Making EU Inc. Fit for Venture Capital

The EU Inc. initiative marks a landmark in the construction of a genuine “28th regime” for European businesses.

For the first time, entrepreneurs across the Union would be able to incorporate under a single, digital-first, (partly) European legal form, rather than navigating twenty-seven divergent national company laws.

By lowering the frictions of formation, cross-border operation, and access to capital, the Proposal directly serves the Union’s ambition to foster innovation and to help its most promising startups and scaleups raise finance and grow.

We warmly welcome the initiative and offer the following amendments in a constructive spirit, to help the instrument deliver fully on its own premises.

A word on scope is warranted at the outset.

The debate over a genuine “28th regime” is considerably broader than the concerns of venture-backed firms: harmonised, EU-wide company-law rules matter for a much larger population of businesses that today bear the same fragmentation costs of operating across twenty-seven divergent national regimes.

This brief deliberately trains its lens on innovative startups and scaleups financed by venture capital, because their financing needs throw the Proposal’s constraints into especially sharp relief.

That focus should not, however, be mistaken for a claim that the 28th regime is—or should be—a bespoke instrument for high-growth, VC-backed companies. It is better understood as one flagship application of a far wider harmonisation project, and the amendments we propose are offered in that spirit.

The proposed amendments share a single guiding rationale: that innovative startups (as well as scaleups) need, and should be granted, materially greater contractual freedom than the Proposal currently envisages. The reason is grounded in how high-growth firms are financed.

Over decades, venture-capital practice has converged on a sophisticated and highly standardised contractual architecture designed to address the acute uncertainty, information asymmetries, and moral hazard that characterise the funding of innovative projects.

That architecture relies on arrangements that depart from ordinary corporate-law defaults: differentiated cash-flow and control rights, liquidation and other class preferences, drag-along and down-round mechanics, board-appointment rights attached to shares or investors, redeemable and convertible instruments, exculpation of directors, and employee equity with cashless exercise.

These are not aggressive deviations from a fair baseline; they are the mechanisms that make risky, early-stage financing possible in the first place.

What may appear “unfair” to one class ex post is typically what all parties, sophisticated and professionally advised, agreed was fair ex ante, behind a veil of ignorance as to which state of the world would materialise.

The difficulty is that European corporate laws frequently frustrate these arrangements. Crucially, the obstacle rarely lies in explicit statutory prohibitions.

It arises instead from doctrinal interpretation and judicial practice—general clauses, reasoning by analogy, anti-avoidance principles, and mandatory readings of otherwise open-ended standards—which together render several national regimes far more rigid in action than they appear on the books.

This matters for EU Inc. because the Regulation will be applied by national courts and interpreted by the Court of Justice, and there is a well-documented tendency for EU corporate-law instruments to be read through the lens of national doctrines.

There is a real risk, moreover, that contractual freedom will be constrained through recourse to general principles and standards. If that happens, EU Inc. would import precisely the rigidities it was meant to overcome, and simply repealing explicit mandatory provisions would not be enough to prevent it.

The amendments therefore pursue three complementary strategies for innovative startups (and innovative startups only).

First, they introduce rules of interpretation that steer the “law in action” in a private-ordering-friendly direction: limitations on contractual freedom are to be narrowly construed in light of proportionality, and good faith is to be assessed consistently with the economic logic of venture-capital transactions, while abuse remains sanctionable.

Second, they enable and protect the specific arrangements on which VC finance depends, including through recognition of model charters and shareholder agreements kept current by expert bodies.

Third, they secure predictability, by anchoring insolvency jurisdiction and applicable law to the registered office.

Underlying all of this is a simple premise: sophisticated parties, advised by specialised counsel, are well placed to design firm-specific governance, and the law best serves innovation by enabling their choices, enforcing them with certainty, and intervening only against genuine abuse.

IEP Bocconi does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.

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