In its judgement of 9 September 2009 in Akzo Nobel NV v Commission (Case C-97/08), the European Court of Justice ruled that a 100% shareholding of a parent company in a subsidiary is sufficient to create a rebuttable presumption that the parent company exercised decisive influence over the commercial policy of the subsidiary and to enable the Commission to hold the parent company liable for the infringement committed by its subsidiary.
In its decision in the Choline chloride case (2004), the Commission held Akzo Nobel NV and four of its subsidiaries jointly and severally liable for an infringement of Article 81 on the ground that the subsidiaries participated in a cartel.
In the present proceedings, the ECJ had to rule on the question whether the mere fact that the four Akzo Nobel subsidiaries in question were wholly-owned subsidiaries of Akzo Nobel, was sufficient to hold the parent company liable. In other words, could a parent company be held liable for the infringement committed by its subsidiaries irrespective of its direct participation in the cartel and the extent to which it de facto directed the subsidiaries' activities?
Up until now, there had been some uncertainty in this regard. Most previous case-law (in particular AEG Telefunken v Commission1) appeared to suggest that full ownership of the share capital of a subsidiary is per se sufficient to give rise to a presumption that the parent company exercised decisive influence.
However, in the Stora Enso judgment2 the ECJ relied not only to the fact that the parent company owned 100% of the capital of the subsidiary's share capital but also on other circumstances, including the fact that it was not disputed that the parent company exercised influence over the commercial policy of the subsidiary or that both parties were represented jointly during the administrative procedure. It could be argued therefore that for the presumption to arise, on top of the extent of the shareholding, the Commission had to adduce additional indicia to demonstrate that decisive influence was actually exercised.
In its appeal before the ECJ, Akzo Nobel relied on this interpretation of the Stora judgment to argue that the Commission, and subsequently the Court of First Instance ("CFI") that dismissed Akzo's appeal against the Commission decision, had applied the wrong legal test in order to determine whether or not Akzo Nobel's could be held jointly and severally liable for the infringements committed by its subsidiaries.
The ECJ's ruling
The ECJ upheld the CFI's findings in their entirety, ruling that "[I]n the specific case where a parent company has a 100% shareholding in a subsidiary which has infringed the Community competition rules, first, the parent company can exercise a decisive influence over the conduct of the subsidiary and, second, there is a rebuttable presumption that the parent company does in fact exercise a decisive influence over the conduct of its subsidiary.
In those circumstances, it is sufficient for the Commission to prove that the subsidiary is wholly owned by the parent company in order to presume that the parent exercises a decisive influence over the commercial policy of the subsidiary. The Commission will be able to regard the parent company as jointly and severally liable for the payment of the fine imposed on its subsidiary, unless the parent company, which has the burden of rebutting that presumption, adduces sufficient evidence to show that its subsidiary acts independently on the market .
[W]hile it is true that at paragraphs 28 and 29 of [the Stora Enso case] the Court of Justice referred, not only to the fact that the parent company owned 100% of the capital of the subsidiary, but also to other circumstances, such as the fact that it was not disputed that the parent company exercised influence over the commercial policy of its subsidiary or that both companies were jointly represented during the administrative procedure, the fact remains that those circumstances were mentioned by the Court of Justice for the sole purpose of identifying all the elements on which the Court of First Instance had based its reasoning and not to make the application of the presumption mentioned [above] subject to the production of additional indicia relating to the actual exercise of influence by the parent company." (paras 60 to 62)
The Court concluded that the CFI did not make any error of law and thus dismissed Akzo's appeal.
The Commission was therefore correct to address the contested decision to all the appellants, including the ultimate parent company of Akzo Nobel group. It was immaterial in this regard that Akzo Nobel had not itself participated in the cartel, or that the Commission had been unable to demonstrate that it in fact directed the commercial policy of the subsidiaries concerned. Furthermore, the amount of the fine had been calculated correctly on the basis of the worldwide consolidated turnover of Akzo Nobel group and the combined market shares of all its subsidiaries.
In keeping with its current tough stance on cartels, the Commission frequently relies on the "single economic entity" concept in order to impose fines at the highest level of a corporate group. As a result of the present case, it is now settled that legal ownership of the share capital of a company is sufficient for the presumption of decisive influence to arise. Experience shows that it is extremely difficult, if not virtually impossible, for companies to prove to the Commission that wholly-owned subsidiaries determine their commercial behaviour autonomously because it requires proving a negative fact (the lack of effective control). Therefore, in practice, the proof required to rebut the presumption amounts to a probatio diabolica (impossible proof) rendering the presumption de facto quasi-irrebuttable. This implies that parent companies must always expect to be held liable for the infringing conduct of their wholly-owned subsidiaries.
The ECJ's judgment reinforces the Commission's enforcement powers and its ability to impose very high fines on cartel offenders. The implications for the undertakings in question are potentially significant:
- parental liability is likely to increase the amount of the fine because the maximum cap of 10% of turnover set out in Regulation 1/2003 will be calculated on the basis of the consolidated group turnover rather than that of the subsidiary alone;
- the Commission can apply a "deterrence multiplier" on the basis of the undertaking's total size and financial resources, thus leading to a potentially higher fine;
- parental liability increases the risk of a finding of recidivism – an aggravating factor that may lead to a fine increase – as previous infringements of the parent company and other subsidiaries, including in different sectors, can be taken into account;
- third parties instituting claims for damages in respect of losses suffered from a cartel are likely to prefer a parent company to its smaller subsidiary as litigation target. Bringing proceedings directly against the parent company is facilitated by a Commission decision addressed to it; and
- there can be reputational effects for the parent company, in particular if it is a listed company which is required by stock exchange regulations to disclose ongoing competition law proceedings to its shareholders and investors.