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Startups and Company Law: The Competitive Pressure of Delaware on Italy (and Europe?)

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Abstract

US corporate law and, in particular, Delaware law, which leaves ample room to freedom of contract, has been one of the reasons for the successful creation and financing of startups in Silicon Valley. We analyze the Italian attempt to modernize company law in order to promote startup creation within the wider movement of company law simplification and modernization around Europe. In Italy a suitable corporate law statute for early stage startups was missing. Italy is a dual system jurisdiction. The SPA (public company type) has at least part of the required financial flexibility, but it is still burdened by European rules on legal capital and inflexible rules concerning management and controls. The SRL (private company type) offered a lot of leeway as to the management of the company, but left no room for freedom of contract with regard to financing, since it was not imagined as a vehicle for investors. In response to competitive pressure, economic aspirations and social changes, and to general demands from European institutions for some forms of facilitation of firm creation and venture capital, the Italian lawmaker has slowly transformed the SRL and created what is basically a new type of company (the SME SRL), which lies in between the two original types but whose borders are not fully clear. The ambiguous character of this company form makes it a problematic model for venture-funded startups. On the basis of our analysis, we argue that Italian corporate law is under competitive pressure from Delaware rather than from inter-European competition on corporate charters, and that path-dependance and remaining limits to freedom of contract burden Italian company law and prevent economic growth. We make some policy suggestions, among which the introduction of a counter-Satzungsstrenge principle for private companies.

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Notes

  1. For an overview of the issue of freedom of establishment and the main developments of the European market for corporate charters, following the jurisprudence of the European Court of Justice (ECJ), see, e.g., Lombardo (2019); Bartolacelli (2017), pp 187 et seq.; Gelter (2019), pp 467 et seq.; Gerner-Beuerle et al. (2019), pp 425 et seq., exclude that a ‘European Delaware’ will emerge in the near future, with the regulatory competition mainly confined to minimum capital requirements and rules affecting the ease of the incorporation process. For a comparison between the US and the European market for corporate charters, see Ventoruzzo (2006), pp 91 et seq.

  2. On this argument, see recently Moon (2019), pp 1 et seq.

  3. See Pollman (2019), p 9.

  4. The reference goes to Apple, Alphabet, Microsoft, Amazon, and Facebook.

  5. For such information, see also Pollman (2019), p 3.

  6. See Lee (2013).

  7. See European Commission (2016).

  8. The European Commission describes its Startup Europe initiative as intended to ‘connect local startup ecosystems around Europe and enhance their capacity to invest in other markets such as Silicon Valley and India’. For this statement, see European Commission (2019). For a general overview on the policy goals pursued by public intervention into the Silicon Valley venture capital market, see Lerner (2002), pp 73 et seq. For a good description of the (unique) peculiarities of the Silicon Valley venture capital market, see Kuntz (2016), pp 203 et seq.

  9. Cf. Gilson (2003), pp 1067 et seq.; Da Rin et al. (2006), pp 1699 et seq.; Armour and Cumming (2006), pp 596 et seq., showing that countries with less liberal personal bankruptcy laws have significantly lower demand for venture capital and private equity; Vermeulen (2018), pp 193 et seq.

  10. Yoox SPA, the first Italian high fashion online discount retailer, was incorporated in 2000. The seed stage was widely supported by Italian private equity funds (firstly, the leading Italian VC Elserino Piol through Kiwi I and Kiwi II) and some Italian entrepreneurs, including Renzo Rosso from Diesel. Only 3 years later, Yoox was already a European leading company in the field of online fashion, operating in more than 15 countries and ready to penetrate the US market, also thanks to the support of the US Benchmark Capital, along with other international venture capital funds. Yoox was listed first on FTSE STAR in 2009, then on FTSE MIB in 2013. In 2015 Yoox merged with the U.S. Net-A-Porter, a company controlled by the Switzerland Compagnie financière Richemont, to become YNAP SPA. In 2018 Compagnie financière Richemont made a successfull 5.3 billion takeover bid of YNAP SPA. The company was subsequently delisted as a result of this transaction. See ‘Richemont bids to take full control of Yoox Net-a-Porter’, Financial Times, 22 January 2018.

  11. See McCahery and Vermeulen (2004), pp 227–232. On the ‘LLC revolution’ and its legislative history, see Ribstein (2010), pp 119–123.

  12. See, e.g., Bankman and Gilson (1999), pp 289 et seq.; McCahery and Vermeulen (2008), pp 159–163.

  13. See Kuntz (2016), pp 48–50.

  14. Generally on these arguments, Hölmstrom (1979), pp 89–91.

  15. See Ross (1977), pp 23 et seq.

  16. Cf. the fundamental contributions by Berglöf (1994), pp 247 et seq.; Aghion and Bolton (1992), pp 479 et seq.; Triantis (2001), pp 305 et seq. For an excellent summary and overview of the US venture capital experience, see Kuntz (2016), pp 61 et seq.

