4.3.1 Controlling the Conduct of the Subsidiary

Promoting the effective enforcement of competition law is probably the most important objective of the single economic unit theory. But how exactly does the liability of parent companies contribute to this objective? The clearest statement by one of the EU Courts on this point is to be found in the GC’s judgment in Dow Chemical (2012). In that decision, the GC stated that ‘as a result of the parent company’s power of supervision, the parent company has a responsibility to ensure that its subsidiary complies with the competition rules’. The Court further explained that ‘[a]n undertaking which has the possibility of exercising decisive influence over the business strategy of its subsidiary’ may be presumed ‘to have the possibility of establishing a policy aimed at compliance with competition law and to take all necessary and appropriate measures to supervise the subsidiary’s commercial management’.Footnote ²⁶ Unfortunately, the GC made these statements in a case in which the parent company’s control was not self-evident – the case concerned a 50/50 joint venture. On appeal, the ECJ did not support the GC’s view, but instead maintained that the latter had pondered about the parent’s responsibility ‘purely for the sake of completeness’ and that the statement was therefore not contestable by legal means.Footnote ²⁷ Regrettably, the GC did not see this as an encouragement for any further reflection of this kind.

But the GC was right. As I have explained elsewhere in more detail,Footnote ²⁸ holding parent companies liable for competition law infringements by their subsidiaries serves a number of important objectives. Three reasons should be highlighted here.

First, parental liability restores effective deterrence where subsidiaries are underdeterred, for example, because they lack sufficient assets to pay a fine or because they misjudge the situation on the basis of insufficient information.Footnote ²⁹ From a deterrence perspective, it can make sense to involve the parent company in compliance efforts, if the subsidiary does not respond to the threat of monetary sanctions. However, two conditions should be met: First, it must be likely that the parent company will respond better to incentives than the subsidiary, for example, because the parent has more assets or better information. Second, the parent company must be able to influence the behaviour of the subsidiary and deter it from infringing the law. Typically, both will be the case. Parent companies often possess more assets and better information, and they are in a good position to steer their subsidiaries in the right direction. They can select and replace their subsidiaries’ management, they can establish group-wide compliance mechanisms, and they can set up compensation and promotion schemes that reward compliance and discourage any form of illegal behaviour. In this respect, holding parent companies liable for their subsidiaries’ offences serves a similar function to other forms of vicarious liability, such as the liability of employers for wrongs committed by their employees or the liability of parents for the behaviour of their children.

A second reason for parental liability is that it prevents parent companies from opportunistically exploiting limited liability to separate their assets from their risks.Footnote ³⁰ It is well known from corporate law and economics research that limited liability may induce shareholders to externalise risks to third parties, in particular to involuntary creditors who cannot insist on contractual protections.Footnote ³¹ A strategic use of limited liability allows shareholders to fully benefit from the opportunities for profit, but to disassociate themselves from the company in the event of losses. Such incentives may also exist with regard to infringements of competition law. For example, companies could be tempted to bundle their sales activities in markets particularly susceptible to cartels in weakly financed subsidiaries. If an infringement of competition law were to occur, the damage could then be contained to the subsidiary, while the parent company would remain unaffected. Extending liability to the parent company undermines such strategies. It eliminates the incentive for opportunistically exploiting limited liability and re-internalises all competition law risks to the corporate group and its ultimate shareholders.

The third reason for parental liability is that enforcement is expensive and that parent companies often have a comparative cost advantage over the state.Footnote ³² Many of the most serious competition infringements take place in secret. They are difficult to detect and investigate. As a result, competition authorities have to devote considerable resources to ensure that infringements are established in a way that withstands judicial review. High costs of enforcement are an important reason why competition law relies heavily on cooperative measures such as leniency programmes and settlements. The liability of parent companies can also be seen as a means to save enforcement costs. Parent companies are in a good position to take over part of the investigation work that would otherwise have to be carried out by authorities. They can obtain reports from their subsidiaries, examine contracts and accounts and, if necessary, conduct internal investigations. As internal control mechanisms usually already exist for the purpose of group management, parent companies can typically implement investigative measures at a lower cost than the state. Given the greater cost-effectiveness of internal reviews, this not only turns public costs into private costs but saves administrative costs overall.

Occasionally, it is claimed that the actual design of the single economic entity doctrine does not fit these policy objectives. For example, it is argued that the doctrine does not reward compliance efforts but punishes them because the parent company is liable even if it does everything in its power to prevent the subsidiary from committing competition law violations.Footnote ³³ Moreover, it has been questioned why the parent company is also liable if the subsidiary is solventFootnote ³⁴ and why the application of the doctrine does not depend on whether the parent could actually have prevented the infringement.Footnote ³⁵ However, the strongest incentive to commit to compliance comes from the possibility of avoiding liability altogether. The parent company is rewarded for its compliance efforts by not being liable if no infringement occurs. If the parent company succeeds in deterring the subsidiary from committing infringements, the question of liability does not arise at all – neither for the parent nor for the subsidiary. Furthermore, the same questions could be asked about the liability of employers under the doctrine of respondeat superior. Both concepts cannot be reduced to a single objective and they are based on fairly general conditions to cope with a large number of different cases. The fact that efficient deterrence can be achieved in individual cases even without vicarious liability does not mean that vicarious liability as a whole is not important for deterrence. Hardly any doctrine does justice to every individual case. It would be possible to differentiate the conditions for the liability of parent companies to a greater extent, but legal certainty would suffer as well. Given this trade-off, it seems justifiable that the doctrine is based on rather general conditions. Moreover, in accordance with the case law of the EU Courts, the Commission has discretion as to whether or not to invoke the parent company’s liability.Footnote ³⁶ Where the application of the doctrine does not contribute to general or specific deterrence, it can therefore remain unapplied.

4.3.2 Ensuring the Correct Calculation of the Fine

Another objective of the single economic entity doctrine is to enable a proper calculation of fines. As we shall see, it is very important to distinguish this function from the one discussed in the previous section. In case law, however, both functions are sometimes confused. The starting point for all consideration is that the benchmark for the calculation of fines is the objective of deterrence. The Courts have repeatedly stressed that the Commission must ensure that the fine has the necessary deterrent effect.Footnote ³⁷ They have also explained that, as far as the specific deterrence of the infringing undertaking is concerned, the deterrent effect must be assessed in relation to the size and the economic power of the undertaking, for which it is necessary to take into account its global resources.Footnote ³⁸ As pointed out by AG Kokott in her statement quoted above, in this context, it is important to correctly assess the ‘true economic strength of the whole undertaking’, i.e. the corporate group. The Courts, therefore, assume that – in so far as turnover is relevant for the calculation of the fine – it is the consolidated turnover of the group as a whole that must be taken into account. In Group Gascogne (2013),Footnote ³⁹ the ECJ explicitly referred to Article 1(1) of Directive 83/349Footnote ⁴⁰ for the purpose of determining the 10% turnover cap according to Article 23(2) of Regulation 1/2003Footnote ⁴¹ and paragraph 32 of the 2006 Fining Guidelines.Footnote ⁴² Today, the relevant provision is to be found in Article 22(1) of the Accounting Directive 2013/34,Footnote ⁴³ which, like its predecessor, obliges parent companies and subsidiaries to prepare consolidated financial statements. The aim is to provide ‘a true and fair view of assets and liabilities, the financial position and the profit and loss’ of the whole group of companies.Footnote ⁴⁴ It should be noted, however, that the conditions for determining ‘parent undertakings’ and ‘subsidiary undertakings’ within the meaning of Article 22(1) of the Accounting Directive are set out exclusively in that provision. The criteria listed there are similar to those used in EU competition law to determine economic units – but they are not identical. It is therefore not necessarily the competition law concept of an undertaking that decides on the attribution of turnover.

