Poverty trap

The European Commission’s primary goal is to protect competition in Europe’s markets. But over the past decade, several companies have complained that the EU’s stringent fining policy has helped push them out of the market – reducing competitors in industries where competition was already compromised. The commission’s approach appears to have softened, but to what extent? Ron Knox and Morris Schonberg investigate

On 16 September last year, Slovakian chemical company Novácke chemické závody declared bankruptcy and asked a local court for protection from its creditors. Among the company’s outstanding debts was a charge to the European Commission for more than €19 million – the amount DG Comp had fined the company weeks earlier for its role in an alleged cartel.

The company at the time warned the commission that the fine as it stood would push it over the financial cliff, threatening its very existence.

But Novácke had failed the test European competition officials force companies to take when pleading poverty – a test companies often fail because, in the eyes of DG Comp, their financial troubles are their own doing. Whether through poor management, a dying industry or otherwise, DG Comp often found that a company’s slide toward insolvency began long before the commission levied its fine, and had little to do with the commission punishing the business for breaking the law.

Novácke’s poverty plea fell on deaf ears.

When the fine came down, the company said it was the debt that pushed it over the edge of solvency – transforming it from Slovakia’s largest chemical producer, to a company asking a court to spare its life.

“The amount of the fine, which is liquidating for the company, is according to the company’s opinion in sharp contradiction with valid legislation of the European Communities,” the company’s board said after it filed for bankruptcy. “The fine can be of [a] vindicatory and corrective nature; however, it can never be of [a] liquidating nature.”

The incident sparked outcry in Brussels’ competition community. Practitioners said that the Novácke case was just one example of what had become a trend in DG Comp cartel cases – smaller companies getting hit with fines that put their competitiveness and, in some cases their existence in the market, in jeopardy.

Novácke is far from alone; indeed, DG Comp has in the past made few concessions for companies facing the same scenario. A GCR review of EU cartel decisions, court cases and other commission records shows that DG Comp has, in some cases, ignored companies’ poverty pleas in order to pursue harsh fines for their participation in cartels.

Since 2005, around 54 companies have asked the commission for lower fines because of their alleged precarious financial state, according to GCR’s computer-assisted analysis of the past five years of DG Comp cartel cases. Of those 54 requests, the commission has granted only 11 – and nine of those came in the three most recently decided cartel cases handed down earlier this year. Further, on at least three occasions during the past 10 years, DG Comp has refused an undertaking’s plea for financial mercy just weeks or months before it declared bankruptcy.

What’s more, records show that DG Comp often spent time and money pursuing fines from companies that had warned the commission they were unable to pay, only to come up empty-handed when those companies turned over their assets to creditors.

It’s only recently, under the leadership of Joaquín Almunia, Europe’s commissioner of competition, that DG Comp’s process for considering inability-to-pay requests appears to have shifted – especially in the face of a global recession. Until Almunia’s arrival, commission policies toward companies teetering on the brink of collapse was, by all accounts, dogmatic: if you break the law, you pay the fine. Whether you remain in business is of little concern.

“If we were to encourage cartelists and others at this point we would be guaranteeing disaster,” Neelie Kroes, Europe’s former commissioner of competition, said in September 2009. “Today’s softness is tomorrow’s nightmare.”


Weighing up the cost

Inability to pay pleadings are, like reductions for cooperation or increases in fines for recidivism, one of the myriad factors DG Comp takes into account when weighing how much to fine a suspected cartelist. The requirements for how the commission weighs these poverty pleas are laid out in the 2006 guidelines, and act as a useful, if unspecific, compass for companies who believe a commission fine will break the bank.

The guidelines say that evidence of a company suffering a loss as a result of a fine is not enough. According to the guidelines, “a reduction could be granted solely on the basis of objective evidence that imposition of the fine as provided for in these guidelines would irretrievably jeopardise the economic viability of the undertaking concerned and cause its assets to lose all their value”. Furthermore, only a company’s inability to pay in a “specific social and economic context” – that is, when it will add to job losses, a nearing depression, and so on – may be considered.

Companies and their counsel say that for years, pleading poverty at the commission has been a futile endeavour. The process that the commission asked companies to go through was arduous and the results rarely tilted in the company’s favour.

