The battle between Malacalza and the European Central Bank

Publishing date: July 25, 2024

Author: Simay Cilingir

Shareholders’ Rights vs Supervisory Authority

In the case T-134/21, Malacalza Investimenti Srl and Vittorio Malacalza (the “Applicants”), shareholders of the Italian bank, Banca Carige, brought a case before the General Court of the European Union (the “Court”), seeking compensation for unlawful conduct of the European Central Bank (“ECB”) in exercise of its supervisory functions of Banca Carige. The Applicants claimed that the Court should order the European Union (“EU”) to pay them a sum of circa EUR 880,000,000 for the harm they suffered as a result of the actions taken by the ECB.

Under Article 340 of the Treaty of Functioning of the European Union (the “TFEU”), the EU is to make good of any damage caused by its institutions in cases of non-contractual liability since it is subject to review of the conformity of their acts. Moreover, under the third paragraph of this article[1], it is the ECB that must make good of any damages that an individual may have suffered from its conduct.

Facts of the case

Banca Carige is an Italian credit institution listed on the stock exchange and has been subject to supervision by the ECB since 2014. Between 2015 and 2019, the ECB adopted a series of supervisory actions.

The Applicants are shareholders of the bank, where Malacalza Investimenti, an investment company and Mr. Malacalza held a considerable amount of the bank’s capital. Mr. Malacalza was also a member and vice president of the bank’s board of directors between 2016 and 2018.

In 2015, the ECB noted that the bank did not fulfil its own fund requirements and therefore, stepped in to adopt an early intervention measure. In 2019, the bank was placed under temporary administration until a new board was elected in 2020. Since the Applicants held considerable shares in Banca Carige, they viewed that the actions taken by the ECB were detrimental to their rights and interests as shareholders of the bank.

In the Applicants’ view, the decisions taken by the ECB were against their duties associated with their supervisory functions and claimed that the EU incurred non-contractual liability on the basis of eight instances of unlawful conduct which will be explained below.

Findings of the Court

The Court noted that for the EU to incur non-contractual liability, applicants must first cumulatively satisfy the following three conditions:

1. Unlawfulness of the conduct attributable to the institution confers rights on individuals;

2. the fact of the damage; and

3. the existence of a causal link between the alleged conduct and the damage complained of.

The Court confirmed that it was satisfied with the first part of the conditions since the alleged conduct involved a rule of law intended to confer rights on individuals and undertakings and the breach alleged against the institution were sufficiently serious. For the remainder, the Applicants had to show that the ECB seriously and manifestly disregarded, beyond the discretion given to it, a rule of law which conferred rights on them. Thus, the Court proceeded to examine the eight instances of alleged unlawful conduct raised by the Applicants.

In the first instance, the Applicants contended that the ECB infringed Italian law by failing to intervene to correct misleading statements made by the bank’s directors concerning its soundness. The Court referred to Council Regulation No 1024/ 2013 (the “Regulation”), pertaining to the ECB’s policies on the supervision of credit institutions, and stated that the ECB has an obligation to publish information to ensure proper functioning of the markets and that, there is no obligation on the ECB to respond to statements made by stakeholders of institutions. Thus, the argument was rejected.

Under the second instance, the Applicants argued that the ECB violated Articles 4 and 16 of the Regulation[2] in relation to Banca Carige’s board of directors by limiting their powers and placing the bank under temporary administration. The Court rejected this argument, stating that these provisions enable the ECB to structure the operation of the banking in the public interest and do not impose any rights on individuals, thereby invalidating the basis for a claim of unlawful conduct.

On third ground, the Applicants alleged that the ECB infringed Italian law by approving a capital increase without adhering to the pre-emption rights granted to shareholders through the bank’s statutes. In terms of the consolidated law on banking in Italy, which also applies to the ECB by virtue of Article 9 of the Regulation[3], the supervisory authority is to ensure that recommended amendments to the statutes of credit institutions are compatible with constraints arising from prudent management.[4] The Court concluded that this did not relate to the proposed amendments to the shareholders’ pre-emption rights, but rather to ensuring that the amendment was sound and prudent. Therefore, the relevant Italian law did not confer any rights on individuals, and this ground was also dismissed.

The fourth argument put forward by the Applicants was also rejected by the Court. They alleged that the ECB significantly violated Italian law with the appointment of temporary administrators who had a conflict of interest, making it difficult for the Applicants, as shareholders, to bring a company action against the administrative bodies. The Court examined that when the ECB appoints temporary administrators, they should be free from conflicts of interest to perform their duties accordingly. Therefore, this principle did in fact confer a subjective right on individuals, and if breached, it could cause harm in a sufficiently serious manner. However, the Court found that the ECB exercised its discretion reasonably in appointing temporary administrators who were well acquainted with the bank’s affairs. Moreover, it was noted that once a temporary administration is lifted, shareholders can bring an action for damages against the members of the administrative bodies for up to five years after those members have ceased to hold office. Thus, the Court determined that there was no sufficiently serious breach by the ECB.

In the fifth instance of the alleged unlawful conduct, the Applicants claimed that the ECB committed a sufficiently serious breach regarding its adoption of the early intervention measure (the “Measure”) and raised six complaints. They argued that the Measure breached shareholder rights, however, the Court confirmed that the ECB used its powers to protect public interest. Additionally, the Applicants alleged that the ECB’s Measures were more stringent than those imposed on other credit institutions in similar circumstances thereby breaching the principle of equal treatment. The Court stated that an applicant must precisely identify comparable situations which led to the rejection of this argument. The Applicants also alleged a breach of the principle of proportionality noting that the Measure caused a write-down of the bank’s loan, resulting in significant losses. The Court reiterated that the “ECB enjoys a broad discretion” in exercising its supervisory tasks and given the Banca Carige’s serious deterioration between 2013-2016, the ECB’s Measure was appropriate, and the argument was also dismissed.

The Applicants further contended that the bank was given a short period to meet its own funding requirements. However, based on the Court’s analysis of the principle of proportionality, it was concluded that the ECB assessed this matter appropriately.

Under the seventh instance, the Applicants argued that the ECB breached the principle of the protection of legitimate expectations by providing assurances to the shareholders regarding the situation of the bank. The Court spurned this argument, stating that the Applicants had not provided any evidence to support the alleged assurances from the ECB, rendering this claim, inadmissible.

The final allegation concerned the breach of the shareholders’ right to property. The Applicants claimed that the value of their shares fell following the ECB’s measures.  However, they failed to establish that that the ECB’s actions directly or indirectly caused this outcome, leading to the rejection of this argument.

Conclusion

The Court concluded that none of the instances of unlawful conduct alleged by the Applicants against ECB for its supervision of Banca Carige gave rise to non-contractual liability within the meaning of Article 340 TFEU. This case reaffirms the ECB’s role in its prudential supervision of credit institutions under the Regulation in order to safeguard public interest and the financial industry within the EU.

[1] The third paragraph of Article 340 TFEU states: “Notwithstanding the second paragraph, the European Central Bank shall, in accordance with the general principles common to the laws of the Member States, make good any damage caused by it or by its servants in the performance of their duties”.

[2] Article 4 sets out the tasks conferred onto the ECB while Article 16 sets out its supervisory powers.

[3] This article states that the ECB is the designated authority in the Member States to carry out its tasks conferred on it in this Regulation.

[4] Referring to Article 56 of the Consolidated Law on Baking.

Disclaimer: Ganado Advocates is responsible for contributing this law report but was not in any way involved as legal advisor for the parties in the judgement being covered in this law report.

This article was first published in ‘The Malta Independent’ on 24/07/2024.