Italy – China: Wind of Change along the Silk Road

General Background

Interesting time ahead on the antitrust side as proposals for amendment are under discussion in many countries, including Italy and China.

Chinese antitrust is currently going through what are likely the most important changes encountered since its inception: an amendment of the Anti-Monopoly Law and the establishment of a new enforcement body.

Likewise, in Italy, the long-awaited proposal for an Annual Competition Law provides for radical changes for antitrust and merger control enforcement powers in Italy and pro-competitive developments for the Italian economy.

While Italy and China are geographically distant jurisdictions, the amendments proposed to both sets of laws pose certain interesting similarities: convergence does not come as a surprise as antitrust regulators in both countries grapple with similar issues such as the perceived need to strengthen and broaden sanctions for infringements of antitrust rules or the attempt to get jurisdiction over ‘killer acquisitions.’

The purpose of this article is to provide a brief overview of the main changes awaited in both Italian and Chinese antitrust law while highlighting the similarities.

China

As described in detail here on 23 October 2021, the Standing Committee of the National People’s Congress – China’s legislature – published a draft revision of the Anti-Monopoly Law (AML) after its first reading (Draft). 

The Draft brings about a major revision of the AML in three particular areas: anti-competitive agreements; merger control and sanctions. 

In the agreements area, the major changes are related to: 

• the extension of the cartel prohibition to intermediaries who do not themselves operate in the affected relevant market;
• safe harbors for agreements between undertakings, whereby even conduct such as horizontal cartels and resale price fixing may benefit from a presumption of legality if the parties to the agreement have market shares below the safe harbor (yet to be determined).

In the merger control area, significant changes are underway as well, namely: 

• the power of the State Administration for Market Regulation (SAMR) to review transactions below the statutory thresholds if it has reason to believe the transactions could have anti-competitive effects; 
• a new ‘stop-the-clock’ feature for merger review whereby SAMR would be able to suspend the timeline for the review procedure which would represent a departure from China’s past practice based on fixed timelines.

The largest impact of the Draft lies in the area of sanctions for anti-competitive conduct. The main changes which are provided for by the Draft include: 

• personal liability for the legal representative, responsible manager, or directly involved employee of the company with fines of up to RMB 1 million (around EUR 140,000) along with the possibility of having the AML sanction recorded in the perpetrator’s social credit information and be disclosed to the public;
• a statutory fine’s increase to RMB 3 million (around EUR 400,000) from RMB 500,000 (around EUR 70,000) for companies which enter into but do not implement an anti-competitive agreement;
• additional statutory fine’s increase for failing to file reportable transactions (from the currently capped RMB 500,000 (around EUR 70,000), to a level up to 10% of annual revenues if the transaction is found to have anti-competitive effects or RMB 5 million (around EUR 700,000) if it does not);
• increase in statutory fines for obstruction of an investigation, with the fine increased from up to RMB 1 million (around EUR 140,000) to a maximum of 1% of annual revenues;
• a new “general aggravation clause” which would allow the antitrust agency to impose a fine two to five times the statutory limits if the situation underlying the AML infringement or the outcome is particular serious, or the impact is particularly malicious (taken literally, this could mean that the maximum fine for an implemented anti-competitive agreement, abuse of dominance, or anti-competitive M&A deal without filing could be as high as 50% of annual revenue);
• registering a company’s conduct in the social credit system, which may have a big effect in China going forward.

The reform package summarized above might be accompanied by an additional radical change announced on 15 November 2021: the creation of a new antitrust authority, the National Anti-Monopoly Bureau (NAMB). 

