Close Corporations and the Financing of SMEs: An Introduction

The Puzzle of the New European COMI Rules: Rethinking COMI in the Age of Multinational, Digital and Glocal Enterprises Abstract EU Regulation 2015/848 (Recast) laid down new rules on the debtor’s ‘centre of main interests’ (COMI) both to make it easier to determine international jurisdiction and to prevent a debtor from fraudulently relocating his/her/its COMI from one Member State to another. However, the terms of the litigation concerning the NIKI case and an in-depth analysis of the Recast demonstrate that this operation has been unsuccessful. This paper argues: first, that the new COMI rules contain logical and teleological flaws; secondly, that the prerequisite that the COMI ‘shall be the place […] which is ascertainable by third parties’ is a duplicate of the prerequisite ‘on a regular basis’; thirdly, that the ‘ascertainability’ prerequisite could even prove to be problematic when insolvency occurs within an enterprise that is multinational in nature; and/or conducts its relationships with suppliers and customers through digital networks; and/or deals with a business having glocal considerations. Consequently, this paper puts forward a proposal for a better regulation that would aim both at fixing the regulatory flaws and at addressing more efficiently insolvencies within multinational, digital and glocal enterprises.

Pecuniary Sanctions Against Issuers in European Capital Market Law: Harming the Protected Investors? Abstract There is a wide consensus in European capital market law that a sound legal framework for the financial sector should rest on a strong supervisory and sanctioning regime. According to this rationale and following the paradigm of competition law, the new legal framework in European capital market law provides for high-magnitude pecuniary sanctions. The new sanctioning regime does not entail special provisions for issuers. However, sanctions imposed on legal entities are of a higher magnitude than sanctions imposed on natural persons. We claim that the imposition of high-magnitude pecuniary sanctions on issuers for violations of capital market law provisions as such does not have the deterrent effect that it is thought to have and, under specific circumstances, can work against the protection of investors. Moreover, the sanctioning provisions of competition law must be examined carefully before being considered as a paradigm for the structure of sanctions against issuers under capital market law. Furthermore, we claim that in cases where innocent investors are harmed, capital market law should resolve the dilemma between entity and manager liability by choosing the latter.

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

Blockchain Startups and Prospectus Regulation Abstract Initial coin offerings are a new way for blockchain startups to finance project development by issuing coins or tokens in exchange for fiat money or Bitcoin or other cryptocurrencies. In this article, we start from the current distinction between different types of tokens and argue that it can create confusion and should be at least partially abandoned. We believe that the conceptual difference between a currency token and a tradable utility token is just the dimension of the crypto environment in which the token is spent. More specifically, ‘utility tokens’ combine the customer payment mechanism with the utility component and, when tradable on a secondary market, the investment one. We argue that they blur the traditional distinctions between currencies, financial assets and consumption goods. Moreover, we stress the increasing importance of online crypto exchanges. Recently some exchanges have also taken up the role of trusted intermediaries and staked their reputation on token offerings, which are termed initial exchange offerings and have gained in popularity. We therefore argue that the crypto market increasingly looks like a segment of the capital market and behaves as such. Given that tokens have a clear investment component, we show that they are tradable securities under the Prospectus Regulation. We compare the European securities regulation with its US counterpart and focus on prospectus exemptions, highlighting the great differences between Europe and the US which make Europe less amicable to blockchain startups.

The Individual Creditor’s Right to Hold a Corporate Shareholder Liable for an Insolvent Company’s Obligations Outside Bankruptcy Proceedings: The Lithuanian View Abstract Lively discussions on civil liability of companies’ directors towards the creditors of financially distressed companies have been going on for decades. Recent trends in Lithuanian case law, however, show that, in parallel, creditors of private limited liability companies have also shifted their focus to other real masters of business—controlling shareholders—by, rather aggressively, enforcing shareholders’ liability for obligations of insolvent companies. Since recovery rates of unsecured creditors in insolvent liquidations are rather modest, creditors seek to by-pass collective bankruptcy proceedings and bring actions against the abusive shareholder exclusively for their own benefit outside bankruptcy proceedings. Based on comparative examples, the article aims to analyse and evaluate the Lithuanian legal framework by addressing the standing of an individual creditor to hold an abusive corporate shareholder liable for an insolvent company’s obligations from the perspective of competing damage claims between an individual creditor and a bankruptcy administrator. The analysis includes both ordinary and fraudulent bankruptcies.

