Parental liability – holding off the decisive influence presumption

It is well established that a parent company can be held liable for the conduct of its subsidiary where it exercises decisive influence over that subsidiary. Decisive influence is presumed where a parent owns 100% of the shares and/or voting rights in that subsidiary. This was further extended in the Goldman Sachs case to consider the broader context, for example, where an investor that previously exercised decisive influence retained significant rights to appoint or remove one or more directors, call shareholder meetings, etc.

More recently this issue has been cast back into the spotlight by the CMA’s decision to fine Allergan plc (Allergan) for the conduct of its subsidiary Actavis UK in relation to the pricing of hydrocortisone tablets. The situation in this case is somewhat unique:

• the CMA found Allergan liable for unfair prices charged by its wholly owned subsidiary Actavis UK Limited over the period from June 2015 until August 2016;
• as part of a transaction pursuant to which Allergan sold its international generics business (including Actavis UK) to Teva Pharmaceuticals Inc (Teva). In this context, Allergan gave legally binding commitments to the European Commission in March 2016 to hold Actavis UK separate from the remainder of the Allergan business – with Actavis UK being run by the hold separate manager under the supervision of a monitoring trustee; and
• as part of its acquisition of Allergan’s international generics business, Teva agreed to divest Actavis UK and following completion of Teva’s acquisition, Actavis UK continued to be run by the hold separate manager and was held separate from Teva.

Tribunal judgment

Allergan appealed the CMA’s finding that Allergan continued to exercise decisive influence over Actavis UK during the period in which the commitments were in force and the fine insofar as it related to this period. 

Allergan argued that the commitments legally precluded it from determining the future strategy of the Actavis UK business and instead, merely required Allergan to support Actavis UK with sufficient resources such that it could continue to operate under its business plan should it choose to do so. Contrary to the CMA’s findings, this the hold separate manager was not obliged to follow the business plans and pricing strategy that had been put in place during Allergan’s period of ownership if that strategy was not, in their view, in the best interests of Actavis UK.

The Tribunal agreed with the arguments raised by Allergan and rejected the suggestion from the CMA that it could continue to rely on the presumption that Allergan continued to exercise decisive influence whilst the commitments were in force. The Tribunal went on to consider whether the CMA had provided sufficient evidence to demonstrate that Allergan had in fact exercised decisive influence over Actavis UK during this period and concluded that this was not made out on the facts.

Comment

Allergan is not the first parent company to seek to rebut the presumption of decisive influence but there are very few, if any, substantive successes in these endeavours. Allergan’s success is important as it sees a meaningful reduction in Allergan’s fines despite the relatively short (in absolute terms) reduction in the duration of the infringement.

There are two important points to consider arising from the judgment. 

First, the situation here is highly fact specific and is likely to have limited broader application. In particular, this principle is likely to only apply where a seller gives commitments to a competition authority to hold its business separate. Notably the CMA did not seek to hold Teva liable when it acquired Allergan’s international generics business on the basis that at all times during which Teva owned Actavis UK, it was subject to hold separate obligations and as such never obtained decisive influence over Actavis UK. It is therefore unlikely that this judgment will pave the way for future successful challenges by parent companies, save in very specific circumstances.

Second, even where the CMA cannot rely on the presumption of decisive influence, the Tribunal remained open to the possibility that decisive influence could be exercised by a parent during a hold separate period notwithstanding legally binding obligations to the contrary. This is likely to turn on the facts in each case.