The conclusion that only consolidated group turnover can be decisive in so far as turnover is relevant for the calculation of the fine is already apparent from the fact that turnover can easily be reallocated within the group. Competition law investigations take a long time, so companies usually know that a fine will be imposed well in advance of the actual imposition of the fine. If the managers of a corporate group could be sure that only the turnover of the subsidiary will be taken into account, they could adapt to this and shift the turnover to other companies in the group. This is particularly true where the Commission does not normally take into account the turnover during the cartel infringement but, as in the case of the 10% turnover cap, the turnover in the year preceding the prohibition decision. At this stage, the company is usually aware that a fine will soon be imposed. Against this background, it is surprising that the ECJ apparently wants to limit the relevance of consolidated group turnover to cases in which liability is attributed to the parent company. In the Groupe Gascogne judgment, at least, the Court held that the Commission is entitled to rely on group turnover where it ‘has established to a sufficient legal standard that an infringement may be attributed to a company which heads a group’.Footnote ⁴⁵ If that was meant as a condition, the Court would be wrong. For the reasons set out above, it must always be the consolidated group turnover that is taken into account, even if only a single subsidiary is liable. Interestingly, the ECJ recognises that the Commission cannot be required to demonstrate the decisive influence of the parent company for each subsidiary whose turnover it wishes to include in the calculation of the fine, as these are ‘two separate issues serving different purposes’.Footnote ⁴⁶ This observation is correct and the conclusion must ultimately be that the calculation of the fine should not depend at all on the economic unit as developed for the attribution of liability. Instead, the Commission should simply always be allowed to rely on consolidated accounts as defined in Chapter 6 of the Accounting Directive.

There is an important difference between the liability function of the single economic entity doctrine and its use for the correct calculation of fines, and that is the point in time that is decisive. The liability function is linked to the parent company’s control and its ability to prevent competition law infringement. Liability based on this ground should therefore apply only to corporate entities which were able to exercise a decisive influence during the infringement. For the calculation of the fine, however, the relevant point in time should in principle be the date of the prohibition decision. The reason is that fines serve primarily as a deterrent and thus have a forward-looking purpose. In particular, the objective of specific deterrence, i.e. ensuring compliance with the undertaking addressed by the prohibition decision, requires the fine to be set in such a way as to anticipate the undertaking’s future behaviour. This is an important finding because the undertaking at the time of the decision may be quite different from the one at the time of the infringement.Footnote ⁴⁷ The objective of setting the fine in such a way as to prevent future infringements may even justify taking into account the economic strength of entities which were not part of the undertaking at the time of the infringement. In contrast to the liability function, it is irrelevant for the calculation of the fine whether other members of the group could have prevented the competition law infringement. Instead, it is simply a matter of correctly taking into account the actual economic strength of the group when calculating the fine.

4.3.3 Ensuring the Payment of the Fine

Another important objective of the single economic entity doctrine, derived from the case law of the EU Courts, is to ensure that fines are actually paid. Even though the Courts adopt an approach which comes close to personifying the economic unit formed by a group of companies,Footnote ⁴⁸ they accept that the Commission can only address its decisions to natural and legal persons.Footnote ⁴⁹ This is the only way to ensure that decisions imposing fines are enforceable under Article 299 TFEU. In this context, the ECJ has described the joint and several liabilities of parent companies and their subsidiaries as ‘an additional legal device available to the Commission to strengthen the effectiveness of the action taken by it for the recovery of fines imposed for infringement of the competition rules’.Footnote ⁵⁰ Moreover, the Court has explained that extending liability to the parent company ‘reduces for the Commission, as creditor of the debt represented by such fines, the risk of insolvency […]’.Footnote ⁵¹ On other occasions, the ECJ has emphasised that joint and several liability ‘cannot be reduced to a type of security provided by the parent company in order to guarantee payment of the fine imposed on the subsidiary’.Footnote ⁵² Thus, the Court has clarified that securing the enforcement of the fine is one purpose of parental liability, albeit not the only one.

Since fines for competition offences are often very high, it is not surprising that companies go to great lengths to avoid them. Past experience has shown that this sometimes includes corporate restructuring. A fairly well-known example that happened in Germany is discussed in detail in Chapter 5 of this book.Footnote ⁵³ In this case, the Bundeskartellamt had to close its proceedings because a restructuring had made it impossible to enforce the fines. This case was one of the reasons why the German legislator decided to introduce parental liability based on the European model as part of the Ninth Amendment to the German Competition Act.Footnote ⁵⁴ As far as the particular function of ensuring the enforcement of fines is concerned, parent company liability competes with other approaches, such as the liability of legal and economic successors or simply faster enforcement of fines. However, it is clear that it becomes more difficult and therefore less attractive to avoid fines through restructuring if liability is also extended to the parent company.

The Courts have in the past linked the problem of collecting the fine with the objective of deterrence.Footnote ⁵⁵ Such a connection does indeed exist since a fine which is not collected cannot contribute to deterrence. According to this logic, if the subsidiary defaults on payment, liability should be extended only to those who could have prevented the infringement, i.e. the parent company at the time of the infringement (or several successive parent companies if there has been a change of control during the period of the infringement). However, as illustrated by successor liability,Footnote ⁵⁶ deterrence is not the only possible objective of such a form of contingent liability. It could also be seen as an attempt to ensure that a large financial claim by the Commission is met in order to protect the EU budget and ultimately European taxpayers. Seen in this light, there would not even need to be a link between the party liable and the competition law infringement. Instead, the substitute debtor could be anyone who held a significant stake in the subsidiary at some point between the beginning of the infringement (when the debt was first incurred) and the payment of the fine (when it is fulfilled). If the main objective is to avoid subsequent restructuring, it makes sense to focus on a point in time before the investigations become known.

To be clear, such liability, which is not linked to the control during the infringement, has not yet been established under EU competition law.Footnote ⁵⁷ Yet, that does not mean that it could not exist.Footnote ⁵⁸ First steps in this direction can be found at the Member State level. Germany has created a form of substitute liability in 2017, as part of its strategy to close loopholes in its former liability law. Under Section 81a of the German Competition Act,Footnote ⁵⁹ a sum equal to the fine can now be demanded from parent companies as well as legal and economic successors if the fine cannot be enforced against a subsidiary or predecessor responsible for an infringement.Footnote ⁶⁰ This type of liability has the advantage that it does not contain any accusation regarding the infringement – the substitute debtor need not have been affiliated with the subsidiary at the time of the infringement – so that the procedural guarantees of the law on fines need not be applied. For this reason, the German legislator suggests, for example, that the provision can also be applied retroactively, even though the law on fines is characterised by the principle that acts can only be punished if they were prohibited before they were committed.Footnote ⁶¹ In fact, the same approach could be used for other high liabilities, such as tax debts – without it being relevant whether any of the companies have infringed the law. Such liability would not be a sanction but would be justified solely by the need to prevent evasive conduct aimed at circumventing high payment obligations.

4.4.1 Sibling Liability

The first issue to be looked at is the liability of sister companies. It has been claimed in the literature that the liability of sister companies already follows from the concept of the single economic unit.Footnote ⁶² Since sister companies form an economic unit with the parent company and with each other, they shall, according to this view, be mutually liable for their respective competition law infringements. This position is closely linked to the view that it is the economic unit as such which commits the infringement and that the infringement can therefore be attributed to all the legal entities constituting the economic unit, i.e. essentially all members of the corporate group.

The Courts have so far acknowledged the liability of a sister company only in the rare case where one sister company exercises a decisive influence over the other.Footnote ⁶³ For other constellations, the case law is not yet clear. The ECJ has held in Aristrain (2003), that it is not possible ‘to impute to a company all of the acts of a group even though that company has not been identified as the legal person at the head of that group with responsibility for coordinating the group’s activities’.Footnote ⁶⁴ The GC has apparently understood this to mean that liability can only be attributed bottom-up in the direction of (direct and indirect) parent companies, but not top-down in the direction of subsidiaries or even horizontally in the direction of sister companies. For example, it held in Parker ITR (2013) that the Commission cannot attribute to a subsidiary the responsibility of its parent company for the unlawful conduct of another subsidiary, which ultimately also means that the subsidiary is not liable for the infringement of the other subsidiary.Footnote ⁶⁵ In other decisions, the GC has indicated that it interprets Aristrain as meaning that liability can only be attributed to the parent company.Footnote ⁶⁶ Christian Kersting, on the other hand, has claimed that the real problem in Aristrain was that the existence of a single economic unit had not been proven, because there was already no ‘parent company’ which would have managed the companies of the group in a uniform manner.Footnote ⁶⁷ That is correct, but it is unclear whether this was a decisive point for the ECJ.

