No Private Ordering Please, We're Italian

Private ordering enables investors to design firm-specific governance arrangements. Aided by specialized lawyers, sophisticated contracting parties can engage in complex private ordering exercises yielding agency cost-minimizing governance structures. Venture capital (‘VC’) contracting is a notable example. Through decades-long iterations, US VC contracts have emerged as the best real-world solutions to the challenges of financing high-tech firms, informing transactional practice globally.

Yet, the law, corporate law included, can hinder the “transplant” of US VC contracts. In a companion paper, we provide systematic evidence that German and Italian corporate laws literally crash contracting parties’ ambitions to transplant US VC contracts. Importantly, we spotlight that blackletter corporate law provisions are less often to blame for this outcome than (widely accepted) scholarly interpretations. Corporate law in action is thus ‘über-mandatory’.

This essay complements our previous research by asking how Italian legal culture can explain this character. We note that Italy’s internal legal culture grants legal professionals wide discretion on how to interpret the law and how they use it to complement blackletter law with a number of implicit rules and principles of a mandatory nature. External legal culture, in turn, explains legal professionals’ (and chief among them legal scholars’) inclination to build a ‘system’ of mandatory corporate law rules. To begin with, the long-standing predominance of banks’ role in corporate finance created demand for rigid corporate laws. Second, legal professionals’ inclination to extend mandatory corporate law is consistent with their self-interest as it increases demand for legal services and, hence, their rents. Third, few Italian legal scholars appear to trust markets and decentralized rulemaking as efficient and fair tools to allocate resources, consistently with the dominant political ideology. Lastly, Italian legal scholars aspiring to establish their academic reputation and advance their careers face stronger incentives to identify novel mandatory requirements that constrain private ordering – thereby demonstrating their mastery of the legal system – rather than to advocate for legal deference to existing private ordering solutions, which may be perceived as trite and unoriginal.