Almost every jurisdiction in the world uses the term ‘enterprise’ or ‘undertaking’, and rarely the word ‘company’, as the subject matter of competition law since the relevant inquiry is the conduct of an economic entity rather than that of a legal entity. For this reason, while the competition law prohibits anti-competitive agreements, the prohibition does not extend to legal entities constituting a ‘single economic entity’, a concept which has been incorporated into the law by judicial interpretations.

The concept of ‘single economic entity’ lays down that irrespective of their legal status, two or more enterprises can sometimes be related so closely to each other that they form a single economic unit and it would be artificial to treat them as separate economic actors. For instance, a parent and its subsidiary would constitute a single economic entity if the subsidiary has no real freedom to determine its course of action in the market contrary to the decisions of its parent. Pertinently, an agreement between a parent and its wholly owned subsidiary company or, for that matter, an agreement between two companies which are under the control of a third company, does not deprive the market place of competitive process and independent decision making. Therefore, from an antitrust perspective, any coordination between them does not represent a sudden joining of two independent sources of economic power that previously was pursuing separate interests. As the parent and its wholly owned subsidiary have a complete unity of interest, common objectives and one corporate consciousness, they are deemed incapable of forging an anticompetitive agreement between themselves.

The concept of single economic entity has profound implications in competition law. On one hand, corporate entities can use the concept of single economic entity as a shield to protect themselves from antitrust liability by demonstrating that an entity does not determine its own commercial policy or that it acts as a controlled and non-competing entity (the defensive dimension); on the other hand, the competition authority may potentially use the concept of single economic entity as a sword to extend the scope of enforcement to impute fines to parent for competition law infringements committed by subsidiaries or affiliates (the prosecutorial dimension). Under the antitrust law, attributing liability to a parent company has grave consequences: (i) the maximum fine of 10 per cent could apply to the worldwide turnover of the group, which would be many times the limit applicable as an individual company (ii) the risk of finding recidivism which may lead to an uplift in the fine increases since any previous cartel behaviour of other companies in the group may potentially be taken into account, and (iii) a decision addressed to a parent company may facilitate the filing of civil damages claims / follow-on actions against each entity in the group of companies found to be part of the single economic entity.

The concept of ‘economic entity’ is fundamental to competition law whereas the concept of ‘legal entity’ is the cornerstone of company law. The legal entity doctrine dictates that a holding company and its wholly owned subsidiary are two distinct legal persons. Mere ownership, parental control, management etc. of a subsidiary is not sufficient to pierce the status of their legal relationship and to hold the parent company liable. Put differently, an action against a company cannot be maintained simply because it owns an interest in another company whose conduct is in question or because there are certain factors such as, common parent, overlapping directors, exercise of general supervisory power, suggesting a relationship between the entities. Corporate law principles, predicated on the foundation of limited liability, are intended to increase economic efficiency of capital and promote risk-taking and, therefore, a corporation is regarded as a distinct legal entity, separate from its shareholders. Though, it is a wellaccepted corporate law principle that a parent company is not liable for the acts of its subsidiaries, courts do abrogate the corporate privilege of limited liability in certain situations, such as to allow a creditor of a subsidiary to hold a parent corporation liable for its debts or where legal separateness of corporate entities are used as a means to carry out fraud or to evade tax. In corporate law, this is referred to as ‘piercing the corporate veil’ or the ‘alter ego’ or the ‘substance over form’ doctrine. At its core, veil piercing is an equitable doctrine that gives courts discretion to circumscribe limited liability to the extent that it interferes with the rights of creditors and the public. Thus, under corporate law, a parent company of a wholly owned subsidiary may not be legally responsible for the unlawful activities of the subsidiary except under exceptional circumstances, such as, where the subsidiary company is a sham or is used as a means to carry out fraud or to evade tax or where it would be otherwise unjust to the creditors. The decisive criteria to hold the parent company liable for the unlawful activities of the subsidiary is ‘whether the parent company’s management has such steering interference with the subsidiary’s core activities that subsidiary can no longer be regarded to perform those activities on the authority of its own executive directors’.1

Thus while parental liability could be fixed both under competition law as well as under corporate law, it is important to note that there are fundamental differences between the two. Under competition law, the scrutiny is centred around harm to the process of competition in the market and to issues related to general consumer protection, while under corporate law, the objective is primarily to protect people from fraud, wrong doing or serious mismanagement of a subsidiary to the injury of creditors under contractual and tort liability. Further, Corporate veil could also be lifted on grounds of public interest2. Absent these elements, limited liability is respected regardless of the degree of control exerted by the parent over the subsidiary.

