Cooperation between administration and start-ups – legal aspects

The advantages of cooperation between the public sector and start-ups are obvious. The administration is faced with the task of digitizing its own authorities and public services and equipping them with future-oriented solutions in order to be marketable and efficient. But there is a lack of staff and resources. Start-ups offer innovative solutions. The start-ups themselves want to develop their ideas further, are looking for reliable partners and want to establish themselves on the market. Cooperation can therefore be worthwhile for both sides. From a legal perspective, however, there are a few things to bear in mind.

Cooperation on a corporate law basis

Public sector companies are generally subject to less stringent regulation than the authorities themselves. Start-ups can therefore be better docked onto public sector companies. The partners can either set up a joint company or the public company can acquire a stake in the start-up. In practice, a convertible loan is often taken out before the participation under company law. Put simply, the public company grants the start-up a loan combined with the right to contribute the repayment claim to the start-up’s equity capital as another additional payment as part of any subsequent capital increase. This solution is interesting for both sides. The public company has the security of permanent access to the innovation thanks to the participation under company law. The start-up receives the necessary capital to establish and further develop the innovation. Public companies in the legal form of a GmbH, GmbH & Co. KG or AG often already exist, preferably in the areas of logistics and transport, in the health sector and in the energy sector. If a group structure exists, the public company can cooperate with start-ups via a subsidiary that specializes in this cooperation.

Compliance with the municipal economic framework conditions

However, public companies are also subject to municipal economic conditions that must be observed. These include

• Ensuring the public purpose of the investment,
• the proportionality of the participation
• and an appropriate limitation of liability for the public legal entity.

Who needs to be involved?

The authority should inform the competent supervisory authority of the planned investment, unless the transaction is already subject to notification or approval under the provisions of federal state law.
There may also be a requirement for the approval of municipal bodies. Municipal regulations often stipulate that the approval of the municipal body is required for municipal supervisory board members of the public company to which they belong. If the public company is an AG, which is characterized by decision-making authority independent of instructions, the approval requirement may not apply in individual cases.

Observe procurement and state aid law

It is important that the public sector does not trigger a process requiring a tender by working with start-ups. Public procurement law makes exceptions to the obligation to award contracts in the area of research and development (see Section 116 (1) No. 2 of the Act against Restraints of Competition – GWB). The innovation partnership is a special procurement procedure that serves the purpose of further developing products and solutions together with a public contracting authority (see Section 119 (7) GWB, Section 19 of the Ordinance on the Award of Public Contracts – VgV). State aid law prohibits the public sector from providing financial support to a start-up without adequate consideration. The cooperation must therefore comply with state aid and the credit conditions must be secured.

Accelerating decisions through fundamental municipal decisions

The administration should not ignore one fact: start-ups are agile and may require quick decisions. This could be difficult for the administration, especially if municipal committee decisions are required and deadlines for invitations and submissions have to be observed. To ensure that the start-up can still make decisions quickly, public legal entities can make conceptual decisions of principle in advance in the form of anticipatory resolutions. These fundamental decisions should contain the key framework conditions for the investment:

• the criteria for terminating a collaboration,
• the scope of conceivable financial support
• and the requirements placed on the reliability of the start-up.

Conclusion

Cooperation between the public sector and start-ups offers a number of advantages. However, there are a number of things to consider when structuring the collaboration to ensure that it runs smoothly. In particular, the public sector should set out its requirements for cooperation with start-ups in policy resolutions. In this way, a framework can be established that creates transparency for municipal bodies and start-ups. Under these conditions, a win-win situation can arise for both partners.