Corporate Opportunities: A Law and Economics Analysis (Contemporary Studies in Corporate Law)

Despite the many open questions on how to interpret corporate opportunity rules, their relevance for the development of a corporation in its early stages is undoubtable. The traditional economic reading of corporate opportunity doctrines has ascribed the rules to the area of economic agency theory, and has stressed their function to contain agency costs. But corporate opportunity rules are surrounded by a far more complex set of variables in highly innovative environments. On the one hand, the rules limit the mobility of corporate founders who sit on start-up boards – where founders represent the very building blocks and knowledge upon which technical innovation depends. On the other, they may limit venture capital intra-industry operativity – when the same general partner sitting on the boards of competing start-ups find themselves in a position of divided loyalty. Far from being a systematic commentary on corporate opportunity rules, this book applies the law and economics method to the corporate opportunity legal paradigm, drawing normative examples from both the common law and civil law traditions. After presenting a simplified economic model for the analysis of bargaining over corporate opportunities, it identifies common patterns in corporate opportunity rules and potential legal and/or contractual solutions for their development, either by way of court innovation or private ordering. These patterns and adaptations may prove crucial to different economic realities, such as industrial districts, venture capital and corporate venture capital. Preface 8 Acknowledgements 10 Table of Contents 14 1. Corporate Opportunity Legal Paradigms and Industrial Development: From Localised Business to Trade and Financial Globalisation 20 I. Introduction 20 II. A Concise Overview of the Debate on Corporate Law Convergence and Divergence 23 III. The Evolution of Corporate Opportunity Rules in Light of the Varieties of Capitalism Theory – a Comparison between British and Italian Law 27 IV. The UK Corporate Opportunity Rules and the Shift from an Industrial-based to a Financial Services-based Economy 32 V. Italian Directors' Duty not to Compete with the Company and Corporate Opportunity Rules in a Diversified Economic and Industrial System 38 VI. Concluding Remarks on the Comparison between the UK and Italy 49 VII. Corporate Opportunity Rules and the Development of the Spanish Economy from Autarchy to Internationalisation 51 VIII. Conclusion 58 2. A Cost-Based Analysis of Corporate Opportunity Doctrines 60 I. Introduction 60 II. The Economic Effects of Corporate Opportunity Doctrines and their Connection to the Duty of Loyalty of Directors 64 III. Deterring Misappropriations and Containing Agency Costs 68 IV. Protecting the Long-Term Business Development of the Corporation and Reducing Hold-Up Costs 74 V. Non-Patentable Technological Innovation and a Corporate Opportunity Doctrine Dilemma: The Costs of Protecting v Diffusing Innovation 79 VI. Bargaining over Corporate Opportunities, Setting Appropriate Remedies and Reducing Transaction Costs 82 VII. Conclusions 83 3. An Economic Analysis of the Remedies for the Misappropriation of Corporate Opportunities 85 I. An Introduction to Deterrence from a Philosophical and Economic Perspective 85 II. The Dismissal of a Company's Director as a Consequence of a Misappropriation of a Corporate Opportunity 88 III. Gain-Based Remedies in Common Law: Account of Profits and Disgorgement of Profits Assisted by a Personal or Proprietary Constructive Trust 94 IV. Gain-Based Remedies in Civil Law Jurisdictions: the Spanish 'Enriquicimiento Injusto' and the German 'Eintrittsrecht' 98 V. Damages Awards for the Misappropriation of Corporate Opportunities in Common Law and in Civil Law Jurisdictions 103 VI. Punitive (or 'Exemplary') Damages for the Misappropriation of a Corporate Opportunity 107 VII. Criminal Sanctions for the Misappropriations of Corporate Opportunities: Notes with a View to the Future Law 112 VIII. The Viability of Temporary Remedies: Injunctions and Astreintes 117 IX. Reputational Sanctions as a Consequence of the Misappropriation of a Corporate Opportunity and the Difficulties of Quantification 119 X. Conclusions 122 4. Bargaining Over Corporate Opportunities as the Central Objective of Corporate Opportunity Doctrines 124 I. Introduction: Leaving behind the Property versus Liability Rules Debate – A Destructured Approach to Bargaining 124 II. Models for the Analysis of Bargaining over Corporate Opportunities 127 III. Assumptions Underlying the Analysis of Bargaining over Corporate Opportunities 131 IV. The Protection of Entitlements to Exploit Corporate Opportunities and Disclosure 136 V. Negotiation and the