On 14 March 2019, the Court of Justice (CoJ) delivered a landmark judgment confirming that acquiring companies may be liable to pay damages for the harm caused by an acquired company's infringement of EU competition law.
The judgment may be expected to have significant implications for the scope of due diligence to be undertaken in the context of transaction planning, as well as the negotiation of contractual protections concerning potential future liabilities, and the maintenance of competition law compliance programmes more generally.
Risks facing an acquiring company
The CoJ has confirmed that where an acquiring company:
- acquires all of the shares in the acquired company, and proceeds to dissolve this entity; and
- then carries on the commercial activities of that acquired company,
the acquiring company may be liable for the harm caused by the acquired company's participation in a cartel that infringed EU competition law.
In such circumstances, the acquiring company may be sued in private actions for damages by third parties suffering harm as a result of the acquired company's infringement, even if the acquirer had no knowledge of that infringement.
Reference to the CoJ from the Supreme Court in Finland
The judgment in Vantann kaupunki v Skanska Industrial Solutions & Others1 followed a reference to the CoJ by the Supreme Court in Finland for a preliminary ruling in the context of a private action for damages before the domestic courts in Finland.
Action for damages commenced in Finland
In this private action, the claimant (the City of Vantaa, Finland) is seeking damages from three defendant companies, on the basis that they are jointly and severally liable for the claimant's additional costs incurred in respect of asphalt works, as a result of a cartel that operated in the asphalt market in Finland between 1994 and 2002.
Each of the three defendant companies had directly (or indirectly) acquired the share capital of a company that had participated in the cartel, with each of these acquired companies then subsequently being either liquidated or wound up on a voluntary basis.
Fines imposed on the basis of economic continuity
Following an investigation into the cartel by the national competition authority, the Supreme Administrative Court in Finland imposed fines on the three defendant companies for the conduct of the acquired companies (as well as on one defendant company for its own conduct in participating in the cartel), on the basis that the conduct in question infringed Article 101 TFEU.
The fines for the conduct of the acquired companies were imposed by the Supreme Administrative Court on the defendant companies in accordance with the principle of economic continuity established by EU case law.
Challenge to the principle of economic continuity
Despite the findings of the Supreme Administrative Court, in the context of the private action for damages, each of the defendant companies asserted that they were not liable for harm caused by their acquired company's involvement in the cartel.
The defendant companies argued that any claim in relation to the acquired companies should have been made in the context of the liquidation or winding up proceedings of the acquired company in question.
At first instance, the District Court in Finland held that the need to ensure the effectiveness of Article 101 TFEU required that the principle of economic continuity must be applied consistently, with liability for damage being determined in the same way as liability in respect of fines.
On appeal, the Court of Appeal held that adopting this interpretation, in the absence of detailed rules, would undermine Finnish law on civil liability, which provides that every limited liability company is a separate legal person with its own liability. Consequently, the Court of Appeal dismissed the claims against the defendant companies in relation to the infringements committed by the acquired companies.
The claimant proceeded to appeal to the Supreme Court, which requested a preliminary ruling from the CoJ regarding the application of Article 101 TFEU, and the basis on which liability for compensation is to be determined under EU law.
Key themes of the judgment
Right to compensation for infringements of EU competition law
The CoJ reiterated that:
- a person has a right to claim compensation for harm suffered as a result of an infringement of Article 101 TFEU; and
- while the domestic laws of Member States may provide detailed rules for the exercise of that right, the determination of the entity liable to pay compensation is directly governed by EU law.2
Liability is personal to the infringing undertaking
In relation to EU competition law, liability for damage caused by an infringement is personal. This means that the infringing undertaking is personally liable, with the infringing undertaking being a single economic unit, which could comprise a number of different legal entities (e.g. group companies forming a single economic unit). As a corollary, the entities required to provide compensation for damage resulting from an infringement of Article 101 TFEU are the undertakings that participated in the infringement. 3
In terms of the restructuring of an undertaking, the CoJ confirmed that, where an entity has infringed EU competition law is subject to a legal or organisational change, this does not necessarily give rise to a new entity free from liability for the infringement, if the two entities are identical from an economic perspective.4
The CoJ therefore found that it was not contrary to the principle of personal liability for liability to be imputed to an acquiring company, if the infringing company has ceased to exist. Instead, it may be necessary to regard the acquiring company as being liable for the infringement, in circumstances where:
- the infringing company has ceased to exist, as it has been taken over by the acquiring company; and
- the acquiring company has taken over the infringing company's assets and liabilities.5
Restructuring should not enable liability to be avoided
In light of this, the CoJ rejected the argument that the case law addressing economic continuity6 arose in connection with fines imposed by the European Commission (the Commission), and so was not applicable to private actions for damages brought before domestic courts.
