Venture capital funding for biotech pharmaceutical companies in an integrated financial services market: Regulatory diversity within the EC

European Business Organization Law Review

Volumn 2, Issue 3-4, 2001, Pages 585-602

  Haar, Brigitte ^a  

^a MAX PLANCK INSTITUTE   (Germany)

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EID: 82955163465     PISSN: 15667529     EISSN: 17416205     Source Type: Journal    
DOI: 10.1017/S1566752900000616     Document Type: Review

References (88)

1. A prominent example being the market of telecommunications: Mestmäcker (ed.), Kommunikation ohne Monopole (Baden-Baden: Nomos 1980); Mestmäcker (ed.), Kommunikation ohne Monopole II (Baden-Baden: Nomos 1995).
2. Office of Tech. Assessment, US Congress, Commercial Biotechnology: an International Analysis (1984) p. 3.
3. Summing up this molecular approach Burk, "Introduction: A biotechnology primer", 55 U. Pitt. L Rev. (1994) 611, 612-621.
4. COM (95) 688 final, December 1995, p. 15, 24, Annex 1: p. 16/14; hint at "biotechnology... as one of the most promising and crucial technologies for sustainable development in the next century" in European Commission, White Paper on growth, competitiveness, and employment: The challenges and ways forward into the 21st century, COM (93) 700 final, Brussels, 5 December 1993; for the latest official statement on the status of biotechnology in Europe and the legal protection of biotechnological inventions, see the opinion of the Advocate-General of 14 June 2001 in Case C-377/98 Kingdom of the Netherlands v. European Parliament and Council of the European Union.
5. Ernst & Young, Aufbruchstimmung 1998. Erster Deutscher Biotechnologie Report (Stuttgart: Schitag Ernst & Young 1998); this is not changed by the recent growth of the European biotech industry, which leaves the top fifty European biotech firms at a quarter of the size in annual turnover and in stock value in comparison with US firms: Hofmann, "Europäische Industrie noch im Rückstand" ["European Industry still behind"], Handelsblatt (27 May 2001).
6. Giesecke, "The contrasting roles of government in the development of biotechnology industry in the US and Germany", 29 Research Policy (2000) 205, 207 and 208, with reference to Ernst & Young, Biotech 97, Alignment: a new economy (The Ernst & Young Annual Report on the Biotechnology Industry) (Palo Alto 1996).
7. European Commission, A User's Guide for SMEs in the Biotechnology Field (May 1999) p. 2.
8. Identifying the early government support for biotechnology development in Germany Giesecke, supra n. 6, at 206-207.
9. Dolata, Internationales Innovationsmanagement; Die deutsche Pharmaindustrie und die Gentechnik (Diskussionspapier 3-94, Hamburger Institut für Sozialforschung 1994) 66-70; Streck, "Deutsche Biotechnologieforschung mit großem Nachholbedarf", Ifo-Schnelldienst (1994/18) 10-17.
10. In detail Abramson/ Encarnacao/ Reid/ Schmoch, Technologietransfer-Systeme in den USA und Deutschland (Karlsruhe/Washington D.C.: Fraunhofer IRB 1997).
11. " Ashworth, "Development of the European Biotechnology Industry", 33 Cal. W. L. Rev. (1996) 83, 93; Ernst & Young, Biotech 97: Alignment: a new economy, supra n. 6, pp. 42-45; European Commission, A User's Guide for SMEs in the Biotechnology Field, supra n. 7; Giesecke, supra n. 6, at 216-218.
12. Erck, "Symposium: Financing the Biotech Industry: Can the Risks be Reduced?" 4 B.U.J. Sci. & Tech. (1998) 1, 21; for the link between venture capital and IPOs in liquid capital markets, see Black/Gilson, "Venture Capital and the Structure of Capital Markets: Banks versus Stock Markets", 47 J. Fin. Econ. (1998) 243-277; for the latest attention to the global capital markets as an exit option, see Rock, Greenhorns, Yankees and Cosmopolitans: Venture Capital, IPOs, Foreign Firms and US Markets (U. Penn., Inst. For Law & Econ. Res. Paper 01-07 (forthcoming in Theoretical Inquiries in Law) (available in Social Science Research Network Electronic Library). From the German perspective: Hopt, "Stärkung des Kapitalmarktes Deutschland, Förderung des Aktiensparens und Verbesserung der Risikokapitalversorgung", in: The Institute of Comparative Law in Japan (ed.), Toward Comparative Law in the 21st Century (Tokyo: Chuo Univ. Press 1998) 67-70.
