The US-China ‘trade war’ has captured headlines for more than a year now. One of the primary justifications given by the US government for this onslaught—including a WTO case, tariffs, export restrictions, and other measures targeted at China—is China’s persistent use of so-called ‘forced’ technology transfer (FTT) policies. Building on several recent works of mine (at TFSC, at JIM, with Springer, at MIT SMR, and at JWB), this article outlines five main types of policies in China that foreign multinational corporations (MNCs) have characterized as ‘forcing’ technology transfer and highlights how they have been reformed in 2018 and 2019, largely as a result of the trade war and to the benefit of foreign MNCs.
First, foreign MNCs have long expressed concern about de jure and de facto measures in China that require foreign firms to transfer technology to local firms or be denied market access—so-called ‘technology for market access’ requirements. Perhaps the most well-known of these required that foreign MNCs transfer their technology to a foreign-Sino JV as a precondition for market access (e.g., a business license) and/or access to state support (eg, public procurement and other financial resources) in the traditional auto industry and high-speed trains industry. Similar requirements have been reported in other industries such as the big-power-generation turbines industry. Most recently, firms have complained about a Chinese regulation in the new energy vehicles (NEVs) industry that came into effect in 2009 and was tightened in 2017. The 2009 regulation required ‘mastering’ of one of three core NEV technologies within a foreign-Sino JV in order to receive an NEV production license and access to government procurement and subsidies; and the 2017 regulation required mastering of all (not just one of three) core NEV technologies. Other Chinese state policies have been reported to directly or indirectly require transfer of technology as a precondition for market access, such as (the now revised) local content requirements for operating in and winning government procurement contracts in the wind turbine industry, among other foreign investment restrictions (eg, being required to set up an R&D center in China as a precondition for entering a JV in industries in which a JV was the requisite mode of entry, and provisions in Chinese law requiring data servers to be localized in China as a precondition for receiving and maintaining certain business licenses).
Among this group of policies, foreign MNC’s concerns over technology transfer requirements in the NEVs industry were some of the first to be addressed amidst the trade war. Although the 2017 NEVs regulation still appeared to be in effect in early 2019, its impact on foreign MNCs has been largely counteracted by changes to Chinese law in 2018. Specifically, the Special Administrative Measures for Admittance of Foreign Investment, effective as of July 28th 2018, removes foreign ownership restrictions on NEV operations in China as of 2018.
A second main concern of foreign MNCs involves requirements to disclose excessive amounts of trade secrets directly to the state and to experts on state-organized panels as a precondition for receiving regulatory approvals (e.g., in the pharmaceuticals, chemicals, and other industries). Judged by any reasonable standard, such disclosure should not be necessary to grant regulatory approvals; worse, the confidential business information disclosed is sometimes leaked to local competitors.
These concerns have recently been addressed by revisions to China’s Foreign Investment Law (FIL) on March 15th 2019. Article 22 of the new FIL now mandates that ‘administrative agencies and their staff must not use administrative methods to force [强制] assignment [ownership transfer] of technology’. This article builds on a similar provision in Part IV, Article 14 of the Notice of State Council Document No. 19 (2018), effective in June 2018. Article 23 of the new FIL requires that Chinese government officials maintain the confidentiality of trade secret information they are exposed to during regulatory approval proceedings. Also, Article 39 of the new FIL sets-forth the grounds for penalties, including criminal ones, for the involvement of government officials in misappropriating trade secrets.
Further, on April 23rd 2019, the Administrative Licensing Law, which governs business licenses/certain regulatory approvals in China, was revised in a way complementing the new FIL. Article 5 was revised to prohibit the individuals (including not only government officials, but also external experts, among others) involved in licensing procedures to disclose applicants’ trade secrets and other confidential business information without the applicants’ consent, except in situations required by law or justified under national security or public interest grounds. Further, presumably in an attempt to limit the uncertainty created by the aforementioned exceptions, Article 5 specifies that applicants can object to the sharing of their information under such exceptions and that an applicant has equal rights to obtain administrative licenses and the state should not discriminate against applicants. Article 31 of the revised law stipulates that government bodies and their personnel must not make technology transfer a prerequisite for administrative licensing, and in the process of governing the licensing should not indirectly or directly require applicants to assign (transfer ownership of) their technology.
A third main concern of foreign MNCs involves several provisions of China’s Technology Import-Export Regulation (TIER). In particular, Article 27 of the TIER required that subsequent improvements on technology developed in contractual relationships are owned by the party making the improvements. Article 24.3 mandated that foreign technology licensors bear liability for any accusation of infringement that may be brought against a technology importer in relation to the use of their licensed technology. Article 29.3 also specified that a technology import contract must not contain provisions that prevent the importer from improving upon the technology they are supplied with or otherwise restrict the receiving party from using improved technology. These concerns have been addressed by provision 38 in State Council Order No. 709 (Decision of the State Council to Revise Several Regulations), issued and effective on March 2nd 2019, which abolishes all of the aforementioned articles in the TIER.
A fourth area of concern to foreign MNCs, although less controversial than the aforementioned measures, involves China’s Sino-Foreign Equity JVs Regulation. In particular, Article 43.3 of the regulation stipulated that technology contracts are ‘generally’ restricted to a duration of ten years and Article 43.4 stipulated that the technology importing party in the JV should be granted the right to use such technology ‘continuously’ after the term of the contract expires. Provision 33 of the aforementioned State Council Order (No. 709) abolishes these articles.
A fifth issue of concern to foreign MNCs involves court rulings in intellectual property (IP) infringement cases that unfairly favour local firms. Even one protectionist IP judgment can result in significant misappropriation of a foreign firm’s technology. Specialized intellectual property IP courts have recently been established in China that hear cross-regional appeals and therefore can help correct local protectionist tendencies in first-instance judgments. Further, on January 1st 2019, a new, national-level specialized IP appellate tribunal in China’s Supreme People’s Court was established which should act as a counterweight to local judicial protectionism.
