Kitabı oku: «Claves del derecho de redes empresariales», sayfa 7
CAPÍTULO 4
Networks’ Financing: which Perspectives?
PAOLA IAMICELI
1. INTRODUCTION
The latest economic crises pose significant challenges to enterprises, in particular small and medium-sized ones. Investments are needed to face the recession: such as investments in technological innovation, operational innovation (e.g. logistics), organizational innovation (e.g. management, alliances, etc.) and the like174.
Difficulties in getting access to finance are among obstacles to enact such investments175. Both internal and external financing encounter major difficulties. Inside the firm, lack of liquidity and clients’ late payments increase176. Meanwhile external financing becomes more and more critical, as regards public funds and bank lending. The convergence between banks’ and clients’ incentives within the financial transaction is even harder to achieve than before, given the higher level of default risk and the reduced ability of borrowers to provide guaranties or to diversify lending transactions within the market177.
Moreover, lending regulations, namely the Basel II and Basel III Accords, force banks to apply stricter standards to credit assessment. Although the issue is debated, this could result into a reduction of bank offer towards small and medium enterprises in particular178.
Economic and regulatory obstacles to small and medium-sized enterprises’ access to finance are not specifically examined in the present paper. The analysis instead focuses upon the role of inter-firm networks in financial transactions and the impact of firms’ participation in networks on their capability to access finance.
More specifically, two sets of questions will be addressed.
The first issue is whether networks are able to provide enterprises with better opportunities for investment financing or, on the contrary, they constitute an additional obstacle179. This issue will be analyzed without regard to types of networks whose specific function consists in providing credit services or financial guaranties to members, as it is the case for credit cooperatives or mutual guarantee consortia, for instance180.
Secondly, the paper will consider different types of network, mainly distinguishing between contractual and organizational networks. Are there types of networks that, more than others, increase enterprises’ financial opportunities? Which elements of the network structure are particularly important?
While making some concluding remarks, a regulatory issue will be raised in questioning whether a specific legal framework on inter-firm networks is needed in order to enable their role of innovation drivers within a financially constrained environment.
Within these perspectives some preliminary issues deserve consideration in order to develop the analysis.
See Regulation (EU) No 575/2013, 26 June 2013, on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012, art. 4 (Definition): “(38) ‘close links’ means a situation in which two or more natural or legal persons are linked in any of the following ways:
2. DO INTER-FIRM NETWORKS MAKE ENTERPRISES’ ACCESS TO FINANCE HARDER?
Rejecting the assumption that single-handed and stand-alone firms represent the sole reference model for corporate finance and lending decisions, economic literature shows different views on the impact of firms’ conglomerates, grouping and networks on access to finance.
Mostly referring to multi-divisional firms and business groups rather than to infer-firm networks, as strictly intended, this literature shows the advantages and drawbacks of financing mechanisms taking place within the group or network (internal financing) as well as the impact determined by the formation of groups/networks on external financing, particularly bank financing181.
With respect to internal financing the concept of an “internal capital market” is considered in order to describe cross-financing, changes in resource allocation and similar practices occurring among the different units of an integrated firm or affiliates within a business group or, in a different and less common perspective, among distinct entities that are members of an alliance182. The potential of an “internal capital market” is shown as having regard to the informational advantages of members (if compared with potential external financiers), lower monitoring costs, higher monitoring incentives, higher flexibility in structuring the financial relation and taking measures against poor or lack of performance183.
Therefore, at least to some extent, the “internal capital market approach” could help to identify some of the advantages of internal financing practices among members of a given network. Indeed, once the network setting is specifically taken into account, then the financial impact of collaborative practices could be considered with regard to, for example, free services allowances or co-sharing of costs and investments. These practices could determine a reduction in the demand for external finance for participating firms and could provide more adequate incentives to engage in specific projects that are more difficult to support within a stand-alone firm184.
Moving from a different perspective, law and Economics scholars also explain that switching capital allocation among affiliate corporations is significantly more costly than switching such allocation within a firm185. It is possible that not only transaction costs may increase if different managers or board of directors should agree on a given switch, but also that legislation tends to impose restrictions on these decisions through corporate, securities, secured transaction, bankruptcy, and tax law. Managerial discretion is therefore limited. For these reasons the practice of asset partitioning of an integrated firm into a business group with separate affiliates may be seen as a way to reduce agency costs linked with switching resource allocation by managers. A trade-off between flexibility advantages and agency costs arises, shedding light on the relation between resource allocation and corporate governance186.
Having specific regard to business networks, the previous analysis could help to predict that the collaborative setting developed by networks may reduce the transaction costs and information asymmetries normally characterizing “external capital market” transactions, so enabling some level of flexibility in partial accordance with the “internal capital market” hypothesis. Depending on the material structure of the network, agency costs and/ or free riding practices, respectively, may well reduce the efficiency of internal financing strategies. Again, network design and governance seems pivotal in both scenarios, so adding value to the choice of legal form and contractual/organizational models187. As is demonstrated below, the distinction between contractual and organizational networks may be relevant under this perspective, also (though not only) with reference to the different impact of contract v. organizational law on flexibility of capital allocation practices188.
Consequently, the potential of networks with respect to internal financing should not be valued in absolute terms but rather in having regard to a network’s contractual or organizational design189.
