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8 J. Corp. L. Stud. 1 (2008)

handle is hein.journals/corplstd8 and id is 1 raw text is: Journal of Corporate Law Studies SHARE STRUCTURE AND ENTREPRENEURSHIP IN UK BIOTECHNOLOGY COMPANIES: AN EMPIRICAL STUDY OLIVIER MAYNARD* AND WILLIAM BAINS* Biotechnology start-up companies are dependent on investment to discover and develop their products, and often get that investmentfrom venture capital groups (VCs). VCs almost always invest in liquidation preference shares, which provides them with upside enhancement and downside protection, and they impose detailed management controls on the company through shareholder veto provisions. This has been suggested as laying the company open to investor opportunism, actions which drive the company to actions or strategies which, while enhancing the investor's short-term shareholding value, damages the company as a whole and restricts its long-term prospects in the US. This paper reports on an analysis of the effect of the combination of complex share structures with multiple levels of liquidation preference (the norm in UK biotechnology companies) and of comprehensive investor control over the company's management. We find the same problems occurring in UK biotechnology companies as Fried and Ganorfound in the US, with examples of companies beingpreventedfrom achieving exits, raising investment rounds and being driven to mergers which add no value to the enterprise. This both reduces the value of investee companies (an issue that VCs should address) and reduces the willingness of entrepreneurs and business angels to create new companiesfor VCs to invest in. This is made worse by the chronic underinvestment in UK high-tech start-ups. Examination of a number of potential solutions finds few of them are workable, but that requiring companies to disclose contracts that effectively transfer the power of directors to non-director shareholders could have some benefit. * Rufus Scientific Ltd, Royston, UK. Many entrepreneurs and investors have generously given their time and opinions to this study, and we are grateful to them. In particular, we are grateful to the present and previous shareholders in the case study companies for drawing our attention to them, and Phillip Baddeley for access to Companies House data. We are also very grateful to Jesse Fried (UC Berkeley) for comments on early versions of this paper, and the JCLS referee for very helpful comments. The authors wish to emphasise that the case studies here were chosen for their typicality, and should not be taken to reflect their belief that the companies, investors, shareholders, managers or entrepreneurs concerned were necessarily better or worse than any others. April 2008

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