Pertinently, the manner of application of single entity framework, determining the boundaries of competition law enforcement, also differ amongst various jurisdictions. For instance, while the European Commission (“EC”) would hold a parent liable for the cartel conduct of its wholly owned subsidiary even in cases where the parent may have no direct knowledge of the relevant infringement, in the US, a parent company is not held liable for the antitrust violations of a subsidiary or other related company. In the US, corporate separateness and formalities cannot be ignored. Notwithstanding the above difference, a parent and its wholly owned subsidiary is deemed incapable of forging an anticompetitive agreement between themselves both in the US and EU.

The US Supreme Court, in the Copper weld case3, was directly concerned with the question whether a parent company and its wholly owned subsidiary are legally capable of conspiring with each other. The court held that the coordinated activity of a parent and its wholly owned subsidiary must be viewed as that of a single enterprise for purposes of Section 1 of the Sherman Act. The court held that “A parent and its wholly owned subsidiary have a complete unity of interest. Their objectives are common, not disparate; their general corporate actions are guided or determined not by two separate corporate consciousness, but one. They are not unlike a multiple team of horses drawing a vehicle under the control of a single driver.” With or without a formal “agreement,” the subsidiary acts for the parent’s benefit. If the parent and subsidiary “agree” to a course of action, there is no sudden joining of economic resources that had previously served different interests. In reality, the parent and subsidiary always have a “unity of purpose or a common design”. Clarifying the law further in American Needle4, the US Supreme Court eschewed formalistic distinctions, such as whether the alleged conspirators are legally distinct entities, and adopted a functional consideration of how they actually operate, in determining whether there is concerted action under Section 1 of the Sherman Act. The court held that the relevant inquiry is one of substance, not form, which does not turn on whether the alleged parties to contract, combination, or conspiracy are part of a legally single entity or seem like one firm or multiple firms in any metaphysical sense. The inquiry is whether the agreement in question joins together “separate economic actors pursuing separate economic interests,” such that it “deprives the marketplace of independent centres of decision making,” and therefore of diversity of entrepreneurial interests and thus of actual or potential competition. If it does, then there is concerted action covered by Section 1, and the court must decide whether the restraint of trade is unreasonable and therefore illegal. In effect, the Court identified three conditions in American Needle to assess single economic unit i.e. control (absence of independent decision making centres), interests (absence of concurring entrepreneurial interests) and competitive links (lack of actual or potential competition). American Needle did not explicitly overrule Copperweld, but reinterpreted its meaning to propose a rule of reason test rather than a per se approach to affiliated corporations.

In the EU, single economic entity principle has been articulated as ‘economic entity of interest test’, wherein it is seen just how much autonomy the subsidiary and its parent or sister corporations have, in order to determine whether their activity is eligible for immunity. The EU Courts recognize that the formation of subsidiaries, etc., serve economic efficiency purposes and the same shouldn’t be defeated by some formalistic approach to the law. Therefore, in determining the single economic entity status, courts give due regards to the affirmative and negative control rights, business interests and market conduct within and among different affiliated businesses. While control rights generally relate to ownership rights, courts have determined the issue of single entity status in non-ownership cases too based on commercial or financial risks undertaken and other factors. In Suiker Unie5, a case involving non-ownership based control (commercial agency agreement), the European Court of Justice (“ECJ”) held that in order to determine whether such entities would form Single Economic Entity it is necessary that the agent does not bear any financial risk and further that the agent does not engage in activities of both agent and independent trader in respect of the same market. Control rights are also required to be direct as the mere presence of a single parent company of two sister companies cannot suffice to infer elements of control among sister companies’ interactions. In addition to control, integrated market conduct comprises a second step in establishing a single entity test. In Viho6 the ECJ held that the subsidiary, although having a separate legal personality, does not freely determine its conduct on the market but carries out the instructions given to it directly or indirectly by the parent company by which it is wholly controlled. Viho distinguishes ownership-based control and market conduct as two fundamental variables to establish single entity claims in EU law. ‘Market conduct’ assesses whether a subsidiary or controlled entity is able to determine its own policies and actions on the market. If a subsidiary cannot do either, then it is presumed to constitute a single undertaking with the controlling entity. From a prosecutorial standpoint, a controlling entity can rebut the presumption of single entity by claiming that it presents an actual or potential market competitor. From a defensive standpoint, parties to the proceedings may demonstrate that an entity does not determine its own commercial policy or an entity acts in other ways as a controlled and non-competing entity. A parent or otherwise controlling company has to adduce precise explanations regarding its relationship with controlled entities. The assessment of single economic entity status crucially depends on control and conduct factors, including among others, parental control over the board of directors, instructions imposed on the subsidiary to be carried out, the amount of profit taken by the parent and other elements referring to real decisive influence by a parent over its subsidiary.

