Venture Capital and European Corporate Laws: Bargaining in the Shadow of Regulatory Constraints

When: 25 Apr 2022, 14:15-15:30
Where: Zoom
Speaker: Casimiro A. Nigro

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The venture capital (“VC”) industry and its managers – a.k.a. venture capitalists – have built a solid reputation for spurring innovation and economic growth, emerging as one of the crown jewels of the US economy in the 1980s and thus rather quickly turning into a dream for policymakers globally.

VC-driven value creation does largely rests on a very peculiar capital management process, which in turn requires, inter alia, the adoption of a very complex contractual technology at the VC-backed firm level. Consistent with the predictions of financial contracting theory, this contractual technology seeks to address the multiple market imperfections inherent in financing high-tech firms, as well as braiding the existential logic of VC-backed firms with the VC business model’s idiosyncratic organizational features. Corporate law’s relatively flexible or rigid design can affect the adoption of this contractual technology and its overall functionality, thus ultimately emerging, at the margin, as a determinant of contract formation and hence overall VC investment levels.

Building on this conceptual framework, this Article compares and contrast VC contracting under the corporate law regimes in force in the US – say, Delaware – and two major European jurisdictions – namely, Germany and Italy. In the US, taking advantage of the largely flexible design of local corporate law, venture capitalists and entrepreneurs have successfully engineered a contractual framework combining, inter alia, morphing financial claims with tailored fiduciary duties and waivers of fair value protections. In addition to being the closest to the predictions of financial contracting theory that transactional practice has managed to engineer, this contractual framework has proven largely resilient over both industries and investment cycles, thus emerging as a presumptively efficient solution that contracting parties have therefore attempted to replicate globally. European corporate laws do not allow for such imitation exercise, though. The largely mandatory local corporate law regimes do prevent in fact the adoption of arrangements that are key to imprinting into VC-backed firms their peculiar financial structure and governance model, compelling contracting parties into elaborating convolute workarounds that strike a fatal blow to the overall functionality of the contractual technology governing VC deals.

The discussion articulated herein warrants one conclusion. To the extent that corporate law matters for the purposes of attracting VC investments, European corporate laws have the potential to deter, at the margin, VC investments, generating a competitive disadvantage that can contribute to account for the existing transatlantic gap in VC activity.