13. By way of example: Pisano, Innovation through markets, hierarchies, and joint ventures: Technology strategy and collaborative arrangements in the biotechnology industry (Ph.D. thesis, UMI 1989); Shan, Technological Change and Strategic Cooperation; Evidence from Commercialization of Biotechnology (Ph.D. thesis, UMI 1987); more general with respect to technological innovation Teece, "Firm Organization, Industrial Structure, and Technological Innovation", 31 J. Econ. Behavior & Org. (1996) 193-224.
14. Pisano/ Mang, "Collaborative Product Development and the Market for Know-how: Strategies and Structures in the Biotechnology Industry", in: Burgelman/ Rosenbloom (eds.), Research on Technological Innovation, Management and Policy (Greenwich: JAI Press 1993) 109, 120; for differences in the development of the European biotechnology, see Acharya/Arundel/Orsenigo, "The evolution of European biotechnology and its future competitiveness," in: Senker/v. Vliet (eds.), Biotechnology and Competitive Advantage (Cheltenham: Elgar 1998) 89, 95-104.
15. Empirical study on choice between internal vs. external research and development: Pisano, supra n. 13, pp. 137-206; Pisano/Mang, ibid., pp. 120-121; Pisano, "The governance of innovation: Vertical integration and collaborative arrangements in the biotechnology industry", 20 Research Policy (1991) 237, 241-247.
16. Pisano, 20 Research Policy, ibid., at 239.
17. Pisano, supra n. 13, pp. 137-206.
18. Grossman/ Hart, "The Costs and Benefits of Ownership: A Theory of Lateral and Vertical Integration", 94 J. Pol. Econ. (1986) 691-719; Hart/Moore, "Incomplete Contracts and Renegotiation", 56 Econometrica (1988) 755-785; Hart, Firms, Contracts, and Financial Structure (New York: Oxford University Press 1995) 29-55.
19. Aghion/ Tirole, "On the Management of Innovation", 109 Quarterly J. Econ. (1994) 1185-1209; empirical corroboration in Lerner/Merges, The Control of Strategic Alliances: an Empirical Analysis of Biotechnology Collaborations (NBER Working Paper No. W6014, April 1997).
20. Lerner/Tsai, Do Equity Financing Cycles Matter?: Evidence from Biotechnology Alliances (Harvard Business School Working Paper No. 00-038; NBER Working Paper No. 7464).
21. Burrill, "The European Biotech Industry: Gathering Momentum", Biopharm (1 May 1995) (1995 WL 13882566); Ernst & Young, Biotech 97: Alignment: a new economy, supra n. 6, 42-45.
22. With respect to these peculiarities of the biotech industry Gevurtz, "Biotechnology: Business Organization Issues", 32 McGeorge L. Rev. (2000) 237, 238; on the length of the development process DiMasi/Seibring/Lasagna, "New Drug Development in the United States from 1963-1992", Clinical Pharmacology Therapeutics 55 (1994) 609-622.
23. Pisano, "The R & D Boundaries of the Firm: An Empirical Analysis", 35 Adm. Science Quarterly (1990) 153, 157-162; Teece, supra n. 13, at 194-197.
24. Akerlof, "The Market for 'Lemons': Qualitative Uncertainty and the Market Mechanism", 84 Quarterly J. Econ. (1970) 488-500; application of the 'lemons' hypothesis to biotechnology, see Pisano, R & D Performance, Collaborative Arrangements, and the Market-for-Know-How: A Test of the "Lemons" Hypothesis in Biotechnology (Harvard Business School Working Paper No. 97-105).
25. Pisano, ibid.
26. Greenwald/ Stiglitz/ Weiss, "Informational Imperfections in the Capital Market and Macroeconomic Fluctuations", 74 Am. Econ. Rev., Papers and Proceedings (1984) 194-199; Myers/Majluf, "Corporate Financing and Investment Decisions when Firms Have Information that Investors do not Have", 13 J. Fin. Econ. (1984) 187-221.