Despite some ambiguity in the language of some of the aforementioned reforms, they should generally help lessen appropriability risks faced by foreign MNCs in China. Combined with other recent reforms to China’s IP regime, the revisions should give foreign MNCs more confidence in China’s legal regime governing IP and technology transfer.
 As I have discussed in other work (see TFSC, JIM, and Springer), although the term ‘forced’ has been used by MNCs to characterize all the policies discussed herein, that term is not always a fully accurate descriptor of such policies – although in some cases may be apt.
Challenger banks do not only challenge traditional banks but also the rules aimed at them. The detail, how banks have to verify the identity of new customers in different jurisdictions, shows how digitalization increases the need to find common rules for a common digital market.
Challenger banks such as Revolut, Monzo and N26 are currently in fierce competition, both worldwide and within the EU. The quicker they accumulate customers, the quicker they can exploit economies of scale. The first relevant point of interaction of a bank with its customer, and an important step to combat money laundering, is the verification of the customer’s identity. There are different approaches:
If you open an account with Revolut (seated in London, licensed in Lithuania) you have to verify your identity by sending them a selfie and a picture of your ID (‘photo-identification’), a more traditional online bank like DKB (seated in Berlin, licensed in Germany) requires video-identification (have a videochat with a call center agent), whereas N26 (seated in Berlin, licensed in Germany) makes the requirements dependent on where you are located: If you live in Germany, you need to videochat while for new customers from any other jurisdiction the selfie is sufficient.
Why do we find different approaches for what should be the same situation from a regulatory viewpoint? This seemingly technical issue deserves consideration as it shows how digitalization might increase pressure to advance the integration of the common market:
The different procedures are based on Article 13(1)(a) of the 4th European anti-money laundering directive (AMLD4), which obligates member states to require banks to verify the identity of their customers ‘on the basis of documents, data or information obtained from a reliable and independent source’, but leaves the details to the member states and their supervisory authorities. Member states, in turn, based on the above broad wording, established different regimes. Some (such as the UK) consider photo-identification as sufficient while others (such as Germany) require video-identification.
While traditional banks established branches or subsidiaries in multiple member states which competed with other local entities, online banks compete with each other more directly, in many member states without any permanent local establishment. Obviously, to require one competitor to force its customers to video-chat increases the cost of the onboarding process significantly and also means a more burdensome process for customers, thus a lower conversion rate (ie, ratio of website visitors to signed up customers) for that competitor.
In a limited area, the AMLD4 allows for regulatory arbitrage
This makes another part of the AMLD4 interesting: Article 25 provides that banks may rely on subsidiaries or other third parties to perform the customer due diligence, even if such entity is seated in a jurisdiction with lower customer due diligence requirements than the bank, as long as the entity relied on:
a) applies requirements consistent with those laid down in the AMLD4; and
b) is being supervised accordingly (Article 26(1)).
N26, for example, cooperates with the UK seated and FCA supervised company Safened Limited, which performs photo identification procedures for them. The possibility of such regulatory arbitrage might sound like an editorial mistake of the legislator. However, it’s not—it is rather a consequence of an incomplete common market. Unlike prudential regulation, AML is not generally supervised by the ‘home authority’ (ie, supervisory authority of the member state where the bank is seated). According to Article 28, for group-wide policies and procedures, the authority of the home member state should be competent, while for branches and subsidiaries, the authority of the host member state should be in charge. If the host authority is competent for supervision, this also means that their interpretation of the AMLD4 trumps. The same applies if it’s not a subsidiary performing the customer due diligence, but some other third party seated and supervised in another member state.
From a practical point of view, allowing such cooperation concerning customer due diligence across member states also makes sense. In the course of the harmonization of the legal systems across member states, the formal seat of a bank within the common market might gradually lose importance—this is especially true for an online bank with only a minority of customers residing in its home member state. In fact, enabling cross-border value creation by a truly European bank with hubs across multiple member states would be a core-benefit of the common market.
What would you choose?
From the perspective of a national legislator or supervisor from a jurisdiction with higher identity-verification standards, however, this creates a dilemma. Either you allow—in accordance with the AMLD4—supervised banks to apply lower identification standards, or you give a significant competitive advantage to banks supervised by the national competent authority of another member state with possibly overall lower standards. The latter might lead to what you sought to prevent in the first place: More bank customers within the common market are on-boarded by lower standards. What should be done?
Confronted with the dilemma, Germany’s BaFin tried to strike a compromise. According to their interpretative guide to the national law implementing the AMLD4, customer due diligence by a third party for a German bank should be performed by standards of the state where the entity relied on is seated (even if those standards might be lower and include photo-identification). However, if the customer resides in Germany, the national standard and therefore video-identification is required.
As is quite common for compromise solutions to dilemmas, this one is imperfect. Legally, there is no indication in the AMLD4 nor in the implementing national law that the residence of the customer somewhat affects due diligence requirements. Practically, a differentiation according to the residence of the customer is questionable as a fraudster would of course declare residence in a state where lower requirements apply, such as the UK.
Three possible ways to ensure a level playing field
There are three other options to ensure both a level playing field and adequate customer onboarding requirements.
1. Common identification standards for online banks could be imposed by the legislator. However, the upcoming AMLD5 and AMLD6 do not impose specifications concerning customer-identification. As regards identity verification, AMLD4’s broad wording indicated above remains in force. Also, a directly applicable European AML Regulation solving the issue is not within sight. Therefore, ideally the supervisory authorities of the member-states should find an agreement on working level.
2. If that’s not possible, another path would be to stay with the regime as foreseen in the AMLD4. If the benefit of having a level playing field right away without a lengthy legislative or administrative process outweighs the dangers of the photo-identification method, fragmenting the internal market in this regard for video-identification’s sake would not be justified.
