The concept of parental liability
According to established EU case-law, a parent company and its fully owned subsidiary form one economic entity (CJEU in Akzo Nobel v Commission, para 58). Akzo established that where a company has a 100% shareholding in a subsidiary which has infringed competition rules, the parent company can exercise decisive influence over the conduct of its subsidiary. Further, there is a presumption that such a parent company does indeed exercise such influence. This presumption is rebuttable, and has been challenged on numerous occasions. To date, however, no 100% parent has been able to successfully rebut the presumption of parental liability. Therefore, the bar to rebut the presumption is set high.
Notably, parent companies have previously been found jointly and severally liable for the anticompetitive behaviour of their joint ventures where each party had a 50% shareholding (CJEU in Du Pont v Commission, Dow Chemical & Commission). Du Pont and Dow had both exercised decisive influence on their joint venture’s commercial conduct and policies, resulting in the joint venture being held as part of both of their respective undertakings. The subsidiary was not independent as it carried out in all material respects the instructions given to it by the parent companies. This was established through economic, organisational and legal links between the entities concerned. The CJEU noted that, while there is no need to establish the parent’s personal involvement in the anticompetitive conduct, it must actually establish decisive influence. This is in contrast with the rebuttable presumption for fully owned subsidiaries as per Akzo above.
The General Court has also considered the factors indicative of a parent holding decisive influence despite a bare majority shareholding of 51% (see Deutsche Telekom v Commission, Slovak Telekom v Commission). The General Court detailed the cumulative economic, organisational and legal links: (i) imposing views for all votes requiring a simple majority; (ii) nominating a majority of directors under a shareholders agreement; (iii) staff overlap between undertakings; (iv) parent instructions and corresponding compatible director decisions; (v) the parent being informed of the subsidiary’s intended commercial policy; (vi) influence exercised over relationships with other companies; and (vii) the parent being the notifying party in a related merger filing of the subsidiary by a third party. It is worth noting that Deutsche Telekom and its subsidiary Slovak Telekom lodged appeals before the CJEU on 21 and 22 February 2019. There has not yet been a ruling.
The CJEU’s assessment
First, the CJEU considered the argument that GSCP V Funds was not liable for the pre-IPO period as the case-law’s presumption of decisive influence was not applicable because GSCP V Funds did not hold all of Prysmian’s capital during the pre-IPO period, although they did hold all of the voting rights. The CJEU reiterated that the case-law recognises where the parent company holds (directly or indirectly), all or almost all of the capital in a subsidiary which has committed an infringement, the parent is able to exercise decisive influence over the subsidiary’s conduct and there is a rebuttable presumption the parent does exercise such influence (para. 32). However, the CJEU found that as the relevant test was one of decisive influence, for which ownership of the share capital is an indicator, then a parent company who holds all of the voting rights associated with the subsidiary’s shares is in a similar position of influence to that of a company holding all, or virtually all, of the capital of the subsidiary (para. 35). In this manner, the parent company is able to determine the subsidiary’s economic and commercial strategy. The CJEU thereby recognised that a parent company who holds all of the voting rights associated with the subsidiary’s shares is able to exercise decisive influence over the conduct of the subsidiary, regardless of whether the parent owns all of the capital stock. The CJEU further agreed with the General Court’s findings that the burden to rebut this presumption fell on GSCP V Funds, and in any case it had not managed to do so (paras. 47-54).
Second, the CJEU considered the argument that, with respect to the post-IPO period, the General Court erred in relying on factors relevant for the pre-IPO period and by merely asserting that the IPO had not changed anything. The CJEU rejected this argument and agreed with the factors taken into account by the General Court in finding that GSCP V Funds held decisive influence over Prysmian’s activities (paras. 67-72). In particular, it noted that the exercise of decisive influence by a parent over its subsidiary’s conduct can be inferred from a body of consistent evidence, even if some of that evidence when taken in isolation, is insufficient to establish the existence of such influence. The CJEU found that the General Court had carefully took into account the elements relied upon by the Commission, drawing a clear distinction between the pre-IPO and the post-IPO period. Among the elements relating to the entire infringement period, the General Court examined: (i) the power to appoint the members of the various boards of directors of Prysmian; (ii) the power to call shareholders to meetings; and (iii) the power to propose the revocation of directors or of entire boards of directors. The CJEU held that the General Court was therefore correct in relying on elements relating to the prior period in establishing decisive influence.
Third, GS submitted that the General Court was wrong to find that GSCP V Funds had the required level of representation on Prysmian’s board of directors to influence Prysmian’s market conduct. The CJEU disagreed and found that the General Court had sufficiently identified the links between GSCP V Funds and the members of Prysmian’s board of directors (para. 89). These links could be regarded as one of the elements on which the Commission could rely upon to demonstrate that GSCP V Funds had exercised decisive influence over Prysmian. The CJEU also noted that existence of an economic entity formed by the parent company and its subsidiary can be based not only on the formal relationship between the two, but also on informal relationships (para. 93). This can consist of personal links between the legal entities comprising such an economic unit – though the Court gave no examples of what such personal links might be.
The judgment is significant as it further extends the parental liability doctrine to an investment held through an investment fund structure. The CJEU has clarified that the presumption of decisive influence applies where the parent company holds all or virtually all of the voting rights associated with the subsidiary, and not only where the parent holds all or virtually all of the capital.
In light of the CJEU judgment, investors, including financial investors and private equity businesses, should bear in mind the following:
- Investors should carefully undertake due diligence during the acquisition process, with a particular focus on cartel activity. Investors should keep a close eye on competition law compliance and best practices throughout the acquisition phase and consult antitrust counsel. Effective procedures will assist to mitigate potential antitrust risks and allocate liability up-front where issues are exposed.
- Investors should recognise the risk that the best due diligence efforts might not uncover such conduct, particularly if some of those involved are not fully cooperative or transparent.
- The Share Purchase Agreement should contain strong indemnity language as to potential competition issues, this can enable the Purchaser to claim compensation in the event that the existence of a past infringement subsequently comes to light.
- Upon closure of the acquisition, full competition due diligence should be completed as soon as possible. If potential infringements are found, any such continuing should be terminated immediately and consideration should be given to leniency applications where appropriate.