Under EU competition law, the European Commission (EC) has a well-established practice of holding a parent liable for its subsidiary’s involvement in an illegal cartel. The EC relies on the judicial presumption that the parent company, through its 100% ownership of a subsidiary, has exercised decisive influence over the business conduct of that subsidiary. Under this presumption, which has proved exceedingly difficult to rebut, the parent company is held liable for its subsidiary’s wrongdoing.

However, subsidiaries in cartels, like all subsidiaries, often change hands. SKW participated in the calcium carbide cartel case from April 22, 2004 until January 16, 2007 and was owned by several parent companies over that period. From 2001 until August 2004, SKW was part of the Degussa group. On August 30, 2004, Degussa sold SKW to SKW Holding, a wholly-owned company of Arques. Therefore, each parent company was held liable for its respective period of ownership.

The successive parents contested their respective parental liability and thus provided the General Court (GC) with an opportunity to further clarify the concept of the ‘undertaking’ and its consequences for parental liability in Article 101(1) TFEU infringements.[1]

  1. Rebutting the Presumption of Parental Liability: Mission Impossible

SKW Holding challenged the EC decision before the GC and claimed that notwithstanding SKW Holding’s acquisition in August 2004, SKW’s illegal behavior started under Degussa’s ownership and, post-acquisition, Degussa kept influencing SKW’s business conduct, in particular its participation in the cartel. The claim rested primarily on: (i) the important commercial relationships between Degussa and SKW; (ii) the fact that one employee of Degussa worked de facto for SKW and participated in cartel meetings on SKW’s behalf; and (iii) the fact that Degussa was one of the main beneficiaries of SKW’s illegal behavior.

The GC dismissed all of the arguments related to the claim and noted that the EC file contained evidence that SKW employees participated in the cartel after SKW Holding acquired it in August 2004. As such, the fact that one Degussa employee actually continued to work for SKW and to participate in cartel meetings was deemed irrelevant. Even though Degussa may have influenced the conduct of its former subsidiary through one of its employees, this could in no way rebut the parental liability presumption. A former parent’s continued influence over a subsidiary does not break the chain between that subsidiary and its current parent company.

SKW Holding also argued that it was itself a subsidiary of Arques and was only passing Arques’ strategic guidance on to SKW, meaning, Arques was ultimately responsible for SKW’s conduct on the market. Consequently, SKW Holding could only have exercised a “parallel influence”, if any. SKW Holding’s “I was only the messenger” defense was also unsuccessful. The GC clarified that there is neither a ‘parallel influence’ nor a need to determine which parent company exercised the ‘ultimate’ decisive influence over the subsidiary’s commercial behavior. Decisive influence has to be seen as a chain, the ultimate parent company having a decisive influence over the intermediate company which in turn has decisive influence over the subsidiary.

Arques (now known as Gigaset) also challenged the EC decision before the GC and claimed that its activities consisted of acquiring companies in difficult positions, restructuring and developing them and then reselling them within a short time-frame. It further explained that its intermediate subsidiary, SKW Holding, had been used only as a vehicle to acquire SKW from Degussa. On this point, the GC’s response was again merciless. How could Arques restructure and develop SKW without exercising any decisive influence? Arques’ defense and arguments were turned upon their heads as the GC used them as ammunition to conclude that Arques exercised decisive influence over its subsidiary.

In addition to relying on the parental liability presumption, as in other cases, the EC also raised a number of factors that indicated decisive influence did in fact exist. Thus, not only did the parent attempt to rebut the presumption, but it also addressed each of the facts that the EC raised to prove that decisive influence existed. However, this was clearly not enough for the GC which stated that the parent company should not limit itself to criticizing the EC’s finding of factors capable of proving decisive influence. Rather, the parent company has a duty to put forward a comprehensive, detailed and coherent explanation that demonstrates the subsidiary acted autonomously on the market and, therefore, could not be considered as being part of the same ‘undertaking’ despite the 100% ownership. According to the case-law that has built up over the last few years, the existence of ‘decisive influence’ is very easily proven by the EC. It turns out that any economic, organisational or legal link between the parent and the subsidiary would meet the test. By contrast, the EU courts impose an evidentiary burden on parent companies such that it is exceedingly difficult, if not impossible, to rebut a finding of decisive influence.

