Successor liability is a trap that can spring, capturing perhaps innocent parties and making them pay for the competition infringements of others. It can lay hidden for quite a while, and can disrupt the restructuring of an organisation, or its sale and purchase.
At worst, successor liability can be described like this: if you, innocent of any competition law infringement, are buying a business, then beware. The competition law warranties that are commonly included in sale and purchase agreements have a real purpose, which is to force the seller to reveal whether it is or has been party to competition law infringements, and is now or might in the future be subject to competition law investigation. If so, you as a buyer need to understand whether you could be made to pay for it, if you go ahead with the purchase. If there is such a risk, you need to evaluate it, and devise a strategy to meet it.
This is a problem that arises because competition law investigations can take several years. Once an infringement has been found, a decision has to be addressed to the infringing entity or entities. But what happens if that entity has disappeared, perhaps through being sold or restructured? If no-one is made to pay, then liability is lost, which would encourage restructurings and sales merely to avoid competition liability. This would be against public policy.
The basic rule is this: an entity that is the addressee of a decision finding that it has infringed competition law, must pay the penalty that is levied. This is called the principle of personal liability, set out in the Anic case in 1999.
If that entity has ceased to exist (legally – e.g. through dissolution, or economically – it has no turnover) then it cannot be fined. The entity might also cease its activities in the relevant market. In both these cases, it might be appropriate to levy the penalty on its economic successor.
Who is the economic successor? For a share purchase, this would normally be straightforward. If you buy the shares of a company, you are generally buying the company “warts and all”, so that even if you fully integrate the target entity into your business, you could still be liable. Therefore you might need to negotiate an indemnity from the seller to cover the risk of you being fined for the target’s behaviour.
For an asset purchase, matters may be more complex. Liability should remain with the seller, whilst the legal entity that once held the assets still exists. But there is a risk it may transfer if not.
Further complexity was added by the ECJ judgment of 11 December 2007 in Ente Tabacchi Italiani, which was about whether ETI, as the economic successor to the company managing the Italian tobacco monopoly, was liable for price-fixing (with various companies in the Philip Morris group). In this case, the previous owner of the relevant assets, AAMS, continued to exist, but carried out other activities. Under the principle of legal succession above, AAMS would normally have been found to retain liability to pay the fine. However the ECJ instead found that ETI was liable as economic successor, since it carried on the specific activity that had been involved in the infringement, and that since both AAMS and ETI answered to the same public authority, the liability of one could be imputed to the other.
These matters can be tricky to resolve in deal negotiations, and trickier afterwards: buyer beware.