3. If, however, photo-identification really leads to significant fraud rates, a quick solution at national level could be warranted. For Germany, currently a draft law is being discussed which would deviate from Articles 25, 26(1) and 28 of the AMLD4. German banks would at all times have to apply the national customer due diligence regime and would only be allowed to rely on subsidiaries or third parties if those perform customer due diligence in accordance with national law. This option of course would come at a cost: it certainly leads to an imbalance in competition and might even lead to a drain of online-banks and customers to the jurisdiction with the lowest standards. Let’s see whether in the end, the relevant draft clause (§ 17 Abs 1 S 3 GWG-E) might be dropped for those reasons. You might discover the outcome when opening your next online bank account.
Jonas Sturies is a lawyer at Schalast in Frankfurt. He regularly advises fintechs on regulatory issues.
In a recent paper, I discuss the rise and fall of regulatory competition in corporate insolvency law in the European Union. The rise is closely associated with the European Insolvency Regulation (EIR, 2002), and it is well-documented. The United Kingdom (UK) has emerged as the ‘market leader’, especially for corporate restructurings. The fall is about to happen, triggered by a combination of factors: the recasting of the EIR (2017), the European Restructuring Directive (ERD, 2019) and, most importantly, Brexit (2019). The UK will lose its dominant market position. I present evidence to support this hypothesis.
Regulatory competition in European corporate insolvency law happened by accident: it was the unwelcome consequence of the entering into force of the EIR in 2002. The EIR was designed to eliminate forum shopping and to harmonize Member States’ jurisdiction and conflicts rules for international insolvencies. However, in practice, it did not achieve this end. The Regulation’s test for main insolvency proceedings, a company’s ‘Centre of Main Interests’, can be manipulated. Forum shopping became almost a signature feature of the EIR, and the UK emerged as the ‘market leader’ for corporate restructurings in the European Union (EU). The available data clearly confirms this assessment. The popularity of the UK as a restructuring venue also stems from the attractiveness of the Scheme of Arrangement—a procedure that is not within the scope of the EIR. Under the applicable European rules, restructuring decisions taken by courts in one Member State must be automatically recognized in all other Member States.
The regulatory landscape for corporate insolvency law in the EU is changing. The EIR was recast in 2017, the EU passed the ERD in 2019, seeking to harmonize Member States’ pre-insolvency restructuring regimes so that local businesses get local access to restructuring processes, and the UK will probably leave the EU in 2019.
I argue that the recast EIR will not significantly affect forum shopping and regulatory competition in corporate restructurings. However, the ERD will have such an effect, ie it will significantly reduce forum shopping and regulatory competition in corporate restructurings. This is because the ERD mandates that Member States implement certain key features of pre-insolvency restructuring regimes by 2021, effectively ruling out radical legal innovations departing from the new European standard. Unfortunately, the ERD is a ‘defective product’: it mandates inefficient procedures and should be repealed.
Most importantly, Brexit will eliminate the dominant competitor in the European restructuring market, ie the UK. This is because Member States will no longer be forced to automatically recognize decisions taken in UK restructuring proceedings. It appears that the restructuring market already anticipates this effect: one can observe a decline of the popularity of the Scheme of Arrangement in cross-border cases from 2016 onwards. I present evidence in the form of hand-collected data on cross-border Schemes of Arrangement to support this hypothesis.
Horst Eidenmüller is the Freshfields Professor of Commercial Law at the University of Oxford.
In my paper ‘Cartel Prohibition and Oligopoly Theory in the Age of Machine Learning’ I deal with the application of the cartel prohibition in the light of alleged legal gaps resulting from the surge of algorithmic pricing. I focus on Article 101 TFEU, yet I retain a close tie to the jurisprudence and scholarship on Section 1 of the US Sherman Act. Instead of the currently established set of criteria for distinguishing between illicit collusion and legitimate oligopoly conduct, I suggest an effects-based approach in order to fill possible regulatory gaps.
The classical legal approach for distinguishing between illicit collusion and legitimate oligopoly conduct is to rely on criteria that relate to the means and the form of how rivals interact. While firms are deemed to have the right to adapt intelligently to their rivals’ conduct, they shall be prohibited from entering into a ‘form of coordination’ which ‘knowingly substitutes practical cooperation between them for the risks of competition’, as the European Court of Justice puts it. One may emphasize the need to demonstrate an anticompetitive intent among firms to establish illicit collusion. The management of oligopolistic firms might engage in public or private price announcements, for example, to achieve a new collusive equilibrium. This will then qualify as illicit collusion if the managers have thereby ‘knowingly’ substituted practical cooperation for the risks of competition.
From this line of reasoning, it is sometimes concluded that the cartel prohibition of Article 101 TFEU or Section 1 of the Sherman Act can be unable to capture collusion if it is achieved by autonomously acting computers relying on machine learning capabilities. Firms might achieve supracompetitively inflated prices without having specific knowledge or intent. Pricing algorithms might reach a new equilibrium on their own. It is even conceivable that computers with machine learning capabilities reach collusive equilibria although their designers have not intended this.
Against this backdrop, I contend in my paper that it is not appropriate to distinguish legitimate oligopoly conduct from illicit collusion by relying on criteria, such as the ‘knowingly’ criterion or other factors that relate to the means and form or anticompetitive intent. This traditional approach fails to acknowledge that there is, in fact, no categorical difference in the way illicit collusion on the one hand and tacit collusion on the other hand work. Tacit collusion can be characterized as a non-cooperative game in terms of game theory in the same way as concerted practices (and even legally unenforceable cartel agreements) can be considered a non-cooperative game. A firm reacts to its rivals, and the rivals then react to the observed conduct of this firm intelligently.
Therefore, I argue that it is unconvincing to try to find something idiosyncratic about the means or form used for illicit concerted practices, which is purported to be absent in ‘mere’ tacit collusion cases. The law puts different labels on what is ultimately the same economic phenomenon. I therefore suggest in my paper that the relevant criterion should be whether the release of informational signals by two or more rivals creates or sustains a supracompetitive equilibrium, the consumer harm of which is not offset by concomitant consumer benefits. This allows distinguishing between legitimate and illicit collusion based on an effects-analysis guided by the consumer welfare standard. It makes other criteria, which rely on the means and form of communication and the inner sphere of natural persons, dispensable.