Other judgments, such as the GC’s Michelin decisionFootnote ⁶⁸ and both Courts’ judgments in the Versalis litigation,Footnote ⁶⁹ are less significant, as they do not concern the question of liability but the calculation of fines – in particular, the relevant turnover to be taken into account and the question of recidivism. As has been repeatedly stressed in this chapter, these are distinct issues that have little to do with the establishment of liability. Nor does it seem sensible to look for the solution in the notion of the undertaking or the concept of the single economic unit.Footnote ⁷⁰

The decisive factor must ultimately be the purpose of declaring a particular legal entity liable. It has been argued that the liability of sister companies is necessary to properly capture the economic strength of the group.Footnote ⁷¹ But that is not correct. As already shown,Footnote ⁷² it is true that the calculation of fines should be based on the group as a whole. This does not mean, however, that all members must also be individually liable. Remember that the ECJ has made it clear in Group Gascogne (2013) that, where the liability of the ultimate parent company is established, the Commission ‘is entitled, for the purposes of assessing the financial capacity of that company, to take into consideration the latter’s consolidated accounts inasmuch as they may be regarded as constituting a relevant factor of assessment’.Footnote ⁷³ The consolidated accounts, however, automatically include the assets, liabilities, financial positions, profits, and losses of all subsidiaries in terms of Chapter 6 of the EU Accounting Directive 2013/34.Footnote ⁷⁴ Furthermore, the ECJ has pointed out that it is, in this context, not necessary for the Commission to show that each subsidiary was controlled by the parent company.Footnote ⁷⁵ Thus, the Court has clearly separated the question of liability from that of attribution of turnover – and that was the right thing to do.

As explained in detail above,Footnote ⁷⁶ extending liability to legal entities that were not directly involved in the infringement serves to induce them to influence the conduct of the real perpetrator. If this is understood, it is obvious that the mutual liability of sister companies for their respective infringements makes little sense. The same applies to holding subsidiaries liable for infringements committed by their parent companies.Footnote ⁷⁷ Instead, liability should depend strictly on the possibility of control. In corporate groups, however, control is typically exercised from top to bottom. A parent company can take steps to ensure that its subsidiaries do not commit any infringements and holding the parent liable can therefore contribute to deterrence. But sister companies cannot control each other any more than subsidiaries can control their parent companies. The approach of extending liability to companies which are at the same or lower level in the corporate hierarchy than the actual perpetrator is therefore misguided.

4.4.2 Actions for Damages

Another issue is whether parent company liability is also justified in actions for damages. This has been the subject of much debate since the entry into force of the EU Directive on Antitrust Damages Actions in 2014. The issue has gained further attention since the ECJ recently held in Skanska (2019) that the concept of ‘undertaking’ within the meaning of Article 101 TFEU constitutes an autonomous concept of EU law and cannot have a different scope with regard to the imposition of fines on the one hand and actions for damages on the other.Footnote ⁷⁸ However, the answer to the question of parental liability for damages cannot be found in terms and definitions, but only in a purposeful interpretation of the relevant provisions. If one assumes, as seems reasonable, that liability for damages does not only serve the purpose of compensation but is also supposed to contribute to deterrence, there is little reason not to apply the principles of parental liability also in actions for damages. This is particularly true if one further assumes that damages actions concern, at least in part, harm that is not adequately taken into account in fine proceedings. A rule of holding parent companies liable for damage caused by their subsidiaries then ensures that the necessary incentives for compliance are also set in relation to these positions.

5.3.1 The ‘Sausage Gap’ – Background

In 2014, the German Federal Cartel Office (‘FCO’) imposed fines totalling €338 million on 21 sausage manufacturers for illegal price-fixing agreements between 1997 and 2009, which sought to implement industry-wide price increases for the sale of sausage products to the retail trade. Two of the alleged conspirators, partnerships with limited liability (GmbH & Co. KG) that were initially fined €128 million, belonged to the largest German sausage manufacturer – a holding company ultimately held by an entrepreneurial family.Footnote ¹¹

After lodging appeals against the fines, the two partnerships’ major assets were transferred for the benefit of other entities within the group. The partnerships were subsequently subject to formal liquidation proceedings and ultimately dissolved. As a consequence of internal restructuring measures of this sort, the addressees of the fines had literally ceased to exist. According to the FCO, the proceedings therefore had to be closed.Footnote ¹²

Whenever talking about the ‘sausage gap’ (Wurstlücke), it must be kept in mind that this was no isolated incident – it was merely the most noteworthy due to the level of fines imposed. In the course of these proceedings, the FCO’s president publicly expressed his dismay as the FCO grudgingly had to drop fines imposed on three other accused companies on account of similar internal restructuring measures. This led to a failure to collect a significant portion of imposed fines (i.e. €238 million).Footnote ¹³

But why was the chain of liability cut in these – and previous – cases without legislative interference? Context can be provided when looking at the principles that follow and the provisions under German law.

5.3.2 The End of the Sausage: German Reform of the ARC

Ultimately, it was not until 2017 that the legislator closed the infamous ‘sausage gap’ in the course of the 9^th amendment of the ARCFootnote ³³. On the occasion of the implementation of the EU Damages DirectiveFootnote ³⁴, the 9^th amendment significantly extended the liability for fines imposed in cartel fine proceedings in three regards.

Firstly, it introduced the liability of the economic unit (former § 81 (3a) ARC, now § 81a (1) ARC)Footnote ³⁵. If a ‘person in a leading position’ commits an administrative offence by which the competition law duties of the ‘undertaking’ have been infringed, fines can also be imposed on other legal persons that ‘made up’ (formed) the undertaking at the time of the infringement and that exercised direct or indirect decisive influence over the management of the entity which infringed competition law.

Secondly, the liability of the legal successor was tightened by introducing unlimitedFootnote ³⁶ liability for the legal successor (former § 81 (3b) ARC, now § 81a (2) ARC) and stipulating the liability of the economic successor (former § 81 (3c) ARC, now § 81a (3) ARC). This means that the universal legal successor is liable in cases where the legal entity responsible under competition law no longer exists. In addition, a singular legal successor (e.g. acquirer of assets) can be liable, even where the legal entity continues to exist but has become economically irrelevant. Thus, every transfer of a business unit that was involved in a competition law infringement can cause liability for fines in respect of the successor.

Finally, these changes were accompanied by the introduction of a contingent liability during the transition period to also cover restructuring measures until the new regulations became fully effective.Footnote ³⁷

These above-described measures went beyond simply closing the so-called ‘sausage gap’. The intent was to fully harmonise German law with EU practice concerning liability for cartel fines. Introducing liability of the economic unit provoked significant criticism insofar as it violated the principle of legal certainty, the principle of fault, and the principle of in dubio pro reo.Footnote ³⁸ Putting aside constitutional concerns for a moment, from an enforcer’s perspective, the provisions extended liability to the successors of restructured companies and their parent companies with the aim of preventing cartel members from escaping fines by means of internal restructuring. In other words: one would expect German law should have been prepared for the ‘wurst’ case, right? However, the tension between entity liability versus enterprise responsibility in relation to antitrust infringements committed by other legal entities (under justifying circumstances) was thereby only solved with regard to fines.