Julian Joshua, partner at Howrey LLP in Brussels, says that DG Comp has strict procedures in place for what companies have to produce and how that information will be evaluated, including a separate unit inside the commission that specialises in evaluating such claims.

“You do have to go through hoops. It’s regarded fairly sceptically at DG Comp,” Joshua says of the poverty claims. “They have not been very receptive to such arguments.”

The lack of flexibility in accepting poverty pleas appears to have stemmed from the commission’s two stated, sometimes opposed desires – wanting to punish cartelists to the fullest extent of the fining guidelines as a deterrent to other companies that may be considering collusion, and avoiding punishing companies so harshly that they drop out of the market altogether.

“My principal concern is to maintain the effectiveness of our antitrust enforcement,” Europe’s commissioner of competition, Joaquín Almunia, said in a speech this past May. “This is particularly important in our current difficult economic times when companies have an increased incentive to collude with their competitors.”

Indeed, DG Comp officials have pointed out that very often, companies in the most precarious financial positions are also the ones most likely to collude with one another as a way to remain profitable, even at the expense of consumers.

As fines grew steadily during the second half of the 2000s, the commission was loathe to accept companies’ poverty pleas – especially under the tenure of former Competition Commissioner Kroes, whose tenure ushered in an era of harsher penalties and, competition experts argue, a more dogmatic approach to enforcement.

According to records obtained by GCR through the EU’s transparency regulation, DG Comp has on at least three occasions rejected inability-to-pay arguments from companies that teetered on the brink of financial turmoil. In one instance, a company told the commission that its financial crisis “was triggered by the commission’s decision”.


Economic times

The three cases in which companies declared bankruptcy after DG Comp denied their poverty pleas exemplifies what sources say was a commission bent on punishing illegal behaviour, and summarily discounting arguments that its decisions could put companies out of business.

“There were none of these discussions had within the commission,” says Joachim Schwerin, head of the competition team at DG Enterprise and Industry, which is systematically associated to DG Comp investigations and decisions. “There was simply a culture where the commission didn’t think about the economic consequences [of its fines]. A purely legalistic approach dominanted.”

In December 2001, former UK paper manufacturer Carrs Paper Limited was fined €1,570,000 as part of the commission’s crackdown on a cartel in the carbonless paper industry.

The company was to pay its fine by the commission’s May 2002 deadline. However, in January that year, Carrs’ legal counsel wrote to the commission, telling it that the company was in a financial crisis that “was triggered by the notification of the commission’s decision” to impose the fine.

Six days later, the commission’s accounting officer wrote back to the company’s counsel, telling them the request had been rejected, documents show. According to the documents, the officer told Carrs’ counsel that “neither the arguments nor the proposal of the company could be taken into consideration and that the company should conform itself to the commission’s decision”.

Shortly after, the company found a buyer after months of searching. Partner Coatings Ltd acquired 100 per cent of the company in a debt-financed deal that required all the cash and trading surplus of the company to be used to service the debt.

Documents show that the sale would, in part, frustrate debt collectors from DG Budget. And it wouldn’t be the last time.

Carr Paper is one of at least three companies GCR’s review identified that went out of business after they told DG Comp that they did not have the ability to pay a cartel fine against them. In all three cases, the commission denied the request and pursued the fine, only to end up empty-handed when the companies went belly up.

In another instance, removal company Allied Arthur Pierre was hit in March 2008 with more than €2.5 million in fines for its role in an alleged cartel in the international removal services industry, along with its parent company, SIRVA. An inability-to-pay request was made to the commission during the investigation, which was rejected.

SIRVA, which was already in bankruptcy at the time, paid almost €500,000 of the fine through a settlement. Allied Arthur Pierre was still on the hook for the rest. The company declared bankruptcy four months later, and DG Comp’s attempts to collect the remaining money from Allied’s liquidator proved unsuccessful, records show.

The Carbide/Graphite Group was in much the same financial position when DG Comp fined it more than €10 million for its alleged role in a graphite electrode cartel. When the decision was handed down in July 2001, the company found out it got extensive reductions for mitigating circumstances and its assistance with the investigation – but no reduction based on the company’s difficult financial circumstances.

