to the point: technology & digitalisation l May 2023

Rome wasn't built in a day. Neither was Austria's new "FlexCo"

Austrian start-ups to benefit from new corporate form

In an ever-evolving global economy driven by innovation and entrepreneurship, it is imperative for legal systems to adapt and create an environment conducive to the growth of start-ups. Today, we shed light on a remarkable development in Austria's corporate landscape: the introduction of a new corporate form known as the "Flexible Company" (Flexible Kapitalgesellschaft – FlexCo). The Austrian legislator has worked for many years on draft legislation for a new corporate form tailored to the demands of start-ups (we have already reported on it several times in this newsletter). Last week, a comprehensive start-up package was finally presented that includes the implementation of the FlexCo and several other new features (such as tax reliefs for employee participation programmes) that will foster the Austrian start-up ecosystem. FlexCos can be founded as of 1 November 2023.

The FlexCo combines the features of a limited liability company (GmbH) and a stock corporation (AG), aiming to present a unique opportunity for start-ups to flourish. It

• empowers entrepreneurs to establish businesses with lower capital requirements (EUR 5,000 cash pay will be sufficient for establishment);
• encourages employee participation (implementation of a new share class designated for employees);
• facilitates share transfers and issuance of new shares in capital increases (deeds by attorneys will be an alternative to notarial deeds); and
• provides for features that are useful for implementing financing rounds (such as the implementation of authorised capital or convertible instruments with a 75 % majority of the votes cast) and embraces digitalisation in decision-making and governance (shareholder resolutions can be made in text form and not only in written form as currently provided).

The FlexCo demonstrates Austria's commitment to nurturing entrepreneurship and supporting the start-up ecosystem. However, it is important now for start-ups to evaluate and understand the new proposed legislation relating to their businesses and to explore opportunities. We will therefore be talking and writing about these matters throughout the next few weeks, including in this monthly newsletter. Stay tuned.

In the context of venture capital, the terms "runway" and "burn rate" are often used to describe the financial aspects of a start-up or company:

Runway: Runway refers to the length of time a company can sustain its operations before it exhausts its available funds or reaches a point of financial insolvency if no additional revenues or funding are secured by then.

The runway is calculated by dividing the available cash or funding by the average monthly burn rate. A longer runway provides more time and flexibility for the company to reach key milestones, such as product development, market expansion or revenue generation.

Burn rate: Burn rate is the rate at which a company consumes its available funds or cash reserves to cover its operating expenses over a specific period. It is an indicator of how quickly a company is "burning" through its capital.

The burn rate is typically measured on a monthly or quarterly basis and is calculated by subtracting the total operating expenses from the total funding or cash reserves for the given period. It represents the negative cash flow or net loss incurred by the company during that time.

A high burn rate indicates that a company is spending its capital rapidly and may soon require additional funding.

Monitoring the runway and burn rate is crucial for start-ups and companies, as it helps in financial planning and decision-making, and ensures that adequate capital resources are available to support operations and growth.

Liquidation preference is a common provision found in start-up financing documentation. It addresses the risk borne by investors when investing in start-ups. In exchange for assuming this high risk, investors typically require that any proceeds from a company's exit or sale, as well as dividends, be allocated to them before being distributed to founders or employees participating in employment incentive programmes. These provisions ensure that investors recoup their investment before others receive a share of the proceeds.

There are two main types of liquidation preferences: participating (nicht anrechenbare Liquidationspräferenz) and non-participating (anrechenbare Liquidationspräferenz).

1. Non-participating liquidation preference: In a non-participating liquidation preference, investors are entitled to receive a predetermined preference amount (which is in most cases their original investment, or in more investor-friendly agreements also a multiple of their investments) before any other distributions are made. Such non-participating liquidation preference is only relevant in a downside scenario when the pro-rata share of the investor in the proceeds would not at least reach the preference amount. In other words, investors receive either their preference amount or their pro-rata share in the proceeds, whichever is greater.
2. Participating liquidation preference: In this case, investors receive both the preference amount and a pro-rata share of any remaining proceeds, without the preference amount being subtracted. This allows investors to receive a larger return on their investment if the distributed proceeds are higher than the preference amount. Other than in a non-participating scenario, investors receive both their liquidation preference and their pro-rata share, not just the higher of the two.

In cases where multiple investors are involved, the "last in, first out" principle is often applied to prioritise their preferred returns.

A 1x non-participating liquidation preference has been the norm in recent financing rounds of Austrian start-ups. We will see whether this will change under the current market conditions.

On 17 May 2023, following public consultations, the European Data Protection Board (EDPB) adopted the final version of its Guidelines on facial recognition technologies in the area of law enforcement. The Guidelines aim at instructing EU and national lawmakers, as well as law enforcement authorities, on implementing and using facial recognition technology systems. The Guidelines provide for six practical examples of settings and purposes of using facial recognition. In its review of facial recognition technologies, the Guidelines refer to the EU Charter of Fundamental Rights. Other than that, the EDPB once again stressed its opinion as disclosed in EDPB-EDPS Joint Opinion 5/2021 on the proposal for a Regulation of the European Parliament and of the Council laying down harmonised rules on artificial intelligence that facial recognition technologies, which pose unacceptably high risks to individuals and society, should be prohibited.

The Guidelines are available at edpb.europa.eu. 

On 4 May 2023, the ECJ issued two remarkable judgments:

In case C-487/21 it found that the right of access under Art 15 GDPR to obtain a "copy" of personal data means that the data subject must be given a faithful and intelligible reproduction of all those data. The right of access also entails copies of extracts from documents or even entire documents or extracts from databases. The term "copy" does not relate to a document as such, but to the personal data which it contains. The copy must therefore contain all the personal data undergoing processing. This data must be provided to the data subject if it is essential to enable them to effectively exercise the rights under the GDPR. However, the rights and freedoms of others must be considered when fulfilling the right to access. This means that wherever possible, means of communicating personal data that do not infringe the rights or freedoms of others should be chosen. The ECJ also found that the outcome of those considerations may not result in a refusal to provide all information to the data subject.