  17. See Kotha and George (2012), pp 525 et seq.

  18. In approximately half of crowdfunding offerings, investors are offered non-voting shares, which can be converted in voting common shares upon certain triggering events. The purpose is to avoid an excessive fragmentation of the voting rights, which might later restrain VCs from investing in the company. See on this argument, Wroldsen (2017), p 564.

  19. See Broughman and Ibrahim (2015), p 292 (who show that a start-up firm typically makes a binary choice, incorporating either in its home state or in Delaware. Just over two-thirds (67.8%) of the sample firms choose Delaware as the initial state of incorporation, and, of the remaining 32.2%, most—28.7%—incorporate in their home states. Only 3.5% of sample firms choose to incorporate in a jurisdiction other than Delaware or their home state).

  20. See Broughman et al. (2014), p 867. See also Eldar et al. (2019), p 51, Table A.1.

  21. See National Venture Capital Association (2019). The model certificate of incorporation form explains the choice as follows: ‘Delaware is generally the preferred jurisdiction for incorporation of venture-backed companies for many reasons, including: (1) The Delaware General Corporation Law (the “DGCL”) is a modern, current, and internationally recognized and copied corporation statute which is updated annually to take into account new business and court developments; (2) Delaware offers a well-developed body of case law interpreting the DGCL, which facilitates certainty in business planning; (3) The Delaware Court of Chancery is considered by many to be the nation’s leading business court, where judges expert in business law matters deal with business issues in an impartial setting; and (4) Delaware offers an efficient and user-friendly Secretary of State’s office permitting, among other things, prompt certification of filings of corporate documents’.

  22. For a review and discussion, see amongst the most recent studies Broughman et al. (2014), pp 865 et seq.; Skeel (2016), pp 1 seq.; Bainbridge (2018), pp 1–16.

  23. See, e.g., Williams v. Geier, 671 A.2d 1368, 1381 (Del. 1996) (‘At its core, the Delaware General Corporation Law is a broadly enabling act which leaves latitude for substantial private ordering …’).

  24. See Strine Jr (2005), p 674.

  25. See Ibrahim (2008), pp 1443 et seq.

  26. Cf. Lerner et al. (2018), pp 1 et seq.; Sørheim and Botelho (2016), pp 76–91; Prowse (1998), pp 785 et seq.; Wetzel Jr (1983), pp 23 et seq. A new institution form is emerging in the form of investment accelerators, while crowdfunding is not working well as a mechanism to finance early-stage startups: for this argument, see Bernthal (2016), pp 157 et seq.

  27. See Sohl (2003), p 14.

  28. On the conversion price cap and its economic functions, see especially Coyle and Green (2014), pp 163–165.

  29. See Kaplan and Strömberg (2003), p 284.

  30. Cf. Coyle and Green (2014), pp 166–171; Green and Coyle (2016), pp 171 et seq.

  31. According to Coyle and Green (2014), p 172, these stripped-down financing documents provide some protections to investors, such as a board seat, a right of first offer on future financings, a non-participating preferred liquidation preference, certain blocking rights, and may also have a ‘most favored nation’ provision that allow them to capture the benefits of more articulated VC terms that they agreed to give up at the seed stage. See also Ibrahim (2008), pp 1405 et seq., who discusses why angels’ contracts differ from VC ones, the rationale for this difference and the role of angel groups in developing middle-way forms of financing (seed equity).

  32. See Lerner (1998), p 778.

  33. A recent study of 135 unicorn companies found that the average unicorn has eight share classes, and many have a wide mix of equity holders including founders, employees, VC funds, mutual funds, sovereign wealth funds, and strategic investors. For this account, see Gornall and Strebulaev (2019), p 2.

  34. See Bartlett III (2006), p 61.

  35. See National Venture Capital Association (2019), which provides a preliminary non-binding term sheet containing the main term and condition of the final agreement, and several model contracts which include: (a) a stock purchase agreement, by which investors receive newly issued shares of preferred stock in exchange for money; (b) an amended and restated certificate of incorporation, establishing the rights, preferences, privileges and restrictions of each class and series of the corporation’s stock, the classes of shares, and certain investor protections; (c) an investor rights agreement, providing certain rights for the investors (such as information and control rights, registration rights, rights of first offer or preemptive rights); (d) a separated right of first refusal and co-sale agreement; (e) a voting agreement, providing the investors with the right to designate the election of certain members of the board of directors and the terms and conditions to execute such a right; (f) a management rights letter, indicating the ‘contractual rights running directly from the portfolio company to the fund that give the fund the right to participate substantially in, or substantially influence the conduct of, the management of the portfolio company’; (g) an indemnification agreement, providing indemnification rights by the company in favor of its directors or officers, in case they are part of certain proceedings connected to their role in the company; (h) a legal opinion, concerning the existence and composition of the company and the actual power and authorizations to execute the obligation under the transaction documents; (i) HR policy documents; (l) a code of the company’s conduct policy; and a disclosure and confidentiality agreement, regarding proprietary and confidential information of the company.