5.3.3 Developments with Regard to Cartel Damages Claims

The persisting divergence in the treatment of the single economic entity versus the legal entity becomes more obvious when looking at the flip side of the coin: the capacity to be sued. The Member States’ courts have been reluctant to employ the single economic entity principle also in civil damages situations. For example, in 2018, the French Supreme Court ruled that the notion of an economic entity is not applicable to damages claims deriving from anti-competitive conduct. According to the court, competition law should not interfere with the principle of personal liability under French civil law.Footnote ³⁹

In Germany, in the course of implementing the EU Damages Directive, the 9^th ARC amendment also adapted the rules on ‘Damages and Disgorgement of Benefits’ – establishing the framework for compensation for harm caused by a competition law infringement.Footnote ⁴⁰ While the rules on fines have drawn a verbal connection to the concept of the single economic entity (§ 81 ARC, cf 0), the rules on damages (§§ 33a (1)ff ARC) still revert to the ‘infringer’ as the addressee of claims without further description of the specific legal entity. This prompted a vibrant discussion among scholars as to whether the closing of the ‘sausage gap’ with regard to the collection of fines would also have an impact on civil law liability in cartel damages claims.Footnote ⁴¹

The EU concept of the single economic entity would not apply in this way – at least not until the German legislator introduced liability of the group or liability of the parent company for civil damages. The basic principles of German tort law, in particular, the legal entity principle, would continue to apply.Footnote ⁴² Since the EU Damages DirectiveFootnote ⁴³ did not explicitly regulate the question of responsibility and the acquis communautaire had not yet specified the civil liability of group companies for cartel damages, the question of attribution was to be solved by national law.Footnote ⁴⁴

Yet, the opposite opinion emphasises that a provision in a Member State’s civil law does not meet the requirements under the principle of effectiveness if it declares only part of the company liable for damages. This would be in contrast with the EU perspective where the whole company commits the underlying infringement.Footnote ⁴⁵ The EU legislator only would have clarified such a point in the EU Damages Directive if it had wanted to deviate from the EU concept of the undertaking addressed in Article 1 (1) EU Damages Directive. The CJEU in Kone had already developed requirements for national tort law based on the principle of effectiveness and, at the same time, explicitly referred to the undertaking.Footnote ⁴⁶ Thus, the undertaking could be sued under EU law.Footnote ⁴⁷ Injured parties would bear far more than the normal risk of insolvency if only a small sub-unit of the group could be held liable. Assets could easily be reduced to the detriment of the injured party. Groups could transfer assets of subsidiaries which committed competition infringements to other group entities or even pool such competition risks in subsidiaries with low capitalisation.

However, even supporters of that view doubt that the far-reaching EU concept of liability as such takes sufficient account of the fundamental principles of legality, legal clarity, and fault. For example, it is often stated that the principle of personal responsibility on the EU level has become purely abstract and is overshadowed by practically irrebuttable presumptions.Footnote ⁴⁸

So how do the discussed concepts of the legal entity principle and the separation principle in the Member States’ civil law systems relate to the EU concept of the single economic entity? Before addressing by reference to the CJEU’s ruling in Skanska (Section 5.4), we will briefly recall the cornerstones of the concept of the single economic entity in EU competition law.

5.3.4 The Concept of the Single Economic Entity in Contrast to Legal Entity Principle and Principle of Separation

In EU competition law, an independent concept of enterprise prevails, namely the single economic entity. The addressee of competition law is the undertaking, which is to be understood as any entity or body engaged in economic activity, regardless of its legal status and the way in which it is financed.Footnote ⁴⁹ This often involves a (whole?) group of companies.Footnote ⁵⁰ Thus, the CJEU affirms both the possibility of imposing a fine on the legal or economic successor of the company committing the competition law violation in the event that this company ceases to existFootnote ⁵¹ and the possibility of imposing a fine on the parent company for competition infringements committed by its subsidiary.Footnote ⁵² Inasmuch as an undertaking may consist of several legal entities,Footnote ⁵³ the European Commission may also sanction other legal units for this infringement instead of or in addition to the legal entity responsible for the competition infringement. In the former case of sanctioning the successor instead of the responsible corporate entity that ceased to exist, the company continues to exist within the successor (economic continuity); in the latter case of sanctioning the parent company for competition infringements of its subsidiary, both legal entities are considered part of a single economic entity.Footnote ⁵⁴

The liability of a company’s successor under EU law obviously intends to ensure the effectiveness of competition law by making it impossible to escape liability through restructuring, sale or liquidation of the legal entity responsible.Footnote ⁵⁵ With regard to the attribution of liability within a corporate group, this objection is less convincing. The case law tends to indicate an efficiency-driven structural liability of the parent company so that a parent company is held liable as a guarantor for the compliant conduct of the group subsidiary on account of its factual possibilities to influence the subsidiary.Footnote ⁵⁶ The prerequisite for the joint responsibility of legally independent companies, therefore, is that the parent company exercises (can exercise?) decisive influence on the subsidiary so that the subsidiary essentially follows instructions from the parent company.Footnote ⁵⁷ In turn, this is presumed where the shareholding is almost complete (close to 100%).Footnote ⁵⁸

5.4.1 The Setting and the CJEU’s Decision in Skanska

Against the backdrop of the tension between the EU concept of the single economic entity and the legal entity principle governing national civil laws and laws of civil procedure, the CJEU’s 2019 ruling on national reference in Skanska was highly anticipated. In a nutshell, the CJEU was required to clarify whether determining who is liable for compensating victims of a cartel in breach of Article 101 TFEU is a matter of EU or national law.Footnote ⁵⁹ In doing so, the CJEU shifted the rules for attribution of liability for cartel fines within the group (the single economic entity) to questions of civil liability for damages (i.e. who can be sued in damages cases).

The main proceedings concerned a follow-on damages claim brought by the City of Vantaa against a nationwide cartel in the asphalt market implemented in Finland between 1994 and 2002. The City of Vantaa brought a damages action against the defendants (jointly and severally), who had acquired 100% of the shares in each of the supposed cartelist companies (or their then parent companies) in the year 2000 and, later, dissolved and liquidated these companies. The defendants had taken over their respective assets and continued their respective operations. The Finnish Competition Authority had uncovered the asphalt cartel in March 2002 and proposed fines in 2004, whereupon the Finnish Supreme Administrative Court (on the basis of Article 81 EC old version) imposed these fines on the defendants in September 2009 using the economic continuity test.

The defendants argued, inter alia, that they were not liable for claims against independent legal entities (their former subsidiaries). Furthermore, the claims were said to no longer exist as they had not been included in the respective liquidation procedures. These arguments led to contradictory decisions from the district and appeal courts in Finland. Whereas the District Court held that the principle of economic continuity must be applied in the same way as in administrative fine proceedings (on account of the principle of effectiveness), the Helsinki Court of Appeal denied civil liability for lack of a legal basis in Finnish law. It was the Finnish Supreme Court that referred the case to the CJEU as it had to decide between, on the one hand, the assumption that only the legal entity that caused the damage is liable for this, and, on the other hand, EU case law permitting any person to claim compensation for damages resulting from an infringement of Article 101 TFEU. The Court asked whether the determination of the liable party with regard to damages caused by an infringement is a matter of EU or national law and, if a matter of EU law, whether the principle of economic continuity should be applicable like in cases concerning fines.

The CJEU held that it was a matter of EU law to determine the entity required to provide compensation for damages caused by an infringement of Article 101 TFEU. It confirmed that the effectiveness of Article 101 TFEU would be jeopardised if undertakings responsible for damages caused by an infringement of EU competition rules were able to escape liability simply by changing their identity.Footnote ⁶⁰ The CJEU also vaguely addressed the methodological approach for determining the entity under EU law, suggesting that it should be the same as with regard to the imposition of fines under Article 23 (2) of Regulation No 1/2003.Footnote ⁶¹

5.4.2 Ratio of Skanska and Open Questions

If not read as a mere individual ruling, the notion of the court was indeed ground-breaking and not compulsory as Article 101 TFEU does not determine particularities of civil liability. Nor did the EU Damages Directive clarify these topics in 2014. The Commission itself, referring to joint and several liability under the EU Damages Directive, had argued that the person liable to pay damages should be determined under national law.Footnote ⁶²

A variety of questions remains, deriving from the two pillars of the case. On the one hand, there is the CJEU’s case law regarding fundamental principles of the private enforcement system developed since Courage/CrehanFootnote ⁶³ and on the other, there is the very specific notion of undertaking in EU competition law.