This means that established procedures and responses to requests for access should be reviewed fundamentally to comply with this case law.

In the other case (C-300/21), the ECJ found that a mere infringement of the GDPR does not give rise to a right to compensation under Art 82 GDPR. The court stated that the right to compensation is subject to three (cumulative) requirements: an infringement of the GDPR, a material or nonmaterial damage resulting from that infringement, and a causal link between the damage and the infringement. Accordingly, not every infringement of the GDPR gives rise, by itself, to a right to compensation. Also, the court stated that the right to compensation is not dependent on a certain threshold being reached.

It is likely that this ruling will quickly put an end to the current attempts to obtain compensation for simple data protection violations.

In the field of blockchain technology, where decentralisation prevails, a new frontier has emerged: blockchain domain names. Blockchain domain names are part of a new type of domain name system operating on a blockchain, thereby providing decentralised and secure domain registration and management. Blockchain domain names can be recognised by their extensions ".crypto", ".nft", ".blockchain" or ".eth". Unlike traditional domain names, blockchain domain names are not managed by centralised entities like domain registrars and DNS servers. Despite the promising benefits of this decentralised approach, there are pressing legal challenges, since blockchain domain names may disrupt the traditional domain name systems or give rise to trademark infringement, cybersquatting and jurisdictional complexities.

• Trademark infringement

One of main concerns relating to registration of blockchain domain names is the risk of trademark infringement. Due to the decentralised nature of blockchain, anyone can register domain names without being subjected to strict verification processes. This creates potential for bad actors to register domain names that infringe intellectual property rights to existing trademarks. Such actions may lead to confusion among consumers and trademark dilution resulting in reputation damage (harming consumer's perception of the trademark), and, hence, financial losses.

• Cybersquatting

Cybersquatting is the practice of registering, trafficking in or using a domain name with the intent to profit from the reputation of a trademark belonging to third parties. Often cybersquatters register domain names with the intention of selling them later to the rightful trademark owners. The lack of a centralised authority governing blockchain domain names makes it easier to exploit the system and engage in speculative practices.

• Lack of centralised authority

Whereas bodies like the ICANN and EURid govern traditional domain names, blockchain domain names are not part of this hierarchy, as they operate on decentralised networks. The blockchain domain name services "Unstoppable Domains" and "ENS" that distribute blockchain domain names also state in their governance documentation that the respective blockchain domain systems do not belong to the current DNS. The absence of a centralised authorities makes it harder to enforce IP rights against infringers, resolve disputes and take down infringing websites. This poses a significant challenge for brand owners in safeguarding their intellectual property rights in the blockchain ecosystem.

• Jurisdictional complexities

Decentralised blockchain networks operate globally and independently of any specific jurisdiction, making it more complex to determine the jurisdiction and applicable laws for dispute resolution related to blockchain domain names. This lack of clarity complicates the process of navigating legal frameworks, enforcing IP rights and seeking legal remedies.

There are numerous questions and challenges associated with blockchain domain names that brand owners should duly consider to protect their IP rights effectively. The necessary steps for safeguarding brand owners' IP rights may include registration and monitoring their trademarks, defensive registrations of relevant blockchain domain names, a proactive approach to enforcing their intellectual property rights and collaboration with blockchain platforms.

In Austria, temporary legislation allowed virtual shareholder meetings during the Covid-19 pandemic. While such legislation will likely end on 30 June 2023, new Ministerial draft legislation aims to establish a permanent framework for virtual shareholder meetings. The proposed law introduces significant changes and emphasises the importance of articles of association in shaping the future of virtual meetings.

Virtual shareholder meetings have proven their value over the past three years, offering flexibility in terms of timing and enabling shareholders from anywhere in the world to participate without the need for extensive travel.

Under the new proposed law on virtual meetings, the company's articles of association will need to explicitly allow virtual shareholder meetings. The proposed law differentiates between three types of virtual meetings: simple virtual meetings, moderated virtual meetings, and hybrid meetings (combining physical and virtual participation).

For listed companies, additional provisions are introduced to protect the rights of small shareholders.

As the proposed legislation on virtual meetings moves towards implementation, companies should proactively assess and modify their articles of association to accommodate virtual meeting options and ensure compliance with the new legislation, which is expected to take effect in July 2023. Please find more details relating to the proposed legislation in our Legal Insight (German only).

The mandatory fee-based publication in the print medium of the Official Journal of the Wiener Zeitung (Amtsblatt der Wiener Zeitung) ("Official Journal") is going to be replaced by free-of-charge publication on the new Electronic Announcement and Information Platform of the Federation ("EVI").

Read the full article here.

The US Supreme Court recently upheld Section 230 of the Communications Decency Act, a critical legal shield protecting internet companies from most legal claims over user-generated content. In two landmark rulings, the justices dismissed lawsuits aiming to hold tech giants Google and Twitter responsible for content promoting terrorism on their platforms. These decisions signify the first instance where the Supreme Court directly tackled the implications of Section 230, marking a significant victory for the technology industry.

Despite political tensions around Section 230, the tech industry lauded the Supreme Court's decisions, viewing it as a win for free speech online. The rulings mitigate the risk of platforms facing lawsuits over content moderation decisions, an outcome tech companies warn could be disastrous for the internet. However, these decisions leave open the possibility for future debates, potentially in the US Congress, regarding the breadth of legal protection for internet companies.