Startups and Company Law: The Competitive Pressure of Delaware on Italy (and Europe?)
Our paper on startups shows that European company law is still anchored to last century ideas about growth and economic development. We hope that the Italian experience and our proposals can be of interest to any European country which wants to change company law to make it more amicable to startups.
During the last decades of the XIX century, with the rise of stock markets, many financial scams plagued European countries. In reaction to abuses, the German legislator, among other reforms, ‘invented’ in 1892 the GmbH. This corporate form was designed for small and medium firms, which were prevented from accessing outside market investors and capital markets. The United Kingdom, instead, intervened on disclosure regulation. The European dichotomy between the one-law and the two-law company models was born.
After the fundamental 1999 Centros decision by the ECJ and its progeny, the fear of intra-European competition for charters pushed Member States around Continental Europe to overhaul the law of private companies. In particular, the efforts concentrated on the facilitation of the formation of new enterprises, relaxation of rules on legal capital and the introduction of new types or subtypes of close corporations. Although all Member States have made significant efforts for the promotion of entrepreneurship and competitiveness, a specific approach addressing the problems and needs of startups was missing. The GmbH/Société à responsabilité limitée/Società a responsabilità limitata (SRL) was not directed to capture initiatives today vehicled by startups, which in the US inspiring experience are rapid-growth corporations with outside market investors and an IPO (or a trade sale) as final outcome. According to the European tradition, the public company should be the appropriate form for startups. However, the European public company can be very expensive and less open to contractual freedom with regard to management and internal corporate governance. Company law in many European countries does not offer an appropriate space for startups.
After the 2007-2008 financial crisis, Italy needed to reignite economic growth. In the meantime, Italian startuppers who had worked, come into contact or simply heard of the Silicon Valley model were pushing for the adoption of a vehicle similar to the Delaware corporation. Constrained by, on the one hand, European rules on capital concerning public companies and self-imposed strict rules on statutory auditors and management and, on the other hand, the GmbH tradition of a private company that cannot access public markets nor, in the Italian construction, have outside equity investors but only partner-like quotaholders, the Italian lawmaker, in a curious and totally unexpected turn of events, decided to break with tradition. With a row of reforms that took place from 2012 to 2017, Italy morphed the SRL into a semi-liberal creature that should offer Italian startuppers an instrument to finance their business through venture capital, and allow access to crowdfunding and capital markets. As a result, the SRL can now offer its quotas to the public and issue different classes of quotas, mimicking the different stock classes of venture capital financing. At the same time, the private company maintains some form of flexibility as to management and corporate governance organization.
We show in our paper that this reshaping of the Italian private company has been the product of competitive pressure from US company law, and not of intra-European competition for charters. More specifically, this result has been generated by the forces of economic logic and example, but also and totally unexpectedly by the force of direct Italy/US competition for charters, which is clearly visible with regard to Italian teams that have migrated to the US or to Italian teams that have adopted the ‘dual company’ scheme, which in startuppers’ parlance defines teams that establish a US corporation (usually in Delaware) for accessing venture capital funding and simultaneously maintain an entity in their home jurisdiction with laboratories, research and other operational infrastructures. We have identified a small number of high-profile Italian ‘dual companies’, which highlights that Italian teams consider both the US and the Italian legal environment when they think about the company formation and access to capital. We have also identified, among Italian SRLs with US quotaholders, many companies that are financed by early stage US VCs. Moreover, we have collected the charters of other Italian startups which are known for being financed by outside investors and have found, as expected, many of the essential features of US VC financing, even though adapted to the persistent constraints of Italian company law. The articles of incorporation of the companies we have selected and analyzed confirm how the SRL model has been moulded by competitive pressure from the US and Delaware in particular.
In our paper we also show how doctrinal discourses tend somehow to limit the impact of the 2012-2017 reforms by deriving implicit limits to the possibility of using the new-SRL as a true enabling corporate form. Those limits are drawn from what remains of the original law of the SRL, from the limits and barriers contained in the law of the public company through reasoning by analogy, and by potential limits that are drawn from the general principles of company law. The interpretation of the new provisions appears still to be subject to the widespread enthusiasm of Italian jurists for the construction of mandatory, paternalistic provisions through doctrinal legal analysis. Accordingly we propose a rule of construction stating that if a provision is not explicitly identified as mandatory, it has to be treated as a default one, allowing the contracting parties to amend it as they wish. This construction rule would be basically the opposite of the famous principle of Satzungsstrenge (‘statute stringency’: § 23(5) Aktiengesetz) governing the German law of public companies. This intervention would complete the reform and change forever the Italian SRL, making it an enabling instrument for early stage VC deals.
To conclude, our paper shows that European company law is still anchored to last century ideas about growth and economic development. We hope that the Italian experience and our proposals can be of interest to any European country which wants to change company law to make it more amicable to startups.
Paolo Giudici is Professor of Business Law at the Free University of Bolzano-Bozen.
Peter Agstner is Assistant-Professor at the Free University of Bolzano-Bozen.
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