Part II - The Boundaries of the Corporation

4 The Boundaries of the Firm and the Reach of Competition Law Corporate Group Liability and Sanctioning in the EU and the US

Carsten König

4.1 Introduction

It is an essential feature of modern company law that the shareholders are not personally liable for the debts of the company. This form of asset partitioning, often referred to as ‘limited liability’, fulfils a number of important functions.¹ Any exception to the rule is therefore controversially discussed. In recent times, however, the number of exceptions seems to be increasing. An important example can be found in EU competition law. Under the so-called ‘single economic entity doctrine’, parent companies can be held liable for competition law infringements by their subsidiaries. The doctrine only applies to controlling shareholders or, in the words of the EU Courts, to shareholders who exercised a decisive influence over the conduct of a subsidiary at the time when the subsidiary infringed the competition rules.² The application of the doctrine, which is generally considered to have no equivalent in US antitrust law, does not presuppose that the parent company itself has done anything wrong. It does not matter whether the parent company knew about the subsidiary’s infringement and tolerated it. Nor does it matter whether the parent could have prevented the infringement. The liability of the parent company is based on structure, not behaviour, and is justified above all by the possibility of control.

There is of course no doubt that European company law – like all advanced commercial law systems – recognises the corporate law principle of limited shareholder liability. The European Court of Justice (ECJ) has even ruled that shareholder liability may, under certain conditions, infringe Article 63 of the Treaty on the Functioning of the European Union (TFEU).³ That provision governs the free movement of capital, a central element of the European internal market, itself the economic backbone of the European Union. However, the ruling of the Court related primarily to non-controlling shareholders. Moreover, the ECJ has explained that, while limited shareholder liability seems to be accepted as the general rule,⁴ ‘it cannot be concluded therefrom that this is a general principle of company law applicable in all circumstances and without exception’.⁵ It seems that the liability of parent companies for antitrust fines is precisely one of these exceptions. In any event, the ECJ has clearly rejected all attempts to challenge the antitrust liability of parent companies by invoking the principle of limited shareholder liability.⁶ Although the Court’s arguments in this context often sound very formalistic, it seems obvious that the main reason for rejecting such attacks on parent company liability simply is that the judges give greater weight to the objectives of the single economic entity doctrine than to the principle of limited liability, at least in the specific setting of competition law offences.

It is therefore regrettable that the various functions of the single economic entity doctrine are still not properly appreciated. Although the liability of parent companies for infringements by subsidiaries has been recognised in European competition law for decades, much of the literature continues to lose itself in fundamental criticism.⁷ As a result, a thorough examination of the functions of the doctrine and its essential components is still lacking. Against this background, the purpose of this chapter is to examine in more detail the contexts in which the European Commission and the EU Courts invoke the single economic entity doctrine. As we shall see, the use of the doctrine is more nuanced than is generally thought. In particular, the doctrine is not only used to establish the liability of parent companies but also serves important functions in the calculation of fines and their enforcement. Only when these functions as well are appreciated is it possible to make informed statements about the proper reach of the doctrine. It is important to emphasise this because various extensions of the doctrine are currently being discussed. Unfortunately, it often remains unclear what purposes they would actually serve.

Section 4.2 starts with a brief look at the conceptual background of the single economic entity doctrine, which will allow us to better understand the approach of the courts. Section 4.3 then explores three distinct functions of the doctrine: to induce parent companies to control the conduct of their subsidiaries, to ensure the correct calculation of fines and to ensure that fines are actually paid. All three purposes will be analysed in detail and it will become clear that it is important to distinguish the different functions, as they each have their own implications. Section 4.4 discusses borderline questions of group liability: whether companies other than parent companies should also be liable for infringements committed by affiliated companies and whether it can be justified to hold parent companies liable not only for fines but also for damages, i.e. claims brought by private actions. Section 4.5 then broadens the view and asks how the problems solved in the EU by the single economic entity doctrine are addressed in US antitrust law. It will become clear that while on paper there is indeed no liability of parent companies for antitrust infringements by their subsidiaries in the US, the reality is more complex. Section 4.6 concludes.

4.2 Legal and Economic Entities

The starting point for all discussions on parental liability in the case law of the EU Courts is the concept of an undertaking. According to a widely used formulation, that notion ‘must be understood as designating an economic entity, even if, from a legal perspective, that unit is made up of a number of natural or legal persons’.⁸ That phrase was first used by the ECJ in Hydrotherm (1985) to explain that competition is ‘impossible’ between a legal person and its sole owner, as they necessarily have identical interests and act jointly on the market.⁹ The variety of forms offered by company law is simply not relevant for competition law purposes and the same applies to the exact distinction and delineation of legal entities. The EU Courts have held since ICI (1972) that the formal separation between two companies with different legal identities is not decisive for applying the competition rules.¹⁰ If one company controls the other and they therefore behave uniformly in the market, liability may be attributed to the controlling company.¹¹ For the purposes of applying the competition rules, it is the unity of those companies’ conduct on the market that matters, and not their separate legal personality. Similarly, the Courts have always rejected the idea – repeatedly put forward by companies and their lawyers¹² – that the corporate law principle of limited shareholder liability could have any meaning in this context. Instead, insisting on different legal personalities and separate assets is seen as a misplaced form-based approach that ignores economic realities and does not meet the needs of competition law enforcement.¹³

The Courts have even gone so far as to describe the joint and several liabilities of multiple legal entities constituting a single economic unit as ‘merely the manifestation of an ipso jure legal effect of the concept of an “undertaking”’.¹⁴ However, it has rightly been pointed out that the Courts do not automatically hold liable all entities that act jointly in the market as an economic unit.¹⁵ At least so far, the focus has been on the liability of parent companies. This liability is not primarily justified by the uniform market behaviour of the undertaking, but by the parent company’s control over the subsidiary. According to the case law, the conduct of a subsidiary may be imputed to the parent company ‘where, although having a separate legal personality, that subsidiary does not decide independently upon its own conduct on the market, but carries out, in all material respects, the instructions given to it by the parent company’.¹⁶ A parent company will only be liable for offences committed by its subsidiary if the parent is in a position to exercise a decisive influence over the commercial policy of the subsidiary and does in fact exercise that influence.¹⁷ This is presumed, however, for the specific case that the parent company holds all or almost all shares in the subsidiary.¹⁸ It is then up to the parent company to rebut the presumption of control by adducing sufficient evidence to show that the subsidiary acted independently on the market at the time it committed the competition law infringement.

Ironically, in recent years, an almost form-based use of the concept of an undertaking has emerged. While initially the instrumental approach was strongly emphasised, in recent years, the Courts have sometimes tried to find meaning in words instead of exploring the relevant problem. In particular, the substantive examination has occasionally been replaced by a reference to established definitions and (alleged) precedents.¹⁹ Moreover, the Courts have begun to treat the economic unit as akin to a legal entity, sometimes even seeming to endow it with legal personality. The apparent de facto personification of the economic unit seems to be linked to the growing number of arguments before the Courts based on fundamental procedural rights. For example, the Courts have countered the argument that parental liability infringes the principle of personal responsibility with the claim that this principle only applies to the economic unit, and they have made the same argument for the principle that the penalty must be specific to the offender and the offence. The ECJ held in Siemens Österreich (2014) that these principles ‘relate only to the undertaking per se, not the natural or legal persons forming part of the undertaking’.²⁰ Similarly, the General Court (GC) explained in Nynäs (2012) that parental liability ‘does not in any way constitute an exception to the principle of personal responsibility, but is the expression of that very principle’, as the parent company and its subsidiaries form a single undertaking and are thus collectively responsible.²¹ This reasoning has been rightly criticised in the literature.²² The undertaking is not a legal entity and therefore cannot be a bearer of rights and duties, let alone of fundamental rights.²³ To equip the undertaking with legal personality would confuse the economic and the legal level and would inevitably lead to misconceptions. The notion of undertaking is merely a legal mechanism by which certain objectives can be achieved – attribution, parental liability – and the concept of a single economic unit helps to explain why these objectives are appropriate. But a simple reference to the economic unit can never replace substantive arguments and it should not be used to disguise the solution of legal problems.

Even if the approach of personifying the undertaking de facto is not convincing, it is understandable that the EU Courts try to counter the often fundamental, uncompromising criticism by companies and their lawyers of the single economic entity doctrine with similarly heavy artillery. And apparently, the Courts believe that it would be more difficult to justify parental liability as a form of vicarious liability. Ultimately, however, the concept of the Courts will only gain acceptance if it goes beyond a mere interpretation of words. If the Courts really want to convince, and maybe even provide an example for other jurisdictions, they must show that their approach is good policy. This is actually not that difficult. As I will show in the following section, most of what the Courts do on the basis of the single economic entity doctrine, is justified by good reasons. However, it will also become obvious that it is important to clearly distinguish between the different purposes that the unitary perspective on corporate groups is intended to serve.

4.3 Three Distinct Functions

Much has been written about the concept of undertaking and its implications for the liability of corporate groups, but the exact functions of the single economic entity doctrine continue to be underexplored. Most of the debate still is concerned with the legitimacy of the doctrine, often ignoring that legitimacy cannot be separated from purpose. A good starting point for the question what purpose parental liability serves is provided by Advocate General (AG) Kokott in her opinion in Akzo Nobel (2009).²⁴ She relied on four main arguments:

Where […] a parent company exercises decisive influence over its subsidiaries […] it accords with [1.] the principle of personal responsibility and with [2.] the objectiveof effective enforcement of the competition rules to hold all the companies of the group […] jointly and severally liable […]. Only in that way can it also be ensured that, when assessing the amount of a fine to be imposed, [3.] the true economic strength of the whole undertaking is correctly taken into account and that [4.] the successful enforcement of the fine is not jeopardised by any transfers of assets between the parent company and its subsidiaries (enumeration and emphasis added).²⁵

In Section 4.2, above, I have already explained that I do not consider it appropriate to apply the principle of personal responsibility to economic units. The other three points, however, are as correct as they are important and they certainly deserve more attention – both by the courts and in the literature. They are discussed in more detail below.

4.3.1 Controlling the Conduct of the Subsidiary

Promoting the effective enforcement of competition law is probably the most important objective of the single economic unit theory. But how exactly does the liability of parent companies contribute to this objective? The clearest statement by one of the EU Courts on this point is to be found in the GC’s judgment in Dow Chemical (2012). In that decision, the GC stated that ‘as a result of the parent company’s power of supervision, the parent company has a responsibility to ensure that its subsidiary complies with the competition rules’. The Court further explained that ‘[a]n undertaking which has the possibility of exercising decisive influence over the business strategy of its subsidiary’ may be presumed ‘to have the possibility of establishing a policy aimed at compliance with competition law and to take all necessary and appropriate measures to supervise the subsidiary’s commercial management’.²⁶ Unfortunately, the GC made these statements in a case in which the parent company’s control was not self-evident – the case concerned a 50/50 joint venture. On appeal, the ECJ did not support the GC’s view, but instead maintained that the latter had pondered about the parent’s responsibility ‘purely for the sake of completeness’ and that the statement was therefore not contestable by legal means.²⁷ Regrettably, the GC did not see this as an encouragement for any further reflection of this kind.

But the GC was right. As I have explained elsewhere in more detail,²⁸ holding parent companies liable for competition law infringements by their subsidiaries serves a number of important objectives. Three reasons should be highlighted here.

First, parental liability restores effective deterrence where subsidiaries are underdeterred, for example, because they lack sufficient assets to pay a fine or because they misjudge the situation on the basis of insufficient information.²⁹ From a deterrence perspective, it can make sense to involve the parent company in compliance efforts, if the subsidiary does not respond to the threat of monetary sanctions. However, two conditions should be met: First, it must be likely that the parent company will respond better to incentives than the subsidiary, for example, because the parent has more assets or better information. Second, the parent company must be able to influence the behaviour of the subsidiary and deter it from infringing the law. Typically, both will be the case. Parent companies often possess more assets and better information, and they are in a good position to steer their subsidiaries in the right direction. They can select and replace their subsidiaries’ management, they can establish group-wide compliance mechanisms, and they can set up compensation and promotion schemes that reward compliance and discourage any form of illegal behaviour. In this respect, holding parent companies liable for their subsidiaries’ offences serves a similar function to other forms of vicarious liability, such as the liability of employers for wrongs committed by their employees or the liability of parents for the behaviour of their children.

A second reason for parental liability is that it prevents parent companies from opportunistically exploiting limited liability to separate their assets from their risks.³⁰ It is well known from corporate law and economics research that limited liability may induce shareholders to externalise risks to third parties, in particular to involuntary creditors who cannot insist on contractual protections.³¹ A strategic use of limited liability allows shareholders to fully benefit from the opportunities for profit, but to disassociate themselves from the company in the event of losses. Such incentives may also exist with regard to infringements of competition law. For example, companies could be tempted to bundle their sales activities in markets particularly susceptible to cartels in weakly financed subsidiaries. If an infringement of competition law were to occur, the damage could then be contained to the subsidiary, while the parent company would remain unaffected. Extending liability to the parent company undermines such strategies. It eliminates the incentive for opportunistically exploiting limited liability and re-internalises all competition law risks to the corporate group and its ultimate shareholders.

The third reason for parental liability is that enforcement is expensive and that parent companies often have a comparative cost advantage over the state.³² Many of the most serious competition infringements take place in secret. They are difficult to detect and investigate. As a result, competition authorities have to devote considerable resources to ensure that infringements are established in a way that withstands judicial review. High costs of enforcement are an important reason why competition law relies heavily on cooperative measures such as leniency programmes and settlements. The liability of parent companies can also be seen as a means to save enforcement costs. Parent companies are in a good position to take over part of the investigation work that would otherwise have to be carried out by authorities. They can obtain reports from their subsidiaries, examine contracts and accounts and, if necessary, conduct internal investigations. As internal control mechanisms usually already exist for the purpose of group management, parent companies can typically implement investigative measures at a lower cost than the state. Given the greater cost-effectiveness of internal reviews, this not only turns public costs into private costs but saves administrative costs overall.

Occasionally, it is claimed that the actual design of the single economic entity doctrine does not fit these policy objectives. For example, it is argued that the doctrine does not reward compliance efforts but punishes them because the parent company is liable even if it does everything in its power to prevent the subsidiary from committing competition law violations.³³ Moreover, it has been questioned why the parent company is also liable if the subsidiary is solvent³⁴ and why the application of the doctrine does not depend on whether the parent could actually have prevented the infringement.³⁵ However, the strongest incentive to commit to compliance comes from the possibility of avoiding liability altogether. The parent company is rewarded for its compliance efforts by not being liable if no infringement occurs. If the parent company succeeds in deterring the subsidiary from committing infringements, the question of liability does not arise at all – neither for the parent nor for the subsidiary. Furthermore, the same questions could be asked about the liability of employers under the doctrine of respondeat superior. Both concepts cannot be reduced to a single objective and they are based on fairly general conditions to cope with a large number of different cases. The fact that efficient deterrence can be achieved in individual cases even without vicarious liability does not mean that vicarious liability as a whole is not important for deterrence. Hardly any doctrine does justice to every individual case. It would be possible to differentiate the conditions for the liability of parent companies to a greater extent, but legal certainty would suffer as well. Given this trade-off, it seems justifiable that the doctrine is based on rather general conditions. Moreover, in accordance with the case law of the EU Courts, the Commission has discretion as to whether or not to invoke the parent company’s liability.³⁶ Where the application of the doctrine does not contribute to general or specific deterrence, it can therefore remain unapplied.

