Under EU competition rules, cartel violations may be fined up to 10% of the total turnover of the infringing undertaking.  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 judgement by the European Court of Justice (COJ) in Kendrion NV v. Commission (C-50/12 P), has, however, demonstrated that in certain circumstances the EC has to apply the 10% cap to the subsidiary.  In particular, this is  the case when the parent sells the subsidiary before the cartel decision is adopted.

Buy/Sell History:  Kendrion NV (Kendrion) is a holding company with interests in the supply of industrial equipment and plastic products.  It bought all of the Fardem group’s assets and operations in Belgium and the Netherlands in 1995.  It sold off the Belgian operations almost immediately, but it held onto the rest of the acquisition until September 2003, when it sold Fardem to the directors of the company.  On November 30, 2005, the European Commission (EC) adopted a cartel decision concerning industrial bags that stated that inter alia Fardem had participated in a cartel from February 1982 until June 2002.  Due to the fact that Fardem participated in the cartel while it was a subsidiary of Kendrion, the latter was deemed to have participated in the cartel from 1995 (when it acquired Fardem) until 2002.  Kendrion challenged the EC’s conclusion that it had exercised decisive influence over Fardem and that they were therefore part of the same undertaking.  Unsurprisingly, both the General Court (GC) and COJ sided with the EC.

Fine Liability: The EC imposed on Kendrion a fine of €34 million, with Fardem being jointly and severally liable for €2.2 million of that amount.

Normally, if a parent company is only liable for a cartel fine because of the actions of its subsidiary, assuming that the undertaking is not a repeat offender, the parent company is liable up to the same amount as the infringing subsidiary (at the most).  In the instant case, Kendrion was only fined because of its ex- subsidiary’s behavior.  Kendrion, therefore, argued that it should only be held liable up to €2.2 million. 

The EC disagreed and argued successfully before the COJ that, if Kendrion had not sold Fardem when it did, Fardem could have been fined up to € 60 million, which is significantly greater than the €34 million Kendrion had to pay for the seven years that Kendrion and Fardem were part of the same undertaking and Fardem was engaged in anti-competitive behavior.  Since Kendrion and Fardem were not part of the same undertaking when the decision was adopted (although they had been during part of the infringement period), the EC should apply the 10% global turnover ceiling to each company individually.  Hence, under that rule, the maximum amount that Fardem could be fined was €2.2 million.  Given Kendrion’s much higher global turnover at the time the decision was rendered, the fine of €34 million imposed on it did not exceed the ceiling.

Commentary:  Admittedly there is something counterintuitive about an ex-parent company being fined more than its ex-subsidiary, especially when the ex-parent company is being fined solely as the result of something that its ex- subsidiary did.  As to whether it is a good thing or a bad thing that the 10% ceiling is applied individually, the answer probably depends on the circumstances.  If Kendrion had not sold Fardem prior to the adoption of the cartel decision, the 10% ceiling would have applied to the whole undertaking.  Therefore, if Kendrion and Fardem had still been part of the same undertaking the final amount of the fine on Fardem might have been significantly greater than the €2.2 million.

As to Kendrion, regardless of when it sold Fardem, it was going to be liable for €34 million – although there would have been a slight shift in responsibility.  Kendrion would have been something like the guarantor of Fardem’s payment (although neither the COJ nor the EC say this is true).  If Fardem could not pay its entire fine, Kendrion would have to pay in up to €34 million.  Fardem, it seems, got a good deal.  It was only liable for € 2.2 million because of the 10% ceiling.

This case is a further illustration that divesting a subsidiary does not relieve the parent of its cartel liability.  If the parent had become aware of the subsidiary’s anti-competitive behavior when it was about to purchase the company (as part of its due diligence) it could have taken any number of steps to minimize its exposure.  This case serves as yet another reminder of how important it is to conduct thorough antitrust due diligence before buying a target.  Otherwise, it can ultimately cost significantly more than the initial price tag (and the fine imposed on the ex-subsidiary).