Differences between harmonized company law and domestic rules: the phenomena of “gold plating” and “circumvention” of EU law

First of all I would like to thank Fondazione Courmayeur and Centro Nazionale di Prevenzione e Difesa Sociale for the excellent organisation, while also giving a heartfelt thank you also to Paolo Montalenti and Mario Notari for the invitation.

1. Definition of gold plating

Gold plating means the process whereby EU Member States (at a State, regional or local level) – at the time of adopting regulations and directives – go beyond the minimum level of regulation provided for by EU law, imposing costs and burdens upon undertakings (and citizens) (so-called over-compliance).

As highlighted by an in-depth study on the matter by the European economic and social committee (1), the definition of gold plating should be understood broadly so as to also include: (a) not taking advantage of any derogation allowed; (b) retaining national regulatory requirements that are more comprehensive than EU-law requirements; (c) introducing new burdens that fall outside the aim of EU law; (d) implementing EU law before it comes into force; (e) applying sanctions or other enforcement mechanisms stricter than required for proper implementation of the EU law.

It should be noted that gold plating cannot be regarded as a transposition measure in open conflict with EU law and, thus, unlawful and subject to infringement procedures, but can trigger regulatory arbitrage, competition between legal systems and races to the bottom (or to the top) (2), thus becoming an attraction or a deterrent for business establishment, financial investment as well as for the attractiveness of the domestic market. Gold plating can ultimately be a serious obstacle to the creation of a true single capital market (3).

2. UE and gold plating: between harmonisation and soft law

As properly noted by the Italian Supreme Court (4), gold plating is not a principle of EU law, which, certainly, binds Member States to the implementation of directives, while leaving them free to choose the most appropriate means of achieving the intended result, except for self-implementing rules (where, however, there is no shortage of gold plating cases).

The absence of a specific EU legal instrument to address said problem, therefore, places on Member states the burden of identifying and removing the cases of gold plating, which is a major disruptor to the smooth functioning of the single market.

According to the EU Commission, indeed, gold plating not only unfairly disadvantages businesses (and, particularly, SMEs (5) and citizens, but also reduces the competitiveness of the European Union as a global player, given the increase in administrative costs, and is an undesirable element of fragmentation of the internal market (6).

The EU might of course remove or at least radically reduce gold plating by moving from minimum harmonisation directives to maximum (or full) harmonisation directives or regulations. However, as is known, the terrain of company law is particularly complex, as has also emerged from the speeches before me, and there are several voices suggesting that we should proceed very carefully and cautiously in the pursuit of harmonisation at all costs (7).

On the other hand, it should be emphasised that significant steps have been taken towards the maximum harmonisation of some areas of financial market law, which has direct relevance to the internal market, by regulations on: accounting information (Regulation 1606/2002), market abuse (Regulation 596/2014) and prospectus (Regulation 1129/2017), which, however, are also often marked by gold plating.

And perhaps further steps can be taken. One of these could be the introduction, which seems to be approaching, of a common framework for multiple voting rights in listed companies (8).

As for the latter, the hope is that the Listing Act being drafted by the Commission will lead to bold simplification illuminated by proportionality for SMEs.

In addition to harmonisation by legislation, the reduction of gold plating phenomena can be the subject of soft law actions by EU institutions, aimed at guiding domestic legislators through recommendations and guidelines, which, however, in order to be truly effective, should be accompanied by systematic monitoring by Member States through, for example, comply or explain processes.

In our field, it is worth mentioning the Recommendations on Remuneration and Duties of Directors of Listed Companies (9), on remuneration policies in the financial sector and on the quality of corporate governance reporting (comply or explain principle).

I will not go further into this topic as it is beyond my assigned task. This afternoon we will hear some extensive reports on the directives to be implemented and the work in progress.

3. Domestic rules

The prohibition on gold plating was codified in Article 14, paragraphs 24, bis, ter and quater, of Law 246/2005 (introduced by Law 183/2011 “2012 Stability Law”), which requires avoiding:

• the introduction or maintenance of requirements, standards, obligations and burdens that are not strictly necessary for the implementation of directives;
• the extension of the subjective or objective scope of application of the rules compared to the provisions of the directives, where resulting in increasing the administrative burdens for the recipients;
• the introduction or maintenance of sanctions, procedures or operational mechanisms that are more burdensome or complex than those strictly necessary to implement the directives.