Importantly, parental liability in Europe is considered to be consistent with the principle of personal responsibility and effective enforcement. Parent’s awareness of, still less its participation in the subsidiaries’ wrongdoing has nothing to do with it. The acid test is whether together they compose one and the same undertaking. Central to the legal construct on which the whole liability theory is based is a presumption, approved by the courts, that a parent exercises ‘decisive influence’ over subsidiaries in which it has a direct or indirect 100 per cent holding. While the courts emphasize that it is open to companies to rebut the presumption and companies have tried to rebut the presumption on various grounds, such as (i) the parent is a pure holding company, restricted to major and broad financial and strategic decisions, which does not have sufficient operational resources to exercise any influence on the business conduct of the subsidiaries; (ii) the reporting to the parent is limited to financial results and forecasts and does not cover the commercial policy of the subsidiary; (iii) the parent and the subsidiary operate on distinct product markets; (iv) the parent company’s influence was not exerted in the specific area in which the infringement occurred, there is no case in which a parent has ever managed to do so. Backed by ECJ Akzo Nobel judgment in 20097, the EC holds a group parent automatically responsible for cartel infringements committed by its wholly owned subsidiaries. In the Akzo judgement, the ECJ held that ‘the fact that a subsidiary has separate legal personality is not sufficient to exclude the possibility of its conduct being imputed to the parent company, especially where the subsidiary does not independently decide its own conduct on the market but carries out in all material respects, the instructions given to it by the parent company.’ The ECJ further ruled that ‘it is sufficient for the Commission to prove that the subsidiary is wholly owned by the parent company in order to presume that the parent exercises a decisive influence over the commercial policy of the subsidiary.’ In other words, the anticompetitive behaviour of a subsidiary can be legally attributed to its parent corporation, if the former cannot decide independently on its conduct on the market, but mainly follows the instructions of the head of the group, specifically due to the economic, organizational and legal links that unite the two legal entities. Thus, both the parent and the subsidiary may be held jointly and severally liable.

In 2013, the Court of Justice of the European Union (“CJEU”), approved the application of presumption of parental liability even in case of a 50:50 joint venture.8 In 2007, the EC had imposed fines totalling Euro 243.2 million on 6 different companies, including El DuPont and Dow, for participating in an illegal price-fixing and market-sharing cartel. El DuPont and Dow were held to be jointly and severally liable for the conduct of their 50:50 joint venture, DDE. The Commission concluded that Dow and EI DuPont exercised ‘decisive influence’ on the commercial conduct and policies of the joint venture, and therefore could be held jointly liable for DDE’s anticompetitive conduct. On appeal, the CJEU held that the behaviour of a subsidiary can be imputed to the parent company where ‘subsidiary does not decide independently upon its own conduct on the market, but carries out, in all material respects, the instructions given to it by the parent company. It further held that in order to impose a fine on a parent company, the Commission does not have to establish the personal involvement of the parent in the infringement but must check that the parent exercised decisive influence over the conduct of the subsidiary. The court also clarified that the requirement to check whether the parent company actually exercised decisive influence over its subsidiary applies only where the subsidiary is not wholly owned by its parent company. Where a parent owns 100% of the capital of the subsidiary, there is a rebuttable presumption of decisive influence. The CJEU added that ‘where two parent companies each have a 50% shareholding in the joint venture which committed an infringement of the rules of competition law, it is only for the purposes of establishing liability for participation in the infringement of that

law and only in so far as the Commission has demonstrated, on the basis of factual evidence, that both parent companies did in fact exercise decisive influence over the joint venture, that those entities can be considered to form a single economic unit and therefore form a single undertaking for the purposes of Article 101.’ The court further clarified that although a full function joint venture is deemed, for the purposes of the EU Merger Regulation, to perform on a lasting basis all the functions of an autonomous economic entity and is, therefore, economically autonomous from an operational viewpoint, that autonomy does not mean that the joint venture enjoys autonomy as regards the adoption of its strategic decisions such that there cannot be decisive influence. It held that ‘The decisive influence of one or more parent companies is not necessarily tied in with the day-to-day running of a subsidiary’. The decisive influence could be inferred from the economic, organisation and legal factors which tied the joint venture in this case to its two parent companies.