Two months later, Carbide/Graphite filed for bankruptcy in the US, then challenged in EU courts on grounds that, among other things, the commission did not take the company’s financial struggles into account when issuing the fine. Several other companies involved in the cartel appealed against their fines as well, including SGL Carbon and UCAR International, but none received reductions. SGL eventually had another cartel fine reduced because of the company’s difficult financial position, but not until nearly a year later.

Now, records and other information suggest that in all three of the above cases, the companies and their industries were put in precarious financial positions well before being hit with a cartel fine.

For example, in the Carbide/Graphite case, the company itself argued that the commission should have considered a range of outside factors that contributed to its wobbly finances, including its lack of production outside of the US, its inability to provide high-level technical services, the poor quality of its products and its vertical integration. The commission told the court that those factors were already reflected in its turnover, and therefore its base-level fine. No further discount for its troubled finances was needed, the court found.

And while lawyers for Carrs said that the fine did lead to the company’s financial ruin, media reports and analysis from that time suggests that the carbonless paper industry was struggling generally. Paper was being used less and less in business as more companies began storing data electronically, and the strong British pound at the time damaged exports, hurting Carr’s bottom line.

Regardless, the commission continued to pursue these companies even after they went out of business, attempting to recover fines from businesses that were no threat to breaking the law again.

It’s important to put issues, such as the Novácke case, into perspective. Of the 50-plus cases where DG Comp has denied inability-to-pay requests, it’s clear that most companies did not go out of business, at least immediately, following a DG Comp cartel fine. Indeed, cases where DG Comp failed to collect cartel fines because a company had gone into bankruptcy have been rare; rarer yet are instances where a company filed for protection from creditors soon after the commission fined it for cartel participation.

And while sources suggest that stiff DG Comp fines in the face of financial problems may have had other, unintended results – industry consolidation, for example – it appears that in most instances, DG Comp made the right call when ignoring poverty pleas.

When asked if the commission has ever reviewed its cases to see whether its fines have contributed to a company’s bankruptcy after a company pled poverty, a spokesperson says only that DG Comp would pursue companies in an effort to recoup unpaid fines.

“Financial distress of companies after receiving a fine can be caused by many factors, not necessarily including the fine,” the commission tells GCR in a statement. “The current approach towards ITP [inability to pay] cases very carefully assesses the risk of companies going bankrupt as a result of the commission’s fine.”

At the same time, records and sources suggest that the commission’s decisions had the potential to deeply impact a company’s financial stability – that its judgement calls could leave suppliers, creditors and others trying to collect money from a bankrupt firm.

Sometimes the commission was among them.


Waiting in line

The queue to pull money and assets from a bankrupt business is often a long one, including banks, suppliers and other creditors keen to recoup unpaid bills. Very often, a European Commission cartel fine goes to the back of the queue – with little hope of seeing any money before a company is liquidated completely.

In some cases GCR reviewed, companies that declared bankruptcy even before a DG Comp fine was due left commission officials to chase money already promised to creditors, and that they had little or no chance of collecting.

The decision to pursue some of those companies despite their financial troubles also left DG Comp unable to collect the entire fine, or empty-handed altogether, after the companies they were pursuing went through liquidation to pay off debtors.

According to notices sent to Kroes, the commission gave up on collection efforts in at least six cases where a company had declared bankruptcy either during an DG Comp investigation or after a decision to fine the company has been issued. In all of those cases, the commission failed to collect all or part of the fine.

In at least three of those cases, the commission denied requests that it reduce the amount of the fine because it would risk putting the companies out of business.

In the case of Carrs Paper, for example, the commission’s efforts to recover the fine were in vain. By 2005, the company was in administration following its purchase and its assets had been sold off without the commission collecting any part of the fine.

Senior DG Comp officials say that it would be bad policy to be lax with companies which have gone into liquidation, and that it’s an important and coherent use of the commission’s resources to pursue unpaid fines in all cases.

But if these companies were indeed in such precarious financial situations, why did DG Comp reject their inability-to-pay applications in the first place? Practitioners say the answer is multifold.


