Defects in the management report and the potential nullity of the shareholders’ meeting resolution approving the financial statements

With judgment no. 10200 of December 23, 2022, the Court of Milan, specialized section for business matters, confirmed its established case law on defects in the management report, ruling that such defects may result in the nullity of the shareholders’ meeting resolution approving the financial statements only where they are such as to undermine the clarity, truthfulness and fairness of the financial statements themselves.

The alleged breach of the principles of clarity and completeness of the information

The dispute originated from the challenge of the resolution approving the financial statements brought by a shareholder of a joint-stock company (S.p.A.) against the latter. In particular, with reference to some items reported in the company’s management report, the shareholder alleged, inter alia, the breach of the principle of clarity set forth under Article 2423 of the Italian Civil Code and of the completeness of the information required under Article 2428 of the Italian Civil Code.

Having entered an appearance, the defendant company argued that the claimant’s claims were unfounded, noting that the alleged lack of information could not amount to a breach of the principles of clarity and completeness, since the claimant had failed to demonstrate how the alleged shortcomings in the information had prevented an accurate and effective understanding of the company’s financial position, assets and liabilities, nor had it provided evidence of any prejudice arising from the approval of the financial statements.

The confirmation of consolidated case law

In dismissing the claimant’s claims, the Court of Milan clarified that the management report – which serves the function of illustrating the company’s economic and management situation – is not the subject of the shareholders’ meeting resolution, as it is not an integral part of the financial statements. In this regard, as expressly provided under Article 2428 of the Italian Civil Code, the financial statements are “accompanied” by the management report, with the consequence that any defects therein cannot formally amount to defects rendering the shareholders’ meeting resolution approving the financial statements unlawful.

However, case law has developed a possible exception to the aforementioned general rule: the resolution approving the financial statements may be declared null where the informational defects affecting the management report are such as to render “the financial statements themselves not clearly intelligible on such point, or even misleading, as may occur with respect to the information on the company’s financial position that the management report is necessarily required to provide, being financial position which is itself part of the true and fair representation that the financial statements must give pursuant to Article 2423 of the Italian Civil Code; in such case, indeed, such shortcoming would translate into a defect of the financial statements and, therefore, of the subject of the resolution”.

That being said, according to the consolidated case law of the Court of Milan, the nullity of the resolution may be inferred from defects in the management report only where such defects concern information directly linked to data contained in the financial statements and are such as to undermine the clarity, fairness and truthfulness of the corresponding items of the financial statements.

In light of the principles of law set out above, the Court of Milan held that, in the case at hand, the claimant had failed to prove any misleading effect of the management report capable of undermining the fairness and clarity of the financial statement documents and, for this reason, dismissed all the claims brought by the claimant.

The principles of clarity, fairness and truthfulness of the financial statements represent a cornerstone of corporate law, protecting shareholders, creditors and the proper information of the market. The solution adopted by the Court preserves this balance: where defects in the management report reverberate on the items of the financial statements, they compromise their truthfulness and justify the annulment of the resolution; outside such circumstances, imperfections in the management report remain extraneous to the assessment of validity, consistent with the systemic function of corporate disclosure.