5.4.3 Developments After Skanska

The Member States’ courts have so far taken different approaches towards questions that have arisen since Skanska.

The question of how the principle of economic continuity will be applied will certainly become even more pressing in the future as it impacts not only the ‘given’ group but a multitude of potential third-party purchasers. As regards the purchase of an undertaking, the CJEU does not seem to presuppose any fault on the part of the purchaser. Rather, the purchaser ‘takes over its assets and liabilities, including its liability for breaches of EU law’.Footnote ⁹⁸ By way of example, a German court’s ruling regarding legal succession held that the company taking over a business unit of the alleged cartelist via spin-off was liable for cartel damages on the basis of a corporate law regulation in the Transformation Act (Umwandlungsgesetz).Footnote ⁹⁹ The successor did not participate in the alleged infringement. However, the German court applied the existing liability scheme of the Transformation Act and affirmed joint and several liabilities of the cartelist and its successor for damages that arose up to the point in time when the spin-off took effect (i.e. by registration in the commercial register). Although the infringement putatively existed even until after this point in time, liability was not extended for the successor in this regard. In short, the court made use of an existing corporate liability regime, which is designed to protect creditors in general, not specifically creditors of cartel damages claims. Unlike in Skanska, the successor neither had been involved in the infringements itself nor did other aspects command an extension of the claimants’ recoverable assets from a normative point of view.

With regard to the more general question of horizontal or vertical liability for competition law infringements of other group companies, a majority of German courts have rejected the possibility of being sued for cartel damages in civil court in relation to a parent’s subsidiary or a sister company and thus, in principle, its civil liability for infringements committed by other members of the same economic unit.Footnote ¹⁰⁰ Even while quoting Skanska, courts have referred to the EU principle of personal responsibility.Footnote ¹⁰¹ If there is a lack of decisive influence, national courts have not reflexively attributed liability to a subsidiary or sister company. Rather, they have focused on whether the subsidiary had control over the actions of the other group companies.

Against the backdrop of national rules which have incorporated parental liability through the transposition of the EU Damages DirectiveFootnote ¹⁰², commentators eagerly awaited the CJEU’s findings in the case of Sumal. Divergent decisionsFootnote ¹⁰³ in Spain had caused a referral to the CJEU for a preliminary ruling on whether a subsidiary can be liable for its parent company’s conduct.Footnote ¹⁰⁴ The CJEU was asked to elaborate on the context of intra-group relationships and, in particular, whether the concept of the single economic entity is to be understood with regard to control or also with regard to other intra-group aspects (such as being a beneficiary of a parent or sister company). The opinion of the Advocate General, in this case, suggested that control alone is not a suitable criterion for assessing liability since subsidiaries do not exert control over their parents. However, the Advocate General also highlighted the principle of personal liability.Footnote ¹⁰⁵ A ‘downward’ liability would require that the subsidiary not only was controlled by the parent company but also was objectively necessary for the infringement of the parent company.Footnote ¹⁰⁶ The market conduct of the subsidiary must have made it possible to concretise the effect of the infringement. Only then, the parent and subsidiary would be jointly and severally liable.Footnote ¹⁰⁷ A consequent application of that reasoning means that there can be more than one single economic entity within a group of companies depending on the context of the respective case.

Eventually, the CJEU holds the subsidiary liable as part of the economic unit even if it is not the addressee of the imposed fines and thus once more pierces the corporate veil. Remarkably, the CJEU’s ruling only partially adopts the Advocate General’s proposed criteria for this veil-piercing. In Sumal, the CJEU first reiterates the established concepts of undertaking and economic unit and the element of control.Footnote ¹⁰⁸ However, after acknowledging the fact that the same parent company may be part of several economic units depending on the respective activity of a conglomerate, the CJEU adopts broader requirements in order to establish joint and several liability in cartel damages cases. Liability shall not be construed to a subsidiary if the parent’s infringements are committed in the context of economic activities entirely unconnected to the subsidiaries’ own activity in which the subsidiary was in no way involved.Footnote ¹⁰⁹ However, the damaged party has (only) to show that the subsidiary formed such an economic unit by proving (i) the economic, organisational and legal links between the defendant subsidiary and its parent and (ii) a specific link between the subsidiary’s economic activity and the subject matter of the infringement of the parent (i.e. by proving that both entities distribute identical products).Footnote ¹¹⁰ So, the CJEU does not implement an automatism of vertical and horizontal liability. But it is just a matter of time before the CJEU will be asked to specify to what extent a product (range) must be identical.

Referring to the right to an effective remedy and to a fair trial, the CJEU cryptically emphasises that the subsidiary must dispose of all means necessary to defend itself. In particular, it must be able to dispute that it belongs to the same economic unit as its parent but as well defend itself with regard to the decision of the Commission arising from previous public enforcement.Footnote ¹¹¹ Means with regard to the latter are factually limited, however, since national courts cannot rule against the existence of an infringement already found by the European Commission.Footnote ¹¹² The contradiction is obvious: the subsidiary is factually not able to exercise such rights, since the European Commission grants such rights of defence only to the entities involved in infringement proceedings, but not to affiliated ‘third-parties’, which according to Sumal can later be sued as part of an economic unit. The CJEU here considers it sufficient that during such infringement proceedings the economic unit exerted such rights of defence.

Supposedly, the CJEU’s ruling opens the path to the liability of any of the sister companies, since any legal entity that is part of the economic unit which has committed an infringement can generally be the addressee of damage claims.Footnote ¹¹³ With that, a new form of forum shopping is possible where damaged parties will consider and weigh favourable conditions in different member states such as presumptions regarding the amount of damages or different statutes of limitation. It will be crucial for subsequent rulings that the CJEU finds suitable criteria that also consider aspects of property and investment protection if the parent company does not hold 100% of the shares.

6.2.1 Economic Development and the Rise of the Chaebol

The emergence of chaebol in Korea is in line with the rapid development of the economy. The formation of initial capital is important for economic development in underdeveloped countries, and this requires the establishment of an investment security and investment inducement system.Footnote ⁴ In Korea, this process was carried out in earnest by the government after the Korean War, where the Korean government fostered investment directly by direct government investments. In the process, the economic resources generated by foreign free or paid financial support were concentrated on a small number of companies actively engaged in the economic development program. This government support provided these companies with an opportunity to grow into chaebol.

The government’s leading role in economic development was embodied in a five-year economic development plan that began in 1962. In particular, the five-year plan that was carried out from the first to fourth plan prioritised economic growth.Footnote ⁵ In accordance with this plan, the government carried out specific allocations of resources. For example, the first five-year plan contained a preferential allocation of funding for the light industry, the second plan for heavy industry, and the third plan for the chemical industry. In accordance with these plans, funding was given to specific operators in the field. In this process, Hirschman’s unbalanced growth theoryFootnote ⁶ became the theoretical basis for economic policy. The performance of leading industries, which had been subject to intensive support under this policy, expanded to related front and rear industries, just as the development of the chemical industry has led to the development of the textile industry ahead and the refinery industry behind. It eventually led to the growth of the entire national economy. In terms of economic development, these strategic choices and practices certainly had a positive effect. Yet, the focused allocation of resources to a small number of industry players also had negative effects such as introducing inequality in the economic system. The emergence of chaebol is a symbolic representation of negative effects. Chaebol has been a key driver of the government’s development policy, and at the same time, the biggest beneficiary of growth. In this regard, the analysis that ‘the Korean government has hardly put a brake on the accumulation of family property as long as it is reinvested in production activities deemed by planners to be high in priority’,Footnote ⁷ provides a proper understanding of the relationship between the government and chaebol at this time. The family underlying the chaebol was an advantageous way of accumulating capital as it served as a powerful means to avoid capital leaks in a culture where it is hard to expect a member of the family to pursue his own interests at the expense of the interests of the whole family. Also, the government did not impose any real restrictions on the expansion of chaebol as long as they followed the government’s development program, which resulted in the size of chaebols growing in lockstep with the rapid growth of the national economy.

