In the EU, liability for antitrust infringements can attach to several entities in a corporate group. Current and former owners can be liable for the conduct of subsidiaries, even indirect subsidiaries, joint ventures and other entities which are not wholly-owned.
Over the last 20 years the acceptance that ‘naked’ cartel activity poses a severe threat to economies and consumers has led to a global fight against cartels and a focus on how best to detect, punish and deter cartels. Most competition law systems now treat cartel conduct as an ‘automatic’ violation of the rules. Further, sanctions for those found to have engaged in cartel activity have been mounting and leniency regimes have been burgeoning.
For companies, this policy has translated into a dramatic increase in the level of fines being imposed on those found to have infringed anti-cartel rules but not to have blown the whistle in time to benefit from immunity. In the US, for example, corporate fines imposed in fiscal years 2009-2013 exceeded $5 billion and in the EU, corporate fines imposed in the period 2010-2014 totalled nearly €9 billion, a dramatic increase from the €293 million fines imposed in the period 1995-1999.
Further, an increasing reality in the EU is that these fines are not imposed solely on the legal entity actually involved in the infringement but also on other responsible companies within the same economic unit. The Commission (with the approval of the EU courts) now seeks, where it can, to hold parent companies jointly and severally liable for the infringement of their subsidiaries where that parent is able to, and does actually, exercise decisive influence over the policy and direct the conduct of its subsidiary.
This can occur even when the conduct is committed by an indirect subsidiary and/or where the conduct was unknown to the parent. Decisive influence (potential and actual) is presumed to exist where the parent holds a 100 per cent shareholding in a subsidiary (or a de minimis amount less) and has been found to exist, where:
- the parent holds only a majority interest in the infringing entity or a minority interest which is allied to rights greater than those normally granted to minority shareholders;
- the parent has negative control over its subsidiary, at least where two or more parents have negative control over a JV and so co-operate to determine the JV’s commercial policy – that is, in situations where the parents have the power to exercise, and have actually exercised, joint control over a JV; and
- a parent is a financial investor but exercises ‘control’ over its investment.
Owning an entity that commits a competition law violation only for a short period and selling it on does not shield the seller from liability in the EU. Further, a new parent might decide to alert a competition authority to the infringement and expose the seller to liability for its past infringements.
This position contrasts starkly with the US common law approach, which treats corporate entities separately – even a parent and its wholly owned and controlled subsidiary – except in rare cases when ‘piercing the corporate veil’ is justified.
It is also clearly established under EU law that a parent cannot ordinarily escape or shift its liability by selling an infringing entity. Rather, the principle of personal responsibility requires that liability attaches to the original operator managing the undertaking in question when the infringement was committed even if, when the decision finding the infringement is adopted, another person has assumed responsibility for operating that entity.
Although this means that a parent purchasing an entity cannot, save in exceptional circumstances, be held responsible for past infringements, purchasers can be held responsible for infringements that continue or are repeated or renewed in the post-transfer period.
In the US, it is purchasers who need to exercise particular care in M&A transactions because if they acquire shares in an entity involved in cartel activity, liability will generally remain with that entity (and not with its previous owner). The evolving law in this area creates many potential traps for the unwary.
A number of EU member states follow the same approach under their national laws to that adopted in the EU. Not all do so, however. In Germany, for example, only the actual legal entity which committed the breach is liable for a cartel infringement. Nonetheless, fines are calculated in Germany by reference to the turnover of the ‘economic unit’ of which it forms part; meaning that the level of antitrust fine have also increased significantly.
Infringing conduct is increasingly covert and difficult to detect. Purchasers must therefore adopt sophisticated techniques when conducting due diligence if they wish to avoid exposure to the severe consequences which may follow from buying an entity which has been engaged in cartel activity.
Looking ahead to 2015
Anticompetitive conduct is difficult to identify but the risks of infringement for companies are significant. Antitrust investigations are time-consuming and intrusive and may cause reputational damage which is hard to repair.
In some major jurisdictions, liability for fines in respect of cartel infringements may attach to several entities within a corporate group, including current and former owners. Businesses must therefore exercise extreme caution when buying and selling subsidiaries.
A number of issues should be addressed to minimise these risks:
Do your compliance programmes operate for all companies for which you would be held to account?
Do not assume that because you hold only a minority shareholding or a non-controlling interest in a subsidiary, or you are only a partner of a joint venture, that you will not be held responsible for its competition law infringements.
- Sellers beware
In the EU, sale of an infringing entity will not ordinarily absolve you from responsibility for its conduct during the period that you owned it. Further, a new parent might decide to alert a competition authority to the infringement and seek immunity from fines.
Your liability as the seller may be unaffected by the new owner’s leniency application, contractual arrangements or the fact that the infringement is historic. Consequently, consider reporting any violations uncovered prior to a sale.
- Buyers beware
Serious antitrust infringements are likely to be concluded secretly and so are difficult to detect. In addition, exposure to antitrust fines is difficult to shift through contractual protection. Purchasers consequently need to adopt a sophisticated approach to due diligence when buying new businesses that is one step ahead of the advanced investigative techniques of antitrust authorities and immediately bring detected infringements to an end.