Parent company to be liable for subsidiary violating competition protection law

Parent company to be liable for subsidiary violating competition protection law

Karolina Łasowska, Marcin Wnukowski, Justyna Świnka – Squire Patton Boggs

On 14 January 2021, an important draft amendment to the Competition and Consumer Protection Act was published (the “Draft”). The Draft incorporates Directive 2019/1 of the European Parliament and of the Council of 11 December 2018 known as the ECN+ (the “ECN+ Directive”), the main assumption of which is to more efficiently and effectively enforce competition protection laws within the EU Member States and to further empower the competent authorities in that regard. This is a yet another new competence of the Head of the Office of Competition and Consumer Protection (UOKiK).

The Draft introduces a rather controversial principle of parent entity’s liability for its subsidiary’s violations. The new regulations provide for a possibility to also fine a parent undertaking for violating anti-monopoly laws, if it “has exercised decisive influence” on the violating subsidiary.

Enacting the Draft will entail a fine for violating a ban on entering into anti-competitive arrangements or for abusing an undertaking’s dominant position to be imposed not only on the violating undertaking, but also on that exercising decisive influence. Further, the fine will be calculated based on the aggregate turnover of both entities and the undertakings’ liability will be joint. 

Dangerous fine calculation mechanism

Another solution proposed in the Draft is introducing a new mechanism of calculating the fine for the violation. The hitherto applied mechanism consisted in determining the value of up to 10% of the violating entity’s turnover for the year preceding that in which the fine has been imposed. The Draft regulation’s assumption is that if it should transpire that decisive influence had been exercised on the violating entity, the Head of UOKiK will be authorized to impose an aggregate fine on both the violating entity and the undertaking exercising such decisive influence. Such entities will then be jointly liable for the violation. Further, when determining the turnover amount, the Head of UOKiK will consider both the violating entity’s turnover and that of the undertaking or undertakings exercising decisive influence. The new fine calculation method will increase the basis for determining its amount.

Undertakings suspending operations will not dodge liability

So far, the key problem has been the undertakings which – fearing liability for the violation and the possible fine imposed by the Head of UOKiK – suspended their business operations. The Draft will have put an end to such practices by indicating that – for the purposes of applying the act – it is assumed that the definition of undertaking will also include an individual who has ceased pursuing business operations.

Fine imposed on associations of undertakings

The hitherto observed cases of competition law violations demonstrate that it is the associations of undertakings – as the entities operating on the relevant market – that are oftentimes the ones to commit such violations. Pursuant to Article 13 of the ECN+ Directive, antimonopoly authorities ought to be authorized to impose fines on associations of undertakings.  The Competition and Consumer Protection Act is currently silent on any particular regulations pertaining to imposing fines on associations of undertakings. However, one ought not draw conclusions that imposing such fines is impossible. The practice so far indicates that, for the purposes of assessing a potential violation, an association of undertakings is considered a single business entity. The current wording of the Competition and Consumer Protection Act, however, does not feature any regulations with regard to calculating the turnover of an association of undertakings and its particular members for the purposes of imposing a pecuniary fine, nor to enabling enforcing such fine, should the association be insolvent. 

The Draft somewhat specifies the above issue. The proposed regulations assume that the aggregate total of each association member’s turnover ought to be the basis for determining the fine amount. The fine imposed on an association of undertakings may not exceed 10% of the total turnover of each of such association’s member operating on the market on which the violation has been committed, in the financial year proceeding that in which the fine has been imposed. However, in a situation when an association of undertakings should prove insolvent, the regulation renders it necessary to call upon the members to make certain contributions toward covering the fine amount.  Inability to make such contributions by the date set by the Head of UOKiK will trigger more severe consequences. That being the case, the Head of UOKiK will be able to request that the fine be paid by each of the undertakings whose representatives were such association’s officers.

Liability for violating competition laws in European law

Liability on the part of a parent entity for its subsidiary’s violation of the antimonopoly law is by no means a novelty in the European law, where such form of liability has existed for a long time, having been established by ample case law. According to the European law, if a parent company and its subsidiary comprise a single economic unit, they constitute a single undertaking as provided for in Article 101 of the Treaty on the Functioning of the European Union (“TFEU”). That being the case, the Commission may address the decision imposing a fine directly to the parent company, without it being necessary to determine whether it has been directly involved in the violation. Such position was taken in the judgement issued by the European Court of Justice on 14 July 1972 in C-48/69 Imperial Chemical Industries v. the Commission, whereby the possibility was allowed to attribute liability for the subsidiary’s actions to the parent company based on the “single economic unit” concept. According to such concept, a subsidiary does not make its own strategic decisions, but it rather executes the will of its parent company, which exercises decisive influence over it, though the degree of a company’s independence should be determined from time to time. Such definition of undertaking was also corroborated, among others, in ECJ judgement issued on 24 October 1996 in C-73/95 Viho Europe v. the Commission and in the European Commission’s Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements.

Polish provisions in light of European regulations

The key prerequisite of a parent undertaking’s liability is “exercising decisive influence” on another undertaking. The Draft does not provide an express definition in that regard. It merely indicates that exercising decisive influence occurs when such economic, legal and organizational ties exist between the undertakings that the undertaking on which influence is being exercised does not determine its own course of action on the market, but rather – in principle – does the bidding of the undertaking exercising the influence (which reflects the single economic unit concept).The issue, however, is not easy to assess, seeing as there are various concepts of what factors ought to be considered upon judging particular actions. It is dubious whether, upon ascertaining if an undertaking is exercising decisive influence, it is sufficient for it to have a share in a company’s share capital, or perhaps this does not suffice and the scope of the analysis should include other factors? The gravity of that is not to be underestimated, as considering a given entity as exercising decisive influence over another opens avenues for extended liability and for imposing a higher fine on a bigger group of entities.

The definition featured in the Draft gives rise to a number of issues. First, using general clauses, which on the one hand causes vagueness and interpretational leeway, while on the other hand it leaves much to the discretion of the Head of UOKiK when assessing particular components of the definitions comprising the notion of decisive influence. Second, the provisions presume exercising decisive influence if an undertaking holds all or “almost all” capital of an entrepreneur on which it exercises decisive influence.

However, what escapes precise interpretation is the notion of “almost all share capital”. Is it enough, for the prerequisite to apply, to hold, for instance, 80% of the shares, or perhaps 90% (what appears more reasonable is to refer to the number of votes criterion, rather than that of the share in the capital)?

Legislative stage

The proposed regulation is currently on a very early legislative stage, therefore it is highly likely that a number of its solutions to be further specified.

What has been observed recently, however, is an ever stricter approach to more stringent provisions of the Competition and Consumer Protection Act and the associated ramifications for undertakings and their further operations.


Author:

Marcin Wnukowski, Partner at Squire Patton Boggs
Karolina Łasowska, Associate at Squire Patton Boggs
Justyna Świnka, Lawyer at Squire Patton Boggs

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