The idea submitted here is not equal to the approach, as suggested in some scholarly writings (eg here and here) on Section 1 of the Sherman Act, of condemning oligopolistic pricing as per se anticompetitive under the cartel prohibition, namely, to equate tacit collusion with agreements or concerted practices. The differentiated approach submitted here avoids some of the conceptual problems that come with that idea. It does not force companies to act as if they do not know what they actually know about their competition.
Rather, the present suggestion is to identify singular elements of communication, ie ‘informational signals’, which must be checked for their propensity to create a consumer harm. If and to the extent that an informational signal creates harm, a firm must refrain from releasing that signal. The relevant counterfactual for the identification of illicit coordination therefore is not a situation in which tacit collusion does not occur at all. Rather, it is the hypothetical market outcome as it would present itself if the potentially harmful informational signal, which is being analyzed, were absent. Some informational signals, such as publicly available price lists, might be indispensable for consumers to make informed choices and plan their purchases ahead. Even though these price lists might facilitate collusion, they can create benefits to consumers which offset a potential consumer harm. They should therefore not be prohibited. If price announcements are being made, however, which do not create benefits to consumers in a given case although they enable oligopolists to collude, this informational signal should be prohibited. This might be the case for non-binding announcements that are being made a long time before price changes are supposed to take place, or for a private exchange of information, if and to the extent that a sufficient consumer benefit cannot be established. If such a harmful signal can be identified, according to the approach submitted here, it will not be decisive whether natural persons or computers with machine learning capabilities have released it. Neither will it be relevant whether natural persons intended to influence prices or whether the designer of an algorithm had any anticompetitive intent.
The advantage of the approach submitted here is that it renders the application of the cartel prohibition more robust in cases where direct human involvement in the coordination process is limited, absent, or hard to detect. This can help to close the regulatory lacuna that is alleged to exist with respect to algorithmic pricing under the cartel prohibition. Also, it reconciles the law with the consumer welfare approach in that it allows for interventions if consumers suffer irrespective of further criteria. Negligence or intent can be relevant for the imposition of a fine or an antitrust damages claim. Yet the lack of an anticompetitive intent, under this approach, will not hinder a prohibition decision. At the same time, the release of information which increases market transparency will be unobjectionable if and to the extent it creates consumer benefits.
Stefan Thomas is a Professor of Civil, Commercial and Competition Law at the University of Tübingen, Germany.
On January 10, 2019, the Italian Government enacted the Business Distress and Insolvency Code (the Code). The Code was drafted taking into account the then existing draft of the recently adopted EU Directive on preventive restructuring frameworks (the Directive). Further amendments to Italian laws are likely to be required in light of the final version of the Directive.
Below is a brief summary of the key changes to the Italian restructuring and insolvency legal framework brought about by the Code.
I. Alert measures
The Code introduces a system of 'alert measures' intended to detect a situation of distress at a time when corporate insolvency could still be avoided. The alert measures will not apply to listed companies, 'large undertakings' (as defined under the EU Directive 2013/34) or financial institutions.
By the time the Code enters into force (August 2020), a crisis composition organization (CCO) will be established within each local Chamber of Commerce to assist the debtor in working out a consensual arrangement with its creditors. Pending such workout the debtor may petition the court to impose a moratorium.
Further, if the debtor’s board of statutory auditors or its outside auditors believe that the company is in distress, they must inform the board of directors of it and, if the board of directors fails to follow up with appropriate initiatives, the auditors must inform the CCO directly of the distress. Likewise, certain public creditors (e.g., tax creditors) must notify the debtor when its exposure towards them exceeds certain thresholds set forth in the Code, and are required to inform the debtor’s auditors and the CCO if the debtor fails to address the situation of distress following such notice. The CCO shall then convene the debtor to work out a consensual arrangement.
If no agreement is reached between the distressed debtor and its creditors with the assistance of the CCO within 6 months of the first meeting between debtor and CCO, the debtor will be required to file for court-supervised restructuring proceedings (failing which the court may open an involuntary proceeding). Likewise, if the debtor does not attend the meeting convened by the CCO upon notification of the debtor’s auditors or public creditors, or the debtor does not take suitable initiatives thereafter, the CCO shall inform the public prosecutor, which may request the court to open an involuntary proceeding.
II. Corporate group restructuring
Corporate group insolvency proceedings may now be started through a single petition to the same court and will be supervised by the same judicial officers.
In case of a court-supervised composition with creditors (concordato preventivo; see also section III, below), the debtor may propose a single restructuring plan for the group. However, the plan must continue to reflect the separate assets and liabilities of each group member (i.e., no consolidation) and is voted on by the creditors of each group member on a standalone basis.
III. Changes to concordato preventivo
Although the automatic stay on enforcement actions by creditors will continue to be imposed upon the initial filing of the debtor, the court must now confirm it or revoke it at the first hearing of the proceedings scheduled after the initial filing. The court may subsequently revoke the stay (which in no event can last longer than 12 months from the initial filing).
Concordato proceedings contemplating full liquidation of the debtor’s assets will not be permitted, unless third parties contribute additional funds for the benefit of the creditors. Also, the restructuring plans envisaging the continuation of the debtor’s business as a going concern will be permissible only if the plan envisages the preservation of certain employment levels (e.g., the debtor – or the buyer of the debtor’s business – for at least 1 year after the court confirmation of the plan may not dismiss a number of employees equal to at least 50% of the average number of employees employed over the 2 years prior to the initial filing).
Secured claims may be rescheduled for up to 2 years, and these creditors may vote on the concordato in value based on their deemed impairment under the restructuring plan.
Separate voting classes must be formed for certain categories of claims (e.g., tax or social security claims; claims secured on third parties’ assets; claims to be satisfied in kind).
