A Comparative Analysis of Shareholder Protections in Italy and the United States: Parmalat as a Case Study

Segato, Lorenzo | January 1, 2006

The goal of this article is to compare the protections offered to minority shareholders by the Italian system of corporate law with those offered by the U.S. legal system of corporate and securities law in order to determine if Parmalat’s minority shareholders would have been better off had Parmalat been an American company listed in the U.S. financial market. This analysis will reveal several weaknesses in Italian corporate and securities laws, thereby providing a basis for suggestions on how to improve minority shareholders’ rights in Italy based on the U.S. experience. Section II of this paper provides an overview of the structure of the Parmalat group, which was dominated by a strong, active majority shareholder and then discusses why Parmalat collapsed. It also describes the financial frauds that dragged the company into bankruptcy, again underlining the determinant role of the controlling shareholder and management. It further delineates the corporate monitoring structure and analyzes whether Parmalat complied, at least formally, with the recommended standards of corporate governance in Italy. Finally, this section outlines the legal remedies used by the Italian minority shareholders to attempt to obtain compensation for the harms they suffered because of this collapse. After a quick review of the legal sources of Italian corporate law, section III of the paper offers an overview of the main innovations introduced into Italian corporate law by the 2003 Reform movement. The innovations changed the structure of corporate governance of Italian stock companies and gave shareholders the opportunity to choose among three different systems of corporate governance. The innovations also created the mandatory requirement of an external auditor or auditing firm for each affected company. Section III next discusses the methods offered by Italian corporate law to protect listed companies’ minority shareholders. It concludes by discussing the role of the Commissione Nazionale per le Societa e la Borsa (“CONSOB” or the Italian SEC) in protecting investors and monitoring the transparency and efficiency of the financial markets. Section IV gives a similar overview of the protection of listed companies’ minority shareholders in U.S. corporate law. It further explains the role of the Securities and Exchange Commission (“SEC”) in financial markets, focusing on the SEC’s investigatory and enforcement powers. Section V addresses the question of how the U.S. system would have protected the Parmalat minority shareholders had Parmalat been a U.S. listed company. It finds that a Rule 1Ob-5 action would be an available remedy for U.S. minority shareholders against perpetrators of fraud, including the company. It analyzes the effectiveness of a private securities fraud class action and its relation to SEC enforcement actions. It concludes by suggesting that the Italian legal system, in light of what happened in the Parmalat case, should introduce a private securities fraud class action similar to the U.S. Rule lOb-5 action. It also suggests that the creation of such a class action should be accompanied by a significant increase in the powers of the CONSOB, specifically the power to enforce Italian securities law, in order to guarantee an adequate recovery of damages for injured shareholders and investors.