4.3.2 Ensuring the Correct Calculation of the Fine

Another objective of the single economic entity doctrine is to enable a proper calculation of fines. As we shall see, it is very important to distinguish this function from the one discussed in the previous section. In case law, however, both functions are sometimes confused. The starting point for all consideration is that the benchmark for the calculation of fines is the objective of deterrence. The Courts have repeatedly stressed that the Commission must ensure that the fine has the necessary deterrent effect.³⁷ They have also explained that, as far as the specific deterrence of the infringing undertaking is concerned, the deterrent effect must be assessed in relation to the size and the economic power of the undertaking, for which it is necessary to take into account its global resources.³⁸ As pointed out by AG Kokott in her statement quoted above, in this context, it is important to correctly assess the ‘true economic strength of the whole undertaking’, i.e. the corporate group. The Courts, therefore, assume that – in so far as turnover is relevant for the calculation of the fine – it is the consolidated turnover of the group as a whole that must be taken into account. In Group Gascogne (2013),³⁹ the ECJ explicitly referred to Article 1(1) of Directive 83/349⁴⁰ for the purpose of determining the 10% turnover cap according to Article 23(2) of Regulation 1/2003⁴¹ and paragraph 32 of the 2006 Fining Guidelines.⁴² Today, the relevant provision is to be found in Article 22(1) of the Accounting Directive 2013/34,⁴³ which, like its predecessor, obliges parent companies and subsidiaries to prepare consolidated financial statements. The aim is to provide ‘a true and fair view of assets and liabilities, the financial position and the profit and loss’ of the whole group of companies.⁴⁴ It should be noted, however, that the conditions for determining ‘parent undertakings’ and ‘subsidiary undertakings’ within the meaning of Article 22(1) of the Accounting Directive are set out exclusively in that provision. The criteria listed there are similar to those used in EU competition law to determine economic units – but they are not identical. It is therefore not necessarily the competition law concept of an undertaking that decides on the attribution of turnover.

The conclusion that only consolidated group turnover can be decisive in so far as turnover is relevant for the calculation of the fine is already apparent from the fact that turnover can easily be reallocated within the group. Competition law investigations take a long time, so companies usually know that a fine will be imposed well in advance of the actual imposition of the fine. If the managers of a corporate group could be sure that only the turnover of the subsidiary will be taken into account, they could adapt to this and shift the turnover to other companies in the group. This is particularly true where the Commission does not normally take into account the turnover during the cartel infringement but, as in the case of the 10% turnover cap, the turnover in the year preceding the prohibition decision. At this stage, the company is usually aware that a fine will soon be imposed. Against this background, it is surprising that the ECJ apparently wants to limit the relevance of consolidated group turnover to cases in which liability is attributed to the parent company. In the Groupe Gascogne judgment, at least, the Court held that the Commission is entitled to rely on group turnover where it ‘has established to a sufficient legal standard that an infringement may be attributed to a company which heads a group’.⁴⁵ If that was meant as a condition, the Court would be wrong. For the reasons set out above, it must always be the consolidated group turnover that is taken into account, even if only a single subsidiary is liable. Interestingly, the ECJ recognises that the Commission cannot be required to demonstrate the decisive influence of the parent company for each subsidiary whose turnover it wishes to include in the calculation of the fine, as these are ‘two separate issues serving different purposes’.⁴⁶ This observation is correct and the conclusion must ultimately be that the calculation of the fine should not depend at all on the economic unit as developed for the attribution of liability. Instead, the Commission should simply always be allowed to rely on consolidated accounts as defined in Chapter 6 of the Accounting Directive.

There is an important difference between the liability function of the single economic entity doctrine and its use for the correct calculation of fines, and that is the point in time that is decisive. The liability function is linked to the parent company’s control and its ability to prevent competition law infringement. Liability based on this ground should therefore apply only to corporate entities which were able to exercise a decisive influence during the infringement. For the calculation of the fine, however, the relevant point in time should in principle be the date of the prohibition decision. The reason is that fines serve primarily as a deterrent and thus have a forward-looking purpose. In particular, the objective of specific deterrence, i.e. ensuring compliance with the undertaking addressed by the prohibition decision, requires the fine to be set in such a way as to anticipate the undertaking’s future behaviour. This is an important finding because the undertaking at the time of the decision may be quite different from the one at the time of the infringement.⁴⁷ The objective of setting the fine in such a way as to prevent future infringements may even justify taking into account the economic strength of entities which were not part of the undertaking at the time of the infringement. In contrast to the liability function, it is irrelevant for the calculation of the fine whether other members of the group could have prevented the competition law infringement. Instead, it is simply a matter of correctly taking into account the actual economic strength of the group when calculating the fine.

4.3.3 Ensuring the Payment of the Fine

Another important objective of the single economic entity doctrine, derived from the case law of the EU Courts, is to ensure that fines are actually paid. Even though the Courts adopt an approach which comes close to personifying the economic unit formed by a group of companies,⁴⁸ they accept that the Commission can only address its decisions to natural and legal persons.⁴⁹ This is the only way to ensure that decisions imposing fines are enforceable under Article 299 TFEU. In this context, the ECJ has described the joint and several liabilities of parent companies and their subsidiaries as ‘an additional legal device available to the Commission to strengthen the effectiveness of the action taken by it for the recovery of fines imposed for infringement of the competition rules’.⁵⁰ Moreover, the Court has explained that extending liability to the parent company ‘reduces for the Commission, as creditor of the debt represented by such fines, the risk of insolvency […]’.⁵¹ On other occasions, the ECJ has emphasised that joint and several liability ‘cannot be reduced to a type of security provided by the parent company in order to guarantee payment of the fine imposed on the subsidiary’.⁵² Thus, the Court has clarified that securing the enforcement of the fine is one purpose of parental liability, albeit not the only one.

Since fines for competition offences are often very high, it is not surprising that companies go to great lengths to avoid them. Past experience has shown that this sometimes includes corporate restructuring. A fairly well-known example that happened in Germany is discussed in detail in Chapter 5 of this book.⁵³ In this case, the Bundeskartellamt had to close its proceedings because a restructuring had made it impossible to enforce the fines. This case was one of the reasons why the German legislator decided to introduce parental liability based on the European model as part of the Ninth Amendment to the German Competition Act.⁵⁴ As far as the particular function of ensuring the enforcement of fines is concerned, parent company liability competes with other approaches, such as the liability of legal and economic successors or simply faster enforcement of fines. However, it is clear that it becomes more difficult and therefore less attractive to avoid fines through restructuring if liability is also extended to the parent company.

The Courts have in the past linked the problem of collecting the fine with the objective of deterrence.⁵⁵ Such a connection does indeed exist since a fine which is not collected cannot contribute to deterrence. According to this logic, if the subsidiary defaults on payment, liability should be extended only to those who could have prevented the infringement, i.e. the parent company at the time of the infringement (or several successive parent companies if there has been a change of control during the period of the infringement). However, as illustrated by successor liability,⁵⁶ deterrence is not the only possible objective of such a form of contingent liability. It could also be seen as an attempt to ensure that a large financial claim by the Commission is met in order to protect the EU budget and ultimately European taxpayers. Seen in this light, there would not even need to be a link between the party liable and the competition law infringement. Instead, the substitute debtor could be anyone who held a significant stake in the subsidiary at some point between the beginning of the infringement (when the debt was first incurred) and the payment of the fine (when it is fulfilled). If the main objective is to avoid subsequent restructuring, it makes sense to focus on a point in time before the investigations become known.

To be clear, such liability, which is not linked to the control during the infringement, has not yet been established under EU competition law.⁵⁷ Yet, that does not mean that it could not exist.⁵⁸ First steps in this direction can be found at the Member State level. Germany has created a form of substitute liability in 2017, as part of its strategy to close loopholes in its former liability law. Under Section 81a of the German Competition Act,⁵⁹ a sum equal to the fine can now be demanded from parent companies as well as legal and economic successors if the fine cannot be enforced against a subsidiary or predecessor responsible for an infringement.⁶⁰ This type of liability has the advantage that it does not contain any accusation regarding the infringement – the substitute debtor need not have been affiliated with the subsidiary at the time of the infringement – so that the procedural guarantees of the law on fines need not be applied. For this reason, the German legislator suggests, for example, that the provision can also be applied retroactively, even though the law on fines is characterised by the principle that acts can only be punished if they were prohibited before they were committed.⁶¹ In fact, the same approach could be used for other high liabilities, such as tax debts – without it being relevant whether any of the companies have infringed the law. Such liability would not be a sanction but would be justified solely by the need to prevent evasive conduct aimed at circumventing high payment obligations.

4.4 Borderline Issues of Liability

After these remarks on the distinct functions that the single economic entity doctrine fulfils in EU competition law, it is now time to reflect on the recent debates on extensions of the doctrine. As we have seen, it is important to distinguish between the question of the calculation of fines and that of liability. The fact that, for example, the turnover of another company should be taken into account in the calculation of the fine does not mean that this company should also be liable. While the calculation of fines depends on a correct assessment of the economic strength of all affiliated companies at the time of the prohibition decision, attribution of liability should be concerned with the question of who could have prevented the competition law infringement at the time when it occurred. This difference must also be kept in mind in the following considerations. It means, in particular, that, at least as a general rule, a much narrower approach is required with regard to liability than with regard to the calculation of fines.

4.4.1 Sibling Liability

The first issue to be looked at is the liability of sister companies. It has been claimed in the literature that the liability of sister companies already follows from the concept of the single economic unit.⁶² Since sister companies form an economic unit with the parent company and with each other, they shall, according to this view, be mutually liable for their respective competition law infringements. This position is closely linked to the view that it is the economic unit as such which commits the infringement and that the infringement can therefore be attributed to all the legal entities constituting the economic unit, i.e. essentially all members of the corporate group.

The Courts have so far acknowledged the liability of a sister company only in the rare case where one sister company exercises a decisive influence over the other.⁶³ For other constellations, the case law is not yet clear. The ECJ has held in Aristrain (2003), that it is not possible ‘to impute to a company all of the acts of a group even though that company has not been identified as the legal person at the head of that group with responsibility for coordinating the group’s activities’.⁶⁴ The GC has apparently understood this to mean that liability can only be attributed bottom-up in the direction of (direct and indirect) parent companies, but not top-down in the direction of subsidiaries or even horizontally in the direction of sister companies. For example, it held in Parker ITR (2013) that the Commission cannot attribute to a subsidiary the responsibility of its parent company for the unlawful conduct of another subsidiary, which ultimately also means that the subsidiary is not liable for the infringement of the other subsidiary.⁶⁵ In other decisions, the GC has indicated that it interprets Aristrain as meaning that liability can only be attributed to the parent company.⁶⁶ Christian Kersting, on the other hand, has claimed that the real problem in Aristrain was that the existence of a single economic unit had not been proven, because there was already no ‘parent company’ which would have managed the companies of the group in a uniform manner.⁶⁷ That is correct, but it is unclear whether this was a decisive point for the ECJ.

Other judgments, such as the GC’s Michelin decision⁶⁸ and both Courts’ judgments in the Versalis litigation,⁶⁹ are less significant, as they do not concern the question of liability but the calculation of fines – in particular, the relevant turnover to be taken into account and the question of recidivism. As has been repeatedly stressed in this chapter, these are distinct issues that have little to do with the establishment of liability. Nor does it seem sensible to look for the solution in the notion of the undertaking or the concept of the single economic unit.⁷⁰

The decisive factor must ultimately be the purpose of declaring a particular legal entity liable. It has been argued that the liability of sister companies is necessary to properly capture the economic strength of the group.⁷¹ But that is not correct. As already shown,⁷² it is true that the calculation of fines should be based on the group as a whole. This does not mean, however, that all members must also be individually liable. Remember that the ECJ has made it clear in Group Gascogne (2013) that, where the liability of the ultimate parent company is established, the Commission ‘is entitled, for the purposes of assessing the financial capacity of that company, to take into consideration the latter’s consolidated accounts inasmuch as they may be regarded as constituting a relevant factor of assessment’.⁷³ The consolidated accounts, however, automatically include the assets, liabilities, financial positions, profits, and losses of all subsidiaries in terms of Chapter 6 of the EU Accounting Directive 2013/34.⁷⁴ Furthermore, the ECJ has pointed out that it is, in this context, not necessary for the Commission to show that each subsidiary was controlled by the parent company.⁷⁵ Thus, the Court has clearly separated the question of liability from that of attribution of turnover – and that was the right thing to do.

As explained in detail above,⁷⁶ extending liability to legal entities that were not directly involved in the infringement serves to induce them to influence the conduct of the real perpetrator. If this is understood, it is obvious that the mutual liability of sister companies for their respective infringements makes little sense. The same applies to holding subsidiaries liable for infringements committed by their parent companies.⁷⁷ Instead, liability should depend strictly on the possibility of control. In corporate groups, however, control is typically exercised from top to bottom. A parent company can take steps to ensure that its subsidiaries do not commit any infringements and holding the parent liable can therefore contribute to deterrence. But sister companies cannot control each other any more than subsidiaries can control their parent companies. The approach of extending liability to companies which are at the same or lower level in the corporate hierarchy than the actual perpetrator is therefore misguided.

4.4.2 Actions for Damages

Another issue is whether parent company liability is also justified in actions for damages. This has been the subject of much debate since the entry into force of the EU Directive on Antitrust Damages Actions in 2014. The issue has gained further attention since the ECJ recently held in Skanska (2019) that the concept of ‘undertaking’ within the meaning of Article 101 TFEU constitutes an autonomous concept of EU law and cannot have a different scope with regard to the imposition of fines on the one hand and actions for damages on the other.⁷⁸ However, the answer to the question of parental liability for damages cannot be found in terms and definitions, but only in a purposeful interpretation of the relevant provisions. If one assumes, as seems reasonable, that liability for damages does not only serve the purpose of compensation but is also supposed to contribute to deterrence, there is little reason not to apply the principles of parental liability also in actions for damages. This is particularly true if one further assumes that damages actions concern, at least in part, harm that is not adequately taken into account in fine proceedings. A rule of holding parent companies liable for damage caused by their subsidiaries then ensures that the necessary incentives for compliance are also set in relation to these positions.