Italy

As described more in detail here the Proposal for an Annual Competition Law (Italian Proposal) approved by the Italian Government on 4 November 2021 provides for, inter alia, a number of important changes in the antitrust enforcement area, including: 

• a rebuttable presumption of economic dependence in commercial relations with a company offering the intermediation services of a digital platform, where the latter plays a decisive role in reaching end-users and/or suppliers, including in terms of network effects and/or data availability;
• a settlement procedure in administrative proceedings conducted by the Italian Competition Authority (ICA);
• a further strengthening of the ICA’s powers to obtain information and documents (in addition to what already implanted through Legislative Decree No 185 of 2021 – see below) even outside formal investigation proceedings as well as in the context of merger review, by giving it the power to impose administrative sanctions in case of refusal  or delay in providing the requested information or documents or in case of misleading or incomplete information.

As regards the merger control area, the list of proposed changes includes:

• the granting to the ICA of the power to review mergers which trigger only one of the two legal thresholds currently in force or where the total worldwide turnover of the companies that are parties to the concentration between business operators exceeds EUR 5 billion will fall within the scope of Italian merger control, if there are reasonable grounds to suspect that the transaction has anti-competitive effects;
• the reportability of cooperative full function joint ventures (i.e., joint ventures performing on a lasting basis all the functions of an autonomous economic entity even when their object or effect is the coordination of the competitive behaviour of the parent companies that remain independent); 
• the application of the relevant turnovers calculation criteria in case of banks and financial institutions as adopted at the EU level; 
• the transition from the “dominance” to the “significant impediment to effective competition – SIEC” test as the substantive merger review test. 

Furthermore, this time of reform is further enhanced by the measures taken, through the Legislative Decree No 185 of 2021, by the Italian legislator for the implementation of Directive (EU) 2019/1, known as “ECN+” with a view to further harmonize the tools and powers at the disposal of the competition authorities of the Member States, including the ICA, and empowering them to be more effective enforcers (see the article) including, inter alia:

• Personal liability of individuals for lack of cooperation during the investigation. In particular individuals might be subjected to administrative fines if they wilfully or negligently: 
  • obstruct the inspection at their home;
  • provide inaccurate or misleading information as well as their refusal to provide or omit it, without prejudice to the right not to self-incriminate;
  • refuse to appear at hearings.
• Significant higher fines for companies for lack of cooperation during the investigation: up to 1% of the total global turnover plus a periodic penalty payment up to 5% of the average daily turnover achieved worldwide during the previous business year for each day of delay.
• The introduction of effective and dissuasive periodic penalty payment for non-compliance with ICA sanctioning decisions or decisions imposing interim measures or commitments: up to 5% of the average daily turnover achieved worldwide during the previous business year for each day of delay.
• New rules for the calculation of fines levied against associations of undertakings: with a transition from a calculation method based on the total value of the membership contributions paid (usually very limited) to the provision of a cap of 10% of the sum of the total worldwide turnover of each member active on the market affected by the infringement of the association concerning the activities of its members (i.e., the large majority of cases).

Next steps 

While, it remains to be seen which of these provisions will ultimately be transformed into law in the respective countries, it seems likely that milestone reforms of the Italian and Chinese competition law systems are approaching. 

The most striking element of significant convergence is represented by the general objective pursued by both the Italian and Chinese legislator, namely, the clear and strong willingness to strengthen antitrust enforcement in the respective national markets.

The most direct and effective sign of the above is represented by the material increase of the level of pecuniary fines under consideration both in China and Italy (although in China this would be related to both substantive and procedural violations, while in Italy only in relation to the latter). 

But that is not all. The antitrust crackdown underway at the two extremes of the silk road implicates the revision of one of the fundamental principle of both systems, namely the limitation of liability to legal entities. The “corporate veil” would no longer constitute an absolute shield for individuals though with at least one major difference: while in China the personal liability would concern substantive breaches of the law, in Italy it would be related to procedural infringements only. Nonetheless, the change remains radical and surprising, from the Italian perspective in particular, if one considers that personal liability for violation of antitrust rules is entirely extraneous to the EU body of rules enforced by the European Commission, i.e. the legal system with regard to which an alignment should take place.  

In the merger field, changes introduced in both China and Italy reflect a recent, and growing, tendency to widen and enhance the ability of competition authorities to review transactions below thresholds where they are felt as possibly detrimental for competition.