Subsequently, Article 32, paragraph 1(c), Law 234/2012, was introduced, which included, amongst the criteria for the exercise of the legislative powers granted to the government for the adoption of EU rules, the prohibition of gold plating, which could have, according to some, a peculiar relevance in the area of enforcement (10).

There is, in addition, the 2018 Guide to Regulatory Impact Analysis and Verification, which sets out provisions for regulatory inquiry with a particular emphasis on gold plating, SMEs, and proportionality (11).

Lastly, let us recall that the administrative action of the Bank of Italy and Consob in the sphere of the regulation of market law must be oriented by the “recognition of the international character of the financial market and safeguarding of the competitive position of Italian industry” under Article 6, paragraph 1, (c) of the Consolidated Act on Finance. In this regard, one should also look at the more general system of public administration and governance of the Supervisory Authorities, which can no longer be a source of competitive disadvantage vis-à-vis other countries (12).

Primary and secondary legislation is fully aligned with the guidelines of the EU Commission and clearly converges towards countering and eliminating gold plating in order to provide a competitive and attractive regulatory framework for businesses and, in particular, SMEs.

4. Cases of gold plating

Despite the clarity of the Italian regulatory framework, are there cases of gold plating? Are they justified because of specific requirements of the Italian market?

Here are a few examples (I counted over 40):

• Some aspects of company law (Directive 1132/2017) - share capital - see Article 2327 of the Italian Civil Code, now €50,000 for S.p.A. (joint-stock companies) can a proportional criterion be adopted for SMEs S.p.A.? I must point out that the minimum threshold is €25,000 (Article 45(1) of Directive 1132/2017) and the rules governing extraordinary transactions such as the raising of risk capital (quorum to be reduced, Article 2368, paragraph 2, of the Italian Civil Code), voluntary capital reduction (quorum to be reduced and terms, Article 2445 of the Italian Civil Code), reduction for losses (which, as highlighted by Prof. Ferri just now could be revised from a “vintage” perspective) contributions in kind (subject to several uncoordinated interventions and lack of derogation pursuant Article 49(4) of Directive 1132/2017), mergers/demergers (time limits and procedure, e.g. 60 days to oppose creditors or publication in the OJ), treasury shares (Article 2357 of the Italian Civil Code), and the quantitative limit to be increased, Article 2368, paragraph 2, of the Italian Civil Code, quantitative limit to be increased, the issue of manipulation is largely superseded by the MAR and the extension of the maximum length of the authorisation to 5 years, see Article 61 of the Directive).
• Shareholder Rights Directive - (EU Directive 2007/36) - extension of the rules on transactions with related parties to issuers of financial instruments widely distributed among the public pursuant to Article 2391-bis of the Italian Civil Code.; binding vote on remuneration policy (Article 123-ter, paragraph 3-ter, TUF, indication of remuneration to affiliated companies (Article 123-ter, paragraph 4(b), TUF);  identification of shareholders at the request of minority shareholders (83-duodecies, paragraph 3, TUF) (13); and see also the concerns expressed by authoritative scholars on Consob’s control of the substantial correctness of RPTs, which may pave the way for an administrative scrutiny of the business judgement rule (14)
• Takeover bid (OPA) - (Directive 25/2004) broader offer document content (see Annex 4, Issuers' Regulation vs. Article 6, paragraph 3, TD); squeeze-out from 95% to 90% (111 TUF, see Article 15, Directive 25/2004), see Loi Pacte (2019) which reduced the threshold from 95% to 90% to limit opportunistic behaviour of a small minority; consolidation takeover bid (106, TUF, not provided for by Directive 25/2004, should it be reconsidered?).
• Transparency (Directive 109/2004): quarterly reporting obligations of transactions carried out with the dissenting opinion of the RPTs Committee (Article 7, paragraph 1, letter (g), Consob RPTs Regulation vs. Article 5, paragraph 4 TD and Article 4, paragraph 1, Directive 2007/14/EC); calling of the shareholders' meeting through notice published in the press (Article 2366 of the Italian Civil Code and Article 113-ter, TUF, with respect to the disclosure obligations of regulated information see Article 21, paragraph 1, and recital 8 TD); content of the notice of calling (Article 127-quater, TUF vs. Article 17, paragraph 2, letters (a) to (d) TD); liability of the manager in charge of drawing up the corporate accounting documents pursuant to Article 154-bis TUF (see Article 7, TD, but Article 3, paragraph 1, which allows for extension but only 5 Member States have extended liability); significant shareholdings thresholds not perfectly overlapping (Article 117, Consob Issuers’ Regulation and Article 9, TD, 3% (discouraging institutional investors) and 90%); methods of disclosure of relevant shareholdings to Consob (see Annex 4 vs. Article 12, paragraph 1, letters (a) to (d)); sanctioning system (192-bis, 192-quinquies, 193 TUF, which seems not proportionate, as required by Article 28, TD).
• MAR (Regulation EU 596/2014) - double track of administrative and criminal sanctions (but see Supreme Court 149/2022 on copyright, which hopefully could lead to a profound rethinking of the sanctioning system); Article 114, paragraph 7, TUF with respect to the application of MAR to controlling shareholders or shareholders with more than 10% (certainly not applicable to MTF issuers but the point should be clarified, see Article 114, paragraph 12, TUF), which could perhaps be reconsidered in light of the gold plating permitted by the Transparency Directive (see Article 120, 4-bis, TUF, and Recital 12 on declaration of intentions); Articles 110 and 111 of the Issuers' Regulation, which, perhaps due to a lack of coordination, apparently impose additional disclosure requirements on MTF issuers;
• Prospectus - (Regulation 2017/1129) liability of the person responsible for the placement (Article 94, paragraph 7, TUF); application of Consob's powers under Article 115 TUF to the issuer's controlling and controlled entities and to the offerors or persons requesting admission to trading (Article 97, paragraph 1 and Article 113, paragraph 1, letter f, TUF) (Assonime). See, however, Consob Resolution No. 22423/2022 of last July (prospectus in English, prefiling also on indications (15);
• Financial Statements - Prohibition to adopt IFRS for companies that may draw up simplified financial statements (16).