4.5 The EU–US Divide

Finally, given the comparative perspective of this book, it will now briefly be discussed how the issues of this chapter are treated in US antitrust law. It is often stressed that there is a strong contrast between the EU and the US system with regard to the liability of parent companies.⁷⁹ Indeed, in the US law on antitrust sanctions, there is no general rule of parent company liability for the antitrust infringements of their subsidiaries. Sections 1 and 2 of the Sherman Act both address ‘persons’, defined in Section 7 of the same Act as including ‘corporations and associations’. These terms are based on a rather narrow legal understanding, which in no way resembles the functional approach developed by the ECJ with regard to the term ‘undertaking’ in Articles 101 and 102 TFEU and Article 23 of Regulation 1/2003. As a result, in US antitrust law, the focus with regard to the establishment of liability is very much on the specific legal entity whose employees committed the violation. However, the requirements of the Sherman Act are not so strict that it would not have been possible to develop a different approach. The reasons for the striking US–EU divide must therefore lie elsewhere. Apparently, up to now, there has simply been no need in US antitrust practice for holding parent companies liable. I have tried elsewhere to help answer the question of what might be the reasons for this phenomenon.⁸⁰ Besides the fact that complex group structures are simply much rarer in the US than in Europe (which makes the advantages of parental liability less obvious),⁸¹ the greater significance of other liability mechanisms is likely to play a major role. In particular, the higher relevance of individual liability of managers and employees can be expected to fill some of the deterrent gaps, to which the EU is responding by extending liability to other legal entities.

However, I would like to use this opportunity to draw attention to two other important points. First, it is clear, in this context as well, that the question of liability should not be confused with that of the calculation of fines. While it is true that US antitrust law does not generally recognise parent companies’ liability for fines, it is equally true that the rules on the calculation of fines do make a difference according to whether a company is part of a larger group or not.⁸² This can be seen, for example, in the rules on recidivism.⁸³ According to §8C2.5(c)(1)(A) of the US Sentencing Guidelines (USSG),⁸⁴ an organisation’s culpability score is to be increased by one point if the organisation committed any part of the offence less than ten years after a criminal adjudication based on similar misconduct.⁸⁵ This is comparable to the European Commission’s approach under paragraph 28 of the 2006 Fining Guidelines, except that these do not provide for a maximum period. In our context, it is important that the official comment to §8C2.5(c), published by the US Sentencing Commission, explains that in determining the prior history of an organisation ‘the conduct of the underlying economic entity shall be considered without regard to its legal structure or ownership’.⁸⁶ This shows an openness to approaches that would be comparable with the broad European concept of ‘undertaking’. However, the approach under §8C2.5(c) appears to be more nuanced and not primarily aimed at including other legal entities in the analysis. On the contrary, the Guidelines make it clear that even within one legal unit, there can be several economic units, each of which may or may not be classified as a repeat offender. This is already hinted at in §8C2.5(c), which not only mentions the ‘organisation’ as a reference point for recidivism but also a ‘separately managed line of business’. The official comment explains that, where separately managed lines of business exist, ‘only the prior conduct or criminal record of the separately managed line of business involved in the instant offense is to be used’.⁸⁷ Furthermore, the comment gives the example of two companies merging and becoming separate divisions and separately managed lines of business within the merged company. In such a case, ‘each division would retain the prior history of its predecessor company’.⁸⁸ As this makes clear, the focus is still on the divisions and not simply on the new company as a whole (as it would be under EU competition law).

An expansive approach can be found in §8C2.5(b), which concerns the involvement or tolerance by high-ranking managers. The provision refers to the size of the workforce for qualifying how much the culpability score is to be increased. However, it does not only focus on the ‘organisation’ but also on the ‘unit of the organisation’, which is defined in the comment as meaning ‘any reasonably distinct operational component of the organisation’.⁸⁹ It is further explained that, if a large organisation has several large units such as divisions or subsidiaries, ‘all these types of units are encompassed within the term “unit of the organisation”’.⁹⁰

In other contexts, it is less clear whether the entire group can be considered or whether the focus is strictly on legal entities. This is the case, for example, with regard to the inability to pay. According to §8C3.3(a) of the US Sentencing Guidelines, courts shall reduce the fine below that otherwise required to the extent that imposition of such fine would impair the organisation’s ability to make restitution to victims. Furthermore, §8C3.3(b) allows for the same reduction if a court finds that the organisation is not able and, even with the use of a reasonable instalment schedule, is not likely to become able to pay the minimum fine under the Guidelines. It is further stated that the reduction under any of the two provisions shall not be more than necessary to avoid substantially jeopardising the continued viability of the organisation. However, neither the Sentencing Guidelines nor a recently published memorandum makes it clear whether the economic situation of affiliated companies should also be considered.⁹¹ As a matter of policy, this is essential, as companies might otherwise try to influence their liability by shifting assets to other members of the corporate group. Other important parameters, which are strongly influenced by the single economic unit doctrine in EU competition law, have no equivalents in US fining practice. This applies, for example, to the 10% turnover limit and the deterrence multiplier.

All in all, however, it can be said that the unitary perspective on corporate groups plays a role under Chapter 8 of the US Sentencing Guidelines. The second important qualification to be made here is that, when it comes to the US American fining practice, there is a big difference between the law on the books and the law in action. For the 20 years from 2000 to 2019, the Corporate Prosecution Registry created by Brandon Garrett lists 293 antitrust decisions.⁹² Only three of these cases were resolved with a conviction. In contrast, 278 cases (almost 95%) were resolved by non-prosecution agreements (12), deferred prosecution agreements (2), or plea agreements (264). The fact that by far most cases are resolved by negotiated settlements gives prosecutors considerable leeway, also with regard to the sanctioning of groups of companies. This can be seen, for example, by looking at some of the international cartel cases that, in the EU, have led to the application of the single economic entity doctrine. In Hydrogen peroxide (2006), for example, the European Commission imposed a fine of 25.2 million euros on Akzo Nobel NV, Akzo Nobel Chemicals Holding AB and EKA Chemicals AB.⁹³ The latter was considered the actual perpetrator, whereas the other two companies were held liable as parent companies.⁹⁴ With regard to the US American part of the hydrogen peroxide cartel, a plea agreement was concluded between the US Department of Justice and Akzo Nobel Chemicals International BV,⁹⁵ at the time a wholly owned subsidiary of Akzo Nobel NV and the parent company of Akzo Nobel Chemicals Holding AB, i.e. two of the three companies addressed in the European decision. Interestingly, the plea agreement refers to ‘the defendant, including its subsidiaries’ as a producer and seller of hydrogen peroxide.⁹⁶ Furthermore, even though the agreement was only signed in the name of Akzo Nobel Chemicals International BV, full and truthful cooperation is promised by ‘[t]he defendant and its parents and subsidiaries that are engaged in the sale or production of hydrogen peroxide’.⁹⁷ This should probably include EKA Chemicals AB (or its successors), which are, however, not mentioned in the agreement.

Similar broad language can also be found in other plea agreements.⁹⁸ It seems that although a specific legal entity is always singled out as the contracting party, in reality, the agreement is effectively concluded with the whole group. There is no indication that the US Department of Justice would relieve parts of a unified group of companies of their responsibility simply because they are organised in separate legal entities. This applies, in particular, to cooperation obligations. The relevant passages in plea agreements typically also refer to parent companies, subsidiaries, and successors collectively referred to as ‘related entities’.⁹⁹ They all need to provide documents and make their employees available if so requested by the Department of Justice, and they all benefit from preferential treatment as long as they comply with the plea agreement. It is therefore obvious that the use of plea agreements avoids some of the problems that need to be solved in the EU with complex attribution mechanisms. Prosecutors in the US use the threat of conviction as leverage to secure the voluntary cooperation of the whole group. Since appeal procedures do not play a role where cases are resolved by negotiated settlements, judicial review of antitrust decisions is much less important in the US than in the EU. Enforcers can therefore take the liberty of differentiating somewhat less carefully between distinct legal entities and it is usually not important to prove specific contributions by individual members of the group.¹⁰⁰

In conclusion, the assertion that there is no liability of parent companies under US antitrust law must therefore be refined in two important ways. On the one hand, the US Sentencing Guidelines allow the particularities of corporate groups to be taken into account at least in some respects. While this cannot solve the problem of liability gaps, it will ensure that the calculation of fines does not ignore the economic reality. On the other hand, and this is even more important, the use of plea agreements gives the US authorities considerable leeway, which they can also use to prevent evasive behaviour by groups of companies. This is a very effective way – albeit less transparent than the European Commission’s much more formalistic approach – to ensure that all responsible actors are actually addressed.

4.6 Conclusion

The findings of this chapter can be summarised as follows:

1. 1. In a clear departure from fundamental principles of company law, EU competition law emphasises the common responsibility of corporate groups regardless of separate corporate personalities and limited shareholder liability. This is because competition law is about assessing the actual effects of corporate behaviour, for which company law formalities play no role.

2. 2. The challenges posed by corporate groups cannot be solved by metaphysical considerations of the undertaking or the single economic unit. The de facto personification of the undertaking by the EU Courts is also mistaken. The undertaking is not a person, but merely a legal concept that is supposed to be open to economic realities. As such, it can be used to answer questions of attribution and liability, but it does not answer these questions by itself.

3. 3. The single economic entity doctrine serves three important objectives: (A) to induce parent companies to control the conduct of their subsidiaries, (B) to ensure the correct calculation of fines, and (C) to ensure that fines are actually paid. It is important to clearly distinguish between these functions, as they each have different implications.

4. 4. The threat of liability can be used to encourage parent companies to prevent infringements by their subsidiaries. But that presupposes two things: (A) the parent company must respond better to incentives than the subsidiary and (B) the parent company must be able to deter the subsidiary from infringing the law. It is therefore correct to make the parent company’s liability dependent on its control over the subsidiary at the time of the infringement.

5. 5. Fines will only have a deterrent effect on groups of companies if the calculation takes into account the economic strength of the whole group at the time of the prohibition decision. When the Commission imposes a fine on a company which is part of a group, it should therefore be entitled to rely on consolidated accounts as defined in Chapter 6 of the Accounting Directive. This should not depend on whether it also holds other members of the group liable.

6. 6. In order to ensure the payment of fines, other entities within a group may be held liable as substitute debtors. In theory, this type of liability could be completely independent of any link to the infringement. The absence of such a connection could even mean that the procedural guarantees of the law of fines do not have to be applied.

7. 7. Holding sister companies mutually liable for each other’s competition law infringements or holding subsidiaries liable for infringements by parent companies does not contribute to the objective of deterrence. The reason is that control in groups of companies is typically exercised only from top to bottom, but not the other way round or horizontally.

8. 8. Extending the rule of parental liability from the law of fines to the law of damages can contribute to deterrence as it ensures that the necessary incentives for compliance are also set in relation to harm that is not adequately taken into account in the calculation of fines.

9. 9. While it is true that parent company liability does not exist as a general rule in US antitrust law, it must also be recognised that in the vast majority of cases this is not decisive because they are resolved by negotiated settlements. This practice provides the US authorities with the necessary flexibility to take due account of the specificities of corporate groups.

5 Piercing the Corporate Veil The German Sausage Saga

Martin Schunke and Mareike Walter

5.1 Introduction: Corporate Responsibility and Competition Law

The question under which circumstances an undertaking is liable for its own competition law infringement – not to mention the liability for infringements committed by an affiliated undertaking – is of invaluable practical importance. From the early days of European competition law, there has been an interesting legal relationship between the ‘single economic entity’ as the addressee of EU competition law and the respective entities under national corporate laws. Legend has it, businesses in some European jurisdictions can avoid fines by way of corporate restructuring, while in other jurisdictions, this is not an option.¹ The present contribution traces the developments in the EU and in Germany during recent years with special regard to the so-called German ‘sausage gap’ – a once well-known and much-exploited lacuna that helped shelter companies from liability through specific corporate restructuring.

Section 5.2 of this chapter discusses underlying principles of corporate and competition law, providing the relevant context for an in-depth analysis of the German ‘sausage gap’. Section 5.3 addresses the evolution of German law and jurisdiction with regard to restructuring efforts aimed at avoiding cartel fines. Section 5.4 then focuses on the European competition law developments with regard to liability for cartel damages claims and, in particular, assesses the interplay of the European concept of the ‘single economic entity’ with underlying principles of law. Finally, Section 5.5 offers some concluding remarks and an anticipated outlook on these issues moving forward.

5.2 Entity Principle and Enterprise Principle – A Comparative Perspective

Corporate law, both nationally and internationally, is based on the premise of the individual corporation – the legal entity. This stems from the fundamental defining characteristic of the corporation constituting a separate legal person with rights and obligations distinct from those of its owners.² The logical consequence of this perception is the ‘corporate veil’, the concept of limited corporate liability under which the shareholders of a corporate entity are not (personally) liable for the entity’s debts. This understanding is largely determined by the traditional concept of a single corporate entity. The emergence of corporate groups in modern economies, where shareholders or creditors often are corporations themselves, has not fundamentally changed this standard conception of the corporation in case law or relevant literature.

However, the nature of a corporate group will not be fully appreciated where too much emphasis is placed to the separate legal entity within a group, the ‘entity view’ only. So on the other hand, the enterprise view would focus on all of the legal entities that form the corporate group as part of a single economic operation.³ Historically, ‘enterprise view’ and ‘entity views’ have therefore provided for competing theories of liability within tort law and various statutory regimes. Tension between the enterprise and the entity approach, as well as the courts’ general hesitation to impose enterprise liability, can be explained in part by the factually complex nature of the corporate group itself as well as by the complicated exercise for uniformly defining the ‘corporate group’.⁴

So whereas the principle of limited liability is provided for in many company law systems, the exception of abolishing the rules of limited liability to the benefits of creditors of the corporation is often referred to as ‘veil-piercing’ and is mostly shaped by courts.⁵ However, situations that call for a piercing of the corporate veil are recognised in virtually all jurisdictions.⁶ There are rather different situations in which corporations of a group are held liable, but most of which do not presuppose the existence of a group. Such are internal liability of the shareholders towards the company, external liability towards third parties, fiduciary duties, contract and tort, attribution of risk, knowledge and fault as well as contractual responsibility, etc.⁷

In contrast, abstracting to the level of the corporate group, a real enterprise perspective implies that the group as a whole bears rights and obligations that either derive from those of one or more members of the group or may also be independent. For the sake of preserving the limited liability within the group, derivative liability of the group (or one entity within the group) based on wrongful conduct by another affiliate has generally been rejected within veil-piercing doctrine.⁸ From a comparative perspective, US courts have determined that ‘piercing the corporate veil’ vertically or extending enterprise-wide liability horizontally (when the separation between the corporation and its shareholders produces anomalous or inequitable results) might occur only in exceptional circumstances.⁹

Interestingly, from an empirical perspective, veil-piercing is common with regard to statutory provisions such as environmental and antitrust law. However, it does not arise as often as one would expect, even less with regard to tort law cases, and it is more likely to occur when the shareholder behind the veil is an individual rather than another corporation.¹⁰ Imposing obligations and potential for liability on the corporate group – or on a parent corporation as a proxy for the group as a whole – is always problematic because it compels the courts to disregard the formal legal identity of the individual companies comprising the group. If applied broadly or unpredictably, this approach could threaten the very existence of corporate groups as it threatens the risk assessment of shareholders as investors.