27. Stiglitz/Weiss, "Credit Rationing in Markets with Imperfect Information", 71 Am. Econ. Rev. (1981) 393-410; Stiglitz/Weiss, "Asymmetric Information in Credit Markets and Its Implications for Macro-Economics", 44 Oxford Econ. Papers (1992) 694-724.
28. For empirical work on such capital constraints of new firms, see Hall, Investment and Research and Development at the Firm Level: Does the Source of Financing Matter? (NBER Working paper No. W4096 June 1992); Himmelberg/Petersen, "R & D and internal finance: A panel study of small firms in high-tech industries", 76 Rev. Econ. & Statistics (1994) 38-51; for review of literature, see Hubbard, "Capital-market imperfections and investment", 36 J. Econ. Lit. (1998) 193-225.
29. Leland/ Pyle, "Informational Asymmetries, Financial Structure, and Financial Intermediation", 32 J. Fin. (1977) 371-387.
30. For similar comparison, see Triantis, "Financial Contract Design in the World of Venture Capital", 68 U. Chi. L. Rev. (2001) 305, 306.
31. For a formal model that uses asymmetric information to explain the existence of venture capitalists and a corresponding study of evidence in Canada, see Amit/ Brander/ Zott, "Why do Venture Capital Firms Exist? Theory and Canadian Evidence", 13 J. Bus. Venturing (1998) 441 - 466; for early influential work on moral hazard, see Arrow, The Limits of Organization (New York: Norton 1974) 33-79; Pauly, "Overinsurance and Public Provision of Insurance: the Roles of Moral Hazard and Adverse Selection", 88 Quarterly J. Econ. (1974) 44-62; pointing out adverse selection and moral hazard as the essential obstacles to strong public securities markets and therefore also to the availability of finance Black, "The Legal and Institutional Preconditions for Strong Securities Markets", 48 UCLA L. Rev. (2001) 781-855.
32. For empirical work, see Amit/ Glosten/ Müller, "Entrepreneurial ability, venture investments, and risk sharing", 36 Management Science (1990) 1232-1245.
33. Lerner, "The Syndication of Venture Capital Investments", 23 Fin. Management (1994) 16-27.
34. Sahlman, "The structure and governance of venture-capital organizations", 27 J. Fin. Econ. (1990) 473, 506-507; Gompers, "Optional investment, monitoring and the staging of venture capital", 50 J. Fin. (1995) 1461-1489; for a formal model, see Hellmann, Essays in Financial Market Imperfections and Institutional Responses (Ph.D. thesis, Department of Econ. of Stanford Univ. 1994) pp. 36-105; for a model showing that staging of commitment of capital is used as a key to resolve informational asymmetries, see Admati/Pfleiderer, "Robust Financial Contracting and the Role of Venture Capitalists", 49 J. Fin. (1994) 371-402.
35. Admati/Pfleiderer, ibid.
36. For documentation of oversight role, see Gompers, "Optional Investment, Monitoring and the Staging of Venture Capital", 50 J. Fin. (1995) 1461-1489; Lerner, "Venture Capital and the Oversight of Private Firms", 50 J. Fin. (1995) 301-318; for new forms of off-balance sheet R&D financing in biotechnology to raise large sums of equity without losing independence of flexibility, see Schoemaker/Shapiro, "Innovative Financial Strategies for Biotechnology Ventures", in: Day/Schoemaker/Gunther (eds.), Wharton on Managing Emerging Technologies (New York: Wiley 2000) 307-332.
37. European Commission, European industrial policy for the 1990s (Brussels 1991) 31, 33; European Commission, "Green Paper on Innovation", COM (1995) 688 final (December 1995) p. 6.
38. COM (95) 688 final (December 1995) pp. 6, 10.
39. European Commission, First action plan for innovation in Europe (Brussels 1997); for download visit < http://www.cordis.lu/innovation/src/action.htm >
40. For details on the program and its participants visit < http://www.cordis.lu/finance/home.html > from a German perspective towards these and similar German programs, see Hopt, "Verbesserter Zugang zu Risikokapital für Existenzgründer sowie kleine und mittlere Unternehmen", in: Pfeiffer/Kummer/Scheuch (eds.), Festschrift für Hans Erich Brandner (Köln: Schmidt 1996) 541, 543-545.
