Claves del derecho de redes empresariales

The distinction between contractual and organizational models of network plays an important role from several angles206. One of these concerns network’s financing, both with regards to internal and external financing on the basis of the analysis developed above.

As regards internal financing, one major concern is related to the definition of rules concerning acquisition of resources through its member’s contributions, use of available assets within the networks, the possible shift in resource allocation from one project to another. As seen before with reference to the “internal capital market” debate, these processes face a trade-off between flexibility and agency costs, as generated by the delegation of powers concerning asset allocation to managers. Depending on the level of asset partitioning and legal autonomy among participant units (and their managers, consequently), transaction costs and collective actions problem may arise as well207.

Bearing this in mind, the distinction between contractual and organizational networks is important to consider. Indeed, both agency costs and collective action problems may be partially reduced by multilateral contracting among a network’s members. Of course, this type of contract will be incomplete and effective enforcement will depend on the observability of the conduct of network managers and participants208. However, incentives to cooperate will be higher given a mutual commitment and a form of explicit delegation for decision-making209.

Mutual commitment among participants and explicit delegation of decision-making powers are typical features of multilateral contracts and membership-based organizations (companies, associations and the like). By contrast, they are generally lacking in contractual networks based on the mere links among bilateral contracts, where de facto authority rather than consensus often forms the basis of control210. Among these forms, the analysis presented above would suggest that, as a single entity, organizational networks enable higher flexibility in asset allocation without entailing significant “tunneling” among participants’ assets211.

This setting is very different from the one of contractual networks based on the mere link between bilateral contracts (e.g. franchising), as is normally the case for contractual networks. Here, the multilateral commitment on asset allocation is more costly to achieve and in practice rarely existent. Indeed, and more commonly, bilateral negotiations are kept separated from interference by other linked contracts and negotiations212.

In contractual networks this approach facilitates the emergence of the unilateral imposition of financial conditions more than a multilateral and coordinated agreement among members participants. For example, franchise contracts often require financial contributions by franchisees for common interest investments and expenses (i.e. marketing and commercial expenses). A final producer often requires subcontractors to put industrial property rights, know-how, patents at network’s disposal without specific consideration or obtains payment term extensions without paying interests for the delay. Not only are bilateral relations often unbalanced, leaving space for opportunistic behavior, but horizontal communication among a network’s participants (franchisees, subcontractors, etc.) is also discouraged or prevented; furthermore, the extension of more favorable clauses is generally not allowed from one bilateral relation to another213.

Under such conditions internal financing within networks may take place. However, in the absence of a common financial plan as agreed among all involved parties, this easily entails re-distribution of financial burdens (for example, the subcontractor or the franchisee is forced to seek for bank credit) more than attaining a co-sharing of financial resources which would reduce the need for external credit in the interest of the whole network. Then, the inefficiencies described by the law and economics literature on internal capital markets and “tunneling practices” are more likely to emerge.

Other characteristics of organizational networks favor internal financing when compared to a contractual network setting. For example, given the contribution by single participants, the network is interested in “locking” such contribution within the network rather than allowing restitution to participants in case of individual withdrawal or exclusion214. Legal systems often enable parties to include “asset lock clauses” in both contractual and organizational settings. However, asset locks as default rules are more common within the law of organizations215 than within the law of contracts, where restitution upon contract termination is the general rule216. Following the theoretical approach presented above, the enforcement techniques of asset locks can be seen as an additional response to possible inefficiencies of the internal capital market.

When it comes to external financing, the reservation against contractual networks is even stronger.

Indeed, depending on the applicable law of obligations, contracts and organizations, the network’s legal form significantly determines the allocation of liability for loan repayment, defining: (i) the person(s) in charge of repayment (whether one or more network’s participants, together or without the organization, or the organization only); (ii) whether, in case of multiple responsibility holders, this is joint or several; (iii) whether, in the case of pooling and partitioning of assets and resources as destined to the network program, the liability is limited to them or unlimited.

As regards these aspects, and keeping the analysis at a very general level, contractual and organizational networks may be distinguished because, in the latter more than in the former, liability tends to be concentrated and charged upon the network’s assets, as partitioned from the participants’ assets; while contractual settings more than organizational ones tend to rely on joint and unlimited liability217. It should be acknowledged that, under these conditions, different approaches and solutions characterize domestic legislation allowing only limited harmonization among countries.