5.3 The German Sausage Saga: Hiding Behind the Corporate Veil

5.3.1 The ‘Sausage Gap’ – Background

In 2014, the German Federal Cartel Office (‘FCO’) imposed fines totalling €338 million on 21 sausage manufacturers for illegal price-fixing agreements between 1997 and 2009, which sought to implement industry-wide price increases for the sale of sausage products to the retail trade. Two of the alleged conspirators, partnerships with limited liability (GmbH & Co. KG) that were initially fined €128 million, belonged to the largest German sausage manufacturer – a holding company ultimately held by an entrepreneurial family.¹¹

After lodging appeals against the fines, the two partnerships’ major assets were transferred for the benefit of other entities within the group. The partnerships were subsequently subject to formal liquidation proceedings and ultimately dissolved. As a consequence of internal restructuring measures of this sort, the addressees of the fines had literally ceased to exist. According to the FCO, the proceedings therefore had to be closed.¹²

Whenever talking about the ‘sausage gap’ (Wurstlücke), it must be kept in mind that this was no isolated incident – it was merely the most noteworthy due to the level of fines imposed. In the course of these proceedings, the FCO’s president publicly expressed his dismay as the FCO grudgingly had to drop fines imposed on three other accused companies on account of similar internal restructuring measures. This led to a failure to collect a significant portion of imposed fines (i.e. €238 million).¹³

But why was the chain of liability cut in these – and previous – cases without legislative interference? Context can be provided when looking at the principles that follow and the provisions under German law.

5.3.1.1 Competition Law Infringements as Administrative Offences

German competition law is based on the tenet that competition law violations are administrative offences (Ordnungswidrigkeiten) which are considered sub-level of crime punished by fines under Sec. 81 (1)–(3) German Act on Regulatory Offences (‘ARO’). The ARO is historically conceived in the way that fines require subjective accountability of the distinct addressee on whom they are imposed. Although fines can also be imposed on a legal entity (Sec. 30 ARO), German competition law like the ARO would in principle require a specific legal person to be such an addressee. This idea is based on the ARO’s principle of liability which is – disregarding terminological subtleties for this purpose – nothing more than the principle of fault (Sec. 12 ARO).¹⁴ In short, since responsibility stems from the (legal) person’s behaviour, it cannot be attached to an entity’s assets and, as such, cannot be transferred nor subject to legal succession.

5.3.1.2 Legal Entity Principle and Principle of Separation

In order to hold a legal entity accountable under German law, it is required that a specific natural person or corporate body has acted on behalf of the legal entity – the legal entity principle (Rechtsträgerprinzip).¹⁵ According to the Act against Restraints of Competition (‘ARC’) applicable at the time of activities of the ‘sausage cartel’, a fine could only therefore be imposed on a legal person if the administrative offence had been committed by a corporate body or an employee working for the company in a managerial capacity. The imposition of a fine required (and still requires) a direct relationship between the acting perpetrator and the legal entity on whose behalf it has acted.¹⁶ This relationship ceases to exist in the case of universal succession due to a merger or as a result of a company’s de-registration after liquidation proceedings. Since the perpetrator did not act on behalf of the absorbing legal entity but, rather, on behalf of the merged entity, the chain of liability is cut where assets are transferred to such a succeeding legal entity. Even if the natural person involved in a cartel continues to conduct business within the succeeding company, there would be no subrogated liability for the newly founded (or respectively surviving) company.

German corporate law is further based on the premise of legal independence of the individual group companies. Although these companies are economically and legally linked within the group in a variety of ways, corporate law does not create a collective legal entity. According to this principle of separation (Trennungsprinzip),¹⁷ a legal entity is only liable for its own activities, even within a group of companies. In general, there is no accessory liability to the detriment of the parent company for the liabilities of a subsidiary. This is a fundamental principle also under tort law. Of course, the parent company may be liable for any of its own infringements of management obligations (Sec. 31 German Civil Code) but only where the parent company was directly involved by action or omission – a condition not often met.

5.3.1.3 Application of These Principles in German Case Law and Legislative Attempts to Establish Liability in Cases of Succession

Long before the renowned ‘sausage gap’, companies had taken advantage of the provisions on legal succession in order to avoid fines. The German Federal Court (‘Federal Court’) had already addressed the problem of corporate legal succession in 1986. Bound by the concepts of the legal entity and the separation principle, the Federal Court developed the so-called concept of ‘near-identity’.¹⁸ According to this concept, the successor is only liable for fines in cases of legal succession where the succeeding company is, from an economic perspective, still the same. This concept required that (i) the assumed (acquired) assets continued to be separated from the assets of the actual person or entity responsible for the infringement; (ii) such assets were used in the same or similar manner as before; and (iii) constitute a significant part of the successor’s assets. In other words, they have retained an economically independent position, characterising the succeeding legal entity (the new legal entity merely forming a new legal and economic shell).

These conditions derived from the specific circumstances of the case such that subsequent case law was dealt with on a case-by-case basis. As such, a comprehensive framework to address legal succession with regard to liability for antitrust fines could not be established. For instance, sticking to the criteria that the assets of the responsible company remain essentially undiminished within the assets of the succeeding company, the Federal Court denied any legal succession in a case of a ‘merger between equals’ in which both the assets of the succeeding company and assets of the merged company had been operationally unified.¹⁹

However, the Federal Court was not oblivious to the opportunities for circumventing an imminent fine by companies employing targeted arrangements under company law.²⁰ Specifically, the Federal Court pointed out that an extension of the legal succession in liability for fines in cases of this kind would lead to ‘group liability’. But in light of the principle of separation, the adoption of such group liability was reserved for the legislator which is obliged to determine its nature and limits.²¹

This reasoning is further underpinned by another essential aspect of administrative offences: the law of administrative offences is traditionally seen as the ‘little brother’ of criminal law. With regard to the criminal law character, the constitutional prohibition of analogy in criminal cases forbids any application beyond the limits of literal interpretation.²² Thus, as long as it is not provided for de lege lata, responsibility for fines cannot be transferred on the basis of universal succession.

In 2014, the Federal Court in Silostellgebühren III considered the implications of EU law, namely of the effet utile.²³ In this case, the FCO claimed that liability for fines of the legal successor could be justified on the basis of the direct application of Article 5 (1) Regulation (EC) No 1/2003 – in other words, confirming the EU concept of the ‘single economic entity’.

The Federal Court confirmed its concept of so-called ‘near identity’ and explicitly rejected the claim that EU standards could be directly applied to determine the undertaking as the economic unit under German law. The Federal Court recognised that the Member States’ courts had to make full use of the interpretative range of German legal provisions with regard to the effet utile. However, EU legislation would empower only the European Commission to take decisions against a single economic entity, not the national competition authorities and courts.²⁴

The Federal Court drew a clear line between the obligation to interpret national law in conformity with EU law and the obligation to obey general principles of national law in such an interpretation. The Federal Court emphasised the limits of literal interpretation as well as the principle of legal certainty, which prohibited interpretation contra legem in this case.²⁵ According to constitutional principles also found in EU primary law (e.g. Article 49 (1) Charter of Fundamental Rights; Article 7 Human Rights Convention), criminal liability could not simply be inferred by interpreting national law which does not provide for such liability. Such an interpretation would not be compatible with EU law.²⁶ Interestingly, the Federal Court saw no need to refer the matter to the Court of Justice of the European Union (‘CJEU’) since ‘the correct application of Union law was so obvious as to leave no room for reasonable doubt’.²⁷

Meanwhile, the legislator attempted to bridge some of the ‘gaps’ that had become obvious in the practice of the Federal Court. In 2013, statutory liability was introduced in constellations of universal succession and partial universal succession by split-up, where the fine could accordingly be imposed on the legal successor.²⁸ However, the legislator did not include all cases of legal succession – not covered were certain cases of partial legal succession such as spin-off (Abspaltung) and carve-out and cases of singular succession (Einzelrechtsnachfolge, e.g. asset deals).²⁹ Hence, legal succession with regard to liability for fines still required that the perpetrator company ceased to exist. Therefore, ‘co-liability’ – for example of the parent company following the model of EU law – was still not provided for under German law.³⁰

As it happens, and despite sausages being a German speciality, the sausage ‘gap’ was not peculiar to Germany. In 2017, for example, the Lisbon Appeal Court found that a parent company could not be held liable for an antitrust infringement by omission under general Portuguese rules, leading to a reduction of the total fines that were imposed on the group by the Portuguese Competition Court.³¹ The Competition Authority did not test this ruling subsequently – leading to speculation that this might also result in a Portuguese ‘sausage gap’.³²

5.3.2 The End of the Sausage: German Reform of the ARC

Ultimately, it was not until 2017 that the legislator closed the infamous ‘sausage gap’ in the course of the 9^th amendment of the ARC³³. On the occasion of the implementation of the EU Damages Directive³⁴, the 9^th amendment significantly extended the liability for fines imposed in cartel fine proceedings in three regards.

Firstly, it introduced the liability of the economic unit (former § 81 (3a) ARC, now § 81a (1) ARC)³⁵. If a ‘person in a leading position’ commits an administrative offence by which the competition law duties of the ‘undertaking’ have been infringed, fines can also be imposed on other legal persons that ‘made up’ (formed) the undertaking at the time of the infringement and that exercised direct or indirect decisive influence over the management of the entity which infringed competition law.

Secondly, the liability of the legal successor was tightened by introducing unlimited³⁶ liability for the legal successor (former § 81 (3b) ARC, now § 81a (2) ARC) and stipulating the liability of the economic successor (former § 81 (3c) ARC, now § 81a (3) ARC). This means that the universal legal successor is liable in cases where the legal entity responsible under competition law no longer exists. In addition, a singular legal successor (e.g. acquirer of assets) can be liable, even where the legal entity continues to exist but has become economically irrelevant. Thus, every transfer of a business unit that was involved in a competition law infringement can cause liability for fines in respect of the successor.

Finally, these changes were accompanied by the introduction of a contingent liability during the transition period to also cover restructuring measures until the new regulations became fully effective.³⁷

These above-described measures went beyond simply closing the so-called ‘sausage gap’. The intent was to fully harmonise German law with EU practice concerning liability for cartel fines. Introducing liability of the economic unit provoked significant criticism insofar as it violated the principle of legal certainty, the principle of fault, and the principle of in dubio pro reo.³⁸ Putting aside constitutional concerns for a moment, from an enforcer’s perspective, the provisions extended liability to the successors of restructured companies and their parent companies with the aim of preventing cartel members from escaping fines by means of internal restructuring. In other words: one would expect German law should have been prepared for the ‘wurst’ case, right? However, the tension between entity liability versus enterprise responsibility in relation to antitrust infringements committed by other legal entities (under justifying circumstances) was thereby only solved with regard to fines.

5.3.3 Developments with Regard to Cartel Damages Claims

The persisting divergence in the treatment of the single economic entity versus the legal entity becomes more obvious when looking at the flip side of the coin: the capacity to be sued. The Member States’ courts have been reluctant to employ the single economic entity principle also in civil damages situations. For example, in 2018, the French Supreme Court ruled that the notion of an economic entity is not applicable to damages claims deriving from anti-competitive conduct. According to the court, competition law should not interfere with the principle of personal liability under French civil law.³⁹

In Germany, in the course of implementing the EU Damages Directive, the 9^th ARC amendment also adapted the rules on ‘Damages and Disgorgement of Benefits’ – establishing the framework for compensation for harm caused by a competition law infringement.⁴⁰ While the rules on fines have drawn a verbal connection to the concept of the single economic entity (§ 81 ARC, cf 0), the rules on damages (§§ 33a (1)ff ARC) still revert to the ‘infringer’ as the addressee of claims without further description of the specific legal entity. This prompted a vibrant discussion among scholars as to whether the closing of the ‘sausage gap’ with regard to the collection of fines would also have an impact on civil law liability in cartel damages claims.⁴¹

The EU concept of the single economic entity would not apply in this way – at least not until the German legislator introduced liability of the group or liability of the parent company for civil damages. The basic principles of German tort law, in particular, the legal entity principle, would continue to apply.⁴² Since the EU Damages Directive⁴³ did not explicitly regulate the question of responsibility and the acquis communautaire had not yet specified the civil liability of group companies for cartel damages, the question of attribution was to be solved by national law.⁴⁴

Yet, the opposite opinion emphasises that a provision in a Member State’s civil law does not meet the requirements under the principle of effectiveness if it declares only part of the company liable for damages. This would be in contrast with the EU perspective where the whole company commits the underlying infringement.⁴⁵ The EU legislator only would have clarified such a point in the EU Damages Directive if it had wanted to deviate from the EU concept of the undertaking addressed in Article 1 (1) EU Damages Directive. The CJEU in Kone had already developed requirements for national tort law based on the principle of effectiveness and, at the same time, explicitly referred to the undertaking.⁴⁶ Thus, the undertaking could be sued under EU law.⁴⁷ Injured parties would bear far more than the normal risk of insolvency if only a small sub-unit of the group could be held liable. Assets could easily be reduced to the detriment of the injured party. Groups could transfer assets of subsidiaries which committed competition infringements to other group entities or even pool such competition risks in subsidiaries with low capitalisation.

However, even supporters of that view doubt that the far-reaching EU concept of liability as such takes sufficient account of the fundamental principles of legality, legal clarity, and fault. For example, it is often stated that the principle of personal responsibility on the EU level has become purely abstract and is overshadowed by practically irrebuttable presumptions.⁴⁸

So how do the discussed concepts of the legal entity principle and the separation principle in the Member States’ civil law systems relate to the EU concept of the single economic entity? Before addressing by reference to the CJEU’s ruling in Skanska (Section 5.4), we will briefly recall the cornerstones of the concept of the single economic entity in EU competition law.

5.3.4 The Concept of the Single Economic Entity in Contrast to Legal Entity Principle and Principle of Separation

In EU competition law, an independent concept of enterprise prevails, namely the single economic entity. The addressee of competition law is the undertaking, which is to be understood as any entity or body engaged in economic activity, regardless of its legal status and the way in which it is financed.⁴⁹ This often involves a (whole?) group of companies.⁵⁰ Thus, the CJEU affirms both the possibility of imposing a fine on the legal or economic successor of the company committing the competition law violation in the event that this company ceases to exist⁵¹ and the possibility of imposing a fine on the parent company for competition infringements committed by its subsidiary.⁵² Inasmuch as an undertaking may consist of several legal entities,⁵³ the European Commission may also sanction other legal units for this infringement instead of or in addition to the legal entity responsible for the competition infringement. In the former case of sanctioning the successor instead of the responsible corporate entity that ceased to exist, the company continues to exist within the successor (economic continuity); in the latter case of sanctioning the parent company for competition infringements of its subsidiary, both legal entities are considered part of a single economic entity.⁵⁴

The liability of a company’s successor under EU law obviously intends to ensure the effectiveness of competition law by making it impossible to escape liability through restructuring, sale or liquidation of the legal entity responsible.⁵⁵ With regard to the attribution of liability within a corporate group, this objection is less convincing. The case law tends to indicate an efficiency-driven structural liability of the parent company so that a parent company is held liable as a guarantor for the compliant conduct of the group subsidiary on account of its factual possibilities to influence the subsidiary.⁵⁶ The prerequisite for the joint responsibility of legally independent companies, therefore, is that the parent company exercises (can exercise?) decisive influence on the subsidiary so that the subsidiary essentially follows instructions from the parent company.⁵⁷ In turn, this is presumed where the shareholding is almost complete (close to 100%).⁵⁸

5.4 The Other End of a Sausage – Is There a Corporate Veil After Skanska?

5.4.1 The Setting and the CJEU’s Decision in Skanska

Against the backdrop of the tension between the EU concept of the single economic entity and the legal entity principle governing national civil laws and laws of civil procedure, the CJEU’s 2019 ruling on national reference in Skanska was highly anticipated. In a nutshell, the CJEU was required to clarify whether determining who is liable for compensating victims of a cartel in breach of Article 101 TFEU is a matter of EU or national law.⁵⁹ In doing so, the CJEU shifted the rules for attribution of liability for cartel fines within the group (the single economic entity) to questions of civil liability for damages (i.e. who can be sued in damages cases).

