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By Paolo Giudici. Many concomitant factors are needed to foster the development of an environment conducive to the growth of start-ups. Not enough attention seems to have been paid to corporate law.

The European Union hopes to increase the number of startups that scale up to large innovative corporations and contribute to the EU’s technological sovereignty, accelerating the green and digital transformation. Many concomitant factors are needed to foster the development of an environment conducive to the growth of startups. Not enough attention seems to have been paid to corporate law to address this issue. The need for fast and cheap procedures to establish a company are usually mentioned, as well as the possibility to issue stock options that are not subject to capital gain tax before their sale and that entitle the holder to acquire non-voting shares. Not much else is usually referred to with regard to corporate law. Is this reasonable?

Before answering this question, let us look at the United States for a moment. US corporate law and, in particular, Delaware law, which leaves ample room to freedom of contract, created no obstacles to the development and optimization of startup financing in Silicon Valley. Today there seems to be almost no significant mandatory law feature standing in the way of negotiations between founders and investors under Delaware law. Moreover, if founders and investors think that the very few mandatory rules of the Delaware corporation are an impediment to their negotiations, they can opt for the full freedom of contract offered by the Limited Liability Company (LLC).

What happened instead in many European legal systems? Founders discovered that their national legal systems did not offer similar flexibility. Italy was a case in point. The Italian public company (‘società per azioni’, S.p.A.) had some traits that could cope well with some startup features, in particular in terms of financial flexibility. But it also required a mandatory minimum capital of Euro 50,000 and a compulsory board of three statutory auditors (‘collegio sindacale’). The new social class of ‘startuppers’ could not turn back to the ‘società a responsabilità limitata’ (the Italian LLC) either, which could not issue classes of stock or convertible notes and was thus financially ‘lame’.

Many Italian startuppers created Delaware corporations. However, in 2012, in the wake of the Greek government-debt crisis, pressed by European institutions which were seeking to reignite economic growth, Italy changed its own LLC law, which could now issue classes of shares and financial hybrids, and could even (this was absolutely revolutionary) offer shares to the public. The continental tradition of the GmbH-type (Gesellschaft mit beschränkter Haftung, a German term meaning company with limited liability) was turned on its head, together with the distinction between the private and the public company. The revolution was not complete, and some significant uncertainties persist in the new law of the LLC. It is worth noting that there were no signs of any European regulatory competition in this reshaping of Italian law – there were no anecdotes of Italian startups established in France, in the Netherlands or the UK, at the time. The reshaping was entirely influenced by US corporate law.

In an empirical paper published last year, Peter Agstner, Antonio Capizzi and I report that almost all Italian startups now adopt the new LLC form, and we identify some Italian law idiosyncrasies in the drafting of charters that are mainly the product of old doctrinal constructions. But we also observe that Italian corporate practice is pushing the envelope in its efforts to adapt Italian charters to startuppers’ and investors’ needs. Accordingly, we conclude that the Italian reforms look more successful than we expected.[1]

What happened in the rest of Europe? We do not know precisely. If one searches the European law journals of the last ten years, one finds very little on the subject. Crowdfunding has been widely commented upon by legal scholars both at a national and European level, whereas startup financing and the related clauses in startup charters (concerning preferred convertible stock, antidilution, co-sales, etc.) are covered by a very few articles. An alien landing on earth would think, while reading the European legal literature, that the crowdfunding discipline is a central issue in making Europe a land of startups, while venture capital financing is almost irrelevant.

Yet, we do know something. For instance, we know that the UK law of the private company is very flexible and UK startups have not had not many problems in adapting their charters to the needs of venture capital financing.  We know that Professor Thilo Kuntz, the scholar who has most studied the topic in Germany, comes to the conclusion that German corporate law allows the adoption of most of the US-like arrangements, more in the GmbH than in the AG (Aktiengesellschaft or joint stock company) where many provisions could not be inserted in the charters due to the principle of Satzungsstrenge (statutory rigidity/rigor), but should go in the shareholder agreements. We know that in France startups generally enjoy the special and very liberal regime of the société par actions simplifiée (SAS). We know that in 2023 in Spain a new law on startups entered into force, very much influenced by the Italian one. But we also know, for instance, that the recent 2019 Belgian Companies Act has not taken into consideration the needs of venture capital and private equity investors – as Professor Hans De Wulf noted in a recent article, it was looking backwards (legal issues of the past) and not forwards (legal issues of the future).

So, Europe offers a very varied landscape and cannot be treated as a whole. However, we can see some trends. Startups tend not use the corporation form that is partly harmonized around Europe (AG-like form), therefore the European harmonization process has no relevance here. In many countries startups use the GmbH-form, which was created as a form of partnership-like corporation for family business and has proven to be more flexible and less expensive than the corporation form that should be the typical vehicle for startups which want to become unicorns. The UK had no problems with its private company law, whereas France, with its own SAS structure, seems to have found a very good way out from the paternalistic approach of Continental Europe law.

Italy is apparently doing well too with its overturning of the GmbH-form, even though contractual innovation processes are still hampered by old doctrines that are no longer in tune with the needs of modern society.[2] Wherever flexibility wins, rigidity succumbs. The reason probably is that there is no inter-European regulatory competition in action here – pressure comes from economic forces and competition (in a wide sense) from Delaware (see Startups and Company Law: The Competitive Pressure of Delaware on Italy (and Europe?).

The result is that some of the old doctrines on which continental European company law was built between the end of the 19th and the end of the 20th century are crumbling. During this process, it would be a terrible mistake even to imagine initiating a European process of harmonization of private company law, which would freeze the collapse of the structure at some point in time. Instead of a new, truly modernized company law, the 27 countries would end up with something like a European Coliseum – half destroyed, half standing up.

[1] This somehow positive conclusion has been strongly criticized in a recent post by Luca Enriques and Casimiro Nigro, who critique our view that many Italian charters contain mechanisms that can be considered functionally equivalent to the US ones. However, they do so by taking as an example Italian antidilution clauses, which in our paper we do not consider functionally equivalent to the US ones yet. With regard to other mechanisms, their critique is based on a different, much stricter use of the concept of ‘functional equivalence’ than the one we used.

[2] On this point, we and Luca Enriques/Casimiro Nigro are on the same page.


By Paolo Giudici, Professor of Business Law at the Free University of Bolzano, where he directs the Center for Research in Law & Economics (CRELE) and teaches Company Law and Capital Markets Law.

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