Looking at the financial structure of single firms, law and economics theory distinguishes between defensive and affirmative asset partitioning218. In a networks’ context such a distinction could be (re-)phrased as follows. Under a “defensive assets partitioning regime” a network’s creditors may not claim any right on its participants’ personal assets out of due contributions to the network fund. This regime would encourage network participants’ investments and induce financiers to strictly monitor the efficient and effective use of network assets219. Under an “affirmative asset partitioning regime”, the participants’ personal creditors may not claim any right on the network’s fund. This regime would release the network’s financiers from monitoring the use of the participants’ personal assets and the existence of concurring personal creditors, reducing the overall transaction costs of the financial transaction220. From the perspective of potential lenders, asset partitioning is also valued for its capacity to limit a borrower’s ability to increase the risk of default by shifting resources from one venture to another221.

Other research contributions specifically concerning networks’ financing have added that, conversely, unlimited liability provides for more collateral, though increasing monitoring costs, and that joint liability creates some space for internal, “peer to peer” control, though within a “collective action” setting and with a risk of free-riding222.

The following analysis will examine whether and to what extent an adequate contractual design could reduce some of the aforementioned limitations regarding contractual networks’ financing.

4. NETWORKS’ FINANCING IN PRACTICE: RECENT EXAMPLES FROM THE ITALIAN LANDSCAPE

The observation of recent practices in Italy suggests that the formation of contractual networks is one of the tentative responses of enterprises to the challenges imposed by the current crises and the difficulties to access the credit market.

Also (but not only) due to a recent reform adding tax advantages to previous legislation on a so called “network contract” (contratto di rete), from March 2010 to December 2013, 1290 network contracts have been concluded by Italian enterprises.

Pursuant to the legislative framework provided by law no. 33/2009 (as modified by law no. 99/2009 and, more significantly, by law no. 122/2010 and law no. 221/2012), these networks are mainly established as contractual agreements in the form of multilateral contracts whereas a minority is formed as a new legal entity223.

The objectives pursued by the parties may be quite diverse but the general function of the contract may be described as a function of collaboration224. Indeed the current law establishes that a “network contract” is a bilateral or multilateral contract in which enterprises aim to, individually and collectively, enhance their innovative and competitive capability in the market, and for this purpose, on the basis of a common network program, commit themselves to cooperate in certain areas linked with their own activity, or to exchange information or (to provide) industrial, commercial, technological supply, or to jointly carry on activities that are included within their own entrepreneurial activity225.

The underlying policy objective consists of promoting the formation or the development of strategic coalitions in areas in which investments for innovation and access to new markets could be fostered by the means of collective synergies and inter-firm cooperation.

As a consequence, network contracts are being signed in sectors that are more prone than others to technological innovation (like electronics, informatics, pharmaceutical production, bio-medical appliances, innovative materials, and the like). Meanwhile sectors that are particularly affected by the current crises (like automotive, constructions and textile industries) are also quite significantly represented in recent statistics on network contracts226.

Focusing on this second observation, the issue is to what extent, and why, the network contract could be a sound response to economic crisis and, in particular, which impact could be determined on the financial perspectives of the participating firms.

4.1. The legal framework and the asset structure of the Italian “network contract”

A brief description of the asset structure of a network contract could help to define the legal terms of the above-mentioned issue.

As regards asset allocation, three models emerge.

The first could be called a “fund free” network contract. In this case no fund is specifically set up. Of course, parties may always agree to share costs, revenues and property as they would do outside a network contract (e.g. firm A buys machinery on behalf of all participants, who will then refund A for price payment). For some reasons this model has a very limited use in practice: (i) because parties tend to use models which are similar to pre-existing practices (namely the one of consortia with a separate common fund); (ii) because contributions into network funds are today subject to favorable tax treatment.

In the second model parties establish a “common fund”, inheriting the practice of inter-firm consortia. This is the most used scheme for the same reasons that have just been recalled to justify the limited use of the first model. Then, parties are requested to contribute, originally and/or periodically, into a network fund (common fund). They commit to use the network fund for the network program implementation only. To reinforce this commitment, parties very often deny any restitution right in favor of participants who are excluded or voluntarily withdraw from the contract. The law also provides that management rules are stated by the contract227.

