The January 2013 judgment in Commission v Tomkins (European Court of Justice (ECJ), C-286/11) showcases the uncertainties and exposure faced by both the buyer and seller of a business, should competition law violations subsequently come to light. This case provides a timely warning to buyers and sellers to consider conducting a thorough audit before a business is sold and to ensure that competition law risks are covered by adequate warranties and indemnities. The seller remains liable for violations committed before the sale.
Tomkins's subsidiary Pegler participated in a copper fittings cartel from December 31 1988 until the European Commission conducted dawn raids on March 22 2001. In 2006 the commission imposed a fine jointly and severally against Pegler and Tomkins, based solely on Pegler's participation.
On February 1 2004 Pegler was bought by its own management team. On August 26 2005 Pegler was acquired by a competitor, Aalberts Industries (which had also participated in the cartel). Both Pegler and Tomkins filed separate appeals at the General Court in December 2006. The court reduced Pegler's fine on the basis that the commission had erred in calculating the duration that Pegler had participated in the cartel and had wrongfully imposed a deterrence multiplier. In Tomkins the General Court applied this approach to Pegler, even though Tomkins had not specifically asked the court to do this. On appeal, the ECJ rejected the commission's assertion that the General Court had exceeded its powers by granting relief beyond the applicant's request.
There is a rebuttable presumption under EU competition law that a parent company is jointly and severally liable for the unlawful acts of its subsidiary during the time in which it controls the subsidiary. In this case, Tomkins was held jointly and severally liable for Pegler's unlawful behaviour, since - for the duration of the cartel - Tomkins was Pegler's parent company, holding 100% of the shares (and therefore the right to direct Pegler's affairs). This presumption applies regardless of whether the parent has actual knowledge of what the management of its subsidiary is doing or the level of involvement that the parent has in the subsidiary's day-to-day affairs. For example, the commission made headlines in 2012 by sending a statement of objections to Goldman Sachs on the basis of alleged illegality committed by one of Goldman's portfolio companies (which the bank had since sold). The decision in this (power cables) cartel case remains pending.
While parental liability is a rebuttable presumption and not an absolute rule, discharging the presumption is difficult in practice as countless cases before the EU courts have shown.
When a subsidiary is sold, that entity's liability for prior infringements continues (successor liability). Successor liability is an issue not only in the event of a share sale (where liability can be traced to the same legal entity) but also in asset deals where there is functional and economic continuity between the previous legal entity and the transferred assets, particularly where the seller dissolves the legal entity after completion. This is why, even after its sale to its new owners in 2004, Pegler's liability for its past misdeeds continued and the commission imposed a fine against it in 2006. This illustrates another feature of EU competition law: there is often a significant time lag between the infringement, detection, initial decision imposing the fine and subsequent appeals through the courts. This is important when bearing in mind the duration of any contractual protections.
When evidence of a hard-core antitrust infringement (eg, price fixing, customer or market sharing, or bid rigging) comes to light, it may often be in the best interests of the company to confess involvement to the commission or another antitrust regulator. In the European Union, the first company to self-report such behaviour will typically receive full immunity from fines, provided that:
- it cooperates fully with the commission;
- it provides the commission with all the information in its possession;
- it terminates its involvement; and
- it does not tip off other cartel members before a raid.
There can therefore be a big advantage to uncovering evidence of cartel behaviour before it comes to the attention of the authorities (eg, because another member of the cartel has blown the whistle). These factors play out slightly differently in a deal context than between buyer and seller.
At the pre-acquisition phase it is useful to consider the risk profile of the target. Certain industries lend themselves to cartels more than others. For example, price-fixing cartels tend to arise in markets for highly commoditised products, where there is limited competition other than via price. The cement industry is one example and has been the focus of countless antitrust investigations around the world. Bid rigging tends to be more of a problem where there are a small number of the same competitors competing for large orders. Similarly, geography can also play a significant role. Higher risk countries tend to be ones where there is limited history of competition law compliance or where cultural factors mean that is commonplace for competitors to meet in a business or social setting.
During the due diligence phase, it is important to ask what compliance programmes the target has in place, how they are implemented and (perhaps most key) how the utilisation effectiveness of any programmes are monitored. While competition agencies in Europe are beginning to place an increased emphasis on promoting compliance (and, in some cases, rewarding compliance efforts when setting fines), the mere fact of a compliance programme, if poorly implemented and monitored, will not be treated favourably. Put another way, a compliance policy that remains on the shelf is worse than useless.
Contractual protection - in the form of warranties and indemnities - is important, although buyers should be wary of relying on these alone. Warranties tend to be limited in both time/duration and amount. However, competition infringements can take many years to come to light, undergo investigation and for fines to be imposed. Moreover, cartel fines (which can be as high as 10% of an undertaking's worldwide group turnover) often dwarf the caps imposed on what a buyer can claim under its contractual warranties, leaving the buyer liable for the difference (possibly millions of euros).
In addition, a buyer should strongly consider active measures to detect prior competition law infringements as soon as possible after completion. There are a number of ways in which this might be done - for example, an audit could be conducted, typically including interviews of targeted employees, as well as a review of documents and emails. If issues are detected or suspected, the buyer could consider setting up an internal amnesty programme to encourage employees to self-report infringements within the organisation. Detecting an infringement at this stage will leave the buyer well placed to control the situation - for example, by applying for immunity (and potentially avoiding substantial fines). If no infringements are detected, the exercise is still liable to generate learning points to develop future compliance policies.
For the seller there are also advantages to detecting an infringement before completion, although the pros and cons are more finely balanced. The big risk is that if the buyer conducts a full audit post completion, detects infringement and applies for leniency, this will leave the seller exposed to significant fines. The General Court has confirmed that in these situations the seller may not rely on the status of the subsidiary/buyer as an immunity applicant (Hoechst v Commission, T-161/05). Nor will the seller have access to the employees, documents and files that it needs to defend itself effectively against the commission. This situation is made worse by the fact that, as the immunity applicant, the subsidiary/buyer has nothing to lose (and arguably everything to gain) by offering the commission as full a confession as possible in terms of demonstrating cooperation with the commission.
That said, detecting an infringement before closing raises its own issues. It will put the seller 'on notice', likely triggering an obligation on the seller to disclose against its warranties, triggering an awkward period of negotiation with the buyer and in all likelihood prejudicing the value of the company.
Balancing these issues is likely to rest on an analysis of the risk factors attaching to the business being sold, both in terms of product and geographic scope. If the business being sold has a high-risk profile, this is likely to tip the balance in favour of a thorough health check on the part of the seller, particularly in the face of a sophisticated buyer (or indeed a buyer with its own history of competition law issues) likely to run its own post-completion health check.
For further information on this topic please contact Kurt Haegeman or Tom Jenkins at Baker & McKenzie by telephone (+32 2 639 36 11), fax (+32 2 639 36 99) or email (email@example.com or firstname.lastname@example.org).
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