Avoiding deadlock in Joint Ventures: the “Russian Roulette" clause in Italy

Did you know that the Italian legal system has been debating on whether the so-called “Russian Roulette” clause is lawful?

The “Russian Roulette" clause (and similar, such as the “Texas shoot-out" clause) has been imported into Italy from the Anglo-American legal system.

The clause aims at resolving deadlock and stalemate situations, especially when a major disagreement between shareholders occurs, but no side holds the majority.

A deadlock situation is risky: it can impede the company’s ordinary business operations if key decisions cannot be taken, and lead to its dissolution and distribution of assets.

On these assumptions, parties often agree on including in the company's by-laws and shareholders' agreements specific mechanisms, such as that provided for in the Russian Roulette clause.

In its simplest scheme, the Russian roulette clause provides that, upon the occurrence of a deadlock situation that cannot otherwise be resolved, one or both of the shareholders is given the power to make an offer to the other shareholder to purchase its shares.

The shareholder receiving the offer may alternatively:

1. accept the offer, and thus sell its own shares at the price indicated by the other party;
2. "turn over" the initiative completely, proposing to become the buyer of the bidding partner's shares, for the price the latter had indicated in its offer.

The clause is commonly used in investment agreements, by-laws, and shareholders’ agreements of equally owned companies.

Notwithstanding, Italian judges have been faced with the many challenges posed by the potential conflicts these kinds of provisions have vis-à-vis the applicable national law and regulations, and general law principles in Italy and in the EU.

Recently, the Italian Supreme Court addressed once again the nature and validity of the Russian Roulette clause with ruling No. 22375/2023, published on July 25, 2023.

The Italian judges addressed the issue of the lawfulness of the clause and confirmed its validity, stating that the rules on merely potestative conditions (Article 1355 Italian Civil Code), determinability of the object of the contract (Article 1349 Italian Civil Code), and fair share price principle (Articles 2437-sexies and 2437-ter Italian Civil Code) do not constitute obstacles to its adoption and enforceability.

The Russian Roulette clause would also not violate Article 2265 of the Italian Civil Code concerning the prohibition of the so-called "leonine" agreement (“Any agreement leading to one or more partners being fully excluded from profit sharing or from participation in losses shall be deemed null and void”).

In fact, on the one hand, the operativity of the clause is not immediate (as it is subject to a deadlock of the management or shareholders), and, on the other hand, such a mechanism of exit procedure may well "backfire" on the same party who first invoked the clause.

Further, such a clause is aimed at modifying the company's share-ownership structure, whereas it does not exclude the participation in profits or losses, which are rights that cannot be compressed by means of a leonine agreeement.

As to the fair share price principle, according to which one could argue that the purchase proposal stemming out from a Russian Roulette clause should provide for a minimum price floor, the Italian judges pointed out that such principle does not apply in this case, as there is no minority shareholder to be protected. In fact, the shareholder receiving the proposal may also become the seller, instead of the purchaser, and therefore it is not in a position of subjection vis-à-vis the one invoking the clause.

Notwithstanding the above, a Russian Roulette clause may still give rise to abuse and therefore its exercise would be subject to the general principles of fairness and good faith.

The Italian judges considered how the North American doctrine and case-law provide for the need for discovery on the part of the shareholder who makes use of the clause so that the other shareholder receiving the deadlock notice and the indication of the price offered has sufficient information to make an informed decision on whether to sell or buy the shares. Furthermore, particular attention should be paid to cases in which there is a strong economic-financial divergence between the parties, to prevent one party from abusing the clause to expel the other partner even when a stalemate is not effective or unilaterally imposed, giving rise to what is called a lack of choice.

Italian scholars argue that the offeree may enjoy compensatory protection for the damages it suffered due to the unfair exit from the company and that the offeree may also prevent the mechanism activated by the other shareholder by means of opposing and paralyzing, even as a precautionary measure, the other's activation of the Russian roulette clause. If the "deadlock" situation was artfully created by the party intending to exercise the buy/sell provision in bad faith, the remedy could also consist in the annulment of the negative resolution or, according to others, in the judicial redetermination of the outcome of the vote up to the ineffectiveness of the deed of share transfer.

The formal and increasing acknowledgement by Italian case-law of the validity of clauses imported from other legal systems more "investor-oriented", paves the way to further progress in aligning the Italian corporate and commercial framework to the best international practices.

Download the full decision by the Italian Supreme Court No. 22375/2023: Link

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The information provided in this article is for general informational purposes only and does not, and is not intended to, constitute legal advice.