  36. Kaplan and Strömberg (2003), p 286 (94% of VC investments from 1987 to 1999 were conducted through preferred stock). The dominance of preferred stocks is also due to tax reasons: Gilson and Schizer (2003), pp 874 et seq.

  37. In a plurality of deals, VCs’ convertible preferred stock enjoy ‘participation rights’. VCs are thus entitled not only to a liquidation preference, but also to share pro-rata with common shareholders any additional value available for distribution to shareholders, usually up to a specified amount. See Fried and Ganor (2006), p 982.

  38. For a thoroughly analysis, see Smith (1997), pp 107–133.

  39. Usually VCs gain additional board seats with each round of investment. There is therefore a gradual transition from the initial board with a minority of VCs’ appointed directors to a board controlled by the VCs: see Smith (2005), pp 326–327.

  40. Hellmann (1998), pp 57 et seq.

  41. This is one of the many scenarios where preferred and common stockholders can have different interests, and where the board’s position and composition becomes fundamental.

  42. See Bratton (2002), p 915.

  43. Those protective provisions are usually set in the term sheet and then inserted in the charter as preferred stocks’ rights.

  44. Negative covenants restrict the company from engaging in business combinations and other key transactions without prior approval from VCs, thus protecting preferred stockholders from common stock maneuvers.

  45. See Gilson (2003), p 1082.

  46. See Fried and Ganor (2006), p 971.

  47. See Smith (2005), p 339.

  48. See Levin and Rocap (2018), Ch. 2–14 et seq. (discussing performance vesting and time vesting).

  49. For some starting points, cf. Gompers and Lerner (2001), pp 145 et seq.; Gompers et al. (2016), pp 1 et seq.; Kaplan and Lerner (2016), pp 1 seq.

  50. Cf. Stevenson (2001), pp 1142 et seq.; Bartlett III (2006), pp 37 et seq. For the argument that contractual flexibility is not enough, see Wortman (1995), pp 1362 et seq.

  51. Cf. McCahery and Vermeulen (2008), pp 31 et seq.; Faccio and Lang (2002), pp 365 et seq.

  52. For the importance of a more flexible company law for VC-financed companies see already, among European corporate law scholars, Baums (2003), p 182.

  53. Cf., for a general overview, Macey (1995), pp 433 et seq.; Ribstein (2010), pp 119 et seq.

  54. See Ribstein (2010), pp 237–238. However Eldar et al. (2019), pp 18 et seq., present data according to which LLC startups are a minority, but still significantly present.

  55. Cf. Pollman (2019), p 33; Benchmark Capital IV, L.P. v. Vague, No. Civ. A. 19719, 2002 WL 1732423 (Del. Ch. July 15, 2002).

  56. See In re Trados Inc. S’holder Litig., 73 A.3d 17 (Del. Ch. 2013). The shift to the entire fairness standard is a significant factor in litigation. The board is not protected by the business judgment rule. Moreover, since ‘the entire fairness standard is inherently fact-intensive, requiring evidence about process and price, it can be very difficult in that setting for directors to have litigation terminated at an early stage when the factual record has not yet been developed’: for this statement, see Bochner and Simmerman (2016), p 8. The topic is thoughtfully discussed, among others, by Bratton and Wachter (2013), pp 1874 et seq.; Bartlett III (2015), pp 263 et seq.; Korsmo (2013), pp 1163 et seq.; for critics see Strine jr (2013), pp 2025 et seq.

  57. Cf. Pollman (2019), p 56; Sepe (2013), pp 329 et seq.

  58. We consider as a good representation of this social group some of the members of the task-force that was established in 2012 to advise the government on reforms aimed at fostering startups’ creation and venture capital: see, for further references, below Sect. 4.1.

  59. A certain degree of financial flexibility is granted by the possibility to issue different classes of shares (Art. 2348 c.c.), or to allocate shares to shareholders non proportional to the contributions made (Art. 2346 c.c.), etc.

  60. The Report of the task force established by the Ministry for Economic Development in 2012, in order to propose reforms to the Italian regulatory system aimed at favouring startups’ creation, describes the situation that startuppers would have faced at the time as follows: ‘they can settle for contractual forms that are not suitable for their purposes, as those forms where imagined for different kind of objectives, and are unable to satisfy their competence and entrepreneurship. Alternatively, they can go abroad—or decide to abandon any further attempt’: see ‘Restart, Italia!’, Report of the task force on startups established by Ministry of Economic Development (2012), http://www.file:///C:/Users/Peter%20Agstner/Downloads/TaskForce,%20Restartup%20Italia.pdf. Accessed 20 July 2019), p 13 (our translation from Italian).

  61. Outside Europe, South Africa and Japan follow the one-law model with a single overarching legal form for (non-listed) limited liability companies. For such references, see Fleischer (2016a), pp 62–63.

  62. Cf. Fleischer (2015a), pp 411–415; Wymeersch (2009), pp 71 et seq.; Andersen et al. (2017), p 16.

  63. See Harris (2013), p 340: ‘Unlike living organism, and contrary to a common misconception, business corporations did not begin small (and private) and only then grew bigger (and public)’.