Protection of Entitlements to Exploit Corporate Opportunities 140 VI. Residual Post-Negotiation Efficiency Profiles and the Protection of Entitlements to Exploit Business Opportunities 147 VII. Notes on the Taking of Corporate Opportunities in a Repeated Game Context 151 VIII. A Normative Benchmark for Continental European Corporate Laws 154 IX. The State of the Art in Anglo-American and in Continental European Corporate Laws 155 X. Conclusion 157 5. Corporate Founders and Corporate Opportunities in Highly Innovative Environments 159 I. Introduction 159 II. The 'Lone Genius' versus the Team, from Leonardo and Edison to the 'Industrialisation of Invention' 161 III. Limited Convergence in Corporate Opportunity Rules, Divergence in Corporate Opportunity Remedies 166 IV. Founders under the Lens of IP Theory: Do Employee Innovation Incentives Apply? 169 V. Overview of an Evolving Research Field – Institutional Economics, Corporate Governance and Innovation 173 VI. At the Core of Technological Innovation: Creation, Circulation and Combination of Knowledge Building Blocks 175 VII. Technologic Innovation Traditional 'Taxonomy' versus Disruptive Innovation 177 VIII. Corporate Founders and their Incentives to Innovate within a Corporation: Founders' and Corporations' Perspectives 181 IX. Founder-Led Innovation and the Corporation in the Light of Modern High-Tech Innovation Strategies 185 X. You Are Smart, You Have Great Ideas! European or US Finance? Implications for the Private Ordering Debate 191 XI. Conclusions 193 6. Corporate Opportunities and Venture Capital 196 I. Introduction 196 II. The Cross-Border Dimension of Venture Capital: Old and New Policy Questions 199 III. The Multi-Layer Dimension of the Conflict of Interest in Venture Capital 204 IV. The Relationship between Venture Capitalists and Entrepreneurs: Business Opportunism, Unilateral, Bilateral and Multilateral Risks of Misappropriations 211 V. Complicating the Taxonomy: Corporate Venture Capital and the Corporate Opportunity Paradigm 232 VI. Welcoming Cross-Border Venture Capital in Europe: Why do Corporate Opportunities Matter? 238 VII. Conclusion 245 7. Corporate Opportunity Doctrines: One Size Fits All or Multiple Efficient Solutions? 246 I. An Overview of the Debate on Private Ordering in Corporate Law 246 II. Does One Size Fit All? A Contract-based Approach 251 III. The Absence of a Clear Definition of 'Corporate Opportunity': Weakness or Strength? 255 IV. The Limited Effectiveness of an Ex Ante Authorisation to Take Corporate Opportunities 260 V. The Benefits of a Waiver for Corporate Opportunities 263 VI. Rules on Resigning Directors and their Vital Importance for Venture Capital 267 VII. Remedies in Civil Law: How to Overcome the Intrinsic Weakness of a Remedial System Lacking Equity Remedies 274 VIII. Conclusions 276 Conclusions 278 Bibliography 280 Index 308 "This monograph provides a comprehensive analysis of corporate opportunities doctrines from a comparative perspective. It looks at both common law and civil law rules and relies to a large extent on a law and economics approach. This book broadens the conventional view on corporate opportunities, a vital step in light of the adoption of corporate opportunities rules in civil law jurisdictions and in light of investors' ever-changing strategies. This approach considers institutional complementarities and especially industrial complementarities. The book thus explores several jurisdictions and their economic and industrial environments, whilst also assessing the impact of globalisation onto legal reform. Furthermore, it analyses the problems related to the application of corporate opportunities rules to cross-border venture capital. In normative terms, the book advances one main stance, articulated in three points: first, it proposes different sanctions for undisclosed and disclosed misappropriations, supporting the core idea that sanctions should be set against disclosure and not authorisation. Secondly, it advances the idea that sanctions against undisclosed misappropriations should be more severe than the ones presently applied. Thirdly, it considers the possibility of a more flexible treatment of disclosed misappropriations. This study is positioned at the intersection of several fields, providing a lens into a much broader range of dynamics that will be of interest to a varied international readership, and offering a window into the broader institutional dynamics at work in centres of innovation (eg Silicon Valley and industrial districts in other jurisdictions). It is rooted in law and economics, but the emphasis is placed on how corporate opportunities rules fit within a broader set of institutional dynamics that affect innovation, industrial efficiency, and economic competitiveness"-- Provided by publisher.