value of the property given to the by the will. Donations are reduced starting with the most recent and then working back to those made previously"[15].
In Germany-it has been pointed out by Roland Krause- a peril to the family business is the risk of forced sale in the event of death, due to the compulsory portion of a testator's estate, if only one of the children of the businessman wishes to join the family business, and the others insist on payment of the inheritance[16].
In Italy the situation is even worse, because compulsory portion is not only a credit, as it is Germany[17]. Like in France before 2007[18], and the other systems influenced by the French civil code, in Italy the legitimate portion is the right to a share of the deceased’s estate. This solution hinders the circulation of assets which are left by will or intestate succession, or by gift, because of the risk of claims on them by the members of the family who are protected through the rules on the legitimate portion.
6.Italian Inheritance Tax - which is due also for gifts- was abolished in 2001 and re-introduced in 2006[19]. It is levied at three different flat rates: 4% to the deceased'spouse and children; 6% to brothers and sisters; 8% to unrelated parties.
For descendants and spouses, sisters and brothers we have a nil rate, the so calleed "franchigia". Inheritances of spouses and direct descendants are taxed on the amount exceeding one million euros per beneficiary. Transfers to brothers and sisters on the amount exceeding one hundred euros per beneficiary.
In 2006 fiscal treatment of transfers of firms was modified, through the abolition or reduction of inheritance and gift taxes. Business and substancial shareholding in a company, whatever the amount, is not taxed if they pass to the descendants of the deceased and if they undertake to continue the business or control the company for at least five years[20].Otherwise, in the value of shares and firms goodwill is not included[21]
7.Our succession law reserves a dominant role to the will: article 458 of Civil Code denies the validity of succession agreements. The will must be personal, individual: article 589 prohibits joint and mutual wills.
This makes proper estate planning difficult. In order to mitigate the consequences of these proibitions business or family agreements are used, so as to mantain a certain number of management rules throughout the change of generations. To protect ownership in family firms some of the clauses above described are used. In the articles of the company whose members are the parent and only the child involved in the business -not his/her sisters and brothers- we often include the buy-sell clause, mandatory for the heirs, that allows the child who is already a member (in the quality of shareholder) to buy all the shares of the deceased, paying full price.
8. Italian law doesn't consider suitable family foundation. It is deemed to be invalid if it has no
other object apart from keeping assets for the benefit of a family, even though there is no esplicit legal prohibition, but only a doctrinal opinion and an old case of our Supreme Court[22], based on the rule against Fidei-commissum, that family foundation would violate.
9. Hereditary business ownership transfers have been studied deeply in Italy in last years, in relation to the use of legal instruments alternative to gifts and wills.
It is well known that according the 1994 Recommendation of the European Commission on the transfer of small and medium- sized enterprises[23] the Member States should consider allowing the conclusion of future succession pacts.
Italian scholars have incouraged the legislator to introduce a new legal instrument, following the model of family agreement used in practice to transmit ownership and management to one or more heirs, shaped in a way to avoid the risk of "azione di riduzione", the proceeding that those with a right to a reserved share can bring to have legacies or donations reduced.
Italian legal tradition knows some similar patterns, especially "division by the testator", where the testator directs the division, specifing how the portions are to be made; he can also state that the division be carried out according to a valuation drawn up by a disinterested third party[24]. But it takes effect under the provisions of a properly executed will, so that the transfer of the firm is postponed, it happens after death; on the contrary, often one wishes an immediate transfer, like a gift, under which title passes immediately to the transferee.
Anther similar pattern wold be "donatio mortis causa"[25]: a gift made during the life of the donor which is conditional upon, and takes effect upon, death. But it was verified in consistency with article 458 civil code and the risults have usually been uncertain.
10. In order to facilitate the transfer of enterprises, succession rules have been reformed[26] , introducing family agreements [27].
Under new articles of the Civil Code, "family agreement" is a contract through which, compatibly with the rules governing family firms and in obedience to the different company types, the entrepreneur transfers the firm, wholly or partially, and the stakeholder transfers, wholly or partially, his stakes to one or more descendants. It must be acknowledged before a public notary.
All legitimate heirs and the spouse of the entrepreneur must partecipate in it, to consent to the
assignment of ownership. They receive an equal value through the transfer of apartments or other assets as compensation, or they must waive any attribution in their favour (it is what the wife often does). They loose the chance to bring later "azione di riduzione".
Payment to other legitimates is made by the recipient of the firm or by the entrepreneur(making another gift to the transferee of the firm).
The entrepreneur cannot revoke the transfer, untill he is entitled to withdraw by the contract. The family agreement can entitle even the recipient of the firm to withdraw, i.e. if the business activity should not reach an average income in the following years.