Startups and online Incorporation: What you need to know

On March 29, 2021, the Council of State upheld the appeal of the National Notaries’ Council (“NNC”) and declared the ministerial regulation on online incorporation of innovative startups in the form of limited liability companies (“LLCs”) unlawful.

This judgment triggered great debate among startup ecosystem operators. Many of them have interpreted this decision as a step backward in the process of digitalization of company incorporation.

The aim of this article is to focus on the exact scope of the judgment, starting from the analysis of the regulation at hand which will lead to a better understanding of the possible consequences of the judgment for Italian startups.

1. The regulation at hand

Decree-Law No. 3 of January 24, 2015 (“DL 3/2015”), converted with amendments by Law No. 33 of March 24, 2015, introduced the regulation of innovative small and medium-sized enterprises into our legal system. Art. 4, paragraph 10-bis of DL 3/2015 provides that innovative startups (governed by the previous Decree-Law No. 179 of October 18, 2012, converted with amendments by Law No. 221 of December 17, 2012) may be incorporated via digitally signed documents in place of public deeds.

The Ministry of Economic Development (“MED”) regulated the procedures for online drafting of deeds of incorporation for innovative startups in the form of limited liability companies via Ministerial Decree No. 17 of February 17, 2016 (“DM 17/2016”). This Decree expressly states that “the deed of incorporation and the articles of association, if disjointed, shall be drafted exclusively in digital mode.”

The NNC claimed the annulment of DM 17/2016 and the claim was upheld by the ruling of the Council of State at hand.

2. The claim of the NNC of May 4, 2016: rejection by the Regional Administrative Court of Lazio and subsequent acceptance by the Council of State

Moving to the judicial proceeding at hand, the NNC challenged three main issues of DM 17/2016.

Firstly, according to the NNC, the MED completely and unlawfully altered the purpose of DL 3/2015 by declaring online digital incorporation of innovative startups in the form of LLCs as the sole mode for incorporation, thus removing the alternative between a digitally signed document and a public deed. The Regional Administrative Court of Lazio did not find DM 17/2016 unlawful on this point. While, the Council of State had a completely different view, supporting the grounds for the NNC appeal and stating that lack of reference to the alternative use of a public deed was completely unlawful.

The second objection addresses two related issues. On the one hand, it is alleged that DM 17/2016 is unlawful because in breach of European legislation that sets forth an advance legality check on the incorporation of LLCs as necessary. Without this check, the deed of incorporation and the articles of association, and their amendments, shall be made in the form of a public deed (Art. 11 Directive 2009/101/EC and Art. 10 Directive 2017/1132/EU). On the other hand, it is alleged the breach of national law that empowers the Register of Enterprises with a merely formal check over corporate deeds (Art. 8, Law No. 580, December 29, 1993, establishing the Register of Companies; Art. 11, Presidential Decree No. 581, December 7, 1995). Indeed, the challenged DM 17/2016 entrusts the Register of Companies to perform a series of checks on the incorporation documents of LLCs that—according to the NNC first and then to the Council of State—would require kind of assessments that go beyond the specific duties assigned to the Register of Enterprises by Italian law. In light of the foregoing, the Council of State deemed DM 17/2016 unlawful, as it broadened the scope of the checks and assessments of the Register of Enterprises without adequate provisions of law and in contrast with existing European and national legislation, also by taking it out the possibility of incorporating innovative startups in the form of LLCs via public deeds.

The third objection of NNC had already been accepted by the Regional Administrative Court and then confirmed by the Council of State. It was challenged the unlawfulness of the registration procedures of innovative startups in the ordinary section of the Register of Enterprises. Indeed, DM 17/2016 sets forth that, when the requirements to be registered in the special section of innovative startups are no longer met, LLCs innovative startups incorporated digitally shall be registered in the ordinary section of the Register of Enterprises (like all other LLCs). This provision was introduced in the first regulation on innovative startups (DL 179/2012), but at that time, innovative startups could only be incorporated by public deeds. Following the introduction of online digital incorporation modalities, the possibility for a LLC not incorporated by public deed to be registered in the ordinary section of the Register of Enterprises would be in contrast with the general principles of corporate law.

3. What is going to happen to startups incorporated (or seeking to be incorporated) online?

The Council of State has not removed the opportunity to incorporate startups digitally online, since this is allowed by DL 3/2015 still in force. Therefore, complaining of a complete return to the past may be misleading and confusing. Nonetheless, in practice, startups cannot be set up online until new provisions on the implementation of DL 3/2015 are approved. Therefore, for the time being, all the startups that had begun the online incorporation procedure or were planning to do so are at a standstill.

And what about the companies that were established under the annulled regulation? Would it be possible to retroactively declare unlawful the incorporation deeds of these companies? In our opinion, this would be a quite extreme solution. It might be considered a subsequent check (presumably by a notary) of the incorporation deeds of these companies, although this might have too burdensome practical consequences. Therefore, such issue should be addressed promptly but with due attention by the appropriate institutions.

It may be interesting to reflect on the (current and future) role of the Register of the Enterprises. According to regulation in force and the Council of State’s judgment, the Register is empowered to carry out only formal checks; therefore, in the absence of an overall reform to such regulation, any kind of expansion of its functions would risk being unlawful. But might it make sense to revise the role of the Register with new functions? Entrusting the Register of Companies with a substantive and/or preventive check might not be the most appropriate solution for many reasons. Firstly, the current duties and organization of the Register might not be adequate to these checks. Secondly, it shall not be disregarded the different roles and functions of the Register of Enterprises and notaries, who have been traditionally entrusted with preventive legality check on companies’ incorporation.

Furthermore, it shall be noted that, by August 1^st, 2021, the Directive 2019/1151 on online setting up and registration of companies shall be transposed in national regulation. On April 20^th, the Italian Parliament has approved the European Delegation Act 2019–2020 setting forth the main guidelines and principles for the transposition of European directives. In this respect, the main principle regarding the implementation of the Directive 2019/1151 says that the online incorporation shall apply to LLCs and simplified LLCs with registered office in Italy, with capital paid through cash contributions, and the relevant incorporation documents shall have the form of a public deed signed with recognized electronic signatures by the titleholders attending the incorporation meeting in videoconference on an online platform.

Indeed, during the examination of the European Delegation Act 2019–2020 by the Senate in August 2020, the NNC submitted to the Senate the project of a web-platform for the online incorporation of LLCs, which seems to have inspired the principle given by the Parliament.

In light of the above, the transposition of Directive 2019/1151 could be an opportunity to redefine the overall online incorporation process of companies also in favor of startups. The government shall take the next steps, by balancing the need for flexibility and speed of startups with the need of lawful and proper controls over companies. Startup operators might support the process by submitting useful requests and suggestions for the drafting of the new regulation.