A guessing game

The problem, practitioners say, is that the commission has protected its methods for evaluating poverty claims under lock and key, leaving companies in the dark as to what kind of financial position they would have to be in to win a reduction in their fine.

Even when attempting to follow the commission’s guidelines, practitioners say that measure has always been difficult for companies to prove. According to the wording of the guidelines, not only would a company have to go into bankruptcy as a result of a commission decision, but its assets would have to become worthless. Even in bankruptcy, that’s not often the case.

“The test is so rigorous, the assets have to lose almost all of their value. And for a number of companies, that’s very difficult to establish,” says Mark D Powell, a partner at White & Case LLP in Brussels and counsel to Garantovana, the parent company of Novácke. “Even if you go into bankruptcy, your assets have some value. It’s as if they want bankruptcy-plus.”

Not only is it difficult to remove all value from a company’s assets, but it has proven next to impossible to prove that a company’s actual inability to pay involves the “specific social and economic context” the guidelines require.

The established EU case law surrounding inability-to-pay cases has created a substantial barrier to successfully pleading poverty, at least in the eyes of EU courts. Under case law established since 2005, the commission has no obligation to take into account a company’s financial losses resulting from a cartel fine – no matter how severe – since doing so would give a competitive edge to the company least capable of thriving in the marketplace.

According to appeals and court decisions reviewed by GCR, EU courts have repeatedly sided with the commission even in cases where companies went out of business after being fined by DG Comp.

Case law stemming from several 2005 and 2006 cases in which a company challenged a commission fine – at least in part because of its alleged inability to pay it – established that even even if a commission decision triggers a company’s bankruptcy or liquidation, that action is not necessarily prohibited. That included competition cases against SGL Carbon, Hangzhou Union Pigment Corporation, Heubach and others.

Those cases led the courts to shoot down inability-to-pay arguments made during a company’s appeal of a DG Comp fine. For example, in KME’s May 2010 appeal against its fine in the copper plumbing cartel case, the General Court found that KME’s argument that it could not afford to pay a DG Comp fine and remain in business – along with the arguments of several other companies snared in the commission’s investigation – could not stand up to the established case law.

“Although the liquidation of an undertaking in its existing legal form may adversely affect the financial interests of the owners, investors or shareholders, it does not mean that the personal, tangible and intangible elements represented by the undertaking would also lose their value,” the court found in rejecting KME’s argument that it couldn’t pay its €67 million fine. Even if KME went out of business – which it hasn’t as of press time – that wouldn’t put the commission at fault for the size of its fine.

The EU court system and its case law pose other problems for companies attempting to lower a commission fine because of money problems. For example, DG Comp has consistently suggested that companies unhappy with its decision to reject or undervalue an inability-to-pay request can go to EU courts and ask for interim measures to stop the fine from being collected. However, in several cases – including the case surrounding Novácke and its parent company, Garantovana – DG Comp has fought hard against such requests for interim measures, court records show, all but assuring that the collection process remains under way, even if a company is teetering on the brink of liquidation – or has indeed already declared itself bankrupt.

“DG Comp will fight tooth and nail against those measures. To me, that seems a little bit hollow,” Powell says, adding that companies which see their interim measure requests rejected are often required to produce either the amount of the fine, or a bank guarantee demonstrating that someone will pay the fine should an appeal fail.

When the economy turns south, securing either the money or the bank guarantee becomes difficult, practitioners say and companies have argued in court.


Breaking with tradition

For the most part, the commission’s rate of accepting poverty pleas remained steady throughout the past decade, even as new guidelines introduced in 2006 saw the commission hit companies with ever-increasing amounts of fines in cartel cases.

While the first decisions reached under those guidelines were relatively mundane, it became apparent to observers that an investigation into an alleged car glass cartel would be different.

“When we came to car glass, we realised that we had a cartel in which you would have an explosion in fines,” says Schwerin, from DG Enterprise and Industry. “There was a danger you would have over-deterrence under the fining system that we had.”

