Russian roulette and Texas shoot-out clauses: interpretive profiles

by Roberta Incorvaia, Filippo Grigolon

With order No. 2026 of April 18, 2024, the Court of Milan, section specialized in corporate matters, ruled on an appeal against a judicial seizure order, under Article 670, par. 1 of the Italian Code of Civil Procedure, regarding part of the quotas of an entertainment company, issued by the Judge of First Instance inaudita altera parte by order of February 23, 2024. By this order, the Court of First Instance ruled, in particular, on the interpretative criteria for ambiguous and/or hybrid Russian roulette and Texas shoot-out clauses, pointing out that, in addition to the literal criterion, the functional criterion shall also be applied, since it enhances the actual purpose pursued by the parties with by providing the contractual clause.

The case

Luisolve S.r.l., a sole quota holder limited liability company (“Luisolve”), and ZDF S.r.l., a limited liability company (“ZDF”), each held 50% of the quota capital of Muschio Selvaggio S.r.l. (the “Company”), a limited liability company operating in podcast’s production and managed by two directors, each representing a quota holder. The Company’s bylaws provided for a so-called “anti-deadlock” clause, which could be activated by any quota holder in case the Board of Directors was unable to adopt a resolution for at least six months, not for objective reasons but due to persistent disagreement between quota holders or directors (i.e. “trigger event”).

Upon the occurrence of the aforesaid trigger event, any quota holder could have triggered the following particular quota purchase mechanism: the proposing quota holder would have offered a price to purchase the quota of the other quota holder, who could have accepted, requested a best offer or refused, with the obligation to purchase the quota of the proposing quota holder at the same price offered for the purchase of its quota.

The non-acceptance of the offer within the following 30 days after its submission would have resulted in its implicit rejection. In the given case, ZDF, deadlock occurred, made an offer to Luisolve to purchase its quota of the Company at a purchase price of Euro 250,000. The receiver rejected it and moreover undertook to purchase the offeror’s quota at the same price as the offer received. ZDF, on the other hand, refused to sell its quota of the Company and made an offer to Luisolve for the improved price of Euro 350,000.

The receiver, however, rejected the offer, asserting its presumptive right to purchase the offeror’s quota at the same price offered to him. ZDF, on the other hand, refused to sell its quota, arguing that the clause had been misinterpreted and that he was not obliged to sell its quota.

Luisolve, therefore, brought an action before the Court of Milan, requesting and obtaining the judicial seizure of ZDF’s quota of the Company.

ZDF, then, appealed against the seizure order.

The judgment

With order No. 2026 of April 18, 2024, the Court of Milan, section specialized in corporate matters, validated the case law (on this point, see Italian Supreme Court No. 22375/2023) according to which the concrete cause of such clauses aims at resolving a deadlock that has arisen within the corporate bodies of the company, responding to a public interest of safeguarding the continuity of a company against the risks of inactivity (and, ultimately, against the risk of its dissolution pursuant to Article 2484, No. 2, of the Italian Civil Code) arising from such deadlock.

The Court then emphasized that, based on a purely literal interpretation, it could not be concluded that the anti-deadlock clause at issue belonged solely to the Russian roulette subtype nor solely to the Texas shoot-out subtype, since it was constructed as a combination of the two subtypes mentioned above (composite nature), omitting both the pure accept/reject mechanism typical of Russian roulette and the pure accept/reject mechanism typical of Texas shoot-out, and providing for both in an alternative manner.

Therefore, the Court pointed out that, in addition to the criterion of literal interpretation (and not subordinated to it), the functional criterion must also be applied, which is described as the primary criterion for the subjective interpretation of the contract, taking into account the aim pursued by the parties in concluding the contract and therefore its concrete cause (on this point, see Italian Supreme Court No. 22343/14, which confirmed that the general principle of the preservation of the contract under Art. 1367 of the Civil Code also applies to bylaws’ clauses).

In case of hybrid clauses, it is also necessary to recall the case law that, on the interpretation of mixed-purpose contracts, deems that the existence of several elements of one type (which must therefore be considered predominant) does not render those of the alternative contract completely inapplicable, if there is no obvious incompatibility (on this point, see Italian Supreme Court No. 22828/2012).

Given the foregoing, the Court rejected ZDF’s claim, considering that the combined application of the literal and functional interpretation criteria leads to the unequivocal conclusion that both the acceptance and the rejection of the proposal to acquire the quotas produce a translative effect, thus fulfilling the specific purpose of the anti-deadlock clause, namely, to overcome the deadlock by eliminating the situation of parity between the quota holders. On the other hand, allowing the first offeror to increase its offer following the offeree’s rejection would render the entire clause redundant, since it would allow the first offeror not to sell its quota despite of repeated rejection by the offeree, thus extending the deadlock without resolving it.