No Private Ordering Please, We’re Italian!

Venture capital contracting is the function of a complex private ordering exercise through which venture capitalists and entrepreneurs address the challenges of financing high-tech firms (Kaplan & Strömberg, 2004). Throughout decades of iterative practice, US venture capital contracts have emerged as the best real-world solution to those challenges, shaping transactional practices worldwide (Kaplan, Martel, & Strömberg, 2007).

Yet corporate law can obstruct the “transplant” of US-style venture capital contracts. As we have shown elsewhere (here and, with Tobias H. Tröger, here, and here, with related blog posts here and here), Italian (and German) corporate law effectively thwarts parties’ efforts to replicate the allocation of cash flow and control rights achieved under US venture capital contracts. Crucially, this outcome stems less from blackletter legal provisions than from prevailing scholarly interpretations of the law, which filter into daily transactional practice through legal gatekeepers and enforcers.

As a result, despite promises of greater flexibility made during the corporate law reforms of 2003 and 2012-2017 (Ferrarini, Giudici & Stella Richter, 2005; Agstner, 2024), Italian corporate law in action still exhibits a distinctly “über-mandatory” structure.

In our paper titled No Private Ordering Please, We Are Italian! we explore the deeper reasons for this finding, with a particular focus on the role of Italian legal culture.

Legal culture is, first of all, about the institutional practices of those regularly engaged with applying, studying, and advising on, the law. In Italy, thanks to rules of interpretation giving them wide discretion, legal professionals—especially legal scholars, most of whom are also practitioners—display a strong inclination to articulate implicit mandatory rules or standards, that is, precepts that are nowhere to be observed in blackletter law but rather result from extensive interpretations and analogy.

But legal culture is also the product of factors that are external to the legal profession, namely ideology, politics, and market forces. Building on this intuition, our paper identifies four complementary explanations for the extraordinary rigidity of Italian corporate law. The first is path dependence in corporate law priorities: the historical dominance of banks in corporate financing has fostered a preference for rigid rules, because sophisticated creditors, especially in a system long characterised by liquidation-oriented insolvency law and practices, have nothing to gain from enhanced contractual freedom within the domain of corporate law, which only raises the transaction costs in the relationship with their corporate debtors. The emergence of private equity and venture capital investment—which heavily relies on contracts— is too recent to have generated sufficient demand for a more flexible legal framework.

Second, legal professionals’ inclination to expand the scope of mandatory law aligns with their own interests. Greater legal complexity increases the demand for expert legal services and, consequently, enhances professional rents.

Third, a pervasive scepticism among legal scholars toward markets and decentralized rulemaking—reflecting the elites’ dominant ideology of the country, which has been long deeply influenced by the Catholic church and Marxist intellectuals—leads many to distrust the ability of private ordering to contribute to social welfare.

Fourth, academic incentives reinforce the prevailing legal culture. Identifying novel mandatory constraints is a better strategy to build a solid reputation as a sophisticated law scholar and advance in legal academia than endorsing practical private ordering solutions. The reason is simple: the latter ultimately rely on one “principle,” the idea of contractual freedom, while the former may find support in several legal concepts and principles, which a brilliant legal scholar may also “find” ex novo in the interstices of the “system.” Younger scholars can thus better demonstrate their mastery of the system by unearthing or applying (implicit) mandatory rules and standards. At the same time, senior academics advocating for the same kind of interpretations have a vested interest in preserving the intellectual paradigms that underpin their own status and influence.

By uncovering the cultural foundations of Italian corporate law’s aversion to private ordering, our work highlights the limitations of reform strategies that focus solely on statutory amendments and repealing statutory provisions: useful as these may be for the purpose of granting further leeway to private ordering solutions for the benefit of venture capital market participants, they run the risk of being replaced or sidestepped by new implicit mandatory requirements further down the road (the process of corporate law sclerosis that one us had predicted in the wake of the broad-sweeping reform of Italian corporate law in 2003). In the long run, only a fundamental shift in legal culture can pave the way for private ordering to thrive in Italy, supporting firms’ access to finance and ultimately economic growth.

Luca Enriques is a Professor of Business Law at Bocconi University.

Casimiro A Nigro is a Business Law Lecturer at Leeds University.

The authors' article can be found here.