The Participating Financial Instruments: Regulatory Framework And Field Of Application

Although more than 15 years have passed since the first introduction, in our legal system, of an important hybrid financing figure for the capital companies, the Participating Financial Instruments (PFI) only recently have aroused strong interest.

An examination of these instruments, which find their main discipline in title V of book V of the Italian civil code, is then appropriate because it offers – both from a civil and tax point of view – several insights.

The merit of the introduction of these tools is due to Legislative Decree no. 6/2003, which, in order to increase the statutory autonomy of the companies, for the first time allowed the creation and the issue, by the capital companies, of financial instruments characterized by more or less broad contents of equity and debt.

Particularly, from the point of view of the investment made by the lender, the PFI can be issued following the contribution of:

–    “pure” loans, i.e. contributions of money or other assets, with a repayment obligation;

–     atypical contributions (of works or services) that are not returnable nor can be registered in the assets of the financed company;

–     equity contributions, i.e. contributions of money or assets, which can be returned on the condition that the company has not recorded losses.

Through the issue of participating financial instruments, it is therefore possible, to make work or services contribution, the conferment of which is, however, prohibited, for the SpA, where paid with the issue of shares.

The only limit imposed by the legislator is that the contribution connected to the PFI’s issue must have economic content and not simply moral or emotional value.

With reference to the remuneration, the PFI are provided with property rights or even administrative rights, excluding, however, the right to vote in the shareholder’s general meeting.

The determination of the capital remuneration is released from the need to identify specific boundaries.

As an example, it may be recognized to the subscriber:

–    the right to participate in the budget profits;

–     the right to remuneration deriving from a particular production sector or from a specific business;

–    the right to refund the capital upon the occurrence of particular events;

–    the rights to the attribution of interests;

–    any other form of remuneration, even if random, for the contribution made to the company.

With regard to the administrative rights, the Articles of Association, pursuant to article 2351, paragraph 5, of the Italian civil code, can equip these financial instruments:

–    the right to vote on specifically indicated subjects;

–    the right to appoint an independent member of the administrative or supervisory board or an auditor;

–    other administrative rights.

It is therefore quite clear that, from a civil standpoint, the relationship between the issuing company and the subscriber is different in nature from the bond between the company and the shareholding structure.

In fact, with the subscription of these instruments, the participation in the share capital is anyway excluded, the owner does not assume the status of shareholder and in the event that the subscriber has a participation in the issuing company, this does not increase. In addition, the Participating Financial Instruments can be issued following  both typical and atypical contributions.

In the coming weeks, we will analyze the application of these tools to the innovative start-ups and their tax treatment.

Author: Avv. Iacopo Bissi

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Contributing Advisors