A recent judgment from the Court of Justice of the European Union (ECJ), the EU’s highest court, provides a reminder that, even after a subsidiary has been sold, its former parent company retains responsibility for any competition law infringements by the subsidiary during the period of ownership. At the same time, if the new owner discovers the infringement after the acquisition and blows the whistle (thus wholly or in part protecting itself and the subsidiary from a fine) the former parent will not benefit from this leniency application and can still be fined by a regulator.

The judgment, handed down on 19 June 2014, concerned the EC’s decision in the industrial bags cartel (originally decided in 2005). One of the companies challenged the fine imposed on it as a former parent. In holding that the protection gained by a leniency application made by a purchaser does not extend to the former owner, the ECJ said that this was justified since the earlier parent neither contributed to the detection of the infringement nor controlled the subsidiary at the time of the application. The whistleblowing rules are designed to promote the detection of infringing conduct, and a former parent that did not make a leniency application has not contributed to detecting the conduct.

There is no getting away from the case law on parent liability. However, a vendor can protect itself to some extent by carrying out a competition law audit prior to disposal and, if an infringement is found, making a leniency application itself. Even if an infringement is not found, the fact of an audit may convince a seller that it is buying a “clean” company. Of course, an audit won’t be appropriate in all cases. However, if the standard risk assessment shows that there is (in particular) cartel risk, and especially if a purchaser is likely to do its own audit, then doing a pre-disposal audit and, if relevant, making a leniency application can be much cheaper than paying a cartel fine down the road.