Pursuant to the 2012 reform, within this model, network participants enjoy limited liability whenever they establish a governing body (“organo comune”) who Is entitled to act and carry on commercial activity with third parties on behalf of the participants. This is a case in which defensive asset partitioning occurs regardless the existence of a separate entity. Indeed, participants do not need to establish the network as a separate entity in order to enjoy limited liability.

As regards defensive partitioning within this model, the law is still unclear. Indeed, it refers to the legislation on consortia (preventing member’s creditors from any claim over consortium’s assets) upon the condition of legal compatibility between the two schemes. Furthermore, interpreters disagree when discussing whether this condition is met228.

A third model can be presented as a “multiple asset partitioning” network contract. Here, no common fund, as traditionally intended, is set up. Yet each participant is requested to contribute by partitioning specific assets within her/his own patrimony pursuant to the special legislation on asset partitioning in the law of companies limited by shares (art. 2247-bis, let. a, Italian Civil Code). As a consequence, scholars tend to interpret this scheme as restricted to network contracts signed only by companies limited by shares229.

Unlike under ordinary company law, partitioned assets are destined to the collective interest activity and not merely to the individual interests of the originating company. Pursuant to company law, partitioned assets enjoy both affirmative and (if not specifically opted out of) defensive partitioning (art. 2447-quinques, Italian Civil Code).

As regards this third model it should be acknowledged that, once introduced in Italy in 2003, this type of asset partitioning has been perceived as costly to administer and subsequently rarely used in ordinary company law, especially by small and medium-sized enterprises. For analogous reasons the prospective use in networks (and in networks of small and medium enterprises, particularly) seems quite limited.

In general terms, it is somewhat questionable whether this legislation on “network contract” has paid sufficient attention to a network’s finance and “asset governance”230. More recent reforms have not only clarified the effects of defensive asset partitioning when a common fund is established but they have also introduced some accounting requirements making reference to the legislation on companies limited by shares. In practice such reference is not sufficient. Indeed, accounting rules need to be tailored on the specific nature of the network activity and economic interaction among its participants. Parties may, at least partially, compensate these weaknesses by the means of self-restraints. They could contractually provide for duties to provide information, accounting procedures, reserve funds, the verifiability of value assessment as regards non-pecuniary contributions, etc. In fact, current practice is only limitedly opting for these solutions, as shown below.

By contrast, both legislation and contractual practice show relatively greater attention to contractual design in terms of the governance of decision-making processes, internal monitoring schemes, penalty measures, etc. It should be considered whether these practices might have an impact on asset management and financial opportunities for networks’ participants, also in terms of credit assessment.

Having considered some of the limits of the Italian legislation, attention should now be paid to current practices.

4.2. A case in the construction sector

The construction sector has been seriously impacted by the current crisis231. In this sector some network contracts have been concluded in order to cope with the present challenges, as illustrated by the following example.

A network contract has been signed by twelve Italian enterprises (mainly construction enterprises, project and engineering service providers, social cooperatives operating as social service suppliers) in order to set up a real estate fund whose financial instruments are offered to qualified investors. The project is mainly focused on investments in the sector of Social Housing. More specifically, the contract is aimed to govern the collaboration among the parties for the accomplishment of the Social Housing project. Particular attention is paid to the real estate management once (and if) assigned to the networks’ participants by the Fund Management Company (FMC).

In the network contract the parties agree to transfer some listed real estate property or building permits into the Real Estate Fund and to provide monetary contribution into the network contract common fund.

The envisaged opportunity consists of creating sound conditions for a prospective job assignment and for the access to a market in which the (former individually) owned assets and constructions can be sold232.

Such conditions would include not only a collaboration plan coordinating complex activities and defining procedures for costs, risks and revenue allocation, but also a governance structure aimed at reinforcing peer and hierarchical monitoring within the network. This could result in greater reliability of the network’s participants as perceived by the market.

From this perspective, attention can be paid to the contractual design including: the allocation of tasks among network’s participants; specific forms of monitoring over performance; control over compliance and sanctioning powers as assigned to a so called network governing body233; the provision of exit penalties; a contractual liability regime which, on the one side, assigns to the sole party in breach the liability for non-performance vis-à-vis clients and third parties in general and, on the other hand, imposes to all the parties a cooperation duty in the interest of the network. This cooperation duty would explain why, in the case of substantial breach by one enterprise, the other participants are enabled to intervene and take adequate measures to mitigate damages at the expense of the party in breach. Parties also commit to provide special guaranties to the FMC if requested.

