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28 June 2023
Schoenherr publication
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to the point: technology & digitalisation l June 2023

Welcome to the June edition of Schoenherr's to the point: technology & digitalisation newsletter!

We are excited to present a selection of legal developments in the area of technology & digitalisation in the wider CEE region.

Insights waiting for you in this edition:

European Commission proposes digital euro

The European Commission has put forward two proposals as part of a "single currency package" to ensure that individuals and businesses can continue to access and pay with euro banknotes and coins throughout the euro area, and to establish a framework for a possible new digital form of the euro that the European Central Bank could issue in the future as a complement to cash.

The package includes a legislative proposal setting out the legal framework for a possible digital euro to complement euro banknotes and coins. It will ensure that people and businesses have another choice in addition to the current private options allowing them to pay digitally with a widely accepted, cheap, secure and resilient form of public money in the euro area.

If the European Parliament and the Council adopt the proposal, it will ultimately be up to the European Central Bank to decide whether and when to issue the digital euro.

The package also includes a legislative proposal on the legal tender status of euro cash to safeguard the role of cash and ensure that it is widely accepted as a means of payment and remains easily accessible for people and businesses throughout the euro area.

The services of the European Central Bank (ECB) and the European Commission are jointly examining at a technical level a wide range of policy, legal and technical issues arising from the possible introduction of a digital euro, taking into account their respective mandates and independence as laid down in the Treaties.

In the context of the EU's digital transition, the digital euro could support the EU's strategies on digital finance and retail payments described above, given its potential as an additional, innovative and secure means of payment. The digital euro could also enhance the international role of the euro and support the EU's open policy space.

Efficient cap table management is crucial in the world of venture capital and deals involving many small investors can lead to complexities. To tackle this challenge, small investors are often pooled through trustees who hold the investments of the small investors on trust. In doing so, only the trustee becomes the legal shareholder of the start-up and only the trustee has shareholder rights. When exercising these rights, the trustee is usually only bound by the terms of a trust agreement with the small investor. These agreements typically provide protective provisions for the small investor such as consent rights. This approach offers benefits to both investors and start-ups by streamlining the cap table.

  1. Simplified cap table: Through the involvement of trustees, small investors can be consolidated into a single entry on the cap table. This simplifies management tasks, reduces administrative burdens and avoids complications associated with handling multiple individual investors.
  2. Enhanced communication: Pooling investors via trustees improves communication and interaction between start-ups and their investor base.
  3. Efficient decision-making: A streamlined cap table enables faster and more efficient decision-making processes, as the trustee represents the consolidated group of small investors. This helps streamline decision-making within the start-up (e.g. only the trustee needs to cast a vote in a shareholder meeting instead of each small investor).
  4. Organisational appeal: Maintaining a small and consolidated cap table makes start-ups more appealing to potential future investors. A cleaner cap table signifies better organisation, less complexity and fewer risks associated with managing many small investors.

An alternative to pooling investors through a trusteeship structure is to form a voting pool in which small investors come together and collectively exercise their voting rights as if they were a single entity. This approach allows for a unified representation of the investors' interests and facilitates decision-making processes within the start-up.

The choice between these two pooling approaches may depend on various factors, including legal considerations, investor preferences, and the specific requirements of the start-up and its investors.

Due diligence is a crucial process in the start-up and venture capital (VC) ecosystem, undertaken by investors to evaluate the potential risks and opportunities associated with an investment opportunity.

During the due diligence process, investors extensively research and examine the start-up and try to understand its business model. The objective is to mitigate risks and make informed investment decisions. Due diligence findings are then reflected in the negotiation of the final deal terms and the assessment of the start-up's valuation.

Key areas of due diligence:

  1. Financial due diligence: This aspect focuses on evaluating the start-up's financial health, including its historical and projected financial statements, revenue streams, expenses, profitability and cash flow. Investors assess the accuracy of the financial data provided and analyse key financial metrics to gauge the start-up's financial viability.
  2. Legal due diligence: Legal due diligence involves a thorough examination of the start-up's legal framework to assess the legal risks and obligations associated with the investment. During a legal due diligence process, various legal aspects are examined, including corporate governance, contracts, intellectual property rights, regulatory compliance, real estate ownership, litigation history, employment matters, environmental compliance and any other legal documentation or issues relevant to the transaction.
  3. Market due diligence: Market due diligence aims to assess the start-up's target market, industry trends, competitive landscape and growth potential. Investors analyse market size, customer segments, competitors and barriers to entry to determine the start-up's market position and long-term prospects.
  4. Operational due diligence: Operational due diligence focuses on evaluating the start-up's operational capabilities, including its organisational structure, supply chain, manufacturing processes (if applicable), technology infrastructure and scalability. Investors seek to identify any operational inefficiencies or risks that could impact the company's growth and profitability.
  5. Team due diligence: Team due diligence involves assessing the start-up's management team, their experience, expertise and track record. Investors evaluate the team's ability to execute the business plan, their alignment with the company's vision and any potential talent gaps that need to be addressed.