IV. Court-ratified Restructuring Agreements
Prior to the entry into force of the Code, the effects of certain court-ratified restructuring agreements may be imposed upon dissenting creditors of a specific class by a qualified majority (75%) of consenting creditors of such class, on the condition that, among other things, the creditors of such class are banks or financial institutions.
Under the Code, such cram-down mechanics may now be extended to any dissenting creditor of a given class regardless of its identity, provided that the restructuring plan underlying the agreement either entails the debtor’s continuity as a going concern, or that at least 50% of its debt is owed to financial creditors (as defined under the Code).
The full version of this article is available here.
The consumer credit reporting system performs three main functions. First, sharing data about consumers reduces the asymmetry of information in consumer credit markets, whereby credit providers typically know less than consumers about factors affecting the latter’s creditworthiness. This helps to mitigate adverse selection and moral hazard effects that undermine market efficiency. Secondly, sharing information via centralized credit reference agencies (CRAs) improves the efficiency of the credit information market. It also facilitates the assessment of consumer creditworthiness: CRAs aggregate the data that they receive from credit providers with public data, such as information on bankruptcies and electoral registration, to provide credit reports and credit scores to credit providers. Thirdly, CRAs offer these credit reports to consumers (known in the UK as ‘Statutory Credit Reports’), allowing them to better understand, and take measures to improve, their creditworthiness. As such, consumer credit reports are an important tool for educating and empowering financial consumers, helping them to manage their financial identity and thereby improve their access to, and cost of, credit.
The Growing Obsolescence of the Consumer Credit Reporting System
These are the main functions that the consumer credit reporting system is supposed to perform. In reality, however, this system is grossly underperforming—and failing to meet the needs of consumers. As I have argued previously, we are now living in a world in which all data is credit data. Credit providers (including both mainstream banks and alternative 'fintech' lenders) increasingly rely on algorithmic credit scoring—leveraging Big Data and AI/ML techniques, and a wide range of ‘social’ and ‘behavioural’ data—to reach credit decisions. This has two implications: first, lenders rely less on the conventional ‘credit’ data that is shared on a reciprocal basis with other lenders and CRAs (namely, credit performance, account transactions and, more recently, utility, telecom and rental payment data). This is particularly true for 'thin file' or'no file' borrowers, who lack conventional credit data. Secondly, Statutory Credit Reports offer consumers an increasingly under-representative picture of their creditworthiness: at least in the case of the three main CRAs (Equifax, Experian and TransUnion), their reports reflect only conventional credit data and limited additional categories (such as electoral and bankruptcy information).
This begs the question whether the existing credit reporting system is still fit for purpose. In particular, how useful can Statutory Credit Reports be for consumers in understanding and improving their creditworthiness, if they don’t reflect a large part of the information that lenders actually use to reach credit decisions?
Not only is the scope of information covered by consumer credit reports inadequate, the lack of explanation as to how information is used by credit providers reduces its usefulness for the consumer. This is not a new problem. Statutory Credit Reports do not currently offer detailed, personalized explanation, for example, of the relative weight given by lenders to the different categories of information on their reports. However, this lack of explanation becomes more pernicious in a world of Big Data and algorithmic credit scoring, where lenders rely on many more, and much more complex, types of data, that often have a much less intuitive relationship with creditworthiness. Unlike your credit history (it is fairly intuitive that if you manage your debt well or avoid bankruptcy your perceived creditworthiness will be higher), it is less intuitive how social, behavioural data like Facebook and Uber activity correlate with creditworthiness, and more importantly, how you as a consumer can act on this information to improve your credit score.
Modernizing Consumer Credit Reporting
To avoid obsolescence, the consumer credit reporting system needs to be modernized. There are two main aspects of this system that demand attention: the inter-creditor aspect, and the consumer-facing aspect. On the inter-creditor side, consideration could be given to bringing certain forms of alternative data about consumers into the framework for information-sharing between credit providers and CRAs. However, this suggestion needs careful further analysis, in particular, taking into account the competitive dynamics of the consumer credit and credit information markets, unintended consequences of over-sharing consumer information (e.g. disincentivizing innovation or enabling gaming of the system), as well as the implications of new data portability mechanisms under EU data protection and payment services regulation (notably, OpenBanking).
On the consumer-facing side, consideration must be given to modernizing the form and content of consumer credit reports. This could involve adding to credit reports the main categories of alternative data that lenders rely upon—for example, a social media ‘score’, based on a consumer’s social media activity. It is important to note in this regard that the main CRAs—notably, Experian—are also key players in the data brokerage market and purveyors of much of the alternative data and Big Data analysis that credit providers rely upon. Notwithstanding the questionable legality of this market, their prime position makes them well placed to reveal more to consumers about their ‘data selves’.
More radically, consideration should be given to transforming the format of the credit report. A particular weakness of existing Statutory Credit Reports is that they are static, lagging indicators of creditworthiness, and often inconsistent inter se: traditional credit data are shared with CRAs only on a monthly basis, and not all credit providers share all data with all CRAs. A possible solution could be to disintermediate CRAs and replace the Statutory Credit Report with a ledger on which all consumer data can be shared, updated and accessed in real-time by both consumers and lenders—as for example in the Bloom credit-chain (banks, such as RBC, are evidently exploring similar solutions). A more decentralized, user-controlled data governance infrastructure, such as a credit-chain, could also facilitate the implementation of consumers’ data portability rights.
Modernizing the consumer credit report in this way is necessary to satisfy the requirements of EU and UK data protection law. In particular, consumers have a right to access all personal data being processed about them, which in relation to CRAs is considered to be all personal data relevant to a consumer’s ‘financial standing’ (s 13(2) UK DPA 2018). In a world where all data is credit data, meeting this standard clearly requires CRAs to provide much more information than they currently do in consumer credit reports. Likewise, consumers have a right to receive ‘meaningful information about the logic involved’ in any decision taken using ‘automated means’ (Arts 13 and 14 GDPR). At the very least, this should require consumer credit reports to reflect more of the data that credit providers actually rely upon, as well as the relative weight placed by credit providers on different categories of data in reaching credit decisions using algorithmic credit scoring.