The main proceedings concerned a follow-on damages claim brought by the City of Vantaa against a nationwide cartel in the asphalt market implemented in Finland between 1994 and 2002. The City of Vantaa brought a damages action against the defendants (jointly and severally), who had acquired 100% of the shares in each of the supposed cartelist companies (or their then parent companies) in the year 2000 and, later, dissolved and liquidated these companies. The defendants had taken over their respective assets and continued their respective operations. The Finnish Competition Authority had uncovered the asphalt cartel in March 2002 and proposed fines in 2004, whereupon the Finnish Supreme Administrative Court (on the basis of Article 81 EC old version) imposed these fines on the defendants in September 2009 using the economic continuity test.

The defendants argued, inter alia, that they were not liable for claims against independent legal entities (their former subsidiaries). Furthermore, the claims were said to no longer exist as they had not been included in the respective liquidation procedures. These arguments led to contradictory decisions from the district and appeal courts in Finland. Whereas the District Court held that the principle of economic continuity must be applied in the same way as in administrative fine proceedings (on account of the principle of effectiveness), the Helsinki Court of Appeal denied civil liability for lack of a legal basis in Finnish law. It was the Finnish Supreme Court that referred the case to the CJEU as it had to decide between, on the one hand, the assumption that only the legal entity that caused the damage is liable for this, and, on the other hand, EU case law permitting any person to claim compensation for damages resulting from an infringement of Article 101 TFEU. The Court asked whether the determination of the liable party with regard to damages caused by an infringement is a matter of EU or national law and, if a matter of EU law, whether the principle of economic continuity should be applicable like in cases concerning fines.

The CJEU held that it was a matter of EU law to determine the entity required to provide compensation for damages caused by an infringement of Article 101 TFEU. It confirmed that the effectiveness of Article 101 TFEU would be jeopardised if undertakings responsible for damages caused by an infringement of EU competition rules were able to escape liability simply by changing their identity.⁶⁰ The CJEU also vaguely addressed the methodological approach for determining the entity under EU law, suggesting that it should be the same as with regard to the imposition of fines under Article 23 (2) of Regulation No 1/2003.⁶¹

5.4.2 Ratio of Skanska and Open Questions

If not read as a mere individual ruling, the notion of the court was indeed ground-breaking and not compulsory as Article 101 TFEU does not determine particularities of civil liability. Nor did the EU Damages Directive clarify these topics in 2014. The Commission itself, referring to joint and several liability under the EU Damages Directive, had argued that the person liable to pay damages should be determined under national law.⁶²

A variety of questions remains, deriving from the two pillars of the case. On the one hand, there is the CJEU’s case law regarding fundamental principles of the private enforcement system developed since Courage/Crehan⁶³ and on the other, there is the very specific notion of undertaking in EU competition law.

5.4.2.1 Is There a European Claim for Damages?

Based on the panacea that is the principle of effectiveness, the CJEU elevates the private damages claim together with the determination of the opponent to the level of EU primary legislation. The Advocate General (in Skanska) claimed that this idea was not entirely new as Article 101 TFEU already has a direct effect and produces legal consequences in relations between individuals. It thus creates rights for the benefit of individuals which the national courts must safeguard.⁶⁴ However, recognising the principles of equivalence and effectiveness means acknowledging that

in the absence of EU rules governing the matter, it is for the domestic legal system of each Member State to lay down the detailed rules governing the exercise of the right to claim compensation for the harm resulting from an agreement or practice prohibited under Article 101 TFEU.⁶⁵

There are probably more open questions after Skanska than before. From a doctrinal point of view, for example, how does a claim for damages under EU law fit into the legal framework of the Member States when EU law demands the claim’s existence and determines the liable persons while the other conditions are (probably) governed by national law? Will there be further prerequisites for damages claims to be derived directly from EU law in the future? Advocate General Wahl’s opinion⁶⁶ could indicate that the substantive criteria of the right to damages, such as a causal link, were also governed by Article 101 TFEU and not by domestic law, which (only) had to be assessed by reference to the principle of effectiveness. This seems at least questionable in light of the Kone decision;⁶⁷ however, the CJEU did not address this issue in Skanska. In general, to define requirements of a national civil law claim under the influence of EU law leads to muddy waters. From a dogmatic perspective, it creates a strange impact on the unity of the legal system, both at the EU and the Member States’ level. It should therefore be noted that competition law damages claims remain claims under the respective applicable national law and that only the existence of a claim for damages, the person of the obligated party (undertaking), and the person of the entitled party (everyone) are defined by EU primary law.⁶⁸ The same outcome could have been achieved without the ratio of Skanska by employing the principle of effectiveness when applying national law.

5.4.2.2 What Is ‘the Undertaking’ Anyway?

With the abovementioned, the EU notion of the undertaking is decisive. The CJEU in Skanska merely recalls that the undertaking is

any entity engaged in an economic activity, irrespective of its legal status and the way in which it is financed […] even if in law that economic unit consists of several persons, natural or legal.⁶⁹

Transferring the concept of ‘undertaking’ to damages claims simplifies the matter, yet it misses the point. An analysis of the European Commission and the CJEU practice shows that the concept of a single economic entity that has been used to identify the undertaking is not at all a consistent concept.⁷⁰ In particular, the attribution of responsibility within the group derived from the concept of the single economic entity is controversial. While numerous authors try to fit such attribution into a conceptually coherent framework and consider it necessary for the effective enforcement of EU competition law,⁷¹ the (arguably) greater part of the literature criticises sanctions against legal persons not responsible for the competition law infringement.⁷²

5.4.2.2.1 Group Liability?

There are voices arguing that the CJEU wanted to establish what is discussed with the buzzword ‘group liability’. In accordance with the case law, imputing a subsidiary’s competition law infringement to the parent company would only be a symptom of imputation to the single economic entity. Hence, albeit not visible in case law yet, the economic unit can be held accountable for the infringement that is to say, subsidiaries are liable for parent and sister companies.

With regard to German civil law, the concept of the single economic entity could be mirrored by stipulating a legal capacity of the corporate group forming a civil law partnership (Gesellschaft bürgerlichen Rechts or GbR, Sections 705ff German Civil Code).⁷³ The GbR is the basic partnership type and most general form of partnership under German company law. Conveniently, a private partnership can be established without formal requirements for any purpose that could (and would typically) be something as small as two people jointly renting an automobile for a weekend trip. Infringements by parts of the economic unit could then be attributed to such partnership leading to a joint and several liabilities of the other constituent parts of the economic unit as a consequence. This opinion pinpoints that the liability of the economic unit must be understood as the liability of all legal entities constituting the economic unit.⁷⁴ From a comparative perspective, similar forms of partnerships might provide the same reasoning in other Member States.⁷⁵ In fact, the idea was already considered (but discarded) in the UK in the 1950s as a ‘single economic unit theory’.⁷⁶

However, every solution which ascribes the single economic entity to a partnership is contradictory: the single economic entity in EU case law is primarily found in constellations of control (parent/subsidiary). A group that might form a single economic entity can at the same time hardly constitute a partnership under civil law because of the typical relationship of superiority and subordination within the group, which is not consistent with the equal pursuit of objectives that characterises a partnership. Due to the complexity in dealing with corporate groups, a ubiquitous ‘corporate group (liability) law’ does not exist. Internationally, there is a persistent rumour, that some jurisdictions have implemented comprehensive regulations of the corporate group, thereby creating a distinct entity form governed by its own body of law.⁷⁷ However, despite many jurisdictions enacting rules for corporate groups,⁷⁸ it must be stated that there is no such thing as ‘the corporate group law’.⁷⁹ Even EU law which contains a large number of laws relevant to groups does not maintain a comprehensive group law system.⁸⁰ Thus, to refer to them as cases of a corporate group, liability would be misleading.

Even proponents in favour of a group liability recognise that there might be cases where such a corporate group liability is not justifiable.⁸¹ Neither the method nor the results of full-blown group liability within the single economic entity are therefore convincing.

5.4.2.2.2 The Single Economic Entity Unravelled

There lies a problem of dogmatic derivation at the heart of the single economic entity. Initially, the concept was developed for the application of the so-called ‘group privilege’.⁸² The single economic entity doctrine is unchallenged with regard to the origin of competition or the intensity of that competition in a market.⁸³ In other words, it is clear that in general rights of control define a single economic entity. However, it is unclear why and under which circumstances the existence of such right should be used to attribute liability. As highlighted before, the CJEU shifts the burden of determination to a presumption. Unlike a legal entity, an economic entity is not clearly defined but requires an ad hoc appreciation by a court based on several factual elements, ones which may be subject to changes over time. The use of presumptions here is tempting, but problematic with regard to legal certainty, the principle of culpability, and the presumption of innocence.

For a variety of reasons, scholars therefore argue that there is no unique single economic entity doctrine that can be used for both identifying the single economic entity with regard to a unified competitive force on the market and attributing liability for infringements of competition law.

The case law has been extensively analysed and differentiated numerous areas of application of the concept of the single economic entity.⁸⁴ In this light, one could even doubt the argumentative intrinsic value of the single economic entity with regard to the attribution of liability.⁸⁵

Against the backdrop of the friction caused by the legal entity principle as a ubiquitous concept in all industrial states and in light of the CJEU’s case law, it is argued that the concept of the single economic entity itself is only the consequence of applying the principle of effectiveness but not a condition for the effective enforcement of competition law. Case law concerned with the application of the principle of economic continuity and parental liability would usually employ both lines of argumentation in parallel without a strict dogmatic differentiation.⁸⁶

The principle of effectiveness itself is the standard according to which any assessment of a single economic entity is to be made. That conclusion is supported by the fact that EU institutions can in no way avoid designating a legal entity as an addressee for the statement of objection in a second step. An ‘economic entity’ without a legal entity is not a suitable addressee for measures of the European Commission. To stay in line with the sausage picture: a kind of black pudding that can hardly be nailed to the wall.⁸⁷ EU institutions impose fines on parents and subsidiaries as joint and several debtors in a two-step approach. The European Commission firstly determines the undertaking and secondly identifies a legal person against which a fine is enforced.⁸⁸ This approach can be best explained by the principle of effectiveness.

In this respect, the judgment in the Skanska case could be seen as a confirmation of this context-dependent understanding of the single economic entity. Strikingly, the CJEU in Skanska justified the transfer of principles from the context of fines to the context of private actions for damages solely on the basis of the common root of both sanction regimes in the efficiency objective.⁸⁹ Yet, the CJEU does not comment on the prerequisites of the single economic entity which would have been expected in this context. Due to this contextual understanding of the single economic entity, parental liability appears to be appropriate and necessary in the absence of an equally effective means for the effective enforcement of EU law.⁹⁰

On the other hand, liability of the subsidiary for competition law infringements by the parent or a sister company does not appear to provide incentives for avoiding such infringements. The single economic entity is conceptually characterised in a way that only one part (usually the parent company) exerts a decisive influence on the other parts and thus is in a position to control behaviour to a significant extent. Behavioural incentives, on the other hand, have no effect when there is no possibility for the subsidiary to influence the behaviour of the parent or sister company. Liability of the subsidiary or sister company is not even necessary to prevent the parent company from transferring assets to these companies. Transferred assets are accessible due to the liability of the (economic) successor and the liability of the parent company.⁹¹

5.4.2.2.3 Implications Of The Cjeu’s Ruling In Skanska For National Rules On Fines?

Skanska found that acquiring companies may be held liable for the damage caused by the infringement and that in determining the liable entities the same principles (concept of undertaking) are to be applied as in cases concerning fines.⁹² With that, one could argue that the ruling’s implications are equally relevant to the law on the imposition of fines. It follows from the equal treatment of fines and damages regarding the notion of undertaking that the addressee of a fine is equally directly defined by Article 101 TFEU when national cartel authorities impose fines for an infringement of Article 101 TFEU.

According to this reading, the ECN Plus Directive⁹³ only has clarifying effect insofar as it requires Member States to ensure that fines can also be imposed on ‘undertakings’ and that the notion of undertaking applies for the purpose of parent and successor liability (cf Article 13 (1), (5), and recital 46).⁹⁴

The introduced § 81a (1–5) of the German ARC would (probably) no longer be required as far as infringements of EU competition law are concerned and even for pure German cases. The CJEU’s ruling in Skanska has no direct impact on matters of national competition law, where they do not affect trade between Member States. However, since the German legislator has amended the key provisions of German competition law by implementing the term ‘undertaking’ explicitly in order to align relevant legal provisions with EU law, the development of EU law is recreated by German law.⁹⁵

More importantly, the CJEU has not limited the temporal effects of its ruling.⁹⁶ Since the CJEU in preliminary rulings clarifies only existing EU law, the finding that the determination of the undertaking is a matter of EU law, ironically, already applied in 2017. From this viewpoint, the German ‘sausage gap’ would not even have existed, but would have been a mere error of law. It did not take long after Skanska until it was hypothesised it could be possible to reopen and continue fine proceedings that were discontinued due to the lack of (solvent) addressees with the parent company or the economic successor.⁹⁷

For mergers and acquisitions, the outcome of the Skanska ruling underscores the importance of due diligence. Broadened liability might trigger a higher demand for buyer-protective representations and warranties regimes in share deals and even asset deals. Particularly, compliance warranties of future transactions might include an explicit commitment by the seller’s business with regard to competition law compliance. Once there are reasonable grounds to suspect that the acquirer will be an addressee of antitrust-related claims originating from the transferred business, a special indemnity might be granted by the seller holding the acquirer harmless from any claims in this regard, ideally backed up by a parent company guarantee in order to mitigate the risk that the selling entity ceases to exist. One crucial point of negotiation will be the corresponding limitation period for claims resulting from a breach of such warranty or indemnity. Since the CJEU in Skanska explicitly rejected limiting the temporal effects of the decision and since competition law infringements often remain in the dark for several years, acquirers might consider the usual limitation periods to be insufficient.

5.4.3 Developments After Skanska

The Member States’ courts have so far taken different approaches towards questions that have arisen since Skanska.