By the time the commission’s investigation of the cartel began, the car glass industry had been cartelised for quite some time – five years in total – and comprised a big chunk of Europe’s economy. In the final year of the cartel, for example, the industry was worth more than €2 billion. The new fining guidelines took both factors into account. Plus, the largest company involved in the alleged cartel, Saint-Gobain, had been nabbed for price fixing before, hiking up its portion of the fine even further.

When the car glass decision came down in November 2008, the results were stunning: four manufacturers were hit with more than €1.3 billion in fines – the most of any cartel case in the history of antitrust enforcement worldwide. The massive fines gave way to some of the first criticisms of the new fining guidelines, with some companies claiming that the heavy fines would stifle investment and growth, and would give a competitive advantage to those who deftly navigated the EU system.

Complaints also began to surface that fines under the 2006 guidelines were especially harsh on small and single-product businesses.

Under the new guidelines, companies are fined according to their sales of the product that was the subject of a price-fixing conspiracy. GCR’s review of cartel fines under the new guidelines shows that for many small companies, fines under this system consistently approached or reached the 10 per cent of annual turnover limit – a limit that had the potential to not only wipe out a year’s worth of profits, but put companies in struggling industries at risk of collapse.

By mid-2008, many industries indeed began to struggle, as the first real shockwaves of the global financial crisis began to ripple through Europe’s economy. Although most lawyers representing companies in cartel cases were still operating under the expectation that inability-to-pay requests would be denied, the commission began to hear protests from some companies whose financial positions had already been weakened.

Until the economic crisis hit, DG Comp operated under what one source described as a “relatively short” internal memo that explained the commission’s methodology for testing whether a company was insolvent. This memo relied on a methodology based on one or two indicators, typically found in the public record, that might show whether a company was in danger of becoming insolvent, the source says.

But as Europe’s economic crisis unfolded before them, it became obvious to commission officials that the old approach to inability-to-pay requests wouldn’t suffice for the predicted wave of claims that companies couldn’t pay their cartel fines and remain in business.

By 2009, that wave of poverty claims began to surface and, very quietly, the commission began reconsidering inability-to-pay requests in a handful of cartel cases. The first, perhaps, was in the heat stabilisers case – an investigation that spanned seven years before the commission published its decision in November 2009. In that case, German additives company Baerlocher pleaded poverty to the commission, arguing that, as a small business with only a handful of products, a fine under the 2006 guidelines could potentially put it out of business.

Dr Micheal Bauer of CMS Hasche Sigle in Brussels, who advised Baerlocher in the case, says that DG Comp officials had begun to grow more receptive to arguments that the 2006 fining guidelines discriminated against small and medium enterprises – including arguments he put forward on behalf of his client. By the time the commission released its decision in the heat stabilisers case, Baerlocher’s fine was, conspicuously, an even €1 million.

While Bauer declined to say exactly how much DG Comp discounted Baerlocher’s fine, it is clear the discount was deep. While Baerlocher paid just €1 million for its role in the conspiracy, its rivals paid as much as 20 times that amount. In court filings, Faci SpA, one of the other alleged cartelists involved in the conspiracy, told the General Court the discount was in excess of 95 per cent.

The commission says in a statement that the financial crisis indeed ushered in an increase in both the number of poverty requests it received and the number it approved. “The crisis is relevant because it worsens significantly the financial situation of companies and thus makes more likely that a significant fine would force them into bankruptcy,” a spokesperson says.

The financial crisis had brought other, more extensive internal changes at DG Comp. With lines of credit crumbling and emergency state aid requests flowing in on what seemed like a daily basis, the commission had to become fast and efficient at evaluating the health of companies. Officials at DG Comp also had to quickly gain a comprehensive understanding of aspects of the market they never paid much attention to before the crisis, such as bank-lending fees and the venture-capital markets.

By late 2009, the commission had become markedly more efficient at understanding what companies could and could not afford without jeopardising their long-term health. The process for evaluating the kind of information contained in an inability-to-pay request was no longer some out-of-the-ordinary thing. Now it was simply part of the routine.

Still, during the first part of 2010, those poverty pleas became more and more frequent – as did complaints about the commission’s handling of them. On the heels of the Novácke decision, other companies subject to harsh cartel fines, including chemical manufacturer ALMAMET, began lodging harshly worded complaints, accusing the commission of unfairly rejecting poverty complaints, even when companies teetered on the bring of bankruptcy.