41. European Commission, "Creating an entrepreneurial Europe; The activities of the European Union for small and medium-sized enterprises" (Brussels 1.3.2001), COM (2001) 98 final, p. 72-76; Murray/Marriott, "Why has the investment performance of technology-specialist, European venture capital funds been so poor?", 27 Research Policy (1998) 947, 958.
42. European Commission, Commission Stajf Working Paper, Report on the implementation of the Action Plan to promote Entrepreneurship and Competitiveness, Annexes (Brussels 27.10.2000) pp. 18, 33.
43. Murray/Marriot, supra n. 41, at 957.
44. European Commission, "Progress Report on the Risk Capital Allocation Plan", COM (2000) 658 final (Brussels 18.10.2000) p. 4.
45. European Commission, "Progress Report on the Risk Capital Allocation Plan", COM (2000) 658 final (Brussels 18.10.2000) p. 7; Murray/Marriott, supra n. 41, at 948.
46. Empirically with respect to small fund size Murray/Marriott, supra n. 41, at 974.
47. European Commission, Risk Capital: A Key to Job Creation in the European Union (Brussels 1998).
48. European Commission, ibid., p. 10.
49. European Commission, Progress report on the risk capital action plan, Supplement A, Economic trends, No. 8/9 (August/September 2000) p. 4.
50. Case 120/78 Rewe v. Bundesmonopolverwaltung für Branntwein, [1979] ECR 649; see for analysis of the developments Barents, "New Developments in Measures having Equivalent Effect", 18 C.M.L. Rev. (1981) 271-308; Baron van Voorst tot Voorst/van Dam, "Europe 1992: Free Movement of Goods in the Wider Context of a Changing Europe", 25 C.M.L. Rev. (1988) 693-709; Mortelsman, "The Common Market, the Internal Market and the Single Market, What's in a Market?" 35 C.M.L. Rev. (1998) 101-136; Weatherill, "After Keck: Some Thoughts on How to Clarify the Clarification", 33 C.M.L. Rev. (1996) 885-906.
51. Cases C-267 & 268/91 Keck & Mithouard, [1993] ECR I-6097 and the case law which followed; in light of the focus of this article on the cross-border activity of financial service providers it does not matter whether these restrictions equally apply to the freedom of movement of capital (applicability favored by Eilmansberger, "Zur Reichweite der Kapitalverkehrsfreiheit" ["The Scope of the Freedom of Movement of Capital"], ÖBA [2001] 377, 380-381; disfavored with respect to the freedom to provide services Kulms, "Rentenversicherung, private Zusatzvorsorge und Europäischer Binnenmarkt für Versicherungsleistungen", in: Basedow/Drobnig/Ellger/Hopt/Kötz/Kulms/Mestmäcker [eds.], Aufbruch nach Europa (Tübingen: Mohr 2001) 183, 187.
52. European Commission, "Commission Recommendation for the 2001 Broad Guidelines of the Economic policies of the Member States and the Community", COM (2001) 224 final (Brussels 25.4.2001) p. 15; for the applicability of the competition rules to financial services, see Usher, The Law of Money and Financial Services in the EC, 2nd Ed. (New York: Oxford University Press 2000) 59-88.
53. Case C-148/91 Vereniging Veronica Omroep Organisatie v. Commissariaat voor de Media, [1993] ECR I-487, I-519-I-520; Hatzopoulos, "Recent Developments of the Case Law of the ECJ in the Field of Services", 37 C.M.L. Rev. (2000) 43, 72 Fn. 162; Usher, ibid., pp. 105-110.
54. European Commission, "Progress Report on the Risk Capital Action Plan" (Brussels 18.10.2000), COM (2000) 658 final, p. 11.
55. OJ [1985] L 375/3.
56. OJ [1985] L 375/3.
57. Directive 89/646/EEC (15.12.1989), OJ [1989] L 386/1.
58. Directive 93/22/EEC (10.5.1993), OJ [1993] L 141/27.
59. Directive 92/49/EEC (18.6.1992), OJ [1992] L 228/1 (direct insurance); Directive 92/96/EEC of 10.11.1992, OJ [1992] L 360/1 (direct life assurance).
