Landmark EU court case calls for new terms in M&A agreements
The Finnish asphalt cartel case continues to make waves, this time affecting the application of national laws as illustrated by a recent decision of the Court of Justice of the European Union. In its decision, the Court ruled on the economic continuity in private enforcement and held that EU laws trump national provisions when determining the entity that is liable to pay compensation for anti-competitive conduct. M&A transactions are affected by the ruling – economic continuity should be taken into consideration in business and asset purchase agreements.
On 14 March 2019, the CJEU gave a landmark decision C-724/17 regarding the principles of economic continuity in private enforcement. The case was referred to the CJEU by the Finnish Supreme Court and zoomed in on whether an individual is allowed to seek compensation from a company that has not itself breached EU competition law but merely continued the economic activity of a cartel participant. It boiled down to a question of national vs. EU: should liability for the infringement be determined on the basis of national or EU laws.
The effectiveness of EU laws requires private enforcement
The Advocate General of the CJEU, Nils Wahl, stressed the deterrent function of private enforcement of EU competition law. In his opinion concerning the case, Wahl saw that the question of liability for compensation must be determined on the basis of EU, not national, law.
AG Wahl’s views were confirmed in the CJEU’s decision. The Court found that EU competition law must be followed in private enforcement cases and when determining which entity is liable to pay compensation for anti-competitive conduct. According to the CJEU, the effectiveness of EU competition law would otherwise be threatened.
“One cannot pick the pockets of a naked man”
According to EU competition law, a person whose rights have been infringed by anti-competitive behaviour is entitled to seek compensation from the infringing party.
AG Wahl saw that in case the infringing party has ceased its operations and its assets and business have been transferred to another legal entity that continues the transferred business, the successor is liable for paying compensation for infringements.
It is economically impossible to obtain compensation from a legal entity which has ceased its operations and may have been liquidated. As AG Wahl puts it: you cannot pick the pockets of a naked man.
Therefore, in order to have the deterrent factor sought after by the EU in its competition cases, the CJEU ruled that the successor must be liable to pay compensation for violations of EU competition law. It is for this reason that the articles of EU competition law trump national provisions in private enforcement cases.
Starting with a clean slate now a thing of the past in M&A transactions
The realm of M&A does not escape the impact of the landmark CJEU ruling. The decision will affect future business and asset transactions, where excluding the target’s prior liabilities from the deal has so far been the norm. Buyers understandably seek to continue the acquired business free from any lurking risks, but, in light of the CJEU’s decision, the exclusions of liabilities relating to EU competition law have now received the kiss of death.
Consequences of the CJEU decision
1) Comprehensive due diligence is recommended
- The CJEU’s interpretation means that an exclusion of prior liabilities stemming from the breach of EU competition law is no longer possible.
- Buyers should carefully investigate the past behaviour of the target company in the due diligence phase of a transaction.
- In addition to carefully reviewing the target’s documentation, it is advisable to interview the target’s management and other key personnel to find out whether there have been, or whether they believe there could have been, any infringements of competition rules in the past.
- Buyers should bear in mind that the statute of limitations in private enforcement cases is very long and the anti-competitive behaviour could have taken place many years ago.
- The CJEU’s interpretation of economic continuity calls for a comprehensive due diligence procedure. The downside is, of course, that the costs of due diligence will increase.
2) Asset and business purchase agreements require new terms
- If there is any doubt whether the target has been involved in anti-competitive behaviour, the buyer should take it into account in the purchase price negotiations.
- If the buyer is later dragged into a private enforcement case, the proceedings will require a lot of legal resources and result in high costs for the buyer. The buyer also risks being ordered to pay damages. Depending on the situation, these may be valid grounds to reduce the purchase price.
- Alternatively, if the purchase price is left untouched, the asset or business purchase agreement should contain a specific indemnity without any time or monetary limitations in relation to the costs of the potential damages and compensation.
- If the remaining company is liquidated in whole or in part after the transaction, a part of the purchase price should, for instance, be put on escrow for several years in order to secure the payment of the specific indemnity.
- The purchase agreement should contain a special competition law warranty without any of the so-called ‘seller’s knowledge’ qualifications.
3) Parental liability must be considered
- While parental liability is certainly no stranger to the EU competition law praxis, it remains to be seen whether domestic courts will begin applying the doctrine.
- Parental liability is particularly interesting for private equity buyers, as the actual buyer of the “polluted” business could be a smaller entity within a portfolio of a large fund.
- It is unclear whether such fund could be held jointly and severally liable for damages based on parental liability in the context of private competition enforcement. Perhaps the CJEU will give its view on this in the future.
In view of the above, the CJEU ruling should be carefully taken into account in future M&A transactions.
For more information on this matter, please see a recent blog post from our competition team here.
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