  64. See Harris (2013), p 342.

  65. For the concept of affirmative asset partitioning and its historical impact on the evolution of legal organizations, see especially Hansmann and Kraakman (2000a), pp 387 et seq.

  66. Fleischer (2015b), Introd., marg. no. 56, who makes references to the position expressed by one of the fathers of the German GmbH Act (Wilhelm Oechelhäuser): The latter saw in the English limited the ‘most dangerous competitor’.

  67. Lutter (1992), p 49, pointedly states that the GmbH-Gesetz represents ‘Germany’s most important and successful legal export product’.

  68. See Harris (2013), p 346.

  69. For a good overview, see Gerner-Beuerle (2017), pp 263 et seq.

  70. Fleischer (2015b), Introd., marg. no. 51.

  71. See Lutter (2006), p 4; Gerner-Beuerle (2017), p 295. For similar arguments expressed in the 1920s during the discussions for the introduction in Italy of the società a garanzia limitata, see Asquini (1939), p 237.

  72. See for historical references, Fleischer (2015b), Introd., marg. no. 64–68.

  73. Noteworthy is the fact that in the period between 1892 and 1922, GmbH operated mostly in risky business sectors, like the mining, transport, metallurgical and chemical industries, confirming the usefulness of the new form also for highly speculative enterprises.

  74. For details, see Gerner-Beuerle (2017), pp 272 et seq.

  75. See sec. 37(1) Companies Act 1907, according to which a private company is ‘a company which by its articles (1) restricts the right to transfer its shares; (2) limits the number of its shareholders to fifty; and (3) prohibits any invitation to the public to subscribe for any shares or debentures of the company’. Today, only the last restriction is still in place.

  76. See Fleischer (2015a), p 413.

  77. See Gerner-Beuerle (2017), p 295.

  78. We refer here to quotaholders instead of shareholders in order to stress that persons participating in an SRL are somewhere in between partners and shareholders.

  79. Cf. Zanarone (2010), p 53 seq.; Buonocore (2003), p 170 (‘new era of shareholder rights’).

  80. Art. 2468(3) c.c.

  81. Art. 2475 c.c.

  82. Art. 2479(2) c.c. For all these arguments, see extensively Campobasso (2015), pp 555 et seq.

  83. See Campobasso (2015), p 557.

  84. Art. 2468(1) c.c.: ‘The shareholders’ quotas can neither be represented by shares nor be offered to the public as financial instruments’. Also the newly allowed possibility to issue debt securities (Art. 2483 c.c.) suffers important limitations in the SRL: for more details see below Sect. 5.1.

  85. ECJ 9 March 1999, Case C-212/97 Centros Ltd v. Erhvervs- og Selskabsstyrelsen [1999] ECR I-1459. For a historical overview of the relevant ECJ case law, see recently Lombardo (2019), pp 1 seq.

  86. For a good overview, cf. Fleischer (2014), pp 1081 et seq.; Neville and Sørensen (2014), pp 545 et seq.; Ventoruzzo (2014), pp 165 et seq.

  87. Such leitmotif has been expressly stated in the preparatory works of several national reform laws. E.g., for Italy see the Relazione on the SRL reform of 2003 (§ 11: ‘the reform is intended to satisfy the needs particularly observed in the area of small and medium enterprises’); for Spain see the explanatory notes of the reform of 2003, which emphasises the role of the new sociedad limitada nueva empresa for the promotion of small and medium corporations as the backbone of Spanish and European economy and key to creating new jobs (Ley 7/2003, BOE núm. 79, 2 April 2003, 12679, 12680). On the supranational level, see the Small Business Act for Europe of 2008 (COM(2008) 394 final). For further references, see Fleischer (2014), p 1085.

  88. For this systematization, see Fleischer (2014), pp 1085 et seq.

  89. Two prominent exceptions are Austria and Switzerland, where the law requires respectively Euro 35,000 (§ 6 GmbHG) and CHF 20,000 (§ 773 OR) as minimum capital for the incorporation of a GmbH, although in Austria the peculiar regime of the Gründungsprivilegierung is allowed (§ 10b GmbHG). For detailed comparative references, cf. Grimm (2013), pp 51 et seq.; Bartolacelli (2017), pp 197 et seq. For some empirical data, see Braun et al. (2013), pp 399 et seq.

  90. See European Commission, 9 April 2014 COM(2014) 212 final: see explanatory memorandum, par. 3, part. 2, ch. 4: ‘The Directive requires Member States to offer a registration procedure that can be fully completed electronically at a distance without requiring the need of a physical presence of the founder before the authorities of Member State of registration’.

  91. See for similar conclusions, Fleischer (2014), p 1086.

  92. See Bartolacelli (2017), p 199.

  93. See Code des sociétés et des associations of 23 March 2019. For the new regulation of LLCs (société à responsabilité limitée or SRL), see especially book 5 (Art. 5:1 et seq.) of the mentioned Act.

