Arbitrability of corporate disputes

A recent ruling of the Court of first instance of Rome (decision no. 25936 of 30 December 2015, Italian text available here) brings up the issue of the arbitrability of corporate disputes, in particular those relating to the challenge of resolutions of company’s general meetings.

This is a summary of the case decided by the Court of first instance of Rome.

Some quotaholders  of a limited liability company challenged the resolution of company’s general meeting whereby certain previous resolutions of distribution of company’s profits were repealed/nullified/rendered ineffective.

The defendant appeared in Court and objected that the Court did not have jurisdiction. Indeed, article 29 of the company’s Articles of association states that “all disputes between the quotaholders and the company, the directors, liquidators or the statutory auditors, concerning rights which may be negotiated by the parties and that refer to the company relations, shall be settled by a sole arbitrator appointed by the President of the Notarial Council of the District in which the company has its registered office. (…) The award will have the effects of a judgment issued by the Court and the arbitrator shall decide ex aequo et bono within 90 days of the appointment. The arbitrator is not required to file the arbitration award and shall also decide on the arbitration fees. This arbitration clause shall not apply to the disputes in which the Law requires the compulsory intervention of the Prosecutor.”

First of all, the Court of first instance of Rome examined the nature of the dispute at hand, in order to ascertain whether it concerned negotiable rights (that would have to be settled by the Arbitral Tribunal), or non-negotiable rights (over which the Courts have absolute jurisdiction). In this particular case, the Court of first instance concluded that the dispute concerned negotiable rights. Indeed, in the opinion of the Court of first instance of Rome: “the area of non negotiable rights, for which referral to arbitration is forbidden, is limited to those interests protected by imperative rules, the violation of which triggers the Courts’ reaction without the need of any initiative by the parties.” Having said this, the Court of first instance of Rome ruled that the alleged irregularities of the challenged resolution do not trigger such “reaction without the need of any initiative by the parties”. 

In my point of view, the Court of first instance of Rome came to the right conclusion that the dispute at hand may be referred to the Arbitral tribunal. However, its reasoning may not be entirely accepted.

Pursuant to Article 34 of Legislative Decree no. 5, of 17 January 2003, only the “disputes (…) that concern negotiable rights in corporate matters” may be settled by an Arbitral Tribunal. Such provision is not different from that of Article 806 of the Italian Code of Civil Procedure, as amended by Legislative Decree no. 40 of 2 February 2006, which states that: “The parties may have disputes which have arisen between them decided by arbitrators provided the subject matter does not concern rights which may not be disposed of, except in case of express prohibition by law.”

Consequently, in order to ascertain whether a dispute may be settled by arbitration, the nature of the rights in question (negotiable or non-negotiable) shall be previously assessed.

In this case, I disagree with the Court of first instance of Rome, as to the correspondence between the non-negotiable nature of the disputed rights, and the imperative nature of the law rule that governs such rights. More specifically, the disputed statement claims that, “it should be stressed that the area of non negotiable rights, for which referral to arbitration is forbidden, is limited to those interests protected by imperative rules, the violation of which triggers the Courts’ reaction without the need of any initiative by the parties.”

Among the interests protected by imperative rules, which if violated may trigger the automatic intervention of the Courts, the Court of first instance of Rome highlights those concerning the clarity and accuracy of companies’ financial statements.  In this respect, the Court of first instance also refers to previous case law of the Supreme Court, that has been previously discussed here.

Nevertheless, I believe that such concept of non-negotiable right (that is, a right which aims at protecting vital interests that if violated may trigger the Courts’ reaction irrespective of any party action) is inconsistent with its exemplification  (clarity and accuracy of companies’ financial statements).

Indeed, the protection of the public right to having access to accurate financial statements of the company is not unrelated to any party action. In fact, party action is necessary in these cases. And such action has to be prompt enough, as financial statements may not be challenged after those of the next fiscal year have been approved, pursuant to Article 2434/bis of the Italian Civil Code.

As several scholars have accurately stated, all rights provided by civil rules are negotiable. In other words, excluding the few cases in which the Prosecutor may exercise the civil action, this action may only be exercised by the concerned parties and their inaction equals to a waiver.

In fact, other scholars have proposed to limit the area of non-negotiable rights to the few matters where the parties may not freely exercise the civil action, because the Prosecutor is entitled to exercise the civil action or is required to intervene in the proceedings.

This construction is very interesting, but it contradicts the existing law rules.  Indeed, Article 34(1) of Legislative Decree no. 5/2003 sets forth that “the disputes arising among the share/quotaholders involving negotiable rights concerning the corporate relationship can be referred to arbitration, by means of an arbitration clause contained in the Articles of association of the companies (…).” However, this provision also specifies that “disputes in which the law requires the intervention of the Prosecutor may not be referred to arbitration.”

In other words, the law establishes that disputes involving non-negotiable rights are other than the disputes where the law requires the intervention of the Prosecutor. For instance, I do not believe that disputes concerning the judicial revocation of a company’s liquidator involve non-negotiable rights. However, such disputes may not be referred to arbitration, since they require the intervention of the Prosecutor, pursuant to article 70 of the Italian Code of Civil Procedure (indeed, that disputes could be commenced by the Prosecutor, pursuant to Article 2487(4) of the Italian Civil code).

On the other hand, the imperative nature of certain rules does not entail the non-negotiability of the rights governed by such rules, and consequently, the non-arbitrability of any dispute concerning these rights.

Indeed, cases in which imperative rules have to be applied may be referred to arbitration. For instance, cases concerning the nullity of legal transactions, even if such nullity is a consequence of a breach of public order rules (that is, antitrust  disputes).

What is, then, the definition of non-negotiable rights ?

In my point of view, non-negotiable rights are the rights that may not be waived by contract.

If we assume that the above definition is right, it becomes much easier to determine which disputes may not be settled by arbitration.

In fact, “negotiable rights concerning the corporate relationship” pursuant to article 34 of Legislative Decree no. 5/2003 are those rights which may be negotiated according to Italian corporate law.

Moreover, the non-negotiable rights are the inalienable rights of the share/quotaholders. That is, the rights that cannot be waived by the general meeting, even if all shareholders including their owner agree.    

The above theory would be able to significantly reduce the multiple criteria that the Courts consider in order to determine whether a corporate dispute may be referred to arbitration.