By conducting due diligence, investors can minimise risks, identify potential red flags and gain confidence in their investment decisions. Start-ups benefit from the due diligence process as it helps them identify areas for improvement, enhance transparency and build trust with potential investors.

Note: The due diligence process can vary in its depth and scope depending on the specific requirements and preferences of the investor or VC firm.

There's no getting around them anymore: cookie banners. No matter what website you visit, you first have to select your cookie preferences. In many cases, end users give their consent just to get rid of the annoying window as quickly as possible and get to the content they want to see, especially since it is still common for so-called dark patterns to be used in the design of the cookie banner options.

Germany's Federal Ministry for Digital and Transport has now put forth a revised draft regulation aiming to tackle this proliferation of cookie banners on the web. The proposed "Consent Management Regulation" (Einwilligungsverwaltungsverordnung, available in German here) aims to enable users to enjoy a full year of uninterrupted browsing without constant requests for consent. The draft will be open for consultation until 14 July 2023.

The initiative centres around "recognised consent management services" (anerkannte Dienste zur Einwilligungsverwaltung) as a user-friendly alternative to the multiple decisions made manually by end users every day. These services manage the end user's specific cookies preferences and share the decision with the respective digital media service provider upon request. Once the tele media service provider receives the end user's consent settings through this method, it no longer needs to seek the user's consent in each individual case. Unless the end user indicates a different preference, a request to review the settings will only be made again after one year. However, if the tele media service provider has made relevant changes to access and storage processes, end users would need to provide consent again.

By means of such a recognised consent management service, end users would be provided with a transparent tool through which they can configure, track and review consent settings at any time. Recognition of the consent management service by a competent body should provide an incentive for end users and digital media providers to use such consent management services and to increase confidence in a legally secure procedure.

A first proposal addressing this issue was presented already in August 2022, but the project was not pursued further for several months. Hopefully, this time the undertaking will be followed up and a corresponding regulation will be implemented. This could be the first step towards a comprehensive solution to reconcile data protection principles and user-friendliness. According to the Federal Ministry for Digital and Transport, the initiative is also being followed with interest by the European Commission at the European level.

On 15 June 2023, the European Parliament adopted a resolution that provides a summary of amendments necessary to limit spyware abuse. The resolution is the outcome of a year-long investigation and consultation of the use of Pegasus and equivalent surveillance spyware and has been adopted with 411 votes in favour, 97 against and 37 abstentions. Members of the European Parliament drew special attention and provided targeted recommendations for Hungary, Poland, Greece, Cyprus and Spain after alleged abuses. The recommendations referred to actions such as complying with European Court of Human Rights judgments and restoring judicial independence, launching credible investigations, ensuring independent and specific judicial authorisation before deploying spyware, repealing export licences which are not in line with EU export control legislation and providing people with real legal remedies. The resolution also calls for the creation of an EU Tech Lab, an independent research institute with powers to investigate surveillance and provide technological support, including device screening and forensic research.

The resolution and the use of spyware has been interestingly summarised by Committee Chair Jeroen Lenaers: "Spyware can be an effective tool in fighting crime, but when used wrongly by governments, it is a huge risk to the rule of law and fundamental rights. Instead of banning spyware, we should make sure that EU Member States fulfil certain requirements, like effective judicial authorisation and independent oversight, and spyware use must be proportional and respect EU law. It is now up to the other EU institutions to take the work further, and we will continue to scrutinise the implementation of our recommendations."

The text of the resolution may be found under the following link:

Third-party plugins have recently become available for ChatGPT in Austria and other European countries. The plugins give ChatGPT many enhanced new capabilities. We briefly tested some of the 500+ plugins that are already available, and some work better than others. Regardless, it is evident that large language models and other applications will interact much more closely in the future, and that usability will increase vastly.

Some plugins already work quite well in our tests. A great example is Wolfram which integrates mathematical capabilities into ChatGPT. Previously, the software often got wrong even simple calculations that could easily be done on a pocket calculator, despite ChatGPT confidently presenting each step of the solution. Our initial conclusion was that language models, which work by predicting the probability of the next word, may not be well suited to performing exact computations. But now with the Wolfram plugin, combining a math computer with a language model seems to work much better. The language model behind ChatGPT usually understands the problem presented verbally by the user quite well, and the Wolfram plugin then makes the correct calculations. This is helpful even for us lawyers.

Lastly, OpenAI has also introduced a built-in browsing function which, according to our initial tests, cannot yet replace a search performed by the user. This may change. Some third-party plugins are already competing with the built-in search function. Both the plugins and the search function are available only to Plus users who pay USD 20 per month.

In a historic move, the European Parliament (EP) adopted its position on the Artificial Intelligence (AI) Act with a significant majority on 14 June 2023. The move initiates interinstitutional negotiations between the European Commission (EC), the European Parliament and the Council of the European Union, intended to finalise the world's first comprehensive regulation of artificial intelligence. This draft proposal comprises some significant changes compared to the EC's initial draft. If you want to find out more, click here.