This should not be read as an unqualified endorsement for the use of Big Data and AI/ML in consumer credit decision-making. As I have argued previously, serious attention should be given to concerns about reliability and fairness when using alternative data (notably, social media data), as well as strengthening the governance and oversight of algorithmic, data-driven tools. There are also privacy, security and broader ethical concerns relating to sharing personal data about borrowers, and the concentration of this information in the hands of a few CRAs. Yet, even adjusting for these concerns, credit decisions will continue to rely upon more information than is currently revealed to consumers in their credit reports. As such, there is no escaping the fact that, in the absence of reform, consumer credit reports are rapidly becoming obsolete. They must be modernized if they are to meet the needs of consumers to manage their financial identity and leverage the opportunities that flow from this, not least gaining access to credit on fair terms.
Nikita Aggarwal is a Research Fellow and part-time DPhil candidate at University of Oxford.
The twentieth anniversary of the important judgment of the European Court of Justice (ECJ) in the Centros case of 9 March 1999 is an opportunity to reassess its impact on developments of freedom of establishment in the European Union. The paper ‘Regulatory Competition in European Company Law. Where Do We Stand Twenty Years after Centros’ has an overview character, presenting the issue of freedom of establishment and mobility of companies from the beginning of the European ‘adventure’ and the development of regulatory arbitrage and regulatory competition in company law in the EU in the last twenty years. It provides also a short assessment of the actual market for company law with a specific consideration of close corporations, taking ownership costs vs contracting costs as a paradigm of analysis.
Indeed, contrary to the US benchmark model, in Europe the phenomenon of mobility of companies has involved almost exclusively close corporations and, in particular, private limited liability companies, with some sporadic exemptions related to listed companies. Given this pattern, the analysis shows that, twenty years after Centros, the situation in the EU differs considerably from the United States. A US style market for corporate charters for listed corporations with dispersed ownership will probably not develop in Europe in the future. Centros had the positive effect of reconsidering the philosophy of harmonization of company law in Europe and making all the actors more aware of the pros and cons of such a device to reach the goal of an integrated internal market (Article 3(3) of the Treaty on European Union).
More importantly, Centros served as a very simple but at the same time very incisive device, decided by the ECJ as ‘motor of European integration’, (i) to eradicate the very deep fears anchored on and defended by the real seat theory followed by some Member States against ‘(EU)-foreign’ companies, and as result (ii) to affirm the relevance of the country of origin principle and the mutual recognition principle, already applied in other areas of law, also in the field of company law. The mentioned fears were exaggerated both with respect to the protection of shareholders and the protection of creditors and no longer justified in the European internal market context of Article 3(3) of the Treaty on European Union.
At the same time, more recently the issue of creditors’ protection has gained new momentum with the Kornhaas case of the ECJ. This case has reconsidered the relationship between company law and insolvency law, making the regulatory picture at the same time easier but more difficult to evaluate. The liberal case law of the ECJ in the recent past accompanied by the economic and financial crisis after 2008 has led the European Commission to reconsider its action policy in the field of company law, which includes listed companies and close companies. Probably for this reason, the recent ‘mobility package’ of the European Commission is a minimal attempt to try to regulate only the issue of freedom of establishment in terms of reincorporations of private limited companies.
Stefano Lombardo is an Associate Professor of Banking and Financial Law at the Free University of Bolzano.
Is common ownership the Doomsday Machine for the operation of free markets, competition and capitalism as we know it? An observer of cutting-edge law and economics literature may indeed tend to believe that we are approaching a point of ultimate antitrust apocalypse.
The dramatic tone of the ongoing transatlantic debate on common ownership is underscored by a set of novel yet controversial economic theories, developing empirical evidence, and timid enforcement action. Commentators are split both as regards the significance and nature of the problem(s) posed by common ownership as well as over the need for regulatory intervention. Policymakers follow these scholarly developments but are reluctant to draw strong conclusions. This is potentially an area of public concern, but the million-dollar question is: how much of a (real) concern? Are we ready to step into action? On what basis? And what should be done when there is no clear consensus on the notion, extent and harmful implications of common ownership?
My recent article 'The Common Ownership Boom - Or: How I Learned to Start Worrying and Love Antitrust' tries to unfold the ongoing antitrust-focused debate by exploring a series of questions: i) who is a common owner; ii) what are the negative externalities of common ownership; iii) which are the potential anticompetitive mechanisms and theories of harm; iv) what are the appropriate legal solutions to any competition concerns. While there is so much we do not know, common ownership forces us, with some urgency, to revisit and review whether our existing antitrust tools, methods and policies are well fit for purpose.
Common ownership and range of concerns
Common ownership is a new economic reality, well noted in the US and rapidly growing in Europe. The concept refers to a situation where a common set of large, diversified financial investors simultaneously hold non-controlling ownership interests in several competing firms in an industry. These shareholder overlaps among competitors and the concentration of 'ownership via intermediation' by a few, large institutional investors may entail wide-ranging consequences.
The rise of institutional investors and passive index funds has created significant benefits in terms of portfolio diversification and corporate governance. Yet, what has been thus far less recognised are the negative externalities of common ownership and index investing. Common ownership may lead to concentration of corporate power, potential conflicts of interests and new types of agency costs between asset owners and investment fund managers or between diversified and undiversified shareholders, and suboptimal operation of financial markets due to increased volatility and correlation of stock returns and blunted price signals. Intriguingly, ground-breaking economic scholarship suggests that rising and concentrated institutional investment may have further 'hidden' social costs: reduced product market competition and increased industrial concentration.