The question of how the principle of economic continuity will be applied will certainly become even more pressing in the future as it impacts not only the ‘given’ group but a multitude of potential third-party purchasers. As regards the purchase of an undertaking, the CJEU does not seem to presuppose any fault on the part of the purchaser. Rather, the purchaser ‘takes over its assets and liabilities, including its liability for breaches of EU law’.⁹⁸ By way of example, a German court’s ruling regarding legal succession held that the company taking over a business unit of the alleged cartelist via spin-off was liable for cartel damages on the basis of a corporate law regulation in the Transformation Act (Umwandlungsgesetz).⁹⁹ The successor did not participate in the alleged infringement. However, the German court applied the existing liability scheme of the Transformation Act and affirmed joint and several liabilities of the cartelist and its successor for damages that arose up to the point in time when the spin-off took effect (i.e. by registration in the commercial register). Although the infringement putatively existed even until after this point in time, liability was not extended for the successor in this regard. In short, the court made use of an existing corporate liability regime, which is designed to protect creditors in general, not specifically creditors of cartel damages claims. Unlike in Skanska, the successor neither had been involved in the infringements itself nor did other aspects command an extension of the claimants’ recoverable assets from a normative point of view.

With regard to the more general question of horizontal or vertical liability for competition law infringements of other group companies, a majority of German courts have rejected the possibility of being sued for cartel damages in civil court in relation to a parent’s subsidiary or a sister company and thus, in principle, its civil liability for infringements committed by other members of the same economic unit.¹⁰⁰ Even while quoting Skanska, courts have referred to the EU principle of personal responsibility.¹⁰¹ If there is a lack of decisive influence, national courts have not reflexively attributed liability to a subsidiary or sister company. Rather, they have focused on whether the subsidiary had control over the actions of the other group companies.

Against the backdrop of national rules which have incorporated parental liability through the transposition of the EU Damages Directive¹⁰², commentators eagerly awaited the CJEU’s findings in the case of Sumal. Divergent decisions¹⁰³ in Spain had caused a referral to the CJEU for a preliminary ruling on whether a subsidiary can be liable for its parent company’s conduct.¹⁰⁴ The CJEU was asked to elaborate on the context of intra-group relationships and, in particular, whether the concept of the single economic entity is to be understood with regard to control or also with regard to other intra-group aspects (such as being a beneficiary of a parent or sister company). The opinion of the Advocate General, in this case, suggested that control alone is not a suitable criterion for assessing liability since subsidiaries do not exert control over their parents. However, the Advocate General also highlighted the principle of personal liability.¹⁰⁵ A ‘downward’ liability would require that the subsidiary not only was controlled by the parent company but also was objectively necessary for the infringement of the parent company.¹⁰⁶ The market conduct of the subsidiary must have made it possible to concretise the effect of the infringement. Only then, the parent and subsidiary would be jointly and severally liable.¹⁰⁷ A consequent application of that reasoning means that there can be more than one single economic entity within a group of companies depending on the context of the respective case.

Eventually, the CJEU holds the subsidiary liable as part of the economic unit even if it is not the addressee of the imposed fines and thus once more pierces the corporate veil. Remarkably, the CJEU’s ruling only partially adopts the Advocate General’s proposed criteria for this veil-piercing. In Sumal, the CJEU first reiterates the established concepts of undertaking and economic unit and the element of control.¹⁰⁸ However, after acknowledging the fact that the same parent company may be part of several economic units depending on the respective activity of a conglomerate, the CJEU adopts broader requirements in order to establish joint and several liability in cartel damages cases. Liability shall not be construed to a subsidiary if the parent’s infringements are committed in the context of economic activities entirely unconnected to the subsidiaries’ own activity in which the subsidiary was in no way involved.¹⁰⁹ However, the damaged party has (only) to show that the subsidiary formed such an economic unit by proving (i) the economic, organisational and legal links between the defendant subsidiary and its parent and (ii) a specific link between the subsidiary’s economic activity and the subject matter of the infringement of the parent (i.e. by proving that both entities distribute identical products).¹¹⁰ So, the CJEU does not implement an automatism of vertical and horizontal liability. But it is just a matter of time before the CJEU will be asked to specify to what extent a product (range) must be identical.

Referring to the right to an effective remedy and to a fair trial, the CJEU cryptically emphasises that the subsidiary must dispose of all means necessary to defend itself. In particular, it must be able to dispute that it belongs to the same economic unit as its parent but as well defend itself with regard to the decision of the Commission arising from previous public enforcement.¹¹¹ Means with regard to the latter are factually limited, however, since national courts cannot rule against the existence of an infringement already found by the European Commission.¹¹² The contradiction is obvious: the subsidiary is factually not able to exercise such rights, since the European Commission grants such rights of defence only to the entities involved in infringement proceedings, but not to affiliated ‘third-parties’, which according to Sumal can later be sued as part of an economic unit. The CJEU here considers it sufficient that during such infringement proceedings the economic unit exerted such rights of defence.

Supposedly, the CJEU’s ruling opens the path to the liability of any of the sister companies, since any legal entity that is part of the economic unit which has committed an infringement can generally be the addressee of damage claims.¹¹³ With that, a new form of forum shopping is possible where damaged parties will consider and weigh favourable conditions in different member states such as presumptions regarding the amount of damages or different statutes of limitation. It will be crucial for subsequent rulings that the CJEU finds suitable criteria that also consider aspects of property and investment protection if the parent company does not hold 100% of the shares.

5.5 Conclusions and Outlook

This chapter initially outlined the basic premises that corporate law is built on globally: the entity principle and the enterprise principle that, depending on the point of view and field of law, make the unity or multiplicity of the group of companies stand out. In this context, the chapter portrayed how the focus on the single corporation legal entity principle and the principle of separation has been utilised in some instances to avoid liability for cartel fines by restructuring in Germany. This infamous gap was eventually closed by wide-reaching reforms.

Highlighting the persistent tension between the issues of limited liability and responsibility for competition law infringements, the chapter then discussed how basic corporate law principles relate to the EU concept of the single economic entity, with particular regard to private damages claims. This chapter finally argues that the CJEU ruling in Skanska reaffirms that liability for fines and damages should follow a cautious assessment in relation to the principle of effectiveness, which is also the starting point for determining the single economic entity. This may lead to a more contextual and nuanced understanding of the single economic entity and, in turn, a more balanced approach with regard to the allocation of liability within corporate groups (i.e. to the extent required by the principle of effectiveness). In any case, the chapter emphasises that an automatic vertical or even horizontal liability within the corporate group disregards fundamental principles of corporate and civil law and would lead to unreasonable results. Against the backdrop in which EU economic law is still a picture puzzle, it is important that EU courts post-Skanska and Sumal take the opportunity and focus on the general context of matters relating to multi-corporate enterprises. Such focus would avoid that excessive regulatory tendencies regarding group external law undermine general principles of civil law systems in the Member States which could produce equally conclusive results.

6 Korea’s Chaebol Regulations and the Relationship between Competition and Company Law

Myungsu Hong

6.1 Introduction

Regulations on chaebol¹ in Korea are cited by comparative corporate lawyers as a rare example of attempts to regulate corporate groups. Most OECD countries do not have similar regulations;² in this regard, chaebol regulations are recognised as one of the unique regulations in Korea. A chaebol consists of a number of companies, and of course, corporate law will apply to corporate governance. In Korea, however, chaebol regulations under the competition law have replaced those that existed under corporate law to some extent. Therefore, the set of rules which I am going to analyse in this chapter is a very meaningful example of the interactions between corporate law and competition law. It is clear that the reason for such rules being found almost only in Korea is due to the presence of chaebol, of which there are few equivalent economic entities in other countries. Therefore, before looking into chaebol regulations, it is necessary to understand how chaebol came to exist in Korea and the position they hold in the national economy. This understanding, of course, has not always been consistent, but the minimal agreement reached in the process of reconciling these disagreements between ideas³ has provided the basis for chaebol regulation and supported the legitimacy of regulation.

In Korea, chaebol regulations began in earnest in 1987. There have been several revisions to the law since then, but the basic framework of the regulation that was first introduced has continued without major changes. This means that the basic understanding of chaebol is maintained, but several revisions to the regulations suggest that changes have occurred in the perception of chaebol problems and regulatory goals. Thus, the history of the current regulations must be considered in understanding them. This process will reveal issues that have been resolved or remain unresolved so far. These might be the drivers of future regulatory changes.

This article will proceed in the following order. First, the specific significance of chaebol, their impact on the Korean economy, and the practical background of the regulations will be reviewed. Then, a deductive review of regulations on chaebol and the significance and details of the current legal system will be conducted, and the significance of the various disputes that have arisen regarding the existence or content of these regulations will be examined. In addition, an assessment of a series of legal tools related to the improvement of governance will be carried out with regard to the strengthened corporate law. Based on these discussions, this article will conclude by making predictions on the significance of chaebol on the Korean economy in the future and reviewing the direction of the ongoing discussions on improving the relevant regulations.

6.2 Significance and Evaluation of Chaebol

6.2.1 Economic Development and the Rise of the Chaebol

The emergence of chaebol in Korea is in line with the rapid development of the economy. The formation of initial capital is important for economic development in underdeveloped countries, and this requires the establishment of an investment security and investment inducement system.⁴ In Korea, this process was carried out in earnest by the government after the Korean War, where the Korean government fostered investment directly by direct government investments. In the process, the economic resources generated by foreign free or paid financial support were concentrated on a small number of companies actively engaged in the economic development program. This government support provided these companies with an opportunity to grow into chaebol.

The government’s leading role in economic development was embodied in a five-year economic development plan that began in 1962. In particular, the five-year plan that was carried out from the first to fourth plan prioritised economic growth.⁵ In accordance with this plan, the government carried out specific allocations of resources. For example, the first five-year plan contained a preferential allocation of funding for the light industry, the second plan for heavy industry, and the third plan for the chemical industry. In accordance with these plans, funding was given to specific operators in the field. In this process, Hirschman’s unbalanced growth theory⁶ became the theoretical basis for economic policy. The performance of leading industries, which had been subject to intensive support under this policy, expanded to related front and rear industries, just as the development of the chemical industry has led to the development of the textile industry ahead and the refinery industry behind. It eventually led to the growth of the entire national economy. In terms of economic development, these strategic choices and practices certainly had a positive effect. Yet, the focused allocation of resources to a small number of industry players also had negative effects such as introducing inequality in the economic system. The emergence of chaebol is a symbolic representation of negative effects. Chaebol has been a key driver of the government’s development policy, and at the same time, the biggest beneficiary of growth. In this regard, the analysis that ‘the Korean government has hardly put a brake on the accumulation of family property as long as it is reinvested in production activities deemed by planners to be high in priority’,⁷ provides a proper understanding of the relationship between the government and chaebol at this time. The family underlying the chaebol was an advantageous way of accumulating capital as it served as a powerful means to avoid capital leaks in a culture where it is hard to expect a member of the family to pursue his own interests at the expense of the interests of the whole family. Also, the government did not impose any real restrictions on the expansion of chaebol as long as they followed the government’s development program, which resulted in the size of chaebols growing in lockstep with the rapid growth of the national economy.

There has been a fundamental change in the government’s economic policies since the 1980s. By that time, the size of the economy had grown too much to be run by the government’s programs. Similarly, the pursuit of other values such as resolving inequality problems in addition to economic development has emerged as an unavoidable social agenda, shifting the government-led economic management style to one based on private initiatives. Symbolising this change was the Monopoly Regulation Act that was enacted in 1980, which was the first legislation to institutionalise competition policies in Korea. In this new environment, where private sector autonomy is expanded and market functions strengthened, chaebol achieved explosive growth. This trend continued until the 1997 foreign exchange crisis. This crisis in late 1997 resulted in a fundamental change in the previous industrial structure. Above all, it was an opportunity to put the brakes on business behaviour and the chaebols’ unconditional expansions; since then, there have been structural changes focused on high-value-added industries. But this change did not lead to a change in the industrial structure, where chaebol plays a central role in the entire industry. As such, the trend of chaebol leading the industry as a whole has been maintained. But the gap between chaebols is widening and the influence of the top chaebol is increasing. This development may continue depending on the changes in the industry and the extent to which the chaebols respond.⁸

6.2.2 Characteristics and Definitions of Chaebol

6.2.2.1 Characteristics in Finance

As mentioned earlier, in Korea, chaebol has grown as the biggest beneficiaries of state-led economic development. The government allocated limited resources to a small number of entities that responded to its economic development strategy, thereby pursuing efficient and sustained economic development. This specific allocation of resources carried out by the government was mainly done by means of financial support, The government also paid attention to the establishment of an institutional basis to ensure that the process was carried out efficiently. Under the Act on Temporary Measures for Financial Institutions enacted in June 1961 and the Act on the Handling of Illegal Property Accumulation enacted in October of the same year, the voting rights of bank shares held by major shareholders were restricted or recovered.⁹ The government thereby strengthened its control over general banks, and the revision of the Korea Bank Act in 1962 strengthened the government’s authority to intervene in the Bank of Korea.¹⁰ On this institutional basis, the government took the initiative in implementing growth-oriented financial policies such as follows: 1) allocation of foreign loans, the main source of financing since the early 1960s; 2) financial support in the process of clearing up insolvent companies, which was implemented several times from the late 1960s to the mid to-late 1980s; 3) financial support to foster general trading companies for the purpose of expanding exports in the 1970s, and 4) financial support during the consolidation of the heavy and chemical industry in the late 1970s and early 1980s.¹¹ Through such financial support, the business sectors of chaebol expanded to include new industries and markets. The support focused on light industries in the 1960s and heavy industries¹² in the 1970s served as a catalyst for chaebol entry into these fields. In other words, the government’s economic development policy was implemented mainly by providing financial support to leading sectors, and the economic entities that received resources entered various industries and expanded the scope of their business, which resulted in the formation of an industrial structure based on chaebol.¹³

The government’s financial support for the chaebol, which continued during the economic development process, also had an important impact on the chaebol’s capital management style and ownership structure. The financial support for chaebol meant that chaebol financing was biased towards external borrowing rather than equality. There are numerous reasons for this bias. Some of these reasons include tax differences where interest payments on borrowing funds were treated as expenses, while dividends on shares are not,¹⁴ low-interest financial support below-market interest rates, internal funds insufficient to allow for expansion into new industries, and an insufficiently developed capital market.¹⁵ Due to these factors, a financial structure emerged in chaebol management that relied heavily on borrowing funds, resulting in the high debt-to-equity ratio of the companies, one of the main criticism during the 1997 financial crisis.¹⁶ Furthermore, the practice of relying on borrowing funds is deeply related to the establishment of a generalised ownership structure for chaebol. The fact that borrowing funds have become the main source of funds for the expansion of chaebol means that the expansion process did not affect the existing ownership structure; rather, it increasingly strengthened the ownership structure, a structure dominated by the owners and their families during the chaebol formation period.¹⁷

6.2.2.2 Characteristics in Ownership Governance

In general, chaebols are exclusively controlled by owners and their families. The fact that a chaebol’s decision-making authority is wholly vested in the owner and that such control is inherited within the family is the basis for this understanding. It is worth noting, however, that this governance relationship was not built by direct ownership by the owner or his family. For example, the owner and his family owned only 3.3% of the 10 largest chaebols in 2002, and this figure has only changed to 2.5% in 2019.¹⁸ In other words, 100% control is carried out with a small stake. This divergence creates an inconsistency between ownership and control.¹⁹

Given such small stakes, cross-shareholdings are extremely important as a means of enabling the exclusive control of affiliates by the chaebol owners. Although mutual investment is restricted under the Commercial Act and the Monopoly Regulation Act prohibits cross-shareholding²⁰ and circular ownership²¹ by large enterprise groups, the practice of cross-shareholding between affiliates continues, and this structure provides for exclusive control by chaebol owners with small stakes.²² The pyramid scheme, which culminates in holding companies or substantial holding companies, is also a factor that enables this dominance.²³

Furthermore, this ownership structure continues through family succession. The succession itself should not be viewed negatively. It is important to note that the succession of control is not done by normal procedures for the transfer of rights, but in a way that utilises cross-affiliated investments to form a new governance relationship centred on the successor. The succession of Samsung Group, for example, took place in the 1990s in a manner whereby the immediate family of the owner of the group obtained new control over Samsung Everland (an unlisted company), which plays an important role in the group’s equity structure.²⁴

6.2.2.3 Characteristics in Organisation and Operation

Given a structure in which the control of the chaebol is exclusively attributed to one head, the organisation and operation of chaebol are carried out in a corresponding manner. Chaebol involves a number of affiliates gathering together to form a group. Each affiliate has an independent decision-making structure as required by Commercial Act, but in practice, the final decision-making authority is vested in the head (owner), and the whole affiliate is operated as an integral part of the single decision-making structure led by the head. This aspect is evident when a chaebol is made up of a holding company system. But even when it is not, they are operated similarly as they operate around a company that is a de facto holding company. Of course, the chaebol themselves are making efforts to enhance management efficiency, and one of these efforts is to respect the autonomous management judgment of their affiliates.²⁵ However, as long as control is wholly attributable to one head (owner), the management independence of each affiliate will be limited.