The issue concerning the impact of networks on external financing (mainly bank financing) is even more controversial than the one just discussed. Indeed, part of the economic literature shows the advantages of networks in producing and signaling useful information for potential external financiers, or in providing explicit or implicit guaranty. Networks could also endow members with bargaining power in their relation with potential lenders on the basis of a reputation effect linked with the network’s functioning190. However, counter-effects should be taken into account: network’s reputation may be negative and could in principle increase, rather than decrease, the level of opaqueness as regards relevant information for its members’ credit assessment191. Following the predictions of some scholars, this complexity might call for a preference of bank credit over different types of credit (e.g. non-professional financiers, non-qualified investors and the like) being banks more skilled in screening and monitoring192.
A further element that should be considered concerns the external financiers’ monitoring over networks and the risk of “contagion effects” within the network193. Indeed, the increase in monitoring costs is particularly linked with the interdependence that networks incorporate into collaborative practices194. Network cooperation is often based on the coordinated use of complementary resources, mainly immaterial ones, often individually possessed by single participants and open to pooled use195. Investments made by one of the members are relevant for connected transactions put into force by other participants and common interest projects do have success if (and often only if) all participants duly perform. Though being the means for a network’s success, such interdependence also contributes to creating vulnerability in cases in which an individual breach is not adequately monitored or external factors negatively affecting a single participant create a burden for the whole project and network. For example severe distress for a participant’s major client can in fact cause distress for the participant himself, in addition to having an impact upon the network196.
Under these circumstances, a bank’s monitoring of a client’s ability to perform (return capital and pay interests) becomes quite costly and might require a greater need for more collateral and guaranties.
The regulatory framework reinforces this expectation.
Pursuant to the European Regulation n. 575/2013, which implements the Basel II/III Accords into European legislation, banks are due to take measures against risk concentration within their credit portfolio197. The concept of risk concentration is linked with that of “connected clients”, which, under some circumstances, could describe the type of relations typical of network participants198. More particularly, Article 108 of the Directive provides thresholds for risk concentration (including the one generated by groups of connected clients), defining large exposures and prohibited ones199. In the perspective of the Basel III Accords, the more recent Proposal for a new Directive on the access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms would prescribe a very similar approach200.
Among others, the aforementioned economic and legislative factors would make finance (and especially bank finance) more difficult for inter-firm networks201.
What is puzzling about this regulatory approach is that financiers would be requested to take interdependence into consideration merely on the side of credit risk concentration, while apparently ignoring the possibly positive influence of interdependence on the debtor’s ability to accomplish his/her project. A defensive rather than pro-active approach towards networks would then be favored by the current bank legislation.
A different approach would require a higher attention to characteristics of network collaboration that could increase the efficiency and effectiveness of financed investments, possibly counter-balancing the negative impact of interdependence on risk concentration. This hypothesis will be examined infra in this paper.
3. DO CONTRACTUAL NETWORKS MAKE ENTERPRISES’ ACCESS TO FINANCE HARDER?
The previous analysis has shown that the impact of networks on an enterprise’s access to finance is not only sparsely examined by the current debate (more focused on group finance than on networks) but also hardly observable without taking into account the organizational and functional characteristics of networks. Indeed these elements could significantly influence a network’s capability to provide members with adequate incentives to (also financially) collaborate and to correctly signal a network or network member’s trustworthiness to potential external financiers.
In this perspective attention should be paid to a network’s structure and design, more drastically distinguishing the case of networks from the one of integrated firms and business groups.
Sociologists, economists and lawyers involved in the interdisciplinary debate on inter-firm networks have paid increasing attention to the hybrid connotation of these cooperative structures. In this perspective networks would stand in the middle between markets and integrated firms, between contracts (more precisely, bilateral exchange spot contracts) and organizations (more precisely, organizations qualifying as legal entities or legal persons)202.
In legal terms the hybrid connotation of networks raises an issue concerning the identification of applicable legislation. Indeed, legal systems often lack specific dispositions on hybrid forms. Moreover, legislation on contracts and organizations does not always reflect the intrinsic nature of networks203.
A parallel issue concerns the choice of legal instruments that govern network-type relations. Although, in practice, enterprises do use contracts and organizations to establish and develop network relations, these types of contracts and organizations do not totally reflect the concept of contracts and organizations as intended by traditional legal theory204. This consideration does not prevent the referral to contracts and organizations as a means for a network’s establishment and governance.
Here stems the distinction between contractual and organizational networks. According to a relatively recent perspective, contractual networks are those based on either a multilateral inter-firm collaboration contract (a contractual joint venture, a network contract, an enterprises grouping, etc.) or a set of (mainly bilateral) exchange contracts that are linked within a consistent collaborative setting, often under the coordination of a leading enterprise (e.g. subcontracting networks, franchising, distribution networks, intellectual property rights’ licensing networks, etc.). In comparison, organizational networks are based on the creation of an entity whose mission is to govern an inter-firm collaboration program among its participants. Their legal form may include non-profit organizations (e.g.: associations, foundations), “mutual interest” entities (e.g.: cooperative companies, corporate consortia), for-profit corporations (e.g.: corporate joint ventures, network companies, etc.)205.
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.