The CoJ emphasised the fundamental importance of the right to claim compensation for an infringement of Article 101 TFEU, stating that this strengthened the operation of EU competition law, and contributed significantly to maintaining effective competition in the EU.
Against this background, the CoJ noted that if the undertaking responsible for damage caused by an infringement could avoid liability by making legal or organisational changes, this would jeopardise the deterrent effect of EU competition law.
On this basis, the CoJ concluded that the concept of an undertaking (and, implicitly, the principle of economic continuity) must be applied consistently in relation to (i) the imposition of fines by the Commission; and (ii) private actions for damages.7
From the information provided by the referring court, the CoJ considered that:
- each of the defendant companies had obtained the share capital of each of their respective acquired companies; and
- subject to a definitive assessment by the referring court, from an economic perspective the defendant companies and their respective acquired companies are the same, and the acquired companies have now ceased to exist as legal entities.
The CoJ held that each defendant company, as the successor to its acquired company, had therefore assumed liability for the damage caused by the cartel, as the defendant company had ensured the continuation of the economic activities of the acquired company.8
Implications for businesses
The judgment emphasises the need for an acquiring company to conduct appropriate due diligence with regard to any target business, and to ensure that adequate contractual protections are negotiated where concerns arise in relation to possible future liabilities (i.e. addressing both public enforcement action, and private actions for damages).
While the operative part of the judgment addresses circumstances in which the acquiring company obtains the share capital of the acquired company, on the basis of the application of the principle of economic continuity9 then, exceptionally, the acquisition of a business by way of an asset purchase could also result in the acquiring company assuming liability for the acquired business's participation in an infringement of EU competition law.10
From the perspective of a business that may be an acquisition target, the likelihood of increased scrutiny by a prospective purchaser (and the possible impact of this on the transaction price), highlights the need to maintain a demonstrably effective and robust competition law compliance programme.
More generally, as the judgment is retrospective in its application, this may encourage prospective claimants to seek to re-evaluate the merits of potential actions for damages, particularly in circumstances in which the infringing companies have been acquired and subsequently dissolved.
1 Case C-724/17 Vantaan kaupunki v Skanska Industrial Solutions and Others ECLI:EU:C:2019:204.
2 ibid, paragraphs 27 – 28.
3ibid, paragraph 32.
4 ibid, paragraph 38.
5 ibid, paragraphs 39 – 40.
6 See, for example, C 280/06 ETI and Others EU:C:2007:775; C 448/11 P SNIA v Commission EU:C:2013:801; and C 434/13 P Commission v Parker Hannifin Manufacturing and Parker-Hannifin EU:C:2014:2456.
7ibid, paragraph 47.
8 ibid, paragraph 50.
9ibid, paragraph 47, which provides that "the concept of 'undertaking', within the meaning of Article 101 TFEU, which constitutes an autonomous concept of EU law, cannot have a different scope with regard to the imposition of fines by the Commission under Article 23(2) of Regulation No 1/2003 as compared with actions for damages for infringement of EU competition rules".
10 See, for example, Case T 531/15 Coveris Rigid France v European Commission ECLI:EU:T:2018:885, paragraph 40, which provides that "...when the assets of a legal entity that participated in an infringement are transferred to independent undertakings, liability follows those assets only in exceptional cases, where the legal entity that owned those assets has ceased to exist in law or has ceased all economic activities".
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