  94. For detailed comparative references on the above subtypes and the legislative evolution process, cf. Fleischer (2014), pp 1088–1089; Portale (2010), pp 1237 et seq. For empirical data on the costs of incorporation of Italian simplified SRL, see Lavecchia and Stagnaro (2019), pp 277 et seq.

  95. The European Model Company Act (EMCA) group has sought to induce a cultural change in the approach to the law of the private company around Europe. Its proposal is to abandon the two-law model in favour of the one-law model, and to give to European private companies the maximum possible financial flexibility, by taking the Finnish and Italian experience of public companies as a reference point for private companies as well. Therefore, even though the US startup experience is not at the core of the proposal of a European Model Company Act, it is clear that it represents a strong signal of disaffection with the rigid approach that has been typical of Continental Europe so far. See Andersen et al. (2017), pp 15–16. For the pros and cons of the transition from a one-law to a two-law model and vice versa, see Fleischer (2016a), pp 63–65.

  96. According to mass media, the task force was composed of Paolo Barberis (founder of Dada SPA); Giorgio Carcano (ComeNExT); Annibale D’Elia (Bollenti Spiriti); Luca De Biase (journalist and founder of the association Startup Italia); Andrea Di Camillo (Banzia, Principia); Riccardo Donadon (founder of H-farm, a venture incubator); Mario Mariani (Net Value, a venture incubator); Massimiliano Magrini (Annapurna Ventures, then merged with Jupiter Ventures to form United Ventures, a VC); Enrico Pozzi (academic and founder of Eikon); Giuseppe Ragusa (academic interested in innovation and startups); Selene Biffi (social entrepreneur); and Donatella Solda-Kutzmann, an officer at the Ministry with international academic studies. Apparently, no company law experts were involved.

  97. See, in particular, Report (2012), above n. 60, pp 51–52.

  98. For these policy guidelines, see the ministerial report accompanying the first reform on innovative startups of 2012. Similarly, Council Recommendation of 10 July 2012 on the National Reform Programme 2012 of Italy and delivering a Council opinion on the Stability Programme of Italy, 2012-2015 (2012/C 219/14) [2012] OJ C 2019/46, rec. no 6. (‘Improve access to financial instruments, in particular equity, to finance growing businesses and innovation’).

  99. The original limit was 4 years. This means that qualification as an innovative startup is necessarily limited in time.

  100. The research and development expenses must be equal to, or greater than, 15% of the higher value between the company’s production costs and the company’s production value.

  101. At least one-third of the personnel shall be represented by individuals having a Ph.D., or carrying out a Ph.D. or having a degree and having completed a research program of 3 years at public or private research entities in Italy or abroad. Alternatively, at least two-thirds of its workforce shall be composed of individuals with a master degree.

  102. Art. 25(8), Decree Law 2012, no. 179.

  103. Here less relevant are tax benefits enjoyed by startups, as well as some exemptions from general labor and bankruptcy law.

  104. See Art. 26(2), Decree Law 2012, no. 179. Thus, it is legitimate to grant corporate rights not proportional to the holding in the company; or to assign special rights to the class of quotas (and not the single shareholder), thereby derogating from the general rules set forth for private companies in Art. 2468(2–3) c.c. Furthermore, it is possible to create classes of quotas without voting rights, with multiple voting rights or with voting rights limited only to particular resolution matters (Art. 26(3)).

  105. See Art. 26(5), Decree Law 2012, no. 179, thus derogating from the principle laid down in Art. 2468(1) c.c. For equity crowdfunding see also the newly introduced Art. 100-ter of the Consolidated Financial Service Act (CFSA) of 1998, no. 58.

  106. See Art. 26(6), Decree Law 2012, no. 179, thus derogating from the general rule set forth in Art. 2474 c.c. In the legal literature on all the above-mentioned regulatory innovations, cf. Benazzo (2017), pp 467 et seq.; Cian (2018), pp 818 et seq.; Campobasso (2019), pp. 140–141.

  107. See Art. 26(1), Decree Law 2012, no. 179.

  108. On this last argument, see Benazzo (2017), p 470.

  109. See, for references, Cian (2015), pp 969 et seq.

  110. National Commission for Companies and the Stock Exchange (CONSOB), Regulation no. 18592 of 26 June 2013.

  111. Cf. Art. 26 (company law amendments) and Art. 30 (crowdfunding), Decree Law 2012, no. 179.

  112. Art. 25, Decree Law 2012, no. 179 mentions the recommendations by the European Council and the Program of National Reform 2012, which do not mention crowdfunding and refer, instead, to venture capital: see Council recommendation 2012, premises no. 11 and recommendation no. 5.

  113. This point is also remarked by De Luca et al. (2017), p 164. For an excellent exam of the crowdfunding phenomenon, see Schedensack (2018), pp 37 et seq.

  114. Cf., among the many authors that have examined the new startup reform, Benazzo (2017), pp 467 et seq.; id. (2014), pp 101 et seq.; Cagnasso (2015), pp 79 et seq.; id. (2016), pp 2285 et seq.; Cossu (2014), 1705 et seq.; Cian (2018), pp 818 et seq.; id. (2015), pp 969 et seq.; Guaccero (2014), pp 699 et seq.; Speranzin (2018), pp 335 et seq.