Antitrust theories of harm and efficiencies
Market concentration and market power arising from common ownership is a hotly debated issue in competition law and economics circles. Research is developing with regard to empirical evidence, theoretical measurement tools and potential transmission mechanisms to capture the impact of common ownership on competition. Yet, common shareholding may affect corporate policy and empirical studies confirm its anticompetitive effects in concentrated product markets.
Economic analysis has primarily focused on unilateral anticompetitive effects: common shareholding may lead to short-term price increases due to lessened incentives to compete between the commonly owned firms. However, long-term anticompetitive strategies such as (tacit) collusion or (parallel) exclusion may also be linked to common ownership and may indeed be more likely theories of harm. On the other hand, common ownership may create pro-competitive efficiencies or positive spillovers on innovation.
Importantly, long-term anticompetitive effects or efficiencies based on coordination need not depend on (partial) control or active influence within corporate governance but may be also based on communication mechanisms or altered long-term incentives to collude flowing from partial ownership. Indeed, firm management control and market concentration may not be conclusive of antitrust harm or good predictors of that harm. Common ownership does not typically hinge on formal legal control or stand-alone economic control of the firm but reflects situations of indirect, de facto, collective control in firm governance and product markets due to the interaction and cumulative effect of small parallel holdings in competitors by diversified investors.
Competition policy and enforcement
Existing merger control and antitrust law could be applicable to potentially harmful common ownership cases but is either practically limited or not well suited to capture the full range of such cases. Policymakers, for instance at the US Federal Trade Commission, the European Commission, the German Monopolkommission and the OECD, recognise the importance of the issue and the need to re-think current rules and practices.
In my article, I suggest ways to guide antitrust authorities going forward: 1) update traditional merger analysis to account for common shareholding when reviewing mergers between industrial firms or asset managers; 2) reactivate and update antitrust enforcement in line with any new theories of harm associated with common shareholding; 3) more deeply understand all possible ways in which common ownership may lead to anticompetitive effects or efficiencies, so we are able to duly appreciate and weigh the two under merger control or antitrust enforcement.
Common ownership is a complex problem that calls for careful and balanced solutions. Further research is needed to inform competition policy and enforcement; yet, regulatory complacency is also not justified. Staggered legal change and case-by-case assessment based on detailed guidance may be a wiser approach to the common ownership challenge.
Anna Tzanaki is a Max Weber Fellow at the European University Institute and a Senior Research Fellow at the UCL Centre for Law, Economics & Society.
In a paper to be published in European Business Organization Law Review’s special issue on Centros@20, Elizabeth Pollman provides an answer to the questions of why we don’t see more regulatory arbitrage in the tech industry and what constrains it. Her paper draws upon an article by Victor Fleischer identifying a number of constraints on regulatory arbitrage, and adds three new ones: what she calls the ‘social license’, the bundling of laws and resources, and the fact that in some cases a different – and perhaps more radical – course of action is taken: ‘regulatory entrepreneurship’, or the strategy of ignoring, first, and then obtaining, changes to the law, rather than merely avoiding it.
This comment focuses on two elements in Professor Pollman’s analysis: the nature (and desirability) of regulatory arbitrage and the strength of social license constraints.
Professor Pollman’s treatment of regulatory arbitrage is unambiguously negative: it is a problem in search for a solution, or at least something which has to be constrained. In her own definition, “the term consistently includes the notion of manipulation or strategic design of an activity to take advantage of specific legal or regulatory treatment” (emphasis added). This negative connotation is definitely consistent with the post-financial crisis world we live in, where exploitation of regulatory arbitrage opportunities has been identified as one of the many kinds of abusive behavior that almost led to a financial meltdown in 2008. The tax minimization schemes which giant tech companies have indulged in have only rightly increased skepticism about the idea that businesses may select the applicable laws and regulations.
It may be just a reflection of my having grown up intellectually in an environment with different views on the same phenomenon (the supposedly free-marketeer-dominated pre-crisis era), but I would still argue that there are virtues to granting businesses freedom to pick the laws they prefer in some areas. If that were not the case, the only explanation for the choice made by individual jurisdictions (and even by supra-national institutions like the EU) to explicitly allow for regulatory arbitrage would be that they are captive to special interests. While that may be true in some cases, one would hesitate to think it’s the case for all. The EU internal market construction itself is, in part, premised on the idea that businesses should be given some freedom to choose the EU member state that gives them the most favourable legal environment to engage in the production and sale of their products. The regulatory arbitrage opportunities unleashed with the Centros case are just a consequence of this general approach. But even within jurisdictions, a number of phenomena can be viewed as allowing firms to choose the relevant regulatory framework: think of different legal forms, or tax and accounting menus (the latter also embedded in EU accounting directives and regulations). This is just a reflection of the idea that, in many instances, one size does not fit all and, relatedly, that the lawmakers may not always be in the best position to couple an individual firm to a given regulatory framework based on one or the other characteristic it displays.
One should also not forget that the alternative to a world in which firms can pick and choose the rules they like is one where the state as a lawmaker has a monopoly over the supply of such rules. It is somewhat surprising that we tend to see private monopolists in a negative light, but we do not always take the same starting point when we think of a lawmaker in a similarly monopolistic position. Only an unfettered faith in the effectiveness of our democratic institutions can justify one’s belief that the monopolistic lawmaking power by public institutions will be abused less often and less harmfully for society than monopolistic market power by private firms.
Consider the most hideous form of regulatory arbitrage, international tax arbitrage: leaving aside its current, possibly extreme manifestations, it may be viewed as less abominable than we tend to think, if one focuses one’s mind on what the world would look like without it. In an age where political moderation can no longer be taken for granted, the total suppression of opportunities for tax arbitrage could easily lead to abuse of a state’s newly gained monopoly power in exacting taxes: abuse could for instance take the form of high, hard-to-sustain tax rates to finance short-term political projects favouring some key constituencies; or it could manifest itself as unequal treatment for industries or individual firms that are inimical to the ruling party.
