ECJ confirms that economic successors can be held liable for competition damages
The European Court of Justice (ECJ) confirmed in its judgment on 14 March 2019 (C-724/17) that an acquiring company cannot avoid liability for damages caused through breaches of competition law by restructuring their businesses. Prior to the judgment, economic succession test had only been applied to the imposition of infringement fines.
Principle of economic succession in practice
Under the principle of economic succession, the liability for an infringement of competition rules follows the economic activity in which the infringement has been committed. Economic succession has been applied in situations where
1. the original holder of the business activity no longer exists legally or financially; or
2. there are structural links between the holder and the acquirer; or
3. the aim of the corporate transaction is to avoid competitive liability.
Facts of the case
The case in question concerned Finnish asphalt companies involved in a cartel. The ownership of the companies had changed. Their businesses were transferred to their new acquirers, after which the original companies were wound up by the acquirers.
Following conflicting views taken by lower courts in damages proceedings concerning the cartel, the Supreme Court of Finland requested the ECJ's preliminary ruling on whether EU law should be applied in determining the liable entity in the damages case and whether the EU law definition of 'undertaking' is also applied in private enforcement of competition law. The lower courts had disagreed on whether this is needed to ensure the effectiveness of EU competition rules.
Definition of undertaking
The definition of 'undertaking' under EU competition rules is central when determining who can be held liable for damages. That is because only an undertaking committing the infringement under that article can be liable. The definition of an undertaking is broad in the context of EU competition law and it differs from the definition of a company in corporate law. As ECJ points out, what needs to be understood is that an undertaking according to Article 101 TFEU is any entity engaged in economic activity, meaning that legal or organisational changes in an entity do not automatically abrogate the entity from the infringements of its predecessor, if from an economic point of view, the two are identical.
The interpretation given by the ECJ is important as it clarifies the present legal state by defining from whom can a company claim damages when a company taking part in an infringement has been dissolved. The ECJ's position seems clear: in such an event, damages can also be claimed from a company that continues the economic activity of the dissolved company.
According to the ECJ, the object and the practical effect of competition rules would be jeopardised if undertakings responsible for damages could avoid penalties simply by restructuring their businesses. This, in turn, leads to the result that the definition of 'undertaking' cannot have a different scope with regard to the imposition of fines as compared with actions of damages for infringement of EU competition rules.
The judgment also has practical importance when it comes to acquisitions of companies. Infringements of competition rules are often long-lasting and they come to knowledge retroactively. This means that acquires should place even greater emphasis on the potential competition infringements of the acquired companies as it is possible that they might be held liable for damages in accordance with economic succession. The successor's awareness concerning the infringement (or the lack thereof) is not a decisive factor in establishing liability, and it appears economic succession can take place long after the actual transaction. This is the case when, for example, the original seller liable for the infringement becomes insolvent post-transaction.