There has been a fundamental change in the government’s economic policies since the 1980s. By that time, the size of the economy had grown too much to be run by the government’s programs. Similarly, the pursuit of other values such as resolving inequality problems in addition to economic development has emerged as an unavoidable social agenda, shifting the government-led economic management style to one based on private initiatives. Symbolising this change was the Monopoly Regulation Act that was enacted in 1980, which was the first legislation to institutionalise competition policies in Korea. In this new environment, where private sector autonomy is expanded and market functions strengthened, chaebol achieved explosive growth. This trend continued until the 1997 foreign exchange crisis. This crisis in late 1997 resulted in a fundamental change in the previous industrial structure. Above all, it was an opportunity to put the brakes on business behaviour and the chaebols’ unconditional expansions; since then, there have been structural changes focused on high-value-added industries. But this change did not lead to a change in the industrial structure, where chaebol plays a central role in the entire industry. As such, the trend of chaebol leading the industry as a whole has been maintained. But the gap between chaebols is widening and the influence of the top chaebol is increasing. This development may continue depending on the changes in the industry and the extent to which the chaebols respond.Footnote ⁸

6.2.2 Characteristics and Definitions of Chaebol

6.2.3 The Assessment of Chaebol in the Korean Economy

Chaebols are becoming economic entities that embody the concentration of economic power at each level of market concentration, general concentration, and ownership concentration. The degree of general concentration is understood as the share of a particular enterprise or enterprise group in the entire industry or entire national economy.Footnote ³¹ As an indicator of this share, the total amount of capital, total assets, employment, etc., from a stock perspective and sales, net income, output, and value added from a flow perspective are utilised. The ownership concentration, beyond the perspective of wealth inequality or equity, relates to the ownership structure of enterprises, the most important production organisation in a capitalist economy that recognises private ownership of means of production. In other words, the concentration of ownership as a concentration of economic power means that the enterprise’s issued shares or remaining claims are concentrated in a small number of individuals or their families,Footnote ³² and this makes it a key issue for the allocation and utilisation of economic resources through the entity to individuals. Therefore, this problem is not separated from the problem in which the control of a company or a business group is wholly attributed to an individual.Footnote ³³

In Korea, chaebol exists as entities that embody the concentration of economic power that is understood from various perspectives. First of all, with regard to market concentration, according to a survey in 2015, the industry concentration was 49.2% when the affiliates of the conglomerate were included in the top three companies in accordance with the CR3 criteria.Footnote ³⁴ If the affiliates were not in the industry, the industry concentration was 45.2%. And the figure was 28.9% when the affiliates are entering the industry but are not included in the top three.Footnote ³⁵ The figures suggest that chaebol affiliates’ entry into an industry and increased market share are correlated with industrial concentration. It is also worth noting that, when looking at the cases of abuse of a market-dominant status, most of the abuses are found to be caused by affiliates belonging to chaebol.Footnote ³⁶ It is also noteworthy that the current Monopoly Regulation Act targets business groups with assets of more than 10 trillion won in affiliates for special regulations. In 2020, 27 business groups controlled by the owner that can be classified as chaebol have an average of 48.2 affiliates. This situation suggests that concentration in individual markets in Korea is closely related to chaebol. The general concentration by chaebol is also increasing in Korea. Table 6.1 shows how general concentration by the top 10 chaebols has been developing in Korea since 2010 through changes in total assets and GDP.

The total asset growth rate of the 10 largest chaebols during the period was 92.3%, well above the GDP growth rate of 45.0%. Also, compared with GDP, the total assets of the top 10 chaebols rose from 53.1% in 2010 to 70.5% in 2019. These figures indicate that chaebols account for a large portion of the national economy and that this trend is also deepening, increasing the general concentration of chaebol. It is hard to find a case in which chaebols have not shown complete control by their owners in terms of ownership concentration. However, as noted earlier, this control is not achieved by an absolute interest. As of 2019, only 0.9% of the top 10 chaebols hold stakes in affiliates held by their heads, while only 2.4% of them have such stakes held by family members. However, 54.3% of the shares are held between affiliates by cross or circular shareholdings. Such an equity relationship allows the owner to exercise 100% control over the entire group. Therefore, the issue of ownership concentration could be replaced by the issue of having full control of a chaebol with a small stake and whether there is a mechanism in place to check them internally and externally to ensure managerial efficiency.

To sum up the above analysis, chaebols are becoming economic entities that embody the concentration of economic power at each level of market concentration, general concentration, and ownership concentration. It is also important to note that these three types of economic concentration define the complex nature of chaebol. In other words, market concentration can be intensified by large business groups,Footnote ³⁷ general concentration can be increased by strengthening the dominant position maintained in a large number of markets, and problems can be aggravated by the fact that ownership concentration is used to control large business groups.Footnote ³⁸ As a result of this complex nature, attempts of regulating to address one type of economic concentration will inevitably only have limited effect.

It is hard to deny that chaebol has made positive contributions to economic development in Korea.Footnote ³⁹ However, chaebol has also had negative consequences, and in particular, the concentration of economic power within the chaebol. Chaebol’s concentration of economic power accounts for a high portion of the national economy, and this concentration continues to grow, negatively affecting individual markets. In addition, the phenomenon of almost absolute control being concentrated on the owner creates centralisation. The overall characteristics of this pattern of economic concentration are also concerning. Chaebols are also seen negatively from non-economic perspectives. Economic power concentrated on chaebol is cited as one of the main factors of social instability, as it is a source of deepening wealth inequality and polarisation problems; furthermore, the concentration of economic resources on a small number of individuals could undermine the foundation of democracy.Footnote ⁴⁰ While the importance of such problems and the discussion of these issues should not be denied, for the order and operation of the economy, the core of the problem of chaebol is the concentration of economic power leading to a disruption to the market economy, which should be maintained as mandated by the constitution.Footnote ⁴¹ The general concentration of chaebol can have a negative impact on competition in individual markets. In addition, the concentration of decision-making authority during the course of the chaebol’s operations can lead to inefficient resource allocation, which is recognised as a concrete example of this problem.

6.3.1 Significance and Contents of the First Chaebol Regulation

The first legislation aimed directly at regulating chaebols was made by the First Amendment of the Monopoly Regulation Act in 1986, and it is necessary to examine the meaning of the legislation itself. First of all, it is highly significant that the legislation was made through a revision of the Monopoly Regulation Act, Korea’s competition law. This demonstrated the legislative determination to deal with the chaebol issue from the perspective of competition policy. It is also important to note that while institutionalising chaebol regulations, the government proposed suppression of the concentration of economic power as the title of the regulation clause. This legislation reflects the perception that the essence of the chaebol problem is economic concentration. Finally, it should be noted that the Japanese Anti-Monopoly Act had a significant impact on legislation at that time. Japan’s Anti-Monopoly Act was enacted as part of its economic democratisation policy after World War II and the intent to avoid an economic operation method centred on zaibatsu (chaebol),Footnote ⁴² which was the basis of the previous wartime economic operation.Footnote ⁴³ The Allied Military Government dismantled the existing zaibatsu and later imposed a ban on holding companies in Anti-Monopoly Act enacted in 1947 to prevent the formation of new zaibatsu.Footnote ⁴⁴ In addition, as companies belonging to disbanded zaibatsus gradually formed keiretsus(affiliates), reflecting concerns that such a keiretsu could lead to market rigidity, the Anti-Monopoly Act was amended in 1977 to introduce regulations limiting the total amount of shares that can be held in companies belonging to the same keiretsu.Footnote ⁴⁵ In the Korean economy, chaebol held an important position similar to that of zaibatsu in Japan before World War II, and for this reason, the Japanese Anti-Monopoly Act became a strong legislative model for the revision of the Monopoly Regulation Act.

According to the original regulations, a regulation banning holding companies was introduced, and a system was enacted to regulate the equity investments of large enterprise groups, which organised chaebols under a legal conception. Specifically, Article 7–2 of the revised 1986 Act prohibited the establishment of holding companies, and Article 7–3 stipulated the prohibition of mutual investment, Article 7–4 limited the total amount of investment, and Article 7–5 restricted the voting rights of insurance and financial companies belonging to large enterprise groups.

