Corporate re-structures deemed redundant in context of EU competition law and private enforcement
On 14 March, the European Court of Justice issued a momentous ruling that encourages the private enforcement of European Union competition laws and enhances the legal standing of those who have suffered damages as a result of anti-competitive behaviour.
On 14 March 2019, the European Court of Justice issued a momentous ruling that both encourages the private enforcement of European Union competition laws and enhances the legal standing of those who have suffered damages as a result of anti-competitive behaviour.
According to settled case law of the European Court of Justice, undertakings that have been found guilty of anti-competitive behaviour are held responsible for the attributed fines. However, it is not unusual that at the time of imposing fines the infringing undertakings have ceased to exist. This is often due to complex corporate re-structures, making the undertaking cease to exist either in law or fact by transferring the very same business activities to a new operator. As a result, the European Commission and European Courts have adopted the so-called ‘economic continuity’ principle, which provides that liability through public enforcement (i.e. fines imposed by the Commission or National Competition Authorities) may be attributed to an undertaking which played no part in the anti-competitive behaviour per se, but as a result of corporate re-structures is now in charge of the operations of the infringing undertaking(s). Established case law shows that the principle of economic continuity applies when (i) the new operator belongs to the same group of companies or (ii) the transfer of business has been implemented with the intention of avoiding sanctions as provided by the competition laws of the European Union.
Prior to last week, neither the Commission, the European Parliament nor national legislators knew how far-reaching the scope of the principle of economic continuity could be in the field of private enforcement. Private enforcement in the context of competition law refers to claiming
compensation through private litigation for such suffered damage that has a causal link with unlawful anti-competitive behaviour. On 14 March 2019, the European Court of Justice published a long anticipated preliminary ruling concerning a cartel in the asphalt market operating in Finland. The cartel in question was investigated by the National Competition Authority of Finland, which proposed fines for seven different undertakings. The fines were accepted and imposed by the Supreme Administrative Court of Finland. As a consequence of the fines, a municipality in Finland wanted to claim damages from some of the sanctioned asphalt companies with whom that municipality had conducted business with. The claim for damages was based on the fact that the unlawful cartel had resulted in higher prices to the detriment of that municipality. The Finnish Supreme Court was uncertain as to whether (i) it should apply Article 101(1) TFEU directly (for lack of suitable national provisions) to such private enforcement and (ii) the principle of economic continuity would apply, as some of the undertakings operating in the cartel had ceased to exist in law. The case was particularly convoluted as three of the companies which took part in the cartel had been dissolved under voluntary liquidation procedures by their parent companies. Those parent companies then assumed control of the capital and continued their commercial activities. The Finnish municipality wanted to claim damages from the parent companies, who in their defence argued that they should not be held liable for the actions of their autonomous subsidiaries.
The Court’s Ruling
Decisively, the Court cited previously established case law and ruled that the full effectiveness of Article 101(1) TFEU requires that it be open to individuals claiming damages for damage caused by anti-competitive behaviour. As such, the Court held that the national court may rely directly on EU law in private enforcement cases such as the one at hand with regard to the attribution of
liability between undertakings taking part in a cartel. The Court then proceeded to assess the definition of an undertaking and emphasised that undertakings taking part in a cartel are responsible for the damage caused by their infringement. Here the Court faced the unprecedented question of how to attribute liability in private enforcement cases when some of the undertakings have ceased to exist in law due to corporate re-structuring. In essence, the question here is about the applicability of the principle of economic continuity in private enforcements. Without hesitation the Court followed Advocate General Wahl’s Opinion, in which he stressed that the full effectiveness of Article 101(1) TFEU from the perspective of deterrence requires that liability may not be escaped by fraudulent corporate re-structuring. As such, the Court concluded that ‘when an entity that has committed an infringement of the competition rules is subject to a legal or organisational change, this change does not necessarily create a new undertaking free of liability for the conduct of its predecessor that infringed the competition rules, when, from an economic point of view, the two are identical’ (Case C‑724/17, paragraph 38). Further, the Court asserted that the meaning of an undertaking, which is an autonomous concept of EU law, must be interpreted similarly both in the scope of sanctions imposed by the Commission and private actions for damages. Thus, the ruling establishes that the principle of economic continuity applies both to public and private enforcements as long as the infringing undertaking in reality continues to function under a new operator.
On multiple occasions, the Court has emphasised that the central purpose of EU competition rules is the protection of the immediate interests of consumers and competitors, as well as the protection of the structure of a competitive market as such. This preliminary ruling is a pivotal extension of that purpose, as the principle of economic continuity ensures that fraudulent corporate re-structures
are not utilised to avoid liability. Prior to last week, however, it was unclear as to what extent EU law and the principle of economic continuity in particular, could be relied upon in private enforcements. This uncertainty has inevitably resulted in fewer persons aspiring to pursue justice through litigation for fear of significant financial losses. As such, the first and perhaps most significant practical implication of this preliminary ruling is the rise of private enforcement proceedings in the field of competition law. This would not only further protect the immediate interests of consumers and direct competitors who have suffered damage as a result of anti-competitive behaviour, but also create an even greater deterrent for undertakings from taking part in anti-competitive conduct.
The second implication, however, is somewhat complicated. While it is settled case law that the principle of economic continuity applies when (i) the new operator belongs to the same group of companies or (ii) the transfer of business has been implemented with the intention of avoiding sanctions, the Court here confirms that the principle of economic continuity plays a role in legitimate mergers and acquisitions as well. The Court emphasises that by acquiring an undertaking, the purchaser “takes over its assets and liabilities, including its liability for breaches of EU law” (Case C‑724/17, paragraph 40). In practice this means that allegations and investigations conducted by the Commission, not to mention findings of anti-competitive behaviour, will have ever-greater significance in the field of corporate acquisitions and the evaluation of risks and equitable market value.