  1. Mitigating Circumstances are Assessed at the Level of the Entity Having Committed the Infringement

The GC also rejected SKW Holding’s argument that its fine should have been reduced on account of mitigating circumstances. In particular, SKW Holding claimed that it had bought a company already implicated in a cartel, which continued to be under the influence of its former parent company, Degussa. Thus, the role played by Degussa should have been considered as a mitigating circumstance in SKW Holding’s favor. The GC responded that it is the conduct of the company participating in the infringement that decides as to whether a parent company can benefit from mitigating circumstances or not. The fact that the subsidiary was under some influence of its former parent company is of no relevance in that regard.

  1. Only the Undertaking Applying for Leniency May Enjoy its Benefit

For businesses such as SKW, the problem may arise as to which “undertaking” should benefit from the leniency application. In the present case, Degussa benefitted from a reduction of 20% on account of leniency. The company provided evidence of SKW’s conduct, but filed the leniency application under its own name. As the leniency program should benefit the cooperating “undertakings,” SKW and SKW Holding argued that they should benefit from the reduction. They claimed in substance that the EC could not declare SKW and Degussa part of the same undertaking for the purpose of applying Article 101 TFEU and apply the reduction for the purpose of leniency only to Degussa and not SKW.

The question was therefore whether leniency should benefit the entities in the same “undertaking” at the time of the infringement or at the time of the leniency application. Since, according to the leniency notice, an application is based on an undertaking cooperating with the EC during its investigation, the GC ruled that only companies belonging to the “undertaking” at the time of the application could see their fines reduced for their cooperation. As at the time of the application, Degussa and SKW were no longer part of the same undertaking, the leniency only benefitted Degussa, the company which filed it. The GC concluded that SKW and SKW Holding should have filed their own leniency application in order to obtain a reduction of fine.

  1. Recidivism: It Applies to the “Undertaking” at the Time of the Former Infringement

In 2001, Degussa became the indirect owner of SKW, through AlzChem. A year later Degussa was fined for its participation in the methionine cartel. However, at the time of the methionine cartel, AlzChem was not part of Degussa and therefore both companies were not part of the same “undertaking”. Logically, AlzChem was not an addressee of the methionine decision. However, the EC took the 2002 methionine decision into account when holding Degussa and Alzchem liable for SKW’s conduct and applied a fine multiplier for recidivism to both companies.

AlzChem legitimately claimed that the fine increase imposed on account of recidivism should only apply to Degussa. Thankfully, the GC looked at the entities that formed part of the same “undertaking” when the methionine cartel was in operation. Although AlzChem belonged to the same undertaking as Degussa at the time of the leniency application in the calcium carbide case, it was not held liable for the recidivism increase applicable to Degussa because it was not part of Degussa at the time of the methionine cartel.

In light of the above, the evolving contours of an ‘undertaking’ can have significant implications for former or existing parent companies, not only in terms of their financial liability for their subsidiary’s wrongdoings, but also in determining the extent to which they can file for and benefit from leniency or, conversely, incur further liability on account of a repeated offense. As the GC indicates, it is a question of timing. In relation to the issue of liability, this will depend on the evolving structure of the undertaking during the period of the infringement. The same line of reasoning applies when the EC identifies a finding of recidivism, i.e. one has to look at the structure of the undertaking during the period of the first infringement. Finally, for leniency, the EC considers the undertaking at the time the application is made.

In terms of compliance and risk management, companies should carry out, as far as possible, thorough due diligence when they contemplate acquiring targets. They should also seek to implement robust compliance programs as soon as possible after closing and ensure adequate mechanisms to detect and handle potential or previous violations of the antitrust rules.

Co-authored with Jean-François Guillardeau