The holding company was the method used to form a zaibatsu before World War II, and therefore the Japanese Anti-Monopoly Act limited the powerful means of forming a zaibatsu through regulations prohibiting such. Although chaebols were not utilising a holding company structure at that time, concerns that a holding company system could be an easy way to control a large number of companies with small capital, given Japan’s regulatory cases, led to the introduction of a regulation banning holding companies in the Monopoly Regulation Act as a precautionary measure.

It is also noteworthy that legislation regarding existing chaebols regulated their equity investments instead of directly demanding structural changes such as dismantling enterprise groups. At that time, chaebols were generally forming enterprise groups through circular shareholding structures, so the regulation on investment limited the formation or maintenance of enterprise groups. In order to clarify the chaebol subject to regulation, a large group of enterprises was designated among chaebols when certain legal scale and structural requirements were met,Footnote ⁴⁶ and a regulatory framework was established. First, cross(mutual)-shareholdings between affiliates were prohibited in principle. However, since these regulations had limits to regulating circular (not mutual)-shareholdings, to compensate for this regulation were introduced as a second prohibition that uniformly limited the total amount of investments made by affiliatesFootnote ⁴⁷ belonging to large enterprise groups. The regulation on the ceiling for total amount of investment was expected to be a regulation that could have a real impact on the structure of the enterprise group that involved such things as circular investment.Footnote ⁴⁸ As a third prohibition, regulations were introduced to limit voting rights of shares of affiliates held by financial and insurance companies belonging to large enterprise groups, which were also aimed at preventing huge amounts of funds being raised from customers and used like private coffers to expand or strengthen their affiliates.

6.3.2 Changes in Holding Company Regulations

The change from a ban of a holding company to a system that allows them in principle stems from the revision of the Monopoly Regulation Act in February 1999. Originally, the ban was justified based on concerns that holding companies could be a means of forming a large enterprise group by controlling a large number of companies with very small capital. However, this perception changed and led to a fundamental shift in regulation.

In particular, the revision of the Japanese Anti-Monopoly Act in 1997, which became a legislative model, had a significant impact on changes to regulations on holding companies under the Monopoly Regulation Act. In Japan, it was considered that holding companies are no longer likely to function as a means of forming zaibatsu, and that companies need to be given a choice to take advantage of the positive functions of holding companies. The law as was thus changed prohibiting holding companies only when business control was excessively concentrated.Footnote ⁴⁹ This change in Japan led to a reconsideration of holding companies with respect to the Monopoly Regulation Act in Korea. The functional advantages of holding companies due to the separation of ownership and management between companies, and the fact that the holding company system is relatively transparent compared to the existing chaebol structure based on circular investments, were highlighted in the debates around the changes in Korea. Yet, certain restrictions were imposed on holding companies and subsidiaries, reflecting the view that there was still concern that holding companies would become means of concentration of economic power. Article 8–2(1) of the 1999 Amendment prohibited holding liabilities exceeding the amount of net assets (No. 1), holding shares of subsidiaries less than 50/100 (No. 2 30/100 in the case of listed subsidiaries), holding shares for controlling purposes in domestic companies other than subsidiaries (No. 3) and general holding companies having financial and insurance subsidiaries and financial holding companies having general subsidiaries according to the principle of separation of financial and industrial capital (Nos. 4 and 5). In addition, it was in principle prohibited for a subsidiary of a holding company to have a grandchild company under Article 8–2(2). The above-mentioned regulations on holding companies, in particular those under paragraph 1 No. 2 and those on subsidiaries under paragraph 2, are deeply related to attempts to block the possibility of enterprise groups expanding horizontally or vertically.Footnote ⁵⁰ This restriction reflects the legislative intention to address concentration of economic power.

After the changes to the law on holding companies, it was expected that a number of large enterprise groups would introduce a holding company system, and the Korea Fair Trade Commission (hereafter KFTC)’s policy reflected that change. Above all, the enhanced transparency and efficiency of corporate governance of holding companies as compared to the circular structure, typical of chaebol, have become a corner stone for policy formation.Footnote ⁵¹ Yet, since not many chaebols switched to holding company systems, measures have been sought to facilitate the transition to a holding company. As a result, the revisions to the law continued to ease the restrictions imposed on holding companies. The actions regulated under Article 8–2(1) of the current Monopoly Regulation Act include holding more than twice the total amount of capital, owning shares of a subsidiary less than 40/100 of the total number of shares issued by that subsidiary, owning shares of a domestic company that is not an affiliate in excess of 5/100 of the total number of shares issued by that company, or owning shares of domestic affiliates other than subsidiaries. The actions regulated under Article 8–2 (1) of the current Monopoly Regulation Act include holding more than twice the total amount of capital, owning shares of a subsidiary less than 40/100 of the total number of shares issued by that subsidiary, owning shares of a domestic company that is not an affiliate in excess of 5/100 of the total number of shares issued by that company, or owning shares of domestic affiliates other than subsidiaries. These requirements are considerably less stringent than those when imposed when holding companies were first allowed. The number of holding companies increased gradually in response to these eased requirements. After holding companies was allowed in 1999, only seven companies switched to the holding company system by 2000. But this number increased gradually with the deregulation, rising to 173 in 2019. It also appears that 39% of the large business groups have transformed their structure into a holding company-oriented one.

6.3.3 Changes in Cross or Circular Investment Regulations

The core of the regulations for large business groups is investment regulation, which is also the most controversial part of the process of changing the regulations. The legal prohibition of cross-shareholding was circumvented through indirect(circular) investment. Thus, a regulation on indirect investment relations was made to supplement the ban on mutual investments.

The investment ceiling regulation introduced in the original legislation was aimed at limiting the total investment in affiliates belonging to large business groups to a certain percentage of their net assets. This regulation was criticised as excessive for limiting unconditionally the investment on a formal basis without distinguishing the purpose or content of the investment. Moreover, such strict investment regulations could be a real impediment to the active investment activities of the entity. In addition, the issue of the effectiveness of the system in actually suppressing cross-shareholding Was strongly raised.Footnote ⁵² In 2009, the total investment ceiling regulation was finally abolished.

However, after the abolition of the total investment ceiling regulation, the amount of investments between affiliates belonging to large enterprise groups soared significantly. Table 6.2 highlights changes to the equity ratios of the owner, family, and affiliates in the Top 10 large enterprise groups with owners since 2004.

Due to this situation, concerns over chaebol’s concentration of economic power arose again, and it served as an opportunity to seek legislative countermeasures. As a result, a regulation banning new circular investments was introduced by the 2014 revision of the Act. While not prohibiting established curricular investments, Article 9–2(2) of the Amended Act, prohibit a company belonging to a large enterprise group from forming or strengthening a new circular investment.

6.3.4 Other Attempts of Regulation

The first large enterprise group regulation was based on a ban on the establishment of holding companies and the regulation of investments between affiliates by existing large enterprise groups, but it was questionable whether such a system was sufficient to curb the concentration of economic power by chaebol. Thus, legislative supplementation continued; first was the regulation on debt guarantees, which was introduced by the revision to the law in 1992. The debt guarantees between affiliates could pose financial risks to the entire group and problems with the inefficient allocation of resources. The first inter-affiliates debt guarantee regulation was limited to 200% of capital but was lowered to 100% under the revision in 1996, and the regulation was strengthened by prohibiting debt guarantees entirely after the revision in 1998.

The thought that chaebol problems could be corrected by the market’s ability to adjust autonomously also had an important impact on changes to the regulations on large enterprise groups. The legislation reflected the recognition that inefficient governance or management in the capital market or commodity market can be controlled, and that it is important for enterprise groups to provide key information so that these functions can be exercised effectively. Thus, obligations were imposed with regard to disclosure of prior resolutions and key details of the board of directors (as revised Monopoly Regulation Act in December 1999), disclosure of important matters of unlisted companies belonging to large enterprise groups (as revised in December 2004), and disclosure of the status of large business groups (as revised in March 2009).