ALMAMET appealed against its €3 million fine to Europe’s General Court, and its managing director, Alexander Rhomberg, told GCR in February that the commission’s fining policy “forces smaller, independent and more competitive players out of the market”.

At that point, the commission was close to announcing a new outlook on the inability-to-pay requests – fueled, in part, by new commissioner of competition Almunia, who had taken over from Kroes in the midst of the crisis. Whether by design or coincidence, Almunia was an ideal candidate to take over at DG Comp during one of the deepest recessions in modern European history. As the former head of economic and monetary affairs at the commission, sources close to the commission say he had an immediate sympathy for companies for which a steep cartel fine would legitimately push them toward the brink of collapse.

“You don’t have to explain to him what businesses need,” the source says.

In Almunia’s May speech for European Competition Day, he solidified his position that DG Comp would not fine companies into bankruptcy.

“I have no interest in endangering the viability of companies,” he said in his speech. “I am looking very closely at the individual financial situation of companies with difficulties in paying the fines imposed.”

By the time the bathroom fittings cartel case was announced the following month, the commission’s new approach to inability-to-pay requests was firmly in place. Indeed, five of the 10 companies targeted in that case who told DG Comp they couldn’t afford their fine were granted considerable reductions – between 25 and 50 per cent.

In handing down the decision, Almunia reiterated that the commission would look carefully at all inability-to-pay claims and, where warranted, reduce fines accordingly.

“What we assess is whether the fine we are planning to impose would cause, as it is alleged, the bankruptcy of the company. Of course, for this to happen the company would need to be in a very bad shape already and the fine would push it over the cliff,” he said when announcing the bathroom fittings case. “But we would not want to provoke a company’s bankruptcy. Competition policy is about promoting competition, not eliminating firms from the market place.”

The data backs this up. In recent cartel decisions in 2010 – heat stabilisers, bathroom fixtures and fittings, pre-stressing steel and animal feed phosphates – the commission has granted poverty reductions to 10 out of approximately 28 companies which requested such reductions. This represents a success rate of 36 per cent, as compared to 4 per cent in previous decisions from 2005 onwards, according to GCR’s review of commission data. Notably, the reductions themselves have also been substantial, the average reduction amounting to just over 45 per cent.

But questions remained. If the commission’s approach to poverty pleas had in fact changed, no one had truly explained how. What exactly was the commission looking for when analysing requests to reduce fines? Was there a threshold that had to be met?

Just days before the bathroom-fittings decision became public, Almunia circulated an internal briefing to the College of Commissioners, outlining the approach DG Comp would take in inability-to-pay cases – a document that has become the closest thing to a road map the commission has provided.


Making things clear

The note, circulated that June, contained what Almunia called a “clarification of the ITP conditions” in the fining guidelines, and “the general principles to be applied in this field”. The note’s tone made it clear that the commission would be far more willing to listen to poverty arguments from companies – marking the first time DG Comp have given outsiders even so much as a peek into its outlook on inability-to-pay requests.

According to the note, the commission has intensified its review of companies’ pleas of poverty when hit with cartel fines. Those reviews appear to be quite methodical, assessing each of the four conditions contained in the 2006 fining guidelines separately.

The four conditions are:

• the specific social context;

• the specific economic context;

• that the fine would irretrievably jeopardise the economic viability of the company; and

• that the fine would cause the assets of the company to lose all value.

Of these four, the condition that receives the most attention in the note is the third – that the fine would irretrievably jeopardise a company’s economic viability. Almunia calls the condition “the most important but also most complex and difficult part of the ITP test”.

To conduct that test, the commission says it will look for indicators of a company’s financial state of being, all derived from models noted for their ability to predict bankruptcy, and will “assess whether and how the fine would cause the above financial indicators to deteriorate”.

“Thus, if there is sufficiently clear evidence that a company is in immediate danger of bankruptcy,” Almunia says in the note, “the commission will try to assess whether it is likely that bankruptcy would indeed be caused by the fine.”

