Piercing the corporate veil in competition cases – The ECJ in Eni

Update 13 June 2019 for an interesting paper by Anil Yilmaz Vastardis and Rachel Chambers, comparing investment law and the relevant issues for corporate veil and human rights abuses, see here.

Update 21 September 2016. For an application in the environment field, see [2016] EWCA Crim 1043 R v Powell and Westwood and analysis by Robert Biddlecombe, who brought the case to my attention.

Update 20 June 2016 the strict approach was confirmed in C-155/14P Evonik.

There is no general EU rule on the piercing of the corporate veil. Neither company law nor tort law is sufficiently (or in the case of tort law even embryonically) harmonised to be able to speak of much EU influence here. However in EU competition law, the principle is more or less established and may, one suspects, inspire in other areas, too. In Eni, the ECJ confirmed on 8 May the strong presumption of attribution in the case of shareholder control.

It is established case-law under EU competition law that the conduct of a subsidiary may be imputed, for the purposes of the application of Article 101 TFEU, to the parent company particularly where, although having separate legal personality, that subsidiary does not autonomously determine its conduct on the market but mostly applies the instructions given to it by the parent company, having regard in particular to the economic, organisational and legal links which unite those two legal entities. In such a situation, since the parent company and its subsidiary form part of a single economic unit and thus form a single undertaking for the purpose of Article 101 TFEU, the Court has repeatedly held that the Commission may address a decision imposing fines to the parent company without being required to establish its individual involvement in the infringement.

In the particular case in which a parent company holds all or almost all of the capital in a subsidiary which has committed an infringement of the European Union competition rules, there is a rebuttable presumption that that parent company exercises an actual decisive influence over its subsidiary. In such a situation, it is sufficient for the Commission to prove that all or almost all of the capital in the subsidiary is held by the parent company in order to take the view that that presumption is fulfilled.

In addition, in the specific case where a holding company holds 100% of the capital of an interposed company which, in turn, holds the entire capital of a subsidiary of its group which has committed an infringement of European Union competition law, there is also a rebuttable presumption that that holding company exercises a decisive influence over the conduct of the interposed company and also indirectly, via that company, over the conduct of that subsidiary.

In the present case, for the entire duration of the infringement in question, Eni held, directly or indirectly, at least 99.97% of the capital in the companies which were directly active within its group in the sectors in which there had been a violation of competition law. The ECJ held that in particular the absence of management overlap between Eni and the daughter companies, was not enough to rebut the presumption of the companies being a single economic unit. In competition law, therefore, the corporate veil may be quite easily pierced in a holding context, which undoubtedly is not the approach which many Member States take outside of the competition law area.

The waters therefore on the piercing of the corporate veil other than in the area of competition law, remain quite deep. This has an impact on the conflicts area, in particular in the application of the Rome II Regulation and the debate on corporate social responsibility, on which I have reported before on this blog.

Geert.

postscript: point made in e.g. the UKSC on 12 June 2013, in Petrodel v Prest (a matrimonial assets case which was decided on the basis of trust), where Lord Neuberger stated obiter  “if piercing the corporate veil has any role to play, it is in connection with evasion”.

Lord Sumption’s take was “there is a limited principle of English law which applies when a person is under an existing legal obligation…which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control. The court may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company’s separate legal personality“. He added ‘The principle is properly described as a limited one, because in almost every case where the test is satisfied, the facts will in practice disclose a legal relationship between the company and its controller which will make it unnecessary to pierce the corporate veil.’

Lord Clarke, agreeing with Lord Mance and others, stated “the situations in which piercing the corporate veil may be available as a fall-back are likely to be very rare”.

 

Mirror, mirror. Cartesio obiter clarified in Vale. The Court of Justice further completes the corporate migration jigsaw.

Postscript 22 December 2016. Corporate migration also often triggers issues of ‘exit taxation’. Core reference is C-371/10 National Grid Indus (other than Daily Mail of course; referred to below). Grid Indus was referred to extensively by Kokott AG yesterday (21 December) in Case C-646/15 Panayi. Do trust enjoy the protection of the four freedoms even if they do not have distinct legal personality? (Answer Yes). What is Member States’ freedom of manouevre for exit taxation. (Answer in principle untouched. But since such taxation impacts upon freedom of establishment, tax treatment needs to be proportionate).

 

In family law, the status and capacity of a natural person is largely determined by a person’s nationality, which generally stays with it for life, or, particularly in common law countries, by a person’s domicile, which is less fixed but nevertheless assumes strong links with a particularly State. The corporate equivalent of nationality and domicile is the lex societatis. It is the ‘personal law’ or corporate identity of companies [Hartley, T.C., International Commercial Litigation, Cambridge, CUP, 2009, 506.]. It often determines ‘whether the company had been validly created; what its constitution is; what the powers are of its organs, officers and shareholders; whether it has been merged with another company; and whether it has been dissolved.’ [Ibid] These in others words are the corporate equivalents of life and death, capacity, marriage, divorce, adoption etc.

Just as individual may want to change nationality, or acquire another, and face the consequences of their choice under States’ nationality laws, so, too, do companies want to migrate for all sorts of reasons: shareholder structures, fiscal, directors’ liability, etc. They, too, face consequences: the original State (the ‘home’ State) may not want to let go, and put in place al sorts of hurdles for the company to migrate. The new State (the ‘host’ State) may equally be unimpressed with and unwelcoming to the newcomers’ arrival. States’ willingness or not to welcome new arrivals and to say goodbye to those wishing to leave, loosely translates into two main models: the real seat theory, and the incorporation theory.