60. European Commission, Communication of the European Commission, "Risk Capital: A Key to Job Creation in the European Union", SEC (1998) 552, p. 11-12; European Commission, "Progress Report on the Risk Capital Action Plan" (Brussels, 18.10.2000), COM (2000) 658 final, p. 10; The Committee of Wise Men, Final Report on the Regulation of European Securities Markets (Brussels, 15.2. 2001) pp. 10-13.
61. European Commission, Communication from the Commission to the Council and the European Parliament, "Progress Report on the Risk Capital Action Plan" (Brussels, 18.10.2000), COM (2000) 658 final, p. 10; The Committee of Wise Men, Final Report on the Regulation of European Securities Markets (Brussels, 15.2.2001) p. 13.
62. European Commission, "Financial Services Action Plan" (Brussels 11.05.1999), COM (1999) 232, p. 6.
63. Council - ECOFIN, 2335th Council meeting, Press Release 6925/01, (Brussels, 12 March 2001), p. 19; European Commission, Financial services: "Commission welcomes political agreement on investment fund management Directive", 12 March 2001 < http://www.europa.eu.int/comm/internal-market/en/finances/mobil/01-345.htm > visited 27 May 2001.
64. European Commission, Amended Proposal for a Directive of the European Parliament and Council amending Directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) with a view to regulating management companies and simplified prospectuses, COM (2000)331 final as amended by document no. [500PC0331] < http://www.europa.eu.int/eur-lex/en/com/dat/2000/en-500PC0331.html >
65. European Commission, ibid.
66. European Commission, ibid.
67. European Commission, ibid.
68. For this reason, calling for effective home Member State supervision Hertig, "Regulatory Competition for EU Financial Services", 3 J. Int. Econ. L. (2000) 349, 352-354; for parallel argument in context of freedom of movement of goods, see Kerber, "Interjurisdictional Competition within the European Union", 23 Fordham Int'l L.J. (2000) 217, 243; for limits of this principle of mutual recognition because of abuse and resulting dangers for the investors, see Calliess, "Heimatstaatprinzip und Europa-Paß im Finanzmarktrecht" ["Home country supervision and the European passport in the law of financial services"], EWS (Europäisches Wirtschafts- & Steuerrecht) [2000] 432, 435-439.
69. European Commission, supra n. 64.
70. European Commission, supra n. 64.
71. For a similar assessment of harmonization in the field of freedom of movement of goods, see Kerber, supra n. 68, at 243.
72. See for empirical evidence Jackson/ Pan, "Regulatory Competition in International Securities Markets: Evidence from Europe in 1999, Part I", 56 Bus. Law. (2001) 653, 655, 684-687.
73. European Commission, Directorate General for Economic and Financial Affairs, Supplement A, Economic trends, No. 12 - December 1999, "Risk capital: a key to job creation. Implementation of the Action Plan", p. 9 Fn. 12; European Commission, Progress report on the risk capital action plan, (Brussels, 18.10.2000), COM (2000) 658 final, p. 24.
74. Case C-212/97 Centros Ltd. v. Erhversog Selskabsstyrelsen, [1999] ECR. I-1459 (ECJ decision of 9.3.1999); on this decision, see, for example, Behrens, "International Company Law in View of Centros decision of the ECJ", 2 EBOR (2000) 125-146; but note at the same time the political agreement reached by the EU' s Council of Ministers on December 20 on the Regulation to establish a European Company Statute.