In my opinion, almost all of such cases seem to be the result of an excess of tutiorism. Often, a spontaneous instinct of precaution seems to prevail in the Italian legislator, with provisions introduced into the legal system in a non-systematic way but, rather, by means of occasional and non-organic legislative initiatives, sometimes in response to crises and scandals of various kinds and media coverage (17).

5. Quo vadis?

How to intervene in order to eliminate gold plating so as to comply with one of the cardinal objectives of the company law reform, namely “to encourage the creation, growth and competitiveness of companies, including through their access to domestic and international capital markets” (see Article 2, 1, (c), of Law 366/2001?

The solution can only be a robust, rapid (and courageous) legislative intervention (18) aimed at modernising and simplifying company and financial market law, and we hope that this will be one of the priorities of the next government. In 2023 the reform of the Italian Civil Code will be twenty years old, while the Consolidated Law on Finance will be twenty-five years old.

Pleas to such effect follow one another and were also the subject of an article in Monday's Financial Times (19).

To tell the truth, in our country, much of the work has already been done by the current Government and, in particular, by the Fifth Division - Regulation and Supervision of the Financial System of the MEF, directed by Stefano Cappiello, who published at the beginning of the year a Green Paper entitled La competitività dei mercati finanziari italiani a supporto della crescita (Competitiveness of Italian financial markets in support of growth) (February 2022), which obtained broad market consensus (20).

The Green Paper, drafted with the participation of Consob, Banca d'Italia, Borsa Italiana and various trade associations, mentions numerous micro-regulatory measures (21) aimed at eliminating the legislative and regulatory provisions issued over the years in breach of the prohibition on gold plating Their full adoption would lead to a significant simplification (and strengthening) of company law (22).