In the EU, these issues play a particular role as they come within the purview of the freedom of establishment, laid down in Article 49 of the Treaty on the Functioning of the EU (‘TFEU’):

Article 49

(ex Article 43 TEC)

Within the framework of the provisions set out below, restrictions on the freedom of establishment of nationals of a Member State in the territory of another Member State shall be prohibited. Such prohibition shall also apply to restrictions on the setting-up of agencies, branches or subsidiaries by nationals of any Member State established in the territory of any Member State.

Freedom of establishment shall include the right to take up and pursue activities as self-employed persons and to set up and manage undertakings, in particular companies or firms within the meaning of the second paragraph of Article 54, under the conditions laid down for its own nationals by the law of the country where such establishment is effected, subject to the provisions of the Chapter relating to capital.

Article 50 TFEU foresees harmonisation to accompany the principal freedom. However the Union legislator (and the Community legislator before it) has not got all that far.

It has therefore, largely been the Court of Justice which has had to establish how far Member States’ freedom of manoeuvre reaches in obstructing corporate migration. In Daily Mail, the Court gave a lot of leeway to Member States on the outbound corporate migration side: the home Member States have a lot of freedom in determining the consequences of corporate migration. By contrast, in Centros, Ǜberseering, and Inspire Art, the Court was much stricter for inbound corporate migration: the host Member State has to have very good, ad hoc reasons for obstructing  freedom of establishment (and services) by insisting on incorporation and /or refusing commercial activities of affiliates, if all the company concerned wants to do, is to do business in the host Member State (rather than actually incorporating). All these cases are referenced in Jääskinen AG‘s Opinion.

In Cartesio, the Court stuck to its perceived dichotomy between in- and outbound migration, despite a plea by Maduro AG to approximate the two. The court then added an obiter in para 112:

‘In fact, in that latter case, the power referred to in paragraph 110 above, far from implying that national legislation on the incorporation and winding-up of companies enjoys any form of immunity from the rules of the EC Treaty on freedom of establishment, cannot, in particular, justify the Member State of incorporation, by requiring the winding-up or liquidation of the company, in preventing that company from converting itself into a company governed by the law of the other Member State, to the extent that it is permitted under that law to do so.’

[the English version of the text in fact is not the clearest]

That obiter got many excited, and confused: do the final words of para 112 imply that the host Member State can choose whether to accept such re-incorporation, or rather, does Article 49 TFEU imply that the host Member State has no choice but to accept such re-incorporation?

In Cartesio, a company incorporated in Hungary wanted to change its operational headquarters to Italy but keep Hungarian incorporation. Hungarian corporate law does not allow for this: a company can keep its Hungarian incorporation but only if it moves headquarters within Hungary. Otherwise it has to dissolve in Hungary and incorporate elsewhere.

The case decided yesterday, Case C-378/10 Vale, is a mirror image (see also Stefan Rammeloo’s bullet-point overview of issues here): an Italian company wants to dissolve in Italy and re-incorporate in Hungary, and it wishes its Italian predecessor to be recognised as its legal predecessor, meaning all rights and obligations of the old company transfer to the new. A procedure which is perfectly possible for Hungarian companies, within Hungary: in particular, by changing company form. Vale’s application for registration was rejected. The obiter in Cartesio led to speculation whether the host Member State is under a duty to co-operate with such conversion (as opposed to Cartesio, which sought to establish the limits to obstruction by the home Member State).

The Court in my view /in my reading of the judgment took a perfectly logical approach to the obiter: ‘to the extent that it is permitted under that law to do so‘ refers to the existence of a national conversion procedure. If nationally incorporated companies may convert and transfer all rights and obligations to the new company, any restrictions on foreign companies employing this mechanism come within the reach of Article 49 TFEU.

There may be reasons for the host Member State to restrict this possibility in specific instances (for reasons of e.g. protection of the interests of creditors, minority shareholders and employees, the preservation of the effectiveness of fiscal supervision and the fairness of commercial transactions: see para 39 of Vale), however none of these apply here: Hungarian law precludes, in a general manner, cross‑border conversions, with the result that it prevents such operations from being carried out even if the interests mentioned in paragraph 39 above are not threatened in any event (para 40).

The host Member State must therefore open the possibility of conversion to foreign registered companies, (only) if it has such conversion possibility in its own corporate laws. Any conditions imposed by national law (documentation, proof of actual economic continuity of operations etc) may also be imposed on these foreign companies, provided this is done in a transparent, non-discriminatory fashion, and in a way which does not jeopardise the actual freedom of establishment.

It is interesting to note that the Court recycled (as it did in Cartesio), the very core Daily Mail quote which explains its hesitation effectively to harmonise corporate law itself, through too drastic an interpretation of Article 49 TFEU:

‘companies are creatures of national law and exist only by virtue of the national legislation which determines their incorporation and functioning‘(Vale, para 27).

No doubt many corporate law implications escape me (see, on the AG’s Opinion, rather excellently Thomas Biermeyer and Thore Holtrichter in the Columbia Journal of European Law here) and will lead to further cases at the Court.

 Geert.
(Handbook of) European Private International Law, 2nd ed. 2016, Chapter 7, Heading 7.6.
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