This type of clause comes into play when in the events of the company, is the case for example of the italian compani (S.r.l.) in which the participations are held to 50% from two associates, we find ourselves in situations of decisional stall (so-called deadlock). In such cases, in the disagreement of the parties, the effect would be to effectively paralyse society to the point of dissolution.
At the international level it, is frequent then the use to insert in the statute the so-called “russian roulette clause“, typical of the systems of common law, on whose legitimacy the Notary Council of Milan has recently pronounced with the maximum n. 181 of 2019.
Normally we find the aforementioned clauses in the shareholders agreements (italian parasocial pacts), or in the equity joint venture agreements, where the contractual text incorporates the rules that the venturers have given themselves to manage the common society they have created.
The russian roulette clause previews that, in case of stalemate, one of the associates (or both) can decide the transfer of the respective participation, forcing the other partner to the choice between two alternatives:
1) agree to purchase the shareholder’s share at the price indicated by him;
2) sell its shareholding to the shareholder at the same price, with the consequence that one of the two partners becomes the owner of 100% of the shares.
In this way, who activates the Russian roulette determines the price and are not allowed raises. Unilateral pricing is balanced and causally balanced by the risk of losing social participation. The final choice, in fact, belongs to the partner who has not determined the price.
The option expressed in the clause may:
1) be assigned by the statutes to one or more members, subject, where appropriate, to certain conditions;
2) be attributed by the instrument of incorporation to one or more members as “particular right” provided for in article 2468, paragraph 3, of civil code;
3) connotation of a specific category of shares provided for in the statutes pursuant to article 2348 of civil code.
There are several variants of the russian roulette clause: for example the case of the shareholder holder of a minority share, in the event that the company is not listed on the stock exchange within a specified period, or, provision may be made for the members, by activating this clause, to initiate an escalation of increased offers and counter-offers for the purchase of their holdings, until one of the partners refrains from making further counter-offers and, in so doing, undergoes the purchase of another.
Legality of the clause
The Court of Rome had expressed the legitimacy of this clause in its judgment of 19 October 2017, n. 19708, stating its validity in different respects for the purposes and for the effects referred to in article 1322, paragraph 2 of civil code, as it allows to put an end to risky situations of blocking of the activity of the decision-making body of the company.
Subsequently, the Notarial Council of Milan, with the recent maxim n. 181, confirmed the legitimacy of this clause, adding an interesting element of clarification in this regard. The Council has, in fact, considered that the express faculty of the clause can be validly exercised only where the price established by the partner who activates the clause is compatible with the principle of “fair valorization” of the participation.
In essence, the value of the participation indicated by the partner using the russian roulette clause cannot be lower than that which would be attributed to it in the case of exercise of the right of withdrawal from the company, in analogy with what has already been expressed with regard to the clauses of “drag along“, or in the norms in matter of legal withdrawal (articles 2437-ter and 2473 of civil code), as in those of conventional redemption (article 2437-sexies of civil code) and exclusion (article 2473-bis of civil code) in so far as it departs from the principle expressed by the judges of merit in that judgment.
The court’s denial of the possibility to apply the above-mentioned principle of fair value in the same way as the share buy-back (c.d. drag along clause) arises from the consideration that the clauses are different in function, mechanism and structure. Who accepts, in the presence of a Russian roulette clause, to be exposed to the other’s valorization of the social assets with possible and consequent expropriation of its share is at the same time invested with the alternative power to buy at the same price at which it could have sold. This latter “protection”, if it can be defined as such, is absent for whom – as in cases of share redemption ex art. 2437 sexies c.c. – is merely subject to the right of the other person to be entitled to a redemption.
Therefore, the member subject to a russian roulette clause has the right to choose whether to sell or buy, while the member subject to a“share redemption clause” suffers indistinctly from the choice of others to redeem, This means that if the law provides for mandatory protection in the form of a minimum threshold for redemption, the same mechanism cannot be analogously adapted also to the tied partner from a russian roulette clause.
In the light of the above, those who intend to avail themselves of the exit mechanism provided by the russian roulette clause, will have to place particular attention in determining the value to attribute to the participation, in order to prevent the consequent sale from being subject to disputes and appeals by other shareholders or third parties that are of interest to them.
In addition, on the one hand, it would allow the shareholder who has an interest in the company’s business plan to make a purchase proposal to the other and, on the other hand, the other partner would be able to leave the company or, if he were to consider it more convenient, proceed in its turn to the purchase of the participation of the original bidder to the sum established by the latter.