  115. See Art. 4(9), Decree Law 2015, no. 3.

  116. The category of micro, small and medium-sized enterprises (SMEs) is made up of enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding EUR 50 million, and/or an annual balance sheet total not exceeding EUR 43 million (see Annex, Art. 2 of the mentioned Recommendation). According to the EU Commission, SMEs represent 99% of all businesses in the EU.

  117. See Art. 4(1), Decree Law 2015, no. 3. In particular, the company’s headquarters must be located in Italy or in an EU Member State (with at least one branch in Italy); the balance sheet has to be audited; the shares or quotas cannot be listed on regulated markets; the company shall not be registered as innovative startup in the special section of the company register. Furthermore, innovative SMEs must comply with two (and not only one as stated for innovative startups) of the following technology benchmarks: (a) R&D expenses must be equal to, or greater than, 3% of the higher value between the company’s production costs and the company’s production value; (b) one fifth of company’s workforce must have a doctoral degree or, alternatively, at least one third shall be composed of individuals with a master degree; (c) holding of at least one intellectual property right.

  118. Art. 57 of the above mentioned Decree Law, thereby referring to Art. 26(2, 5 and 6) of the Decree Law 2012, no. 179.

  119. Cf. Black and Gilson (1998), p 260; Gilson and Schizer (2003), pp 874 et seq.; Gilson (2003), pp 1067 et seq.; Leitner (2009), p 19.

  120. See Art. 2483 c.c.

  121. See Art. 2410 c.c.

  122. See the accompanying report to the Reform Law of 2003, § 11, which emphasizes the importance of the new rules, evidencing that they were enacted in order to ‘obtain a balance between the need of SRLs to get access to debt financing and the necessity to protect the investors’ interests’. In practice, on 31 March 2013 only 18.90% of all SRLs (1,357,936) amended their bylaws in order to allow the issuance of titoli di debito. For such data, see Bellavite Pellegrini and Pellegrini (2014), pp 19 et seq.

  123. See Art. 2420-bis c.c.

  124. For the negative opinion, cf. Fimmanò (2005), pp 99 et seq.; Spada (2003), p 806. For the affirmative solution, see Campobasso (2007), pp 786-787. The most important obstacle to the issuance of convertible titoli di debito is represented by Art. 2468(1) c.c., which forbids that quotas can be represented by negotiable financial instruments. In fact, the assignment of an equity conversion right could represent a mechanism apt to bypass this mandatory provision. It is well possible, though, and also known to the practice, that the quotaholder grants a loan to the company, incorporating also a contractual conversion right, i.e. the classical debt-to-equity swap. Still, this contractual solution bears many inconveniences, considering that at the time of conversion the interested loanholder has to acquire the consent of all current quotaholders, including the ones who eventually became members afterwards, willing to transfer the necessary interests to the loanholder or to increase the share capital specifically for this purpose. Furthermore, the breach of any contractual obligation incurred gives rise only to compensation for damages and not to specific performance.

  125. Italian law does not provide any definition of such type of investors, so that interpretative doubts arise. Annex 3, Regulation no. 20307 of 15 February 2018 of the National Commission for Companies and the Stock Exchange provides the definition only of ‘private professional investors’. The definition of prudential supervision, on the other hand, concerns the consistency and financial stability of the investor, and is strictly related to bank supervision.

  126. Cf. Art. 11 Banking Act; Interministerial Committee for Credit and Savings, resolution of 19 July 2005; Bank of Italy, Provisions on the collection of savings by entities other than banks, 8 November 2016.

  127. Also Italian public companies, for the issuance of debt securities, are subject to the limit of the double amount of the share capital plus retained earnings pursuant to Art. 2412 c.c., but with many exceptions, among which one for listed companies and another for convertibles.

  128. It is noteworthy that, among the articles of incorporation examined in our empirical research (see, for further details, below Sect. 6.1), in one case the innovative SRL is allowed to issue hybrid financial instruments (the above mentioned strumenti finanziari partecipativi) with a conversion right into equity. Italian scholars discuss if the limitations foreseen in Art. 2483 c.c. for titoli di debito are applicable also to the issuance of hybrid financial instruments. For the affirmative solution, see Maltoni and Spada (2013), p 1130, although not considering the eventuality of the attachment of a conversion right.

  129. See Art. 2481-bis c.c.

  130. One must consider that while Art. 2346(5) c.c. is a direct application for public companies of mandatory European rules (Art. 8, Directive 2012/30/EU), Art. 2464(1) for private companies is the result of a free choice of the Italian legislator.

  131. Among Italian authors, opinions on how to cover the difference vary from those requiring non-proportional contributions by the other shareholders (Giannelli (2006), p 278), or the destination of retained earnings until the expiration of the conversion date (Portale (1975), p 213), or the parity only between nominal value of shares and debt obligation arising from the security (see Notary Bar of Milan, Guideline no. 61/2005, available at https://www.consiglionotarilemilano.it/documenti-comuni/massime-commissione-società/61.aspx. Accessed 18 July 2019).

