These delicate parents-children matters...
In the world of humans, it goes without saying that up to a certain age parents assume full or limited legal responsibility for their children and their conduct. In the world of companies, this principle also gains increased support and recognition. The only conceptual differences are that in the latter case, the level of responsibility does not decline with the "age" of the daughter- or the son-subsidiary, and that the levels of liability potentially involved are quite different.
Would it be correct to reply to an old-fashioned question about the limits of the parent company’s liability for the acts and omissions of the subsidiary in the same old-fashioned way? Is the liability of a majority shareholder or a participant in a joint-stock company or a limited liability company, respectively, limited by the amount of the shares or participatory interests it holds? On the one hand, this is what the law says, while on the other – the right answer is "not really". In dealings with private parties, the limitation would normally apply, while as long as some areas of regulatory compliance are concerned, a company would not be viewed as a stand-alone entity, but rather taken together with its relatives, primarily parents and grand-parents and these are the latter that may bear the bigger part of liability. Actually, in some instances, the level of liability will be linked to the group’s revenues, not to the revenues of the infringing subsidiary.
This time, the wake-up calls came not from Verkhovna Rada but from the European Commission and the Court of Justice of the European Union (CJEU) and, perhaps, this is the reason why they were not noticed by the businesses in Ukraine. In the EI DuPont Case (C-172/12 P) and the Dow Chemical Case (C-179/12 P) related to a price-fixing and market-sharing cartel, the Commission, as supported by the Court, found both joint venture partners jointly and severally liable for the conduct and antitrust wrongdoing of their 50-50 joint venture on the basis of exercising "decisive influence" over it. In those cases, the “decisive influence” of both parent companies was rooted in their participation in the members' board of the joint venture that, in particular, resolved on some strategic management and business matters. The argument that each of the parent companies was able to apply its veto rights with respect to certain strategic decisions, and, therefore, could not be considered as exercising the “decisive influence” over the joint venture failed in all instances. In a number of other cases, the Commission and the CJEU created a solid chain of precedents indicating that a parent company holding all or almost all of the share capital in a subsidiary exercises “decisive influence” over the subsidiary. The other material factors that are taken into account when establishing the link of “decisive influence” are whether and to what extent the parent company or its governing bodies are responsible for appointment of the governing bodies of the subsidiaries, whether they control or allocate budgets and approve business plans, whether they finance the subsidiaries or some of the latters’ projects, etc.
Importantly, the possible legal succession in the group, spin-offs, mergers and the existence of the holding companies between the subsidiary and the parent were not considered an obstacle to attributing liability for the subsidiary’s wrongdoing to the parent companies. Neither were the attempts to invoke the doctrine of “corporate veil” and separate legal personality of the legal entities. The decisions mentioned above strongly motivated the businesses across the European Union to develop competition compliance programs across their groups and extend their application to the subsidiary companies, primarily in the EU. Indeed, in some European countries, existence and proper performance under such policies is a mitigating factor for the purposes of imposing sanctions for the competition wrongdoings.
This is something that also needs to be factored into by the foreign EU-based groups operating in Ukraine or planning acquisitions or joint ventures here. Indeed, if a Ukrainian subsidiary or a joint venture controlled by an EU parent but managed locally conducts activity on the EU markets, such a conduct may be attributable to the EU parent, and a sanction may be imposed on the latter. The relevant businesses are advised, therefore, to check to what extent their European competition compliance policies and procedures were rolled out to their Ukrainian group companies and are adhered to. The businesses planning acquisitions or joint ventures in Ukraine are advised to pay specific attention to their targets’ competition compliance programs, policies and patterns and assess to what extent they 1) can generate risks that can be uploaded to the new parent and 2) need to be aligned with those of the new parent during the post-merger integration process.
Antitrust regulation is not the only field where the parents become more vulnerable for the sins of their children and where the stakes in the game become higher. The other good examples are anti-fraud and anti-corruption compliance. On them, to be continued…