It also needs to be considered that many chaebols are entering a number of industries and show aspects that can be characterised by the so-called non-relevant diversification. In particular, industries on which the government had focused during the relevant economic development period, such as export replacement industries in the 1960s, heavy and chemical industries in the 1970s, and information and communication industries since the 1990s, have become important milestones in the process of chaebol expansion. As a result of this process, most of the chaebols now make inroads into various industrial sectors, and this ‘non-relevant diversification’ phenomenon is understood as one of the important characteristics of chaebols.²⁶ Of course, It is also necessary to keep in mind that industrial diversification itself can be a corporate strategy.²⁷ However, it was hard to avoid problems such as a lack of expertise in a number of industries, excessive and overlapping investments, and worsening financial health of the chaebol due to the transfer of risks between affiliates.²⁸ Such concerns over excessive diversification have been embodied in policies to strengthen the expertise in industries since the late 1980s and inducing chaebol to engage in the large-scale specialised enterprises that accompanied restructuring after the 1997 financial crisis. Yet such policies are still far from realising their objectives, and the situation continues where affiliates of chaebol are distributed across various industries and also have a dominant position in many markets.²⁹

With the affiliates that make up the chaebol distributed throughout various industries and the final decision-making power over them being concentrated in one person, an organisational response to carry out such decisions effectively may be inevitable. If a chaebol establishes a holding company system, the holding company functions as a headquarters and affects subsidiaries or their subsidiaries. On the other hand, if it is not a holding company system, an organisation that can assist the control of chaebol owners may be needed, and it is common for a large-scale secretariat to be set up or a special organisation, such as a restructuring headquarters, to act as a control organisation for all affiliates. Such a unified way of operating the group has created the problem of limiting room for affiliates to manage efficiently and flexibly. It created management inefficiencies that make it difficult for them to respond effectively in the face of intensifying competition. There are also concerns that such organisations generally exist as illegal organisations, with the result of reduced functions for the Board of Directors as the voting bodies of each affiliate based on corporate law.³⁰

6.2.2.4 Significance of Chaebol

In light of the characteristics of the chaebol mentioned above, chaebol means a business group consisting of multiple affiliates owned by the owners and their families, and whose control is effectively vested in the owner. Being owned by the owner and his family means that the right to claim the distribution of the remaining property legally belongs to them, but as mentioned earlier, they do not have absolute equity rights in the affiliates, and investments between the affiliates play a decisive role in the attribution of total control. Also, the fact that a chaebol is a group of multiple companies, not a single company, that they enter various industries, and that they are dominant in most industries are commonalities shared by most chaebols. It is also important to note that the operation of business groups is carried out in a unified and single manner based on control wholly attributable to the head and that organisational arrangements arise for this purpose.

6.2.3 The Assessment of Chaebol in the Korean Economy

Chaebols are becoming economic entities that embody the concentration of economic power at each level of market concentration, general concentration, and ownership concentration. The degree of general concentration is understood as the share of a particular enterprise or enterprise group in the entire industry or entire national economy.³¹ As an indicator of this share, the total amount of capital, total assets, employment, etc., from a stock perspective and sales, net income, output, and value added from a flow perspective are utilised. The ownership concentration, beyond the perspective of wealth inequality or equity, relates to the ownership structure of enterprises, the most important production organisation in a capitalist economy that recognises private ownership of means of production. In other words, the concentration of ownership as a concentration of economic power means that the enterprise’s issued shares or remaining claims are concentrated in a small number of individuals or their families,³² and this makes it a key issue for the allocation and utilisation of economic resources through the entity to individuals. Therefore, this problem is not separated from the problem in which the control of a company or a business group is wholly attributed to an individual.³³

In Korea, chaebol exists as entities that embody the concentration of economic power that is understood from various perspectives. First of all, with regard to market concentration, according to a survey in 2015, the industry concentration was 49.2% when the affiliates of the conglomerate were included in the top three companies in accordance with the CR3 criteria.³⁴ If the affiliates were not in the industry, the industry concentration was 45.2%. And the figure was 28.9% when the affiliates are entering the industry but are not included in the top three.³⁵ The figures suggest that chaebol affiliates’ entry into an industry and increased market share are correlated with industrial concentration. It is also worth noting that, when looking at the cases of abuse of a market-dominant status, most of the abuses are found to be caused by affiliates belonging to chaebol.³⁶ It is also noteworthy that the current Monopoly Regulation Act targets business groups with assets of more than 10 trillion won in affiliates for special regulations. In 2020, 27 business groups controlled by the owner that can be classified as chaebol have an average of 48.2 affiliates. This situation suggests that concentration in individual markets in Korea is closely related to chaebol. The general concentration by chaebol is also increasing in Korea. Table 6.1 shows how general concentration by the top 10 chaebols has been developing in Korea since 2010 through changes in total assets and GDP.

Table 6.1 Change of total assets and GDP (2010–2019)

	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019
Total assets	703 (581)	816 (706)	940 (798)	1,018 (886)	1,074 (970)	1,122 (936)	1,166 (945)	1,213 (1,011)	1,298 (1,107)	1,352 (1,167)
GDP	1,323 (1,094)	1,389 (1,202)	1,440 (1,223)	1,501 (1,306)	1,563 (1,411)	1,658 (1,383)	1,741 (1,411)	1,836 (1,531)	1,898 (1,619)	1,919 (1,657)

Units: trillion Won(billion US$)

The total asset growth rate of the 10 largest chaebols during the period was 92.3%, well above the GDP growth rate of 45.0%. Also, compared with GDP, the total assets of the top 10 chaebols rose from 53.1% in 2010 to 70.5% in 2019. These figures indicate that chaebols account for a large portion of the national economy and that this trend is also deepening, increasing the general concentration of chaebol. It is hard to find a case in which chaebols have not shown complete control by their owners in terms of ownership concentration. However, as noted earlier, this control is not achieved by an absolute interest. As of 2019, only 0.9% of the top 10 chaebols hold stakes in affiliates held by their heads, while only 2.4% of them have such stakes held by family members. However, 54.3% of the shares are held between affiliates by cross or circular shareholdings. Such an equity relationship allows the owner to exercise 100% control over the entire group. Therefore, the issue of ownership concentration could be replaced by the issue of having full control of a chaebol with a small stake and whether there is a mechanism in place to check them internally and externally to ensure managerial efficiency.

To sum up the above analysis, chaebols are becoming economic entities that embody the concentration of economic power at each level of market concentration, general concentration, and ownership concentration. It is also important to note that these three types of economic concentration define the complex nature of chaebol. In other words, market concentration can be intensified by large business groups,³⁷ general concentration can be increased by strengthening the dominant position maintained in a large number of markets, and problems can be aggravated by the fact that ownership concentration is used to control large business groups.³⁸ As a result of this complex nature, attempts of regulating to address one type of economic concentration will inevitably only have limited effect.

It is hard to deny that chaebol has made positive contributions to economic development in Korea.³⁹ However, chaebol has also had negative consequences, and in particular, the concentration of economic power within the chaebol. Chaebol’s concentration of economic power accounts for a high portion of the national economy, and this concentration continues to grow, negatively affecting individual markets. In addition, the phenomenon of almost absolute control being concentrated on the owner creates centralisation. The overall characteristics of this pattern of economic concentration are also concerning. Chaebols are also seen negatively from non-economic perspectives. Economic power concentrated on chaebol is cited as one of the main factors of social instability, as it is a source of deepening wealth inequality and polarisation problems; furthermore, the concentration of economic resources on a small number of individuals could undermine the foundation of democracy.⁴⁰ While the importance of such problems and the discussion of these issues should not be denied, for the order and operation of the economy, the core of the problem of chaebol is the concentration of economic power leading to a disruption to the market economy, which should be maintained as mandated by the constitution.⁴¹ The general concentration of chaebol can have a negative impact on competition in individual markets. In addition, the concentration of decision-making authority during the course of the chaebol’s operations can lead to inefficient resource allocation, which is recognised as a concrete example of this problem.

6.3 Regulation of Chaebol

6.3.1 Significance and Contents of the First Chaebol Regulation

The first legislation aimed directly at regulating chaebols was made by the First Amendment of the Monopoly Regulation Act in 1986, and it is necessary to examine the meaning of the legislation itself. First of all, it is highly significant that the legislation was made through a revision of the Monopoly Regulation Act, Korea’s competition law. This demonstrated the legislative determination to deal with the chaebol issue from the perspective of competition policy. It is also important to note that while institutionalising chaebol regulations, the government proposed suppression of the concentration of economic power as the title of the regulation clause. This legislation reflects the perception that the essence of the chaebol problem is economic concentration. Finally, it should be noted that the Japanese Anti-Monopoly Act had a significant impact on legislation at that time. Japan’s Anti-Monopoly Act was enacted as part of its economic democratisation policy after World War II and the intent to avoid an economic operation method centred on zaibatsu (chaebol),⁴² which was the basis of the previous wartime economic operation.⁴³ The Allied Military Government dismantled the existing zaibatsu and later imposed a ban on holding companies in Anti-Monopoly Act enacted in 1947 to prevent the formation of new zaibatsu.⁴⁴ In addition, as companies belonging to disbanded zaibatsus gradually formed keiretsus(affiliates), reflecting concerns that such a keiretsu could lead to market rigidity, the Anti-Monopoly Act was amended in 1977 to introduce regulations limiting the total amount of shares that can be held in companies belonging to the same keiretsu.⁴⁵ In the Korean economy, chaebol held an important position similar to that of zaibatsu in Japan before World War II, and for this reason, the Japanese Anti-Monopoly Act became a strong legislative model for the revision of the Monopoly Regulation Act.

According to the original regulations, a regulation banning holding companies was introduced, and a system was enacted to regulate the equity investments of large enterprise groups, which organised chaebols under a legal conception. Specifically, Article 7–2 of the revised 1986 Act prohibited the establishment of holding companies, and Article 7–3 stipulated the prohibition of mutual investment, Article 7–4 limited the total amount of investment, and Article 7–5 restricted the voting rights of insurance and financial companies belonging to large enterprise groups.

The holding company was the method used to form a zaibatsu before World War II, and therefore the Japanese Anti-Monopoly Act limited the powerful means of forming a zaibatsu through regulations prohibiting such. Although chaebols were not utilising a holding company structure at that time, concerns that a holding company system could be an easy way to control a large number of companies with small capital, given Japan’s regulatory cases, led to the introduction of a regulation banning holding companies in the Monopoly Regulation Act as a precautionary measure.

It is also noteworthy that legislation regarding existing chaebols regulated their equity investments instead of directly demanding structural changes such as dismantling enterprise groups. At that time, chaebols were generally forming enterprise groups through circular shareholding structures, so the regulation on investment limited the formation or maintenance of enterprise groups. In order to clarify the chaebol subject to regulation, a large group of enterprises was designated among chaebols when certain legal scale and structural requirements were met,⁴⁶ and a regulatory framework was established. First, cross(mutual)-shareholdings between affiliates were prohibited in principle. However, since these regulations had limits to regulating circular (not mutual)-shareholdings, to compensate for this regulation were introduced as a second prohibition that uniformly limited the total amount of investments made by affiliates⁴⁷ belonging to large enterprise groups. The regulation on the ceiling for total amount of investment was expected to be a regulation that could have a real impact on the structure of the enterprise group that involved such things as circular investment.⁴⁸ As a third prohibition, regulations were introduced to limit voting rights of shares of affiliates held by financial and insurance companies belonging to large enterprise groups, which were also aimed at preventing huge amounts of funds being raised from customers and used like private coffers to expand or strengthen their affiliates.

6.3.2 Changes in Holding Company Regulations

The change from a ban of a holding company to a system that allows them in principle stems from the revision of the Monopoly Regulation Act in February 1999. Originally, the ban was justified based on concerns that holding companies could be a means of forming a large enterprise group by controlling a large number of companies with very small capital. However, this perception changed and led to a fundamental shift in regulation.

In particular, the revision of the Japanese Anti-Monopoly Act in 1997, which became a legislative model, had a significant impact on changes to regulations on holding companies under the Monopoly Regulation Act. In Japan, it was considered that holding companies are no longer likely to function as a means of forming zaibatsu, and that companies need to be given a choice to take advantage of the positive functions of holding companies. The law as was thus changed prohibiting holding companies only when business control was excessively concentrated.⁴⁹ This change in Japan led to a reconsideration of holding companies with respect to the Monopoly Regulation Act in Korea. The functional advantages of holding companies due to the separation of ownership and management between companies, and the fact that the holding company system is relatively transparent compared to the existing chaebol structure based on circular investments, were highlighted in the debates around the changes in Korea. Yet, certain restrictions were imposed on holding companies and subsidiaries, reflecting the view that there was still concern that holding companies would become means of concentration of economic power. Article 8–2(1) of the 1999 Amendment prohibited holding liabilities exceeding the amount of net assets (No. 1), holding shares of subsidiaries less than 50/100 (No. 2 30/100 in the case of listed subsidiaries), holding shares for controlling purposes in domestic companies other than subsidiaries (No. 3) and general holding companies having financial and insurance subsidiaries and financial holding companies having general subsidiaries according to the principle of separation of financial and industrial capital (Nos. 4 and 5). In addition, it was in principle prohibited for a subsidiary of a holding company to have a grandchild company under Article 8–2(2). The above-mentioned regulations on holding companies, in particular those under paragraph 1 No. 2 and those on subsidiaries under paragraph 2, are deeply related to attempts to block the possibility of enterprise groups expanding horizontally or vertically.⁵⁰ This restriction reflects the legislative intention to address concentration of economic power.