75. Fundamental in this respect is Winter, "State Law, Shareholder Protection, and the Theory of the Corporation", 6 J. Leg. Stud. (1977) 251-292; under the same assumption concerning the control capacity of the capital market, see Romano, The Genius of American Corporate Law (Washington D.C.: AEI 1993); dissenting: Cary, "Federalism and Corporate Law: Reflections upon Delaware", 83 Yale L.J. (1974) 663-705; skeptical with regard to Canadian corporate law recently Cumming/Macintosh, "The role of interjurisdictional competition in shaping Canadian corporate law", 20 Int' L Rev. L & Econ. (2000) 141-186; on the perspective of jurisdictional competition in this decision, see Freitag, "Der Wettbewerb der Rechtsordnungen im Internationalen Gesellschaftsrecht" ["Competing Laws in International Company Law"], EuZW [1999] 267-270 (269); Kieninger, "Niederlassungsfreiheit als Rechtswahlfreiheit" ["Freedom of establishment as the freedom of choice of law"], ZGR [1999] 724, 747-749; Merkt, "Das Centros-Urteil des Europäischen Gerichtshofs - Konsequenzen für den nationalen Gesetzgeber" ["The Centros-Decision of the ECJ - Consequences for the National Legislator"], in: Gesellschaftsrechtliche Vereinigung VGR (ed.), Gesellschaftsrecht in der Diskussion 1999 [Corporate Law in the Debate 1999] (Köln: Schmidt 2000) 111, at 120 et seq.
76. Romano, The Genius of American Corporate Law, ibid.; on the transfer of the concept to investor protection, see Romano, "Empowering Investors: A Market Approach to Securities Regulation", in: Comparative Corporate Governance: The State of the Art and Emerging Research, (Hopt/Kanda/Roe/Wymeersch/Prigge [eds.]) (Oxford: Clarendon 1998) 143-217; for the German literature hereto, see Dreher, "Wettbewerb oder Vereinheitlichung der Rechtsordnungen in Europa?" ["Competition or a Unified Legal System in Europe?"], JZ [1999] 105-112; Kieninger, ibid., at 747-749; Kübier, "Rechtsbildung durch Gesetzgebungswettbewerb? Überlegungen zur Angleichung und Entwicklung des Gesellschaftsrechts in der Europäischen Gemeinschaft" ["Legislation by Competing Legal Systems? Thoughts on the Harmonization and Development of Corporate Law in the EC"], 77 KritV (1994) 79-89; Merkt, "Das Europäische Gesellschaftsrecht und die Idee des Wettbewerbs der Gesetzgeber" ["European Community Law and the Idea of a Competition of Legislators"], 59 RabelsZ (1995) 545-568; Müller, Systemwettbewerb, Harmonisierung und Wettbewerbsverzerrung [Competition of Legal Systems, Harmonization and Distortions of Competition] (Baden-Baden: Nomos 2000); Schön, "Mindestharmonisierung im europäischen Gesellschaftsrecht" ["Minimal Harmonization in European Community Law"]: 160 ZHR (1996) 221, 232-238.
77. For an overview of this development in English and US law, see Mahoney, "Mandatory Disclosure as a Solution to Agency Problems", 62 U. Chi. L. Rev. (1995) 1047, 1054-1077.
78. For examples, see Erlanger v. New Sombrero Phosphate Co., (1878) 3 A.C. 1218, 1218-1223 (HL); Whaley Bridge Calico Printing Co. v. Green, (1879) 5 Q.B.D. 109, 109-110.
79. See for example Emma Silver Mining Co. v. Grant, (1879) 11 Ch.D. 918, 918-925.
80. Erlanger v. New Sombrero Phosphate Co., (1878) 3 A.C. 1218 (HL), 1229-1230, 1236.
81. 63 & 64 Vict., ch. 48 (1900).
82. 19 & 20 Geo. 5, ch. 23(1929).
83. For details, see Seligman, The Transformation of Wall Street, Rev. Edition (Boston: Northeastern University Press 1995) 44-46, 53, 57, 63.
84. With respect to similar principles in the area of the freedom of movement of goods, see Kerber, supra n. 68, at 243.
85. European Commission, Risk Capital: A Key to Job Creation in the European Union (April 1998) pp. 10-12.
86. For the assessment of the character of corporate codes as public goods, see Easterbrook/ Fischel, The Economic Structure of Corporate Law (Cambridge: Harvard University Press 1991) 34-35; for the role of interjurisdictional competition for the provision of public goods, see Kerber, supra n. 68, at 224-226.
87. Going even further and calling for effective competition Vanberg/ Kerber, "Institutional Competition among Jurisdictions: An Evolutionary Approach", 5 Const. Pol. Econ. (1994) 193-219.
88. See for evidence of International-style Offerings in Europe, Jackson/Pan, supra n. 72, at 684-686.