For years, Europe has been tacked between two regulatory approaches to financial market integration: fully-fledged supranational centralization on the one hand and overly bureaucratic convergence exercises, seeking to harmonize the law in 27 jurisdictions, on the other hand. The results have been underwhelming. Fragmented markets and limited cross-border scaling persist. One reason is that businesses must organize under national laws, frequently inattentive to the specific needs of fledgling high-growth firms. The European Parliament’s draft report on the 28th regime for innovative companies offers a promising new approach, overcoming some of the weaknesses of past initiatives.
Centralization of corporate forms, i.e., an autonomous supranational charter, always seemed just as unlikely as a harmonization-induced convergence that could spur market integration. National legal traditions varied substantially, with distributional consequences for stakeholders. Therefore, productive compromises were impossible to reach against the resistance of vested interests, and supranational legislation remained patchy at best and did not even set out to tackle the looming frictions at the interfaces of supranational corporate law with national insolvency, labor, or general private law. The failed attempts to establish a European private company (Societas Privata Europaea, SPE) or at least a single-member private limited liability company (Societas Unius Personae, SUP), and the lackluster track record of the European company (Societas Europea, SE) amply illustrate this assessment.
New Corporate Form to Boost Cross-Border Funding for European Start-ups
In particular, small and medium-sized enterprises (SME) on a growth trajectory face the challenges and costs of fragmentation when attempting to attract cross-border funding. The need to organize firms in response to the idiosyncrasies of national corporate law prevents efficient contracting and limits European firms’ access to finance. At the margin, founders of innovative and scalable businesses are pushed towards other markets from the get-go, especially the US, but also incrementally the UK.
The response proposed in the draft report is simple. In the future, member states shall offer all new and existing limited liability companies a choice: Either incorporate and organize themselves according to existing national law or opt for incorporation as a European scale-up and start-up company (ESSU), a new corporate form to be established in each member state. The unique feature of the ESSU is that it deliberately caters to the specific needs of early-stage firms with peculiar financing needs and risk structures.
A third path for European Corporate Law
The proposal for a 28th regime rests on three principles: optionality, fully digital processes, and a harmonized model charter. Companies that choose to incorporate as an ESSU shall do so via a fully digital process within 48 hours. Once established, ESSUs are granted a unique digital identifier, registered with a European institution. In the process, companies can freely choose the country of incorporation. Critically, the report tallies with a proposal floated earlier and calls for a model charter, promulgated at the EU level. EU legislation should provide standardized articles of association and shareholder agreements to safeguard investors and entrepreneurs and make the ESSU attractive for early-stage funding. This proposal acknowledges the crucial importance of private ordering for venture funding. Contracting parties custom-tailor cash-flow and governance rights in start-ups and deviate from default corporate law to minimize the frictions stemming from the pervasive informational asymmetries at early-stage firms. Hence, efficient financing relationships hinge critically on the validity of VC-backed firms’ charters and shareholder agreements. Prior research shows that member states’ corporate laws frequently call arrangements typical for US VC deals into question.
Lessons from Delaware for a European start-up ecosystem
The 28th regime offers advantages for companies that seek to attract cross-border funding. So far, these companies face costly frictions, even in sectors thatare, in principle, harmonized on the EU level. National laws and doctrines still vary considerably and frequently prevent financing arrangements, familiar to international VC-investors, leading to a discount in deal valuation that reduces available funding for European start-ups. A harmonized model charter in all member states can potentially overcome these frictions. Even more so, if the ambitious proposal to establish specialized and distinct panels within national courts in all member states was enacted. Such specialized expertise, akin to the one typically ascribed to the Delaware judiciary, could ultimately overcome the inherent resistance of traditional lawyers to extensive private ordering and induce them to accept outcomes that seem “unfair” ex post but follow an economic rationale that enhances utility for all contracting parties ex ante.
The proposal goes one step further in mimicking the US model to overcome national corporate law variations, including those in enforcement. The draft report for the 28th regime proposes to allow companies to incorporate as an ESSU in any member state, regardless of the location of the company headquarters or its main business operations. This would allow companies to seek incorporation in member states which provide a business-friendly ecosystem, especially regarding the execution of critical transactions, dispute resolution, etc. The explicit reference to the successful model of Delaware Inc. in the US, which provides “efficiency, the speed and the degree of specialisation of the court system adjudicating on matters relating to this corporate form,” shows that the report wants to replicate the successful US model of charter competition.
Ideally, the establishment of the 28th regime would encourage member states to compete in creating an ecosystem that promises legal certainty and speedy administrative processes, thereby attracting entrepreneurs, venture capital, specialized law firms, and other advisors. The specter of regulatory arbitrage and an ensuing race to the bottom seems limited in the context of venture financing, where entrepreneurs would – at least over time – would learn about the relative advantages of one jurisdiction over another and venture financiers would therefore leave money on the table by proposing inferior legal arrangements that do not maximize joint surplus.
What are the next steps?
After the parliamentary initiative, the ball lies in the Commission’s field. A call for evidence asks stakeholders how the 28th regime can be implemented as part of the European Innovation Act, with a legislative proposal expected in the first quarter of 2026. Currently, the report on the 28th regime offers a promising avenue for improving the financing conditions for European companies. Rather than waiting for the unrealistic Europeanisation of corporate law or being stuck in imperfect efforts to harmonize existing national laws, the ESSU offers them integration through choice. Simply put: After decades of suboptimal top-down approaches, the 28th regime follows a bottom-up approach, which leverages the specific expertise of innovative and successful companies and puts their choices at the helm of market integration.
Vincent Lindner is Financial Policy Officer at the SAFE Policy Center.
Tobias Tröger is Director of the SAFE Research Cluster Law & Finance and Professor of Private Law, Commercial and Business Law, Jurisprudence at Goethe University Frankfurt.
Blog entries represent the authors’ personal opinion and do not necessarily reflect the views of the Leibniz Institute for Financial Research SAFE or its staff.
