Pirelli & C.

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Explanatory report drafted by the Directors

Pursuant to art. 72, first sub-section, CONSOB Regulation no. 11971 dated 14 May 1999 and subsequent modifications and supplements.

Modification of articles 5 (Share capital), 7 (Shareholders’ meetings) and 16 (Board of Statutory Auditors) of the company bylaws; numbering of the articles of the company bylaws in individual sub-sections.

1. The reasons for proposing modifications to the Company bylaws.

Shareholders,

We have called this extraordinary meeting to submit for your approval a number of modifications to the Company bylaws.

First of all, I should like to remind you that Legislative Decree no. 27 dated 27 January 2010 containing the “Implementation of directive 2007/36/EC on the exercise of certain shareholders’ rights in listed companies” was recently approved. The new provisions will be applicable to the shareholders’ meetings of listed companies called subsequent to 31 October 2010.

To such purpose, on this occasion, bearing in mind that the regulations implementing a number of the provisions contained in the aforementioned decree are still being drafted by CONSOB, we would like to propose solely the modification of sub-section 4 of article 7 of the company bylaws in the part where the faculty to call the shareholders’ meeting to approve the financial statements - pursuant to article 2364 of the Italian Civil Code - within 180 days of the end of the financial year is not provided for. It should be noted, in relation to this, that Legislative Decree 27/2010, in response to requests from various parties, modifies article 154-ter of the CFL, and again permits the meetings of shareholders of listed companies to approve the financial statements to be called within 180 days of the end of the financial year. It should be recalled that article 2364 of the Italian Civil Code was no longer applicable to listed companies after the introduction of article 154-ter of the Consolidated Finance Law (CFL) by legislative decree no. 195/2007, which required these companies to have their statutory and consolidated financial statements approved within 120 days of the end of their financial year.

The proposed modification will once again allow the Company to avail itself of the faculty provided for by article 2364 of the civil code should it so require.

The Board of Directors reserves the right, when the regulatory framework is complete, to subsequently proceed with evaluation of any further modifications to the company bylaws dependent on the provisions of the decree.

We would also like to propose the reduction of the percentage threshold (from 2% to 1.5%) of the share capital required by the Company bylaws for the presentation of slates for renewal of the Board of Statutory Auditors, in order to further facilitate the presentation of slates by “minorities”.

We would then propose that sub-sections 5, 6 and 7 of article 5 (Share Capital) be suppressed, since the powers granted to the directors to proceed with capital increases and issue convertible bonds provided for by said article 5 have reached their expiry date.

Lastly, there is a proposal to number the individual sub-sections composing the articles of the Company bylaws so as to have a simpler, more immediate method of referring to (and referencing) the single provisions contained in the Company bylaws.

The paragraphs below illustrate in detail the effect of the modifications indicated above on the individual articles of the Company bylaws.

Article 5 (Share capital)

The purpose of the proposed modifications to article 5 is to delete, due to expiry:

  • sub-section 5, concerning the power granted to the directors to increase the share capital against payment, in one or more operations, by a maximum nominal total of 600 million euros, since the last period within which this power could be exercised expired on 10 May 2009;
  • sub-section 6, concerning the power granted to directors to issue bonds convertible to both ordinary shares and savings shares, or warrants valid for subscribing said shares, in one or more operations, to a maximum nominal amount of 1 billion euros, within the limits set by the regulations applicable at the time, with a consequent increase in the capital available for the conversion of bonds and/or the exercising of warrants, the latest term for exercising such power having expired on 10 May 2009;
  • as well as sub-section 7, in as much as related to the powers specified in sub-sections 5 and 6, and which establishes the minimum and optional content of any resolutions for capital increases and for the issue of convertible bonds passed by the Board of Directors in the exercise of said powers.

Article 7 (Shareholders’ Meeting)

As indicated above, the only modification proposed to article 7, sub-section 4 relates to the introduction in the bylaws of the provision by virtue of which the Company may avail itself of the right granted by article 2364 of the Italian Civil Code which allows companies (including listed companies) that are drawing up their consolidated financial statements, or where there are special circumstances, to call the shareholders’ meeting within 180 days since the end of the financial year, as opposed to the current 120 days provided for by the company bylaws.

Article 16 (Board of Statutory Auditors)

As regards the modification to the regulations applying to the renewal of the Board of Statutory Auditors, the proposal is to establish that a shareholder alone or together with shareholders, representing at least 1.5% of the shares with voting rights in the ordinary shareholders’ meeting, may present a slate, or the lesser percentage required by the regulations issued by the National Commission for Companies and the Stock Exchange (CONSOB). In their current version, the Company bylaws require a threshold of 2% of shares with voting rights in the ordinary shareholders’ meeting, or the lesser percentage required by the regulations issued by the National Commission for Companies and the Stock Exchange (CONSOB), set at 2% for the financial year 2010 (see CONSOB Resolution no. 17148 dated 27 January 2010).

Numbering in individual sub-sections of all the articles of the Company bylaws.

The proposal, as stated, is to number the individual sub-sections that make up the articles of the Company bylaws.

2. Comparative view of the articles of the Company bylaws proposed for modification.

The current wording of the articles of the Company bylaws proposed for modification is compared with the wording submitted for your approval in the proposed resolution below.

3. Evaluation by the Board of Directors of the right to withdrawal.

The Board of Directors does not deem that the modifications to the company bylaws described above entitle shareholders to the right to withdraw pursuant to article 2437 of the Italian Civil Code.

4. Resolution proposal

On the basis of the above, the Board of Directors submits for your approval the following proposed resolutions:

“The extraordinary meeting of the Shareholders of Pirelli & C. S.p.A.,

  • having examined the Directors’ Report illustrating the proposed modifications to articles 5 (Share Capital), 7 (Shareholders’ meetings) and 16 (Board of Statutory Auditors) of the Company bylaws and to the numbering of the individual sub-sections of the articles of the company bylaws.