The European Court of Justice ruled on March 14, 2019, that a parent company can in national civil tort proceedings also be held liable for the damage caused by a competition infringement committed by its subsidiary where such parent company (that holds all the shares in the subsidiary) has dissolved its subsidiary but continued the subsidiary’s economic activity.
Background
In 2004, the Finnish Competition Authority imposed fines on the participants in a Finnish asphalt cartel that existed between 1994 and 2002. By 2004, one of the cartel participants had been dissolved in voluntary liquidation proceedings and its assets acquired by its sole shareholder. Such sole shareholder continued the economic activity of its liquidated subsidiary. Based on the principle of ‘economic continuity’, the Finnish Competition Authority fined the shareholder for the competition infringement committed by liquidated subsidiary.
An alleged victim of the cartel claimed compensation from all companies that had been fined by the competition authority – including the above-mentioned sole shareholder – for the damage it incurred because of the cartel. In response, the sole shareholder argued as defense that it could not be held liable for the alleged harm caused by the anticompetitive behavior of another legal entity (i.e., its subsidiary).
Lower Court Rulings
The Finnish District Court and Court of Appeal reached diverging conclusions on the argument raised by the sole shareholder in its defense. Hence, the Finnish Supreme Court posed the following preliminary questions to the European Court of Justice (ECJ):
- Will EU law or national Finnish law determine who is to be liable for the damage caused by an infringement of Article 101 of the Treaty on the Functioning of the European Union (TFEU)?
- If EU law is to determine who is liable, should the EU concept of ‘undertaking’ also apply in private damages proceedings?
- If ‘national law’ is to determine the liable party, does the principle of effectiveness of EU law require that the parent companies in the case at hand be held liable for the damage of their dissolved subsidiaries?
ECJ Ruling
The ECJ ruled that it is for EU law to determine who is liable for harm caused by an Article 101 TFEU infringement. According to the ECJ, Article 101 TFEU says that a parent company is liable for the damage caused by its subsidiary when – as in the underlying case – the subsidiary that committed the infringement has been dissolved and the parent company continued the subsidiary’s economic activity.
The ECJ underscored that the right of parties to claim damages is also an integral part of the enforcement of EU competition law, a system that aims to deter companies from engaging in such conduct. If a company could escape liability by means of corporate or legal restructuring, the objectives of EU competition law would be compromised. Therefore, the notion of ‘undertaking’ should have the same meaning and scope in the context of the imposition fines by the EU Commission as in the context of private damage claims for violation of EU competition rules.
Conclusion
This judgment warrants serious consideration not only by competition law experts but by all involved in the transfer of assets and underlying businesses. A parallel can easily be drawn to situations where one party continues the economic activity of an (unrelated) party which committed a competition infringement, circumstances that can easily arise in common asset transactions by which a business is transferred. It will, among other considerations, require a more strategic approach to due diligence in relation to asset deals, pertinent representations and warranties, and the use of Warranty & Indemnity insurance.