As stated therein, there is an urgent need for an organic and systematic review of the regulatory and institutional frameworks in the sphere of capital market regulation and company law "which - as a result of the stratification of primary and derived legislation, listing rules and administrative practices - lead to stricter constraints and higher costs than those required by harmonised European law (so-called “goldplating” cases) and are not supported by adequate justification, representing exceptions when compared at European level".

The report, prepared by the MEF in compliance with the EU better regulation principles, is characterised by several action guidelines: (a) zero impact in terms of costs for the State; (b) simplification, always keeping in mind the protection of minority shareholders and/or creditors; (c) proportionality for SMEs; (d) analysis of best practices developed in other EU Member States (23), taking up, in the latter, the suggestion formulated by Klaus Hopt at the opening of the millennium, namely see looking beyond frontiers/learning from the neighbour's experiences (24) or by Paolo Montalenti when he speaks of spontaneous adaptation of national laws to similar rules and principles (25).

So, the path seems set out and, looking beyond gold plating, an organic legislative intervention can no longer be postponed. It is therefore essential that politics and the Government focus without delay on the most appropriate instruments to ensure the competitiveness of Italian companies on national and international markets.

As Piergaetano Marchetti (2022) pointed out in a recent seminar, “our system must be competitive with European systems: not competitive in the sense of a more permissive system, but also not competitive in the sense of a more onerous, more limiting system” (26).

This article is for information purposes only and is not, and cannot be intended as, a professional opinion on the topics dealt with. For any further information please contact Lukas Plattner.

(*) Report on XXXV Workshop “Adolfo Beria di Argentine” on current civil procedural law issues. Il diritto societario europeo: quo vadis? Courmayeur, 23-24 September 2022, being printed, in Quad. di Giur. comm.

(1) Smart governance of internal market for business (2014).

(2) Enriques e Zorzi, Armonizzazione e arbitraggio normativo nel diritto societario europeo, Riv. soc., 2016, page 775 et seq.

(3) Marchetti, Il crescente ruolo delle autorità di controllo nella disciplina delle società quotate, Riv. soc., 2016, page 33 et seq.

(4) Italian Supreme Court, judgment No. 100 of 27 May 2020.

(5) Small and medium-sized enterprises (SMEs) are the backbone of Europe's economy. They represent 99% of all businesses in the EU. They employ around 100 million people, account for more than half of Europe’s GDP and play a key role in adding value in every sector of the economy (EU Commission, Entrepreneurship and small and medium-sized enterprises (SMEs))

(6) Communication Better regulation: joining forces for better laws (2021); Communication on Identifying and Addressing Barriers to the Single Market (2020). The EU Commission, also with specific reference to SMEs, has not failed to emphasise the difficulty for it to identify and remove national implementing provisions affected by gold plating while recommending that member states to take steps in this regard (see also Communication Identifying and Addressing Single Market Barriers (2021).

(7) Enriques, 2006, 2015, 2016; European Company Law Expert, Ferrarini et al. 2012. It should also be recalled that the negotiations on minimum harmonization directives are often inevitably influenced by the opportunistic behavior of Member States that may be pressured to accept a (minimum) harmonisation level, already knowing that, having failed to persuade other Member States to agree to more stringent standards, they will adopt more stringent requirements domestically or maintain existing ones, Commission Staff Working Document – “Report on more stringent national measures” concerning Directive 2004/109/EC”.

(8) See Reccomendation TESG in Empowering EU Capital Markets- Making listing cool again Final report of the Technical Expert Stakeholder Group (TESG) on SMEs (2021), further references available at ssrn.com/abstract=3858732, 2021 subsequently submitted for consultation under the Listing Act, available at finance.ec.europa.eu/regulation-and-supervision/consultations/finance-2021- listing-act-targeted_en; see also German government proposal of  26 June 2022, Eckpunkte für ein Zukunftsfinanzierungsgesetz available at  www.bundesfinanzministerium.de/Content/DE/Downloads/Finanzmarktpolitik/2022-06-29- eckpunkte zukunftsfinanzierungsgesetz.html; in Francia Rapport sur les droits de vote multiples du Haut Comité Juridique de la Place Financière de Paris, 15 September 2022; in UK see introduction, of the dual class share onto the LSE premium segment (December 2021)

(9) Recommendations 2004/913/EC, 2005/162/EC, supplemented by Recommendation 2009/385/EC, as well as Recommendation 2009/384/EC and Recommendation 2014/208/EU.