As regards entities where the parental control is less than 100%, there is no presumption of liability and the EC is required to demonstrate ‘decisive influence’ based on a variety of factors. In such cases, the nature of control and conduct parameters exercised by the parents over the subsidiaries, having regard to the economic, organisational and legal links between them, are material in determining the question as to whether the subsidiary can be said to belong to a single economic entity of one parent or not. The concept of single economic entity has been discussed by the Competition Commission of India (“CCI”) in few cases, in which the concept was applied by the charged parties for defensive purposes. As the CCI has not imputed parental liability in the facts of each case thus far, it is difficult to anticipate whether single entity framework in India will develop closer to the US jurisprudence or to the European jurisprudence.

The concept of ‘single economic entity’ was applied for the first time by the CCI in the Exclusive Motors case9 wherein the Commission stated: ‘Agreements between entities constituting one enterprise cannot be assessed under the Act. This is also in accord with the internationally accepted doctrine of ‘single economic entity’. The appellate tribunal concurred with the conclusion of the CCI10, and held that both the companies belonged to the same ‘single economic entity’, on the presumption of influence of the parent on the two subsidiaries.

In Shamsher Kataria case11, the CCI reiterated the single economic entity doctrine and held that ‘an internal agreement/arrangement between an enterprise and its group/parent company is not within the purview of the mischief of section 3(4) of the Act’. The CCI further observed that ‘the exemption of single economic entity stems from the inseparability of the economic interest of the parties to the agreement. Generally, entities belonging to the same group e.g. holding-subsidiaries are presumed to be part of a ‘single economic entity’ incapable of entering into an agreement, the presumption is not irrebuttable. It is a question which should be decided on the facts and circumstances of each case’. The CCI repudiated the defence of single economic entity, invoked by the four public sector insurance companies in the bid rigging case of tenders floated by the Government of Kerala for selecting insurance service provider for Rashtriya Swasthya Bima Yojna12. Their plea was that they constituted a ‘single economic entity’, as the Government of India held 100% shares of each and further that their management and affairs were controlled by the Government of India through Department of Financial Services (Insurance Division), Ministry of Finance. While the CCI agreed that “….although the public sector insurance companies are presently under the overall supervision of the Central Government, each of the OPs placed a separate bid in response to the tenders issued by the Government of Kerala for implementation of RSBY/CHIS schemes. Further, parties themselves have admitted to the DG that all decisions relating to submission of bids, determination of bid amounts, business sharing arrangements, etc. were taken internally at company level without any ex ante approval /directions from Ministry of Finance. Even the decisions taken by the companies were not notified ex post to the Ministry. Thus, it is apparent that the OPs participated in the impugned tenders independent of Ministry of Finance and the DG also did not come across any contra evidence.” On this basis, the Commission held that the Ministry of Finance did not exercise any de facto or de jure control in business decisions in submitting bids for impugned tenders. As such, based on their intra enterprise conduct (i.e. vis a vis their parent) and extra enterprise conduct (i.e. external market conduct), the CCI repudiated their claim of immunity from cartel conduct on grounds of constituting a single economic unit.

The CCI further elaborated on the treatment of single economic entity test in the Delhi Jal Board cartel case13. Pertinently, in the combination case between Grasim Industries Limited (“GIL”) and Aditya Birla Chemicals (India) Limited ()”ABCIL”)14, the CCI approved the merger between the parties as they belonged to one Group, namely, Aditya Birla Group; however, the CCI held GIL and ABCIL guilty of cartel conduct in the Delhi Jal Board case as it did not treat them as constituting a single economic entity. The CCI observed that GIL and ABCIL had participated in the public tender bidding process as separate entities which created a facade of competitive bidding process when, in fact, the bids were designed and coordinated by the same set of professionals. The CCI observed that “Since public procurement involves use of taxpayer’s money and consumer welfare, bid rigging should be viewed as one of the most pernicious anticompetitive conduct inviting serious penalty to serve as a deterrent”. Emphasizing that parties have to comply with the provisions of the Act in letter and spirit, the CCI ruled that where two or more entities of the same group decide to separately submit bids in the same tender, they consciously decide to represent themselves to the procurer that they are independent decision making centres and independent options for procurement. The CCI further observed that the contention of the parties that they form part of a same “group” as defined in Explanation (b) to Section 5 of the Act, and hence is outside the scope of Section 3 of the Act, is completely misplaced because the concept of “group” is applicable only in the context of regulation of combinations under Sections 5 and 6 of the Act and has no application, whatsoever, to the proceedings under Section 3 of the Act which prohibits anti-competitive agreements by and between enterprises.