Again, these vintage views of regulatory arbitrage are not meant to argue that regulatory arbitrage is always a positive phenomenon. Rather, that it can be a good or a bad one depending on circumstances that can obviously change in space and time.
One important constraint on regulatory arbitrage that Professor Pollman draws our attention to is the idea all businesses operate thanks to a ‘social license’, an implicit permission to sell their products and services that society – or public opinion – grants them and may withdraw in the presence of serious misbehaviour. How the social license works in the tech sector, where companies often impose themselves on the market based on a “break everything” attitude, is of particular interest. Pollman’s paper brings the example of Uber as a company that broke both laws and social conventions, which led at one point to the loss of its regulatory license in London. Whether that also had a significant impact on Uber users’ attitude towards the company is of course another story, and one that is difficult to find evidence about.
One important distinction that Professor Pollman makes is between abusive behaviour that harms users (such as higher prices for rides to the airport during protests against the executive order 13769, ie the ‘Muslim ban’) and abusive behaviour (including regulatory arbitrage) that harms others, such as drivers and competitors (such as Lyft or Waymo). The former should have a direct impact on profitability, the latter not necessarily so. Uber engaged in both: whether it also lost business as a consequence of both is another story, one that arguably, and more generally, has to do with the presence of competitors to which a disgruntled customer can switch to. If no competition is available, exploitation via abusive behaviour is just another form of monopoly rent extraction. Which leads to the final observation that with great power comes great responsibility: once a dominant position is reached, you exploit it at your own peril: the customers may be captive, but they may be unhappy too and convert their dissatisfaction into political sensitivity to the monopolist’s behaviour. Ultimately, it will be fear of a political reaction which will make the social license constraint bite. That is why the paper’s example of Uber’s travails with the London transportation authority fits as an illustration of the social license constraint.
Luca Enriques is Allen & Overy Professor of Corporate Law at University of Oxford.
The Spanish Ministry of Economy has recently released a new bill that, among other aspects, proposes an amendment of the Spanish Companies Act to allow listed companies to adopt loyalty shares. These shares will confer additional voting rights to those shareholders staying in the corporation for at least two years. For that purpose, the company only needs to approve the adoption of loyalty shares by a qualified majority. Therefore, following the Italian (rather than the French) model of loyalty shares, the adoption of loyalty shares in Spain will be done as an opt-in rule.
According to the Spanish Government, the introduction of loyalty shares seeks to fulfil three primary objectives: (i) preventing short-termism in Spanish capital markets; (ii) promoting the long-term engagement of shareholders in accordance with the European Directive; and (iii) making Spanish capital markets more attractive internationally.
In a recent note, entitled ‘A Critical Analysis of the Implementation of Loyalty Shares in Spain’, based on my response to the Spanish Government during the public consultation process, I have argued that the implementation of loyalty shares in Spain not only is unnecessary—since Spanish capital markets do not face a problem of short-termism—but it can also undermine, rather than improve, the long-term engagement of shareholders and the competitiveness of Spanish capital markets.
First, as it has been convincingly argued by Professor Mark Roe, there are no reasons to conclude that there is a short-termism problem in US capital markets. Therefore, if this problem does not clearly exist in the United States, where the greater presence of activist shareholders makes the existence of short-termism more likely, it will be difficult to believe that Spanish capital markets face a problem of short-termism. In Spain, the existence of powerful controlling shareholders makes insiders less subject to the pressure of the (few) activist shareholders initiating a campaign against a Spanish public company.
Second, while some authors have shown that the rise of hedge fund activism may harm the value of the firm in the long-term, another group of scholars have shown the opposite result. Therefore, the empirical evidence is not conclusive, even in countries with a higher risk of short-termism such as the United States.
Third, the use of loyalty shares does not seem an effective tool to promote the long-term engagement of shareholder. Indeed, as loyalty shares will favour both majority and minority investors equally, the latter will not have incentives to be more engaged. It will still have incentives to be rationally apathetic. Therefore, the adoption of loyalty shares will make controlling shareholders more powerful without promoting more engagement by minority investors.
Fourth, while the existence of short-termism is not a problem in Spanish capital markets, the lack of confidence by minority investors can be due to the risk of entrenchment and tunnelling by controlling shareholders. Moreover, this lack of confidence by minority investors can be exacerbated by the fact that, unlike other jurisdictions, Spanish corporate law: (i) does not allow minority investors to directly appoint an independent director, as it happens in Italy; (ii) does not grant minority shareholders the exclusive power to approve related party transactions entered into with the controlling shareholder, as it happens in Hong Kong and Israel; and (iii) does not protect minority investors through a sophisticated capital market and the use of other legal devices such as class actions, as it happens in the United States. Therefore, making controllers even more powerful with the use of loyalty shares may exacerbate the major corporate governance problems existing in Spanish companies. As a result, Spanish capital market will become less attractive for public investors.
Finally, the implementation of loyalty shares, as well as other reforms proposed by the Government (including the adoption of semi-annual reporting), may reduce the level of liquidity, transparency and informational efficiency of Spanish capital markets. Therefore, since many investors might not have incentives to invest in Spanish companies and, if so, to engage in shareholder activism, minority investors will be subject to an ever higher risk of opportunism by controllers.
In my opinion, the Spanish Government should not allow public companies to adopt loyalty shares. And in case of doing so, it should require the adoption of these shares before going public, as it happens in many countries with the use of dual-class shares. Otherwise, controllers may opportunistically adopt these shares taking advantages of the greater level of dispersion, asymmetries of information and rationally apathy existing among public investors. Moreover, by requiring the adoption of these shares before going public, controllers will only have incentives to go public with loyalty shares if they think it can also be in the interest of minority investors. Otherwise, they will face the risk of having an unsubscribed or highly discounted offering. Therefore, the requirement to adopt loyalty shares pre-IPO may serve as a powerful tool to protect public investors while making Spanish corporate law more flexible by allowing public companies to use shares with multiple voting rights.