After the changes to the law on holding companies, it was expected that a number of large enterprise groups would introduce a holding company system, and the Korea Fair Trade Commission (hereafter KFTC)’s policy reflected that change. Above all, the enhanced transparency and efficiency of corporate governance of holding companies as compared to the circular structure, typical of chaebol, have become a corner stone for policy formation.⁵¹ Yet, since not many chaebols switched to holding company systems, measures have been sought to facilitate the transition to a holding company. As a result, the revisions to the law continued to ease the restrictions imposed on holding companies. The actions regulated under Article 8–2(1) of the current Monopoly Regulation Act include holding more than twice the total amount of capital, owning shares of a subsidiary less than 40/100 of the total number of shares issued by that subsidiary, owning shares of a domestic company that is not an affiliate in excess of 5/100 of the total number of shares issued by that company, or owning shares of domestic affiliates other than subsidiaries. The actions regulated under Article 8–2 (1) of the current Monopoly Regulation Act include holding more than twice the total amount of capital, owning shares of a subsidiary less than 40/100 of the total number of shares issued by that subsidiary, owning shares of a domestic company that is not an affiliate in excess of 5/100 of the total number of shares issued by that company, or owning shares of domestic affiliates other than subsidiaries. These requirements are considerably less stringent than those when imposed when holding companies were first allowed. The number of holding companies increased gradually in response to these eased requirements. After holding companies was allowed in 1999, only seven companies switched to the holding company system by 2000. But this number increased gradually with the deregulation, rising to 173 in 2019. It also appears that 39% of the large business groups have transformed their structure into a holding company-oriented one.

6.3.3 Changes in Cross or Circular Investment Regulations

The core of the regulations for large business groups is investment regulation, which is also the most controversial part of the process of changing the regulations. The legal prohibition of cross-shareholding was circumvented through indirect(circular) investment. Thus, a regulation on indirect investment relations was made to supplement the ban on mutual investments.

The investment ceiling regulation introduced in the original legislation was aimed at limiting the total investment in affiliates belonging to large business groups to a certain percentage of their net assets. This regulation was criticised as excessive for limiting unconditionally the investment on a formal basis without distinguishing the purpose or content of the investment. Moreover, such strict investment regulations could be a real impediment to the active investment activities of the entity. In addition, the issue of the effectiveness of the system in actually suppressing cross-shareholding Was strongly raised.⁵² In 2009, the total investment ceiling regulation was finally abolished.

However, after the abolition of the total investment ceiling regulation, the amount of investments between affiliates belonging to large enterprise groups soared significantly. Table 6.2 highlights changes to the equity ratios of the owner, family, and affiliates in the Top 10 large enterprise groups with owners since 2004.

Table 6.2 Equity ratio of owner, family, and affiliate⁵³

	2004 (%)	2006 (%)	2008 (%)	2010 (%)	2012 (%)	2014 (%)	2016 (%)	2018 (%)	2019 (%)
Owner	1.3	1.4	1.1	1.0	0.9	0.9	0.9	0.8	0.9
Family	3.1	3.7	3.2	3.1	2.7	2.8	2.6	2.5	2.4
Affiliate	43.3	46.0	45.6	44.0	52.8	49.5	54.9	55.2	54.3

Due to this situation, concerns over chaebol’s concentration of economic power arose again, and it served as an opportunity to seek legislative countermeasures. As a result, a regulation banning new circular investments was introduced by the 2014 revision of the Act. While not prohibiting established curricular investments, Article 9–2(2) of the Amended Act, prohibit a company belonging to a large enterprise group from forming or strengthening a new circular investment.

6.3.4 Other Attempts of Regulation

The first large enterprise group regulation was based on a ban on the establishment of holding companies and the regulation of investments between affiliates by existing large enterprise groups, but it was questionable whether such a system was sufficient to curb the concentration of economic power by chaebol. Thus, legislative supplementation continued; first was the regulation on debt guarantees, which was introduced by the revision to the law in 1992. The debt guarantees between affiliates could pose financial risks to the entire group and problems with the inefficient allocation of resources. The first inter-affiliates debt guarantee regulation was limited to 200% of capital but was lowered to 100% under the revision in 1996, and the regulation was strengthened by prohibiting debt guarantees entirely after the revision in 1998.

The thought that chaebol problems could be corrected by the market’s ability to adjust autonomously also had an important impact on changes to the regulations on large enterprise groups. The legislation reflected the recognition that inefficient governance or management in the capital market or commodity market can be controlled, and that it is important for enterprise groups to provide key information so that these functions can be exercised effectively. Thus, obligations were imposed with regard to disclosure of prior resolutions and key details of the board of directors (as revised Monopoly Regulation Act in December 1999), disclosure of important matters of unlisted companies belonging to large enterprise groups (as revised in December 2004), and disclosure of the status of large business groups (as revised in March 2009).

As a type of unfair trade practices, regulations on unfair support practices also have important implications in relation to curbing the concentration of economic power by chaebol. In the course of running a group of companies, support for uncompetitive affiliates is not only a means of maintaining and expanding the economic concentration. At the same time, it can lead to a negative impact on the national economy through the inefficient allocation of resources as a result of such transactions with marginal enterprises. The regulation of unfair support practices introduced through the revision of the Monopoly Regulation Act 1996 was prescribed in a way that regulates unfair trade practices, but as discussed in the legislative process, the substance of the regulation focuses on the inter-affiliate transactions that take place within large enterprise groups.⁵⁴ From a competition policy point of view, the significance of regulating unfair support practices can be understood in two ways. First, it is noteworthy that it provided a basis for the control of chaebol’s group operations from the perspective of individual markets. Regulating the specific actions of chaebol as unfair trading practices in individual markets may be in line with the structure of competition laws formed to protect competition in individual markets Second, this approach is meaningful in that it can contribute to curbing economic concentration in terms of general concentration. In addition, the regulation of unfair support practices was carried out by ex-post evaluation of transactions, unlike other economic concentration regulations based on the imposition of ex-ante obligations, which meant that they were outside of the uniform and formal regulatory framework. The regulation of unfair support acts can be said to be a unique type of regulation of the Korean Monopoly Regulation Act that is difficult to find in other countries, so there are difficulties in forming regulatory legal principles for unfair support practices. But to some extent, such principles have been established through the regulatory practices of KFTC and court rulings. The Supreme Court ruled, in relation to the unfairness of such support practices, that:

It is based on whether fair trade is likely to be infringed upon due to the support practice that hinders competition in the relevant market or causes concentration of economic power.⁵⁵

Thus, the Supreme Court presented the effects on competition in individual market and concentration of economic power as a double criterion for determining the unfairness of support practices.

The introduction of these regulations and the composition of legal principles were assessed to be appropriate, but there were certain limitations to the actual regulations. In particular, the law needed strengthening in the case of transactions conducted for the purpose of obtaining profits for individuals with special relationships with affiliates, where measures did not fall under support practices or not meeting the requirements of unfairness. Thus, in 2013, Article 23–2 was introduced under the Monopoly Regulation Act. This article prohibited certain transactions where the owner or his family obtains private profits through a transaction in particular by means of the attribution of interests.⁵⁶ The significance of the regulation can be viewed positively, but the difficulty of judging unfairness still remains and the question of whether the regulation will be effective has not been resolved.⁵⁷

6.4 Direction of Discussion on Improving Chaebol Regulations

6.4.1 Adequacy of Subject of Regulation

Under the Monopoly Regulation Act, chaebol regulations were introduced with the aim of curbing them as the concentration of economic power by chaebols intensified. However, the chaebol themselves were not accepted as legal concepts, and as aforesaid, large enterprise groups of a certain size⁵⁸ and structure as a group of multiple affiliates were subject to regulation. At the time of legislation, no differentiation took place between the large enterprise groups and economic entities generally perceived as chaebols. Hence, there was no problem with the subjects of this regulation other than pointing out the inadequacy of intentionally avoiding the term chaebol that had negative implications for the public in Korea. Most of the large enterprise groups that were initially designated shared the characteristic elements of chaebol. Absolute control by the owners and their families. Thus, the concept of large enterprise groups of a particular size and the requirement of having multiple companies was not problematic in embracing chaebol as regulatory targets.

However, problems began to materialise when a group of state-owned enterprises or an enterprise group without governance by natural people was designated as a large enterprise group. There was no control by the owner as a natural person in this enterprise group, thus lacking the problem of ownership concentration that was traditionally perceived as a problem of chaebol. This raised the question of whether the regulations formed to target chaebol were not over-inclusive. Discussions on this issue led to the conclusion that even enterprise groups without an owner are subject to the regulation because enterprise groups without owners can also cause problems with regard to general concentration. In particular, since the 2000s, the increase in the number of affiliates belonging to enterprise groups without an owner, and the expansion of the total size, have served as a strong basis for supporting this approach.⁵⁹

However, discussions continue regarding the need for differentiated regulation between enterprise groups that still have owners (traditional chaebol) and those that have flagship companies at the centre without personal control. Furthermore, the emergence of new types of large enterprise groups is drawing attention. As the digital economy develops, digital companies of such as Naver, Kakao, Netmarble, and Nexon Group are included in the regulation list because they meet the requirements of large enterprise groups. These enterprise groups, which follow the growth of the IT industry, are emerging as the new large enterprise groups. Yet, there are significant differences between such companies and traditional chaebols in terms of governance and distribution of industries. Specifically, the emerging enterprise groups are characterised by the fact that control over the enterprise group is largely not based on a circular ownership structure, that the business sectors are concentrated in the IT sector and do not show a tendency to diversify non-related sectors, and that their status as platform operators is being strengthened, suggesting the need for change to the regulatory system that was formed with consideration towards traditional chaebol.

6.4.2 Approach by Type of Enterprise Groups

The above discussion could be expanded to transform a single regulatory framework into a regulatory framework commensurate with the characterisation of enterprise groups. As mentioned, about 40% of large business groups are switching to holding company systems. Groups with holding company systems differ from groups that have not transitioned in terms of the way of control and structural transparency, and this difference will need to be reflected in regulations.

These discussions also relate to the government’s policy of encouraging holding companies. The KFTC focused on transparency in the governance structures of holding company systems and continuously implemented policies to expand holding companies. In the process, a number of rules were eased that initially imposed limits on holding companies being used as means to concentrate economic power, resulting in an increase in the number of enterprise groups that switched to holding companies.⁶⁰ Whether such a policy is still valid needs to be discussed, and if it is indeed recognised as valid, additional challenges will be placed on how to adjust the content and level of regulations for holding companies and circular investments.

6.4.3 Strengthening the Market vis-a-vis Chaebol

As we saw earlier, regulations on chaebols are aimed at holding companies or large business groups, mainly by demanding a ban on certain activities regarding equity investments. The legitimacy of these regulations arises from the intent to effectively cope with the economic concentration problems caused by chaebol. It is important to keep in mind that it is the task of the Monopoly Regulation Act to address competition problems caused by chaebol in individual markets.

Although one should not deny the importance of regulation on unfair support practices and profit-taking practices of related parties as stipulated in the Monopoly Regulation Act, the effectiveness of these regulations has been questioned. It can be pointed out that it is still not easy to find a reasonable regulatory basis theoretically and practically. The Supreme Court showed that ‘unfairness’ has two aspects, competition restrictions and economic concentration. But it is not clear what aspects or factors of economic concentration can be considered in the context of unfairness, especially in the case of profit-taking practices of related parties. It will need to be supplemented in the future. Such improvements to legal principles will not only have a positive effect on strengthening the enforcement of regulators but will also result in regulatory clarity for market participants. Furthermore, this will make a meaningful contribution to increasing the market’s autonomous control functions.

It is also necessary to look at the issue from the perspective of the protection or promotion of small- and medium-sized enterprises or independent companies that are not affiliated with chaebol. In other words, the concentration of economic power may be addressed through the growth of small- and medium-sized/independent companies. The regulation of chaebol and the protection of small- and medium-sized/independent enterprises can contribute to the suppression of economic concentration and the realisation of free and fair competition. The promotion of small- and medium-sized/independent companies can also be meaningful as a supplement to one-sided regulatory policies. To this end, it is important to provide an opportunity for the growth of small- and medium-sized/independent enterprises in various aspects.

In this regard, there can be no question as to the importance of traditional competition laws in ensuring that opportunities for the growth of small- and medium-sized/independent enterprises. In general, small- and medium-sized/independent enterprises and affiliates belonging to chaebol are related vertically or horizontally. In the case of vertical relationships, it is important to ensure that the trade relationship between small- and medium-sized/independent enterprises and chaebol affiliates is carried out fairly throughout the production and distribution process. In the case of horizontal relationships, it will be important to prevent anti-competitive behaviour. Furthermore, various economic resource support programmes, including financing, will be needed so that competition between small- and medium-sized/independent enterprises and the affiliates under the umbrella of a chaebol can be substantive.

6.5 Conclusion

With the revision of the Monopoly Regulation Act in 1986, regulations on chaebol began to take place. Lawmakers at the time thought that the concentration of chaebol’s economic power had a negative impact on the market economy order. This idea has so far been basically maintained. Various measures have been devised and institutionalised to curb the concentration of economic power. Nonetheless, when comparing the situation at the time of the first legislation and the present one, the concentration of economic power by chaebol has actually increased. In this respect, the effectiveness of the regulation may be questioned, but if we assume that there is no such regulation, it may be understood that the present condition is based on the minimum deterrent function of the regulations. The question is whether chaebol-oriented economic management methods will be effective even in the face of future platform-based changes to industries and the fierce competition for innovation, and such recognition should be reflected in the maintenance or revision of the chaebol regulatory framework under the current Monopoly Regulation Act. Of course, chaebol themselves are seeking improvement on these issues. However, there is still a need for support to ensure that these chaebol’s own efforts will be effective. From this perspective, efforts to improve corporate governance, such as strengthening shareholders’ rights and interests and enhancing the power of the Board of Directors under the Commercial Act, could make meaningful contributions. At this point, however, it is difficult to completely dispel concerns about the concentration of economic power in terms of general concentration or ownership concentration only by improving governance structure, and the need to regulate the entire enterprise group that is composed of affiliates will inevitably be considered positively. On the other hand, in pursuing chaebol policies, caution is required when it comes to the issue of social costs incurred in the formation and operation of business groups. Of course, there will be expenses incurred in forming and operating an enterprise group, but chaebol will only take into account their own private costs. Therefore, it is difficult to expect chaebol to include social costs, such as hindering the growth of competitive independent companies or distorting the efficient allocation of resources, among the costs to be considered when they evaluate their profits and expenses in the process of setting their goals. Such inconsistencies between private and social costs provide justification for regulatory agencies’ policy interventions, while also serving as a limitation to remain within the scope as much as possible.