  132. See Art. 26(2), Decree Law 2012, no. 179.

  133. Cf. Maltoni and Spada (2013), p 1127; Benazzo (2017), p 479; Cian (2018), pp 850 et seq.

  134. See Art. 2351(4) c.c.

  135. Art. 2351(2) c.c.

  136. See Tombari (2016), p 559.

  137. See Pollman (2019), p 1.

  138. For a general overview of private companies’ governance model, see Pederzini and Guidotti (2018), pp 1 et seq.

  139. See § 46 GmbHG, under which, since the enactment in 1892, a catalogue of fundamental resolutions always falls within the competence of the shareholders. See, e.g., Paefgen (2014), § 37, marg. no. 24 et seq. For comparative references, see Fleischer (2018), pp 679 et seq.

  140. See Art. 2479(2) c.c.

  141. See Trib. Roma, 3 August 2018. For the voidability of the operation, see Trib. Piacenza, 14 March 2016.

  142. See Cian (2009), p 25.

  143. See, for the negative solution, Lener (2011), p 789; for the positive, Benazzo (2016), p 2042.

  144. See, e.g., § 51a GmbHG, introduced by the first major reform of the Act in 1980, under which the directors must without undue delay provide each shareholder, upon their request, with information on the company’s affairs and allow them to inspect the books and company records. The articles of incorporation cannot waive such fundamental inspection rights. For references, see Raiser and Veil (2015), p 466 seq. Similarly, for the Swiss law on private companies Art. 802 OR: for references, cf. Schmidt (2018), pp 115–118; Meier-Hayoz et al. (2018), p 704. For the Austrian GmbHG, the relevant provision is contained in § 22(2): for references, see Nowotny (2017), pp 1266–1267. In the Spanish LSC see Art. 272(3) for the minority quotaholder representing at least 5% of the share capital: for references, see Vicent Chuliá (2012), pp 597–598.

  145. See Art. 2476(2) c.c.

  146. See Trib. Milano, 13 May 2017.

  147. See Zanarone (2010), p 1117.

  148. For an overview, see Cian (2018), pp 834 et seq.

  149. See Art. 2476(3). On the argument, see Zanarone (2010), pp 1062 et seq.

  150. See § 43(2) of the German GmbHG, according to which derivative shareholder actions are allowed only if authorized by the general meeting pursuant to § 46 Nr. 8 GmbHG. On this argument, see Fleischer (2008), p 1128. Sometimes a similar right of action is denied if the director is a non-shareholder: see for an obiter dictum, BGH, 28.6.1982—II ZR 199/81. Under the Austrian GmbHG, an actio pro socio is in general forbidden according to § 25: for details, see Nowotny (2017), p 1271. On the contrary, Swiss law refers in Art. 827 OR to the regulation applicable to public companies (in particular, Art. 754 OR), thus conferring the right to sue also to single quotaholders. The same is true for the shareholders of a French SARL (art. L. 223–22 (3) c. com).

  151. See Cian (2018), p 837.

  152. As a matter of fact, the leonine clause prohibition is only mentioned by Art. 2265 c.c. for non-commercial partnerships. Nevertheless, Italian Courts extend it also to commercial partnerships and corporations. On the argument, see lately Cass., 4 July 2018, no. 17500 (where the Supreme Court held that a put option at fixed price does not infringe the pactum leonina). Other jurisdictions do not know such prohibition: e.g. for Germany, see Ekkenga (2015), § 29, marg. no. 68; Fleischer (2016b), pp 201 et seq., in the case law, BGH, 14.07.1954—II ZR 342/53; for the Dutch private company (besloten vennootschap), see Art. 2:228(7) NBW, which permits a contractual exclusion of all or part of the shareholder’s profit rights.

  153. See, in general and for problems regarding the transplant of US vesting arrangements in German corporate law, Kuntz (2016), p 152 and 724.

  154. See Art. 2474 c.c.

  155. Art. 26(6), Decree Law 2012, no. 179.

  156. See Art. 2357 c.c.

  157. See Notary Bar of Milan, Guideline no. 178/2018, available at https://www.consiglionotarilemilano.it/documenti-comuni/massime-commissione-società/178.aspx. Accessed 18 July 2019.

  158. See for this remark, Nieddu Arrica (2018), p 500.

  159. See, e.g. Zanarone (2010), p 344 (opting for the analogous application of Art. 2465 c.c.).

  160. See Art. 2464(6) c.c.

  161. In fact, according to our first empirical investigation (see below Sect. 6.1), some few Italian innovative SRLs foresee certain work-for-equity schemes, all of which are embedded in operations of share capital increase, to be paid up either by contributions (in cash or in kind) or by using retained earnings.

