The revenge of the ‘Russia roulette’ clause

Tuesday 14 May 2024

Daniela Stelé
BLB Studio Legale, Milan


Imported into Italy, France and Europe more generally from the Anglo American legal practice to solve the crisis of governance in 50/50 joint ventures, after a period of slow use the ‘Russian roulette’ clause has taken its revenge through several recent court decisions, which have confirmed its validity under Italian and French law.

According to a recent Boston Consulting Group survey, joint ventures are increasingly relevant for company strategy, especially in times of geopolitical turmoil and economic uncertainty; some say they are even more relevant than traditional merger and acquisition activity,.

In fact, since the end of the Covid-19 pandemic period, a lot of joint ventures have been created in Italy and in France. Some of those cross-border joint ventures, including companies with two shareholders with an equal share participation or voting rights (50/50).

Indeed, the basis for the establishment of a joint venture is a common interest and trust between shareholders. Conflicts about the management of the business may compromise the decision-making process, giving rise to a deadlock or stalemate situation, especially in 50/50 joint ventures. Finally this may lead to the dissolution of the joint venture and the distribution of assets. In order to avoid this catastrophic end, the parties to a joint venture can introduce in the shareholders’ agreement, or in the bylaws of the company, mechanisms that will automatically solve an impasse situation, while maintaining the original relationship among the shareholders (preservation mechanisms), or divorce mechanisms, such as ‘Russian roulette’ or ‘Texas shootout’ provisions.

According to the Russian roulette clause (also known as the ‘Savoy’ clause due the famous US financial case in which it was used), when the trigger event occurs, one of the parties may propose to the other party to purchase its shares at a fixed price and the receiving party may accept to sell at the proposed price, or decide to buy the shares of the offeror at the same price. In the latter case, the offeror is obliged to sell.

Previous rulings

This mechanism has been the subject of various different objections raised before the courts, in particular in connection with the definition of ‘trigger event’ and the determination of the price. Hence, for many years, the Russian roulette clause has been considered non-enforceable for different reasons: (1) the rights and obligations deriving from the application of the Russian roulette clause are null and void because the trigger event is a ‘purely arbitrary’ condition precedent, insofar as the condition depends exclusively on the will of the transferor, (2) the price of the transfer is not determined or not fairly determined, and (3) the Russian roulette mechanism aims to exclude a shareholder from any participation in profits and losses. 

On the other hand, as to the price, according to US and Canadian courts under the Russian roulette mechanism, the price is set in a fair way as: ‘The possibility that a person naming the price can be forced either to buy or to sell, keeps the first mover honest’ (United States Court of Appeals for the Seventh Circuit, Valinote v. Ballis, 295 F.3d 666, 26 June 2002).

Recent rulings

However, recent cases have brought such divorce mechanisms, which are more frequently used in Italian and French joint ventures, back into the spotlight.

In July 2019, the Notary Council of Milan published a written recommendation in which it acknowledged the possibility of introducing a Russian roulette provision in the bylaws of a company. In a recent decision (No. 22375 of 2023), the Italian Supreme Court dealt with, for the first time, the validity of the Russian roulette clause and declared its full enforceability because, in particular: ‘the structure of the Russian roulette clause appears to be consciously conceived in order to avoid one of the parties being subject to the mere arbitrariness of the other party’. Along the same lines, the French Supreme Court (No. 21-25.952/2023) stated that the Russian roulette clause must not be confused with the exclusion of a shareholder clause, although the results are the same, because the objective is substantially different.

Finally, very recently, in a case involving a company created by two Italian celebrities, the Court of Milan adopted an interim measure ordering that 50 per cent of the shares – for which one of the shareholders had received an offer to buy from the other, based on a Russian roulette provision regularly introduced in company bylaws, but the shareholder in question decided to ‘turn over’ the offer and purchase from the offeror at the same price – be assigned to a third-party custodian to prevent their sale to third parties, until the final decision of the court (Court of Milan, 23 February 2024). Indeed, only the final decision on the merits of the case will confirm or reject the validity of the Russian roulette clause, which was indirectly recognised by the judge who adopted the interim measures. In any event, given this recent trend on the part of the Italian courts, there is a good chance that the decision will be positive.