Enforcing Rules on Related Party Transactions in Italy: One Securities Regulator’s Challenge
Marcello Bianchi, Luca Enriques, Mateja Milič
While policymakers across the EU are considering how to implement the EU related party transactions (RPTs) regime contained in the Amended Shareholder Rights Directive, this paper analyses the Italian securities regulator’s experience in policing tunnelling after it introduced a new regulation on RPTs in 2010.
A number of high-profile corporate scandals and the inefficiency of the Italian framework in fighting dominant shareholders’ tendency to extract value to the detriment of minority shareholders prompted Italian policymakers to tackle RPTs by issuing a much more stringent set of rules than the previously existing one. Consob was entrusted with the task of both issuing the new rules and of enforcing them. Rising to the challenge, Consob designed a strict but flexible regulatory framework, based on mandatory transparency requirements and highly adaptable internal procedures. The key tool to prevent abusive RPTs was via an independent directors’ veto over material (large) RPTs.
This solution proved soon to be highly dependent on the regulator’s pro-active stance in enforcing the regime initiative.
In two case studies, the paper shows how, through timely actions and prompt use of formal and informal powers, the regulator was able to encourage companies to adopt better practices and improve RPT terms.
Yet, the story told in the paper has no happy ending: after a few years of zealous enforcement, Consob has become less aggressive in its fight against tunnelling. Based on the view that a widespread attitude of stigmatising tunneling has failed to materialize in Italy in the same period, the paper concludes that Consob’s retreat leaves room for more misbehaviour rather than signalling that aggressive enforcement of RPT rules on Consob’s part is no longer needed.