Regulating Draconian Takeover Defenses with Soft Law: Empirical Evidence from Event Studies in China Abstract In recent years, many Chinese listed corporations have adopted draconian takeover defenses that harm shareholders’ interests. While the courts and the Chinese Securities Regulatory Commission have failed to offer any guidance as to the validity of these defenses, the two stock exchanges in China have adopted a soft-law approach to regulating them by issuing letters of concern to listed corporations. This article makes the first attempt to empirically evaluate the effectiveness of this soft-law approach by examining the effects of takeover defenses adopted under the regulation of letters of concern with event studies. The movements of stock prices during the event period suggest that the takeover defenses adopted by listed corporations under the regulation of stock exchanges were not draconian, and that these corporations were still potential takeover targets. Thus, letters of concern issued by the two stock exchanges are effective in curbing draconian takeover defenses and protecting public investors. These findings enrich our understandings of the effects of soft law and have important implications for investor protection and the development of the capital market in China.

Resolution Plans and Resolution Strategies: Do They Make G-SIBs Resolvable and Avoid Ring Fence? Abstract The paper analyses the public section of the 2015, 2016 and 2017 resolution plans of the eight largest US Global Systemically Important Banks (G-SIBs). It unfolds the beneficial effects that the statutory obligation to draft such plans had on the rationalisation of groups’ structure and on US G-SIBs insolvency preparedness. However, the detailed analysis of those plans also shows how banks have almost uniformly chosen a Single Point of Entry (SPOE) resolution strategy which may not be rapid and orderly and may not be the most effective strategy overall given the location and the type of entities covered. This leads the author to argue that the choice of an SPOE may be the preferred option of the relevant US Agencies, leading to a phenomenon of ‘regulatees’ capture’. The paper also shows how in case of insolvency of a US based G-SIB with entities located in the EU, tensions may arise with the relevant EU authorities. This is mainly because of the uncertainty driven: by non-uniform triggering events; by the existence of two types of resolution plans in the US; by the over-reliance on pre-positioned loss absorbing capital at group level (which may not overcome the double leverage problem); by deficiencies in US law to deal with the liquidation of G-SIBs under an SPOE; and by a possibly different regulatory culture in the US and the EU which may afford dissimilar degrees of protection to bank stakeholders.

The Financing of Small and Medium-Sized Enterprises: An Analysis of the Financing Gap in Brazil Abstract While small and medium-sized enterprises (SMEs) are important for economic growth and employment, they face numerous obstacles in accessing external finance. In this article, we review recent developments in the availability of financing for SMEs in Brazil, focusing on the greater use of equity and debt for SMEs. In assessing the barriers to external financing, we focus on the role of bank characteristics, market structure and variations of interest rate spreads across banks and time. Moreover, as banks retreat from SME financing, we examine the potential for SMEs to seek new sources of financing from private equity and venture capital funds. We examine the changes in the availability of bank loans between 2014 and 2016. By considering demand, we estimate the SME loan gap based on Central Bank and publicly available data. Our results show that the loan gap in Brazil is substantial.

Shareholder Conflicts in Close Corporations between Theory and Practice: Evidence from Italian Private Limited Liability Companies Abstract Shareholder conflicts are said to be the Achilles heel of close corporations. They materialize in different ways and shapes, mostly in the form of majority oppression, minority abuse or shareholder deadlocks. Different cognitive biases and heuristics, as shown by the behavioural law and economics movement currently so much in vogue, contribute to their emergence (such as over-optimism, strategic behaviour, availability and representativeness heuristics, information asymmetry). In international corporate law practice, depending on the concrete governance goal to be achieved, entrepreneurs employ various contractual safeguards to effectively prevent and resolve the above shareholder conflicts. The most common are restrictions on the transfer of shares (e.g., the right of first refusal, consent clauses), special prerogatives for minority shareholders (e.g., veto rights over management decisions, super-majorities for fundamental corporate actions) and expulsion clauses, while more experienced players also recur to drag-along or tag-along arrangements, as well as to shoot-out procedures. The present article builds upon this framework in order to conduct probably the first thoroughly comparative law in action research on a representative data set of Italian private limited liability companies (srl) incorporated in South Tyrol and Milan. The empirical findings, with some unexpected variations between the two places of incorporation, suggest that with reference to conventional safeguards (the right of first refusal, consent clauses, etc.) a more or less significant degree of contractual sophistication can be observed, while innovative clauses such as tag-along or drag-along provisions are generally lacking. The explanation likely lies in the fact that legal advisers path-dependently imitate standardized corporate charter terms widely acknowledged and tested among the legal community rather than investing considerable efforts in the drafting of optimal customized arrangements. The social and economic costs correlated to sub-optimal and status quo-biased contractual design might not be taken into due consideration. This article also provides useful policy suggestions for the legislator and practitioners for the drafting of the best-fitting corporate charter.