(10) Rivellini, Il divieto di gold plating e il problema della sua giustiziabilità in Italia, in Riv. trim. dir. pub., page 815 et seq.

(11) Dipartimento per gli affari giuridici e legislativi Presidenza del Consiglio dei Ministri (DAGL) (2018).

(12) See lastly in relation to Consob governance, contributions by Costi and Vella and of  Plattner and Vismara, Consultazione Libro Verde MEF (2022), available a  https://www.dt.mef.gov.it/it/dipartimento/consultazioni_pubbliche/consultazione_libro_verde.html; see also ESMA, peer review ESMA, 21 July 2022, on balloting and approval of prospectuses.

(13) See Assonime and Confindustria, Osservazioni di Assonime e Confindustria alla consultazione del Ministero dell’economia e delle finanze, Dipartimento del tesoro, sullo schema di decreto legislativo per l’attuazione della direttiva (UE) 2017/828 che modifica la direttiva 2007/36/CE per quanto riguarda l’incoraggiamento dell’impegno a lungo termine degli azionisti (Observations of Assonime and Confindustria to the consultation of the Ministry of Economy and Finance, Department of Treasury, on the draft legislative decree for the implementation of Directive (EU) 2017/828 amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement), 2019, see for further Assonime cases, Risposta a consultazione Consob sul recepimento della direttiva (UE) 2017/82 (Response to Consob Consultation on the Transposition of (EU) Directive 2017/828) (Shareholder Rights Directive) (2019) and Risposta Assonime alla Consultazione UE (Assonime Response to the EU Consultation) “Listing Act: making public capital markets more attractive for EU companies and facilitating access to capital for SMEs” (2022).

(14) Marchetti, op. cit., page [•].

(15) ESMA peer review ESMA, 21 July 2022, on scrutiny and approval of prospectuses by the NCA, where some simplifications are recommended with respect to the operation of the Supervisory Authority where several recommendations are made with respect to the prospectus approval procedure in Italy and to the governance of Consob.

(16) Legislative decree 38/2005, Article 4, paragraph 6.

(17) SICLARI, European capital markets union and national legislation, in BBTC, I, 2016, page 482 et seq.

(18) In some Member States, this process has already been started: see Anti-Gold-Plating-Gesetz of 2019 in Austria (financial information); Projet de loi portant suppression de sur-transpositions de directives européennes en droit français of 2019 (simplification of mergers).

(19) Sciorilli Borrelli, Italy under pressure to boost appeal of Milan stock exchange, 19 September 2022

(20) See post-consultation explanatory report of 1 July 2022.

(21) Some suggested by the OECD in the report Capital Market Review Italy (2020).

(22) As previously pointed out (Marchetti 2016), the prohibition on gold plating can also be extended to the already transposed EU rules and be a reason for reflection in order to expel from the system drifts of overcompliance to which we have succumbed in the past and from which we are constantly at risk of being seduced.

(23) See, for example, Article 45, draft relaunch decree (May 2020), where interesting comparative insights into the extension of multiple voting rights to already listed companies are to be found.

(24) (Hopt, Modern Company Law Problems: A European Perspective Keynote, Company Law Reform in OECD Countries A Comparative Outlook of Current Trends, 2000.

(25) Montalenti, Il diritto societario europeo, in AA.VVV, Il Nuovo Diritto delle Società, Le società, IV, edited by Montalenti, in Trattato Diritto Privato dell'Unione Europea, directed by Ajani and Benacchio, Turin, 2022, page 963 et seq.

(26) Marchetti, Intervento al seminario istituzionale sulla presentazione di liste di candidati da parte dei consigli di amministrazione uscenti delle società quotate (Speech at the institutional seminar on the presentation of lists of candidates by outgoing boards of directors of listed companies), Senate of the Republic, 6th Committee on Finance and Treasury, 16 June 2022.