What happened was this. The City of Milan set up AEM SpA, a limited company, to distribute gas and electricity. When it was first listed on the stock exchange in 1998, the City of Milan held 51% of its capital. As privatization continued, the City reduced its shareholding to 33.4%. Against that background, the right for the City directly to appoint up to one quarter of the directors was inserted in AEM’s articles of association. In addition, the articles confer on it the right to participate in the election on the basis of lists of the directors not directly appointed by it. The consequence was that the City was able to retain an absolute majority of appointments to AEM’s board of directors, even though it holds, subsequent to the transfer of shares, only a relative majority of its capital. That privileged position was based on Article 2449 of the Italian Civil Code that provides that the articles of association of a limited company may confer on a public shareholder the right directly to appoint one or more directors.
Associations of consumers and small shareholders challenged that privileged position in the Italian courts because they considered it discourages potential investors from purchasing shares in AEM and thus reduces the value of their holdings in the corporation. The Italian court seised of the matter then referred the question to the Court of Justice whether the provisions of Article 2449 of the Civil Code amounted to a restriction on the free movement of capital, prohibited by Article 56 EC.
The Court of Justice upheld the claim of the associations of consumers and small shareholders and found that Article 56 EC precluded a provision such as Article 2449 of the Civil Code.
The Court recalled that Article 56 §1 EC lays down a general prohibition on restrictions on movements of capital between member States (see, Case C-112/05 Commission v. Germany, paragraph 17 which we noted here).
It held that by giving public shareholders an instrument to restrict the possibility of the other shareholders participating effectively in the management of the company, the Italian legislation is liable to deter direct investors from other member States. The fact that that measure is included in the provisions of the Civil Code and the right of appointment requires a decision of the general meeting of the shareholders does not take away the restrictive character of the Italian legislation.