Self-extinguishing shares, a new tool for venture capital operations.

In the current Italian corporate environment, which is always looking for tools to facilitate investment and capital raising, a new institution has emerged and it seems to perfectly combine, on the one hand, the need for capital strengthening of companies, and, on the other hand, the need and/or desire to temporally limit the permanence of new shareholders in the company.
These are the so-called "self-extinguishable" holdings (shares or quotas), which are now considered to be legitimate (albeit with some distinctions), both by the doctrine and notaries.
Such holdings, by which the subscriber fully become a new shareholder, are characterized by their automatic termination upon the occurrence of certain conditions or the expiration of a certain term. The choice of condition (which cannot be merely potestative, i.e., left to the simple will of one of the parties) and/or term can be the most varied and can be declined according to the concrete needs of the company and/or investors.
In particular, the regulation of these types of holdings (to be adopted in the bylaws, according to the rules and cautions imposed by the individual instrument and the type of company involved) can be structured in multiple ways, so as to adapt to the particular needs of each, specific, situation. In particular, it is possible to envision quotas and/or shares that automatically terminate:

• to the achievement of certain business goals or failure to achieve certain results;​
• upon distribution of a specified amount of profits (so as to have, eventually, remunerated the investment of the shareholder);
• upon the occurrence of certain future events, e.g., the death of the shareholder (in case one wishes to sterilize generational handover hypotheses), or the removal of the shareholder from certain corporate offices (typical bad leaver hypothesis, in case of stock options).

It is also possible to determine ex ante how the holdings are to be liquidated when they are extinguished.

In particular, both doctrine and notaries recognize how it is legitimate that the parties establish that, upon termination:

• participations are liquidated according to special valuation methods, to be structured on a case-by-case basis, in order to guarantee an exit to the shareholder, for an amount already parameterized at the time of subscription;​
• there is no liquidation of the shareholdings, which, as they are extinguished, do not confer any property rights on the (former) shareholder. 

It is evident that the tool briefly outlined above (and which will be the subject of further and more in-depth comments, both for the issues of an exquisitely corporate nature and for the related tax implications) is particularly interesting for all operators involved in venture capital operations (both as targets and as investors). In fact, with the inclusion of this type of shareholding in the bylaws (and their regulation) it is possible to provide for various hypotheses of exit, liquidation and/or divestment, possibly avoiding more complex provisions of options (put or call) or causes of withdrawal and redemption of shareholdings. Considering the above, it is easy to foresee that the new instrument (which, due to its recent introduction, needs careful analysis and regulation) will be subject to multiple uses in the near future, given its aptitude to satisfy the different interests of the parties usually involved in capital raising operations.

Avv. Paolo Visconti