  162. See Art. 2473(1) c.c., according to which quotaholders are in any case entitled to exit in the following cases: change of the corporate purpose or form, merger, division, revocation of the company’s winding up, removal of one or more causes of withdrawal, transfer of the registered office to another country or a transaction that leads to fundamental modification of the company’s objects. Still, Art. 2473(2) c.c. grants a right to exit at will if the company is established for an indefinite term.

  163. Art. 2473(3) c.c.

  164. The reimbursement shall be aimed at achieving a fair evaluation of the stake in order to protect the shareholder’s interests: see Zanarone (2010), pp 830 et seq.; contra, allowing the application of compensation discounts, Speranzin (2016), pp 894 et seq. In general on this argument, cf. Schmolke (2012), pp 393-396; Fleischer and Bong (2017), pp 1957 et seq.

  165. See Zanarone (2010), pp 775 et seq.

  166. Cf. Zanarone (2010), pp. 786 et seq.; Speranzin (2012), p 149.

  167. Mind the Bridge, ‘European Dual Company: Scaleup Migration?’ (June 2017), https://startupeuropepartnership.eu/reports/.

  168. Our data have been provided by InfoCamere, the digital innovation company that operates for the Italian Chambers of Commerce managing the single Company Registers. In Italy, more than 11,000 companies are registered as innovative startups or SMEs, among which more than 8000 are SRLs according to a research we have conducted on 31 July 2019 through the website http://startup.registroimprese.it. We have collected the data of those SRLs that are registered in the Company Register of Bolzano, and among almost 100 companies not a single one looks like a firm financed by VC or other outside investors—the 2012-2017 Reform accords significant tax benefits to companies that qualify as innovative startups in accordance with the law requirements. Therefore, any new company that can qualify as ‘innovative startup’ may be formed and registered as such. We consider the presence of a tag-along and/or drag-along clause as the most significant indicator of a company with outside investors.

  169. In particular, one US VC seems to be very active in the early stage Italian startups’ market according to our data, Alan Advantage Inc., which holds stakes in nine innovative SRLs.

  170. But see above n. 128, with regard to the articles of association of at least one company with convertible hybrid instruments.

  171. Hansmann and Kraakman (2000b), pp 450–451. See also Kaplan et al. (2007), p 275 (‘Our results indicate that US style contracts can be implemented across a wide range of legal regimes and are used by the more experienced and successful VCs. Although it is not possible to establish causality, we believe a plausible interpretation is that US style contracts are relatively efficient across a wide range of institutional environments’).

  172. In general on the theory of law-making and the different regulatory techniques available for the reform of company law in an innovative economy, see McCahery et al. (2010), pp 71 et seq.

  173. This process has been analyzed by Enriques (2005), pp 171–173 and, with regard to the SRL, pp 181–182, as a form of rent-seeking by academics, notaries and judges.

  174. For a critic of this gusto and its problems, and some proposals to change it, see again Enriques (2009), pp 510–512 (with reference to the political and legal culture determinant); in a broader perspective, see Hopt (2016), pp 13 et seq.

  175. On the above principle cf., among many, Hüffer and Koch (2018), § 23 marg. no. 34 et seq.; Bayer (2008), E 27 et seq.; Mertens (1994), pp 426 et seq.

  176. McCahery and Vermeulen (2004), pp 227–232, had foreseen this path as a possibility for European countries wishing to increase startups and innovation, highlighting that the US LLC ‘provides virtually a complete shield against personal liability (this is important given the risk inherent to a highly innovative start-up) without cumbersome formation and capital maintenance rules’ (p 228).

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Acknowledgments

This article is part of a research project on the law of close corporations directed by Paolo Giudici and involving a team of researchers of the universities of Bolzano-Bozen, Trento and Innsbruck. The project has been financed by the European Grouping for Territorial Cooperation ‘Euregio Tyrol-South Tyrol-Trentino’ within its first call for base research financing, Science Fund IPN 3 G16. For their important research support we are grateful to Antonio Capizzi (Sapienza University of Rome, and research assistant on this project at the School of Economics and Management, Free University of Bozen-Bolzano, Italy), Francesca Redoano, and Maria Vittoria Nanni. For valuable comments on previous drafts we wish to thank all participants of the Symposium on ‘The Law of Closed Corporations’, held at University of Bozen-Bolzano, Italy on 24–25 May 2019. The usual disclaimers apply.

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  1. Italian regulation on academic evaluation requires some form of identification of each author’s individual contribution to a joint paper. Exclusively for this purpose we mention that Sects. 1, 2 and 4 were drafted by Paolo Giudici, while Sects. 3 and 5 were drafted by Peter Agstner; Sects. 6 and 7 were written by the authors together.

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  1. School of Economics and Management, Free University of Bozen-Bolzano, Bolzano, Italy

    Paolo Giudici & Peter Agstner

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  1. Paolo Giudici
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Giudici, P., Agstner, P. Startups and Company Law: The Competitive Pressure of Delaware on Italy (and Europe?). Eur Bus Org Law Rev 20, 597–632 (2019). https://doi.org/10.1007/s40804-019-00163-x

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