Under EU competition rules, cartel violations may be fined up to 10% of the total turnover of the infringing undertaking. Article 23(2) of Regulation 1/2003 states:

For each undertaking […] participating in the infringement, the fine shall not exceed 10% of its total turnover in the preceding business year.

Holding a parent company liable for antitrust violations of a subsidiary is, among other things, meant to allow the European Commission (EC) to apply the 10% turnover ceiling to the group as opposed to just the subsidiary.  The recent judgment by the European Court of Justice (CoJ) in Kendrion NV v. Commission (C-50/12 P), demonstrated that in certain circumstances the EC has to apply the 10% cap to the subsidiary – in particular, when the parent sells the subsidiary before the cartel decision is adopted (see our briefing on the case).  In the recently issued YKK Corp v. Commission (C-408/12 P) judgment, the CoJ reviewed how the 10% cap should be applied when a parent company has purchased a subsidiary that was involved in an infringement at the time of purchase and continued to be involved in the anticompetitive activity post-purchase.

The facts: In September 1995, YKK Corp (through its holding company YKK Holding) purchased 76% of the shares in what became YKK Stocko.  In March 1997, the shareholding was increased to 100%.  Subsequently, in 2007, the EC adopted a decision in which it foundinter alia that YKK Stocko had participated in three infringements of Article 101(1) TFEU.  The infringements had the following durations: (i) May 1991 – March 2001; (ii) April 1998 – November 1999; and (iii) 1999 – 2003.  When calculating the fine for YKK Stocko, the EC used a duration of nine years and nine months and arrived at a final figure of €68.25 million.  YKK Corp and YKK Holding were jointly and severally liable for €49 million of the €68.25 million, since YYK Stocko had only been purchased in 1997.

The YKK group challenged the decision before the General Court (GC) (T-448/07) and then appealed the GC’s judgment.  Among other things, the YKK group argued that:

  • The €19.25 million that YKK Stocko was individually responsible for was 55% of YKK Stocko’s total 2006 turnover, which is considerably more than the 10% cap.
  • When applying a deterrence multiplier, the EC should have taken into account the fact that YKK Stocko was a separate undertaking pre-March 1997.

10% cap:  The EC held the position that the 10% cap applies when the decision to impose the fine is adopted.  The CoJ took a different position, pointing out that Article 23(2) of Regulation 1/2003 clearly refers to the “undertaking participating in the infringement” and that it would be strange to have two interpretations of undertaking – one for attributing liability and another for calculating the 10% cap.  Therefore, when “an undertaking regarded by the [EC] as responsible for an infringement of Article [101] is acquired by another undertaking within which it retains, as a subsidiary, the status of a distinct economic entity, the [EC] must take account of each of those economic entities in order to apply to them, where necessary, the 10% upper limit.”  Rather than consistently use the term “undertaking” in its judgment, the CoJ uses the term “distinct economic entity,” which can be confusing. With this holding, the CoJ is saying that the subsidiary, while becoming part of the parent company’s undertaking post-acquisition, retains its past identity as a separate undertaking. 

Pre-March 1997, YKK Stocko was a separate undertaking.  Therefore, it was individually responsible for its conduct prior to the acquisition.  The EC would need to go back and recalculate the portion of the fine that YKK Stocko was individually responsible for in order to ensure that it did not exceed the 10% cap.  As a result, our reading of the CoJ ruling suggests that the EC would have to impose two separate fines.  The first fine would be for the subsidiary’s conduct pre-March 1997, i.e. prior to it being acquired by YKK Corp and YKK Holding, for which it would be individually responsible and which would not exceed 10% of its 2006 turnover.  The second fine would be imposed on both the subsidiary and the parents for the subsidiary’s post-acquisition conduct, for which both parents, YKK Corp and YKK Holding, would be jointly and severally liable and which would not exceed 10% of the entire YKK group’s turnover.

Deterrence multiplier:  The CoJ noted that the deterrence multiplier is designed to penalize the offending undertaking and to deter others from infringing EU competition law.  In order for the deterrence factor to “deter,” the EC must be able to take into account the size and resources of the undertaking in question when the decision is adopted.  The CoJ therefore concluded that it is irrelevant that the parent company is not jointly and severally liable for the subsidiary’s behavior at some point in the past.  The deterrence multiplier is forward-looking:  it is supposed to modify undertakings’ future behaviors, and should therefore be applied to the undertaking as it is when the decision is adopted.

Observations:  In the EC’s defense on the issue of when to apply the 10% cap, the EC argued that when a parent company bought the subsidiary that was infringing Art. 101 (1) TFEU, it also bought the risk.  The parent company should have included in the contract of sale a provision that would have allowed it to receive compensation from the seller(s). This is a somewhat disingenuous argument.   In most acquisitions it would be difficult to negotiate a provision that stands for numerous years, which would compensate the buyer for such an event. Fortunately for parent companies who regularly acquire businesses, the CoJ disagreed with the EC.

As the Commission acknowledged at the hearing with regard to the part of the fine for which YKK Stocko was held to be solely liable, the EC would not be able to enforce that part of the fine against the parent company if YKK Stocko were to default on payment. A company cannot be held responsible for infringements committed independently by its subsidiaries before the date of their acquisition, since the latter must themselves answer for their unlawful conduct prior to that acquisition.

While the EC is certainly correct, the welcomed ruling from the CoJ states that it has to implement the individual liability principle not only as it relates to the recoverability of the fine against the parent, but also when calculating fines on the subsidiary and its parent(s), in particular in relation to the 10% cap.