In terms of asset structure, the contract provides for the establishment of a common fund due to be conferred into a New co. in one year’s time. The participation of financing enterprises is also foreseen: to these participants, if existing, a seat in the governing body is reserved.

Compared with other network contracts, the individual contribution into the fund is quite substantial and the exit penalty amounts to a sum that is five times greater than this initial contribution. This rule is more rigid than any other contractual “asset lock” preventing the return of individual contributions from the common fund in case of exit.

It is important to highlight that such a fund is not conceived as a means to finance individual activity that participants commit to perform within the network program. Indeed, the contract stipulates that each participant will provide these means separately from his/her contribution into the common fund. Rather, these resources will enable the New co., once created, to bear the risk of unsold assets, as established by the contract also in view of the prospective relation with the FMC.

In the landscape of the network contracts that have been concluded over the past years, the one described here above cannot be considered as representing the main current practice. Rather, in its complexity, it is quite unique. However, while looking at other examples of network contracts, some of the above-mentioned relevant aspects could be confirmed, particularly:

— Parties do rely on the common fund as a contributory means to accomplish the network project; however, the common fund is rarely considered as a sufficient financial resource for network-related investments; in many cases it is very limited and this choice is not always made for reasons concerning the low financial needs generated by the network program234;

— The contractual design of the network is also conceived as a way to ensure the greater reliability of the network with regard to the successful accomplishment of the program235;

— Allocation of risk is often very important (particularly the risk of default in the relation with third parties and sometimes, like in the described case, the risk of unsold assets/merchandise or the like): duties of collective insurance purchase may be provided as an alternative or a complementary solution; the use of the common fund as collateral for credit relations with third parties is sometimes enabled by the contract;

— A direct participation of banks and other financial institutions in the network contract is an emerging trend and increasing in the latest experiences.

These practices show some of the possible applications of the network contract as a means for defining, on the basis of a mutual commitment among participants, asset allocation and management governance. Both internal and external financing find some support in contract design: so, for example, as regards contribution duties, accounting duties, asset locks, internal screening and monitoring mechanisms to reduce the risk of individual and collective default. Minor attention is paid to inefficiencies concerning asset allocation and management in particular cases. For example, when the network programme includes a multi-projects plan, managers and directors are often vested with a discretionary power whose limits are rarely defined as regards possible tunneling from one project to another. Neither are risks and liabilities always easy to define. These seem to represent some of the challenges for the future, both for practitioners and for policy makers.

Though limited, the observation of the former practices allows to draw some conclusions on the virtues and drawbacks of contractual networks’ financing, as presented below.

5. INTERNAL FINANCING IN CONTRACTUAL AND ORGANIZATIONAL NETWORKS: WHICH PERSPECTIVES?

Law & Economics studies show that the way enterprises define a firm’s boundaries influences, among other aspects, their financial structure and financial choices, e.g. debt leverage236. Considering the “new boundaries of the firm”, well beyond the model of the vertically integrated structure towards outsourcing, collaboration contracts and strategic alliances237, the same type of analysis could be extended from the reality of stand-alone firms to the one of inter-firm networks. Then the question can be raised as to whether the existence of a network and its legal structure enable or prevent determined financial strategies.

The previous analysis shows that the potential for self-financing in networks does exist, although its material importance should be more carefully observed in practice and confronted with the analysis concerning networks’ structure and governance.

At the very least, based on the previous analysis, participation in networks could allow some pooling of financial resources or some inter-firm financing as a cooperative strategy based on trust and, sometimes, reciprocity enabling forms of cross financing. Co-financing among a network’s participants can allow for the accomplishment of projects that would not otherwise be affordable by each enterprise separately without a significant amount of debt leverage.

The described case in the construction sector (see par. 4.2) also shows that self-financing inside networks may be improved through an adequate network design both at the governance and asset levels. This can be observed in different ways in both contractual and organizational networks, provided that an explicit agreement and commitment to cooperate for the accomplishment of the common project is achieved among participants. In order to be more effectively enforceable by anyone, such agreement should take the form of a multi-party contract (due to regulate a merely contractual network or to establish a collective entity as an organizational network) rather than the form of a mere link between bilateral exchange contracts. Indeed, the multi-party contract allows parties to share objectives and modes of action and to commit to abide to common rules, enabling single participants or appointed bodies to stand for the collective interest.