As a type of unfair trade practices, regulations on unfair support practices also have important implications in relation to curbing the concentration of economic power by chaebol. In the course of running a group of companies, support for uncompetitive affiliates is not only a means of maintaining and expanding the economic concentration. At the same time, it can lead to a negative impact on the national economy through the inefficient allocation of resources as a result of such transactions with marginal enterprises. The regulation of unfair support practices introduced through the revision of the Monopoly Regulation Act 1996 was prescribed in a way that regulates unfair trade practices, but as discussed in the legislative process, the substance of the regulation focuses on the inter-affiliate transactions that take place within large enterprise groups.Footnote ⁵⁴ From a competition policy point of view, the significance of regulating unfair support practices can be understood in two ways. First, it is noteworthy that it provided a basis for the control of chaebol’s group operations from the perspective of individual markets. Regulating the specific actions of chaebol as unfair trading practices in individual markets may be in line with the structure of competition laws formed to protect competition in individual markets Second, this approach is meaningful in that it can contribute to curbing economic concentration in terms of general concentration. In addition, the regulation of unfair support practices was carried out by ex-post evaluation of transactions, unlike other economic concentration regulations based on the imposition of ex-ante obligations, which meant that they were outside of the uniform and formal regulatory framework. The regulation of unfair support acts can be said to be a unique type of regulation of the Korean Monopoly Regulation Act that is difficult to find in other countries, so there are difficulties in forming regulatory legal principles for unfair support practices. But to some extent, such principles have been established through the regulatory practices of KFTC and court rulings. The Supreme Court ruled, in relation to the unfairness of such support practices, that:

Thus, the Supreme Court presented the effects on competition in individual market and concentration of economic power as a double criterion for determining the unfairness of support practices.

The introduction of these regulations and the composition of legal principles were assessed to be appropriate, but there were certain limitations to the actual regulations. In particular, the law needed strengthening in the case of transactions conducted for the purpose of obtaining profits for individuals with special relationships with affiliates, where measures did not fall under support practices or not meeting the requirements of unfairness. Thus, in 2013, Article 23–2 was introduced under the Monopoly Regulation Act. This article prohibited certain transactions where the owner or his family obtains private profits through a transaction in particular by means of the attribution of interests.Footnote ⁵⁶ The significance of the regulation can be viewed positively, but the difficulty of judging unfairness still remains and the question of whether the regulation will be effective has not been resolved.Footnote ⁵⁷

6.4.1 Adequacy of Subject of Regulation

Under the Monopoly Regulation Act, chaebol regulations were introduced with the aim of curbing them as the concentration of economic power by chaebols intensified. However, the chaebol themselves were not accepted as legal concepts, and as aforesaid, large enterprise groups of a certain sizeFootnote ⁵⁸ and structure as a group of multiple affiliates were subject to regulation. At the time of legislation, no differentiation took place between the large enterprise groups and economic entities generally perceived as chaebols. Hence, there was no problem with the subjects of this regulation other than pointing out the inadequacy of intentionally avoiding the term chaebol that had negative implications for the public in Korea. Most of the large enterprise groups that were initially designated shared the characteristic elements of chaebol. Absolute control by the owners and their families. Thus, the concept of large enterprise groups of a particular size and the requirement of having multiple companies was not problematic in embracing chaebol as regulatory targets.

However, problems began to materialise when a group of state-owned enterprises or an enterprise group without governance by natural people was designated as a large enterprise group. There was no control by the owner as a natural person in this enterprise group, thus lacking the problem of ownership concentration that was traditionally perceived as a problem of chaebol. This raised the question of whether the regulations formed to target chaebol were not over-inclusive. Discussions on this issue led to the conclusion that even enterprise groups without an owner are subject to the regulation because enterprise groups without owners can also cause problems with regard to general concentration. In particular, since the 2000s, the increase in the number of affiliates belonging to enterprise groups without an owner, and the expansion of the total size, have served as a strong basis for supporting this approach.Footnote ⁵⁹

However, discussions continue regarding the need for differentiated regulation between enterprise groups that still have owners (traditional chaebol) and those that have flagship companies at the centre without personal control. Furthermore, the emergence of new types of large enterprise groups is drawing attention. As the digital economy develops, digital companies of such as Naver, Kakao, Netmarble, and Nexon Group are included in the regulation list because they meet the requirements of large enterprise groups. These enterprise groups, which follow the growth of the IT industry, are emerging as the new large enterprise groups. Yet, there are significant differences between such companies and traditional chaebols in terms of governance and distribution of industries. Specifically, the emerging enterprise groups are characterised by the fact that control over the enterprise group is largely not based on a circular ownership structure, that the business sectors are concentrated in the IT sector and do not show a tendency to diversify non-related sectors, and that their status as platform operators is being strengthened, suggesting the need for change to the regulatory system that was formed with consideration towards traditional chaebol.

6.4.2 Approach by Type of Enterprise Groups

The above discussion could be expanded to transform a single regulatory framework into a regulatory framework commensurate with the characterisation of enterprise groups. As mentioned, about 40% of large business groups are switching to holding company systems. Groups with holding company systems differ from groups that have not transitioned in terms of the way of control and structural transparency, and this difference will need to be reflected in regulations.

These discussions also relate to the government’s policy of encouraging holding companies. The KFTC focused on transparency in the governance structures of holding company systems and continuously implemented policies to expand holding companies. In the process, a number of rules were eased that initially imposed limits on holding companies being used as means to concentrate economic power, resulting in an increase in the number of enterprise groups that switched to holding companies.Footnote ⁶⁰ Whether such a policy is still valid needs to be discussed, and if it is indeed recognised as valid, additional challenges will be placed on how to adjust the content and level of regulations for holding companies and circular investments.

6.4.3 Strengthening the Market vis-a-vis Chaebol

As we saw earlier, regulations on chaebols are aimed at holding companies or large business groups, mainly by demanding a ban on certain activities regarding equity investments. The legitimacy of these regulations arises from the intent to effectively cope with the economic concentration problems caused by chaebol. It is important to keep in mind that it is the task of the Monopoly Regulation Act to address competition problems caused by chaebol in individual markets.

Although one should not deny the importance of regulation on unfair support practices and profit-taking practices of related parties as stipulated in the Monopoly Regulation Act, the effectiveness of these regulations has been questioned. It can be pointed out that it is still not easy to find a reasonable regulatory basis theoretically and practically. The Supreme Court showed that ‘unfairness’ has two aspects, competition restrictions and economic concentration. But it is not clear what aspects or factors of economic concentration can be considered in the context of unfairness, especially in the case of profit-taking practices of related parties. It will need to be supplemented in the future. Such improvements to legal principles will not only have a positive effect on strengthening the enforcement of regulators but will also result in regulatory clarity for market participants. Furthermore, this will make a meaningful contribution to increasing the market’s autonomous control functions.

It is also necessary to look at the issue from the perspective of the protection or promotion of small- and medium-sized enterprises or independent companies that are not affiliated with chaebol. In other words, the concentration of economic power may be addressed through the growth of small- and medium-sized/independent companies. The regulation of chaebol and the protection of small- and medium-sized/independent enterprises can contribute to the suppression of economic concentration and the realisation of free and fair competition. The promotion of small- and medium-sized/independent companies can also be meaningful as a supplement to one-sided regulatory policies. To this end, it is important to provide an opportunity for the growth of small- and medium-sized/independent enterprises in various aspects.

In this regard, there can be no question as to the importance of traditional competition laws in ensuring that opportunities for the growth of small- and medium-sized/independent enterprises. In general, small- and medium-sized/independent enterprises and affiliates belonging to chaebol are related vertically or horizontally. In the case of vertical relationships, it is important to ensure that the trade relationship between small- and medium-sized/independent enterprises and chaebol affiliates is carried out fairly throughout the production and distribution process. In the case of horizontal relationships, it will be important to prevent anti-competitive behaviour. Furthermore, various economic resource support programmes, including financing, will be needed so that competition between small- and medium-sized/independent enterprises and the affiliates under the umbrella of a chaebol can be substantive.