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ITALY: The “change of control” clause in commercial agreements.

The Italian Supreme Court on September 17, 2019, case no. 23092, issued a decision concerning the interpretation of the notion of “change of control” as a ground for earlier termination in favor of the licensor in the framework of a trademark license agreement.

Marco Venturello - 17.09.20

The Supreme Court considered that the condition laid down in the clause had not been fulfilled, namely the Rossi family's loss of control over the company (that is the licensee)'s management body.

This judgment was issued on the basis of the following grounds:

- Marco Rossi had remained Chairman of the Board of Directors of the company, even after the sale of the majority of the shares;

- the majority of the Board of Directors had remained in the hands of the Rossi family;

- the management powers had remained in the hands of the Board of Directors, with the exception of certain powers delegated to the Managing Director, which were limited to ordinary management and within the limits of the budget established by the Board of Directors;

- the direct contacts of the employees, even after the sale of the majority of the shares, had remained Marco and Luca Rossi;

- the possibility for the majority shareholder to call the shareholders' meeting and revoke the Board of Directors had not been concretely implemented and was therefore irrelevant in relation to the verification of the actual loss of control of the Board of Directors by the Rossi family.

The Court therefore ruled out the possibility that the sale of the majority of the shares had actually resulted in the loss of the company's governance, in line with the principle of the separation between ownership and management in companies.

In particular, the Court found that in the framework of the Board of Directors the powers granted to the new Managing Director Mr. Bianchi did not affect the effective control of the administration by the Rossi family, since the delegation of powers to the new Managing Director concerned only ordinary management and was also approved within the budget established by the Board of Directors.

This being the position of the Supreme Court, it is interesting to apply the criteria of interpretation to the “change of control” as a ground of termination with immediate effect contained in the IDI models.

In the supplier and principal friendly models the clause is the following:

(Change of control, ownership and of management). If the Distributor/Agent is a company, this contract may also be terminated by the Supplier/Principal with immediate effect at the occurrence of a material change of the legal structure, of the shareholders or of the management of the Distributor/Agent company, carried out without the prior consent of the Supplier/Principal, and particularly where one of the persons indicated in Annex X ceases to have the position therein indicated or anyway ceases to personally take care of the relationship with the customers.

with the following comment:

when the distributor/agent is a company, the supplier/principal frequently relies on the personal qualities of a particular person (e.g. the majority shareholder of the company or a person specially entrusted with the promotion of the supplier/principal's products). The aim of this clause is to give the supplier/principal the possibility to terminate the contract if this situation changes.

If this IDI clause had been present in the case discussed before the Supreme Court, the right to terminate would have been certain, since the change could have been of the shareholders (this happened in the trademark license agreement discussed in front of the Supreme Court) or of the management. This even if the key members of the Rossi family had remained the same, in particular all those mentioned in the Annex X of the IDI model. Even if there was a change of position since, after the sale of the majority of the shares, the Managing Director became Mr. Bianchi, who is not part of the Rossi family.

In the IDI balanced models the clause is the following:

(Change of control, ownership and of management). If the Distributor/Agent is a company, this contract may also be terminated by the Supplier/Principal with immediate effect at the occurrence of a material change of the legal structure, of the shareholders or of the management of the Distributor/Agent company, carried out without the prior consent of the Supplier/Principal, and particularly where one of the persons indicated in Annex X ceases to have the position therein indicated or anyway ceases to personally take care of the relationship with the customers. The Supplier/Principal shall not unreasonably withhold his authorisation to the above changes, especially if the Distributor/Agent gives adequate warranties that the changes will not affect the Distributor’s/Agent’s ability to carry out his contractual obligations in the most effective way.

and the relevant comment:

when the distributor/agent is a company, the supplier/principal frequently relies on the personal qualities of a particular person (e.g. the majority shareholder of the company or a person specially entrusted with the promotion of the principal's products). The aim of this clause is to give the supplier/principal the possibility to terminate the contract if this situation changes. On the other side, a clause of this type may be very burdensome for the distributor/agent, who will depend upon the principal for changes in the company structure and management. This clause tries to establish a balance by limiting the supplier’s/principal's right to terminate the contract if the distributor/agent warrants that the change will not affect his ability to perform his contractual obligations.

If this clause had been present in the case discussed before the Supreme Court, the right to terminate would have been questionable, since the Rossi family could have given adequate warranties that the change would not have affected the company’s ability to carry out its contractual obligations in the most effective way.

In the agent and distributor friendly IDI models there isn’t the “change of control” clause as a ground for earlier termination.

In the IDI comments above mentioned the rationale of the “change of control” as a ground for earlier termination is identified in the so called intuitu personae, that is in the fact that a company enters into an agreement with another company because of the presence of a particular natural person, in most cases as Majority Shareholder and/or Managing Director of the company. The intuitu personae is the assumption for having a material breach of the agreement in case of “change of control”, which gives right to the earlier termination of the agreement. If this is the case, the reasoning and consequent ruling of the Supreme Court is acceptable.

In the trademark license agreements, like in the agency and distribution agreements, another reason why a “change of control” can be useful is that the licensor does not want that the licensee becomes owned, directly or indirectly, by a competitor. And the fact that the management remains the same has little or no meaning, since the new shareholder for example has the right to check all the books of the company, becoming aware of all its trade secrets. Trade secrets which are shared with, or even worse, belong to the licensor, that is the competitor. On the basis of this second rationale, the argument and consequent decision of the Supreme Court cannot be shared.

 

Marco Venturello, IDI Member

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