In a statement, a DG Comp spokesperson says that it will look towards the company’s recent financial statements, its provisional current year statements and future projections, profitability, solvency and liquidity, several ratios that measure a company’s solidity, and its relations with banks and shareholders in order to asses whether a fine would indeed push the company toward bankruptcy.

As for the other three conditions, the note says they are to be “interpreted rather broadly by the commission”. However, in relation to the condition that a company’s assets must lose all their value – the element of the test that has come under the most fire from the private sector – the note admits that, “a literal interpretation of this wording would rather lead to a systematic rejection of claims since individual assets practically never completely lose their value, even if the company goes bankrupt”.

A commission spokesperson tells GCR that in the agency’s eyes, the “total asset loss” requirement should be interpreted instead as “significant” asset loss – that is, that a company faces not only bankruptcy, but damage to their assets that would markedly change their value. It is likely that change alone was enough to open the door to the relative wave of poverty pleas the commission has accepted over the past year.

The tenor and indeed the detail of the commission’s new framework represent a real climb-down as compared with the commission’s previous practice, with the emphasis now unambiguously on avoiding fining a company to bankruptcy.

However, ambiguities do remain. Bauer says that during Baerlocher’s ITP discussions, the commission was very reticent as to its precise economic model of assessment. “The commission clearly is wary that companies may deliberately engage in financial engineering or restructuring simply to fit the commission’s model,” he says.

The commission admits as much. “It is indeed a potential concern that companies would attempt to arrange their financial affairs in view of meeting the thresholds in order to obtain a fine reduction,” the DG Comp spokesperson tells GCR.

The memo itself also raises questions as to whether all four conditions are cumulative or whether some may be alternative. While it is apparent that the commission’s tests for economic viability and asset value rely on one another, this is not so for the first two conditions – the social and economic contexts of a poverty plea. The memo does not make it clear whether both of the first two conditions must be satisfied in each case. Must a company prove that a fine would both cause job loss and deeply worsen a country’s economic health to satisfy the comission’s test? Or just one of those two? And to what extent?

It also remains unclear when assessing a company’s economic viability precisely to what levels the various financial indicators must drop as a result of the fine for the commission to accept a poverty plea. When asked, the commission responded simply that the threshold has not changed, “namely the need to substantiate that the fine will be very likely to cause the liquidation of the undertaking”.

What is clear, however, is that the standardisation and increased analytical rigour with which the commission is approaching inability-to-pay cases will open up its decisions to scrutiny and challenge by unsuccessful applicants, particularly those accusing DG Comp of treating different companies in the same industry unequally. In fact, appeals have already been launched against the heat stabilisers decision, including arguments against the commission’s rejection of poverty pleas in a number of cases.

It remains to be seen how the EU courts will react to such arguments. Either way, the adversarial process before the courts will shine the spotlight further on this murky area of the commission’s fining practice.

That said, the new system appears to be a success on several fronts. Not only is DG Comp more willing to accept legitimate arguments that a company can’t afford to pay a cartel fine, but several chief executives of major European businesses who meet often with their counterparts at DG Enterprise and Industry have said the commission’s analysis now gives them an accurate understanding of whether a full competition fine would indeed put a company out of business.

What’s more, the commission said it has targeted small and single-product companies for reduced fines – exactly the group the private sector said the commission’s fining guidelines unfairly targeted.

That doesn’t mean the knife blade of DG Comp’s fining practice is dulling. Far from it. Even though small companies that have been subject to cartel fines say that fines near Europe’s competition fine threshold – 10 per cent of turnover – still have the potential to push them toward the brink of insolvency, the commission appears unpersuaded.

DG Comp officials say that a 10 per cent cap in and of itself is a safety net protecting firms against bankruptcy. They point out that the 10 per cent rule has led to the reduction of far more fines than any plea based on financial difficulties. “This shows that the 10 per cent threshold continues to fulfil its function of protecting companies from bankruptcy even in the current time of crisis,” a spokesperson says.

Internally, the commission officials believe there’s little chance DG Comp ever returns to its past practices when evaluating poverty pleas. The only change the commission would like to see, officials say, is for the economy to improve, so they begin seeing fewer poverty pleas in the first place.



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