Poland’s government is proposing a new law that would make parent companies liable for their subsidiaries’ violations of the competition protection law if the parent company “exercised decisive influence” on the subsidiary.
Currently, Polish law could be described as being extremely strict in not recognizing “piercing the corporate veil” between parent companies and their subsidiaries. The proposed law would represent a breakthrough and a milestone in Polish corporate law by providing much clearer grounds for finding a parent company liable for the actions of its subsidiary. In addition, it would significantly increase the power and authority of the Head of the Office of Competition and Consumer Protection (UOKiK), which, under its current head, has become much more active in levying substantial fines for violations of Poland’s Competition and Consumer Protection Law.
The justification for the proposal is the need to incorporate the so-called ECN+ Directive into Polish law. In doing so, the proposal addresses the general requirements of the directive, which is intended to provide more efficient and effective enforcement of competition protection laws within the EU member states, and to further empower the competent authorities in that regard.
Dangerous Fine Calculation Mechanism
The government’s proposal extends the fines for violating competition law to parent companies that have “exercised decisive influence” on the violating subsidiary. Currently, a fine for violating a competition protection law may be up to 10% of the violating entity’s turnover for the year preceding that in which the fine was imposed. Under the proposal, if it is determined that decisive influence had been exercised on the violating entity, the Head of UOKiK will consider both the violating entity’s turnover and that of the undertaking (or undertakings) exercising decisive influence. Both entities would be jointly liable for payment.
Liability for Violating Competition Laws in European Law
The liability of a parent entity for its subsidiary’s violation of the antimonopoly law has existed in European law for a long time, having been established by ample case law. According to European law, if a parent company and its subsidiary comprise a single economic unit, they constitute a single undertaking as provided for in Article 101 of the Treaty on the Functioning of the European Union (TFEU). Therefore, the commission may impose a fine directly to the parent company, without determining whether it has been directly involved in the violation. Such position was taken in the judgment issued by the European Court of Justice (ECJ) on 14 July 1972 in C-48/69 Imperial Chemical Industries v. the Commission, whereby the liability for the subsidiary’s actions was attributed to the parent company based on the “single economic unit” concept. According to such concept, a subsidiary does not make its own strategic decisions. Instead, it executes the will of its parent company, which exercises decisive influence over it, though the degree of a company’s independence should be determined from time to time. Such definition of undertaking was also corroborated, among others, in the ECJ judgment issued on 24 October 1996 in C-73/95 Viho Europe v. the Commission and in the European Commission’s Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements.
Polish Provisions in Light of European Regulations
The key prerequisite of a parent undertaking’s liability is “exercising decisive influence” on another undertaking. The proposal currently states that exercising decisive influence occurs when such economic, legal and organizational ties exist between the undertakings that the undertaking on which influence is being exercised does not determine its own course of action on the market, but rather, in principle, does the bidding of the undertaking exercising the influence (which reflects the single economic unit concept). It is presumed that an undertaking exerts such decisive influence if it has all (or almost all) the capital of the undertaking over which it exercises a decisive influence. Given its vagueness and interpretational leeway, the proposal leaves much to the discretion of the Head of UOKiK when assessing particular components comprising the notion of decisive influence. Also, what escapes precise interpretation in the proposal is the notion of “almost all share capital.” Is it enough, for the prerequisite to apply, to hold, for instance, 80% of the shares, or perhaps 90% (and would it not be more reasonable to refer to the percentage of votes at shareholders’ meetings, rather than that of shares held)
Managers’ Liability Extended
Since 2015, the managers of the entity violating the competition law may be subject to a fine if they deliberately allowed the violation. The proposal also extends this liability to the managers of the entity exercising decisive influence.
Fines Imposed on Associations of Undertakings
A separate question arises with respect to associations of undertakings, defined in Polish law as chambers, bodies and other organizations in which undertakings affiliate. To date, cases of violations of competition law demonstrate that associations of undertakings often commit such violations. Pursuant to the ECN+ Directive, antimonopoly authorities ought to be authorized to impose fines on associations of undertakings, taking into account the turnover of the association’s members. The Competition and Consumer Protection Act is silent on any particular regulations pertaining to the calculation of fines imposed on associations of undertakings. However, one ought not to draw conclusions that imposing such fines is impossible. The practice so far indicates that – for the purposes of assessing a potential violation – an association of undertakings is considered a single business entity. Current Polish law, however, does not feature any regulations with regard to calculating the turnover of an association of undertakings and its particular members for the purposes of imposing a pecuniary fine, nor to enabling enforcing such fine, should the association be insolvent.
The proposal attempts to address this issue. It assumes that the aggregate total of each association member’s turnover ought to determine the amount of a fine. The fine imposed on an association of undertakings may not exceed 10% of the total turnover of each association member operating on the market on which the violation has been committed, in the financial year proceeding that in which the fine was imposed. However, if an association of undertakings becomes insolvent (a likely result if a fine is imposed close to the maximum level), members of the association would be required to make contributions to cover the fine. The inability to make such contributions would trigger more severe consequences, including demanding that the fine be paid by each of the undertakings whose representatives were such association’s officers.
Undertakings Suspending Operations Will Not Dodge Liability
Currently, a key enforcement problem has been undertakings that – fearing liability for a violation and a possible fine – have suspended their business operations. The proposal seeks to end such practices by assuming that – for the purposes of applying the act – the definition of undertaking will also include an individual who has ceased pursuing business operations.
The proposed law would amend the Competition and Consumer Protection Act. It is currently at an early legislative stage. Therefore, it is likely that a number of its proposals will be developed. Nonetheless, the proposal reflects an ever-stricter approach to more stringent provisions of the Competition and Consumer Protection Act and the associated ramifications for undertakings and their further operations. “Piercing the corporate veil” in this particular sector would also reflect a fundamental development in Polish corporate law.