The need to enhance competition authorities’ powers in respect of merger review has long been advocated, especially in the digital sphere, but it remains to be seen whether the cure is worse than the disease. Allowing competition authorities to review transactions below thresholds is capable to result in a high level of uncertainty regarding companies: an issue which in Italy is only minimally mitigated by the time limit provided for by the Italian Proposal, (i.e. ICA shall advance such request within a time frame of 6 months from closing)¹.

On a similar note, the ability introduced for SAMR to stop-the-clock in merger review is a tool that is not unknown, especially for companies acquainted with EU merger rules, but it is again capable of injecting more uncertainty into the Chinese merger review process, which so far has been subject to fixed, unmovable deadlines.

On the bright side, some of aspects contained in the Italian Proposal in the merger area are certainly to be welcomed. First and foremost, the proposal to subject also the cooperative (full-function) joint venture to the merger control regime. In the current formulation of the law, for a joint venture to be subject to merger filing, in addition of being full function, it is necessary that it does not have as main object or effect a coordination between the parent companies. In the ICA’s practice, this principle has been applied following an unclear approach which made it difficult for companies to preliminary assess whether a joint venture fell within the category of concentration and consequently led to a number of decisions in which the transactions were found to be outside of the merger review scope². This new proposal, if confirmed, will align the Italian approach to the one adopted at EU level. 

Likewise, so much awaited is the alignment to EU law for the rules concerning turnover calculation for banks - as such would make easier for banks and financial institutions to carry out multijurisdictional analysis - and for the test applied to assess the competition impact of concentration. In this latter respect, the test so far adopted by the ICA to assess merger is primarily based on dominance; in fact according to art. 6 of Italian Law 287/1990 the relevant test entails the evaluation of whether a concentration determines the creation or strengthening of a dominant position so as to eliminate or reduce substantially and for a long time competition on the market. This test implied that the ICA must first assess the specific point on dominance and then evaluate the impact on the market. In practice, in its merger decisions, the ICA has conducted the review without formally distinguishing between the two phases of analysis and focusing on whether the transaction materially impacted on competition. Notwithstanding the fact that in practice the approach followed by the ICA was not too far away from the line adopted at EU level, the alignment of the law to the EU rules is certainly to be welcomed as it ensure that mergers will be assessed along the same lines both at national and EU level.

References:

¹ Despite the uncertainty in which such power leaves the companies, it is interesting to note that many jurisdictions, also at EU level, actually empower competition authorities to do so. This is the case, for instance of Cyprus, Hungary and Latvia where ability to review below thresholds transaction is linked to an evaluation on the merit of the transaction which should be capable of somehow affecting the market. For other EU jurisdictions, however, possibility to review transactions is merely linked to quantitative parameters, such as market share or turnover above certain thresholds (Slovenia, Sweden or Romania) or to no parameter at all (e.g. Lithuania). Outside the EU, it is notable the case of Brazil where merger control rules have a particularly wide reach together with other South American countries (e.g. Argentina, Chile). Also, interesting to note that many African jurisdictions also provide for such possibility: most notably Comesa and South Africa but also, by way of example, Tunisia, Nigeria, Angola.

² Notable in this respects are the cases concerning acquisition of joint control over exploration and production licensing where the ICA attributed relevance, in the assessment, to the content of the cooperation agreements which, following a common practice in the sector, parent companies concluded to rule their respective activities in the field, reaching however, in some cases, divergent conclusion (see ICA decision, C 5499 – Total Fina Elf Italia/Gas della Concordia, 24 October 2002 where the ICA considered that the transaction did not follow under the merger rule prevailing the cooperative aspects while in a similar situation the ICA concluded for the application of merger rule to the transaction – ICA decision, C 5287 Total Fina Elf Italia/ENI, del 27 June 2002).

Authored by Aurora Muselli and Luigi Nascimbene.