13 March 2014

SMEs Linked through Natural Persons

Phedon Nicolaides

The main point

Two or more enterprises may constitute a single undertaking when their owners and/or
managers are related in a way that they can act jointly to exercise influence over the
decision of those enterprises.

Introduction

On 27 February 2014, the Court of Justice rendered a judgment on the notion of “linked
enterprises” following a request for preliminary ruling from a German court. 1 The request
concerned case HaTeFo GmbH v Finanzamt Haldensleben, C-110/13, which arose from a
dispute on the calculation of the amount of an investment subsidy.

Indeed, for aid granting authorities one of the most difficult tasks in preventing aid
applicants from benefitting from SME bonuses is to determine whether personal relations
between apparently distinct enterprises are strong or close enough so that these
enterprises can be considered to be a single economic unit.

A small or medium-sized enterprise is defined as an “autonomous” enterprise with fewer

than 250 employees and turnover not exceeding EUR 50 million [or balance sheet not
exceeding EUR 43 million].2 An autonomous enterprise is neither “linked”, nor “partner”
enterprise. The question put by the referring German court to the Court of Justice was on
the interpretation of linked enterprise in a situation where the influence of one enterprise
over another was exercised by natural persons.

The SME definition

The purpose of the SME definition is to identify enterprises which may suffer economic
handicaps due to their size. Recital 9 of the preamble to the SME Recommendation states:
“To gain a better understanding of the real economic position of [micro, small and
medium enterprises (SMEs)] and to remove from that category groups of enterprises
whose economic power may exceed that of genuine SMEs, a distinction should be
made between various types of enterprises, depending on whether they are

1
The full text of the judgment can be accessed at:
http://curia.europa.eu/juris/document/document.jsf?text=&docid=148389&pageIndex=0&doclang=EN&mode
=lst&dir=&occ=first&part=1&cid=380102
2 See Commission Recommendation 2003/361 of 6 May 2003 concerning the definition of micro, small and

medium-sized enterprises [OJ L 124, 20/5/2003]. It can be accessed at:

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2003:124:0036:0041:en:PDF

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 autonomous, whether they have holdings which do not entail a controlling position
(partner enterprises), or whether they are linked to other enterprises.”

Recital 12 of that recommendation states:

“Account should also be taken, in suitable cases, of relations between enterprises
which pass through natural persons, with a view to ensuring that only those
enterprises which really need the advantages accruing to SMEs from the different
rules or measures in their favour actually benefit from them. In order to limit the
examination of these situations to the strict minimum, the account taken of such
relationships has been restricted to the relevant market or to adjacent markets –
reference being had, where necessary, to the Commission’s definition of “relevant
markets” in the Commission notice on the definition of relevant market for the
purposes of Community competition law”.

The definition of SMEs is given in the Annex of the SME Recommendation. Article 3 of the
Annex relates to the types of enterprises that are taken into consideration when calculating
staff numbers [250] and financial amounts [EUR 50 or 43 million] defined in Article 2.

Article 3(1) provides that:

“An autonomous enterprise is any enterprise which is not classified as a partner
enterprise [defined in Article 3(2)] … or as a linked enterprise.”

Article 3(3) states that “linked enterprises are enterprises which have any of the following
relationships with each other:
(a) an enterprise has a majority of the shareholders’ or members’ voting rights in
another enterprise;
(b) an enterprise has the right to appoint or remove a majority of the members of
the administrative, management or supervisory body of another enterprise;
(c) an enterprise has the right to exercise a dominant influence over another
enterprise pursuant to a contract entered into with that enterprise or to a provision
in its memorandum or articles of association;
(d) an enterprise, which is a shareholder in or member of another enterprise,
controls alone, pursuant to an agreement with other shareholders in or members of
that enterprise, a majority of shareholders’ or members’ voting rights in that
enterprise.

There is a presumption that no dominant influence exists if the investors … are not involving
themselves directly or indirectly in the management of the enterprise in question.

Enterprises having any of the relationships described in the first subparagraph through one
or more other enterprises, or any one of the investors, are also considered to be linked.

Enterprises which have one or other of such relationships through a natural person or group
of natural persons acting jointly are also considered linked enterprises if they engage in their
activity or in part of their activity in the same relevant market or in adjacent markets.

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An adjacent market is considered to be the market for a product or service situated directly
upstream or downstream of the relevant market.”

The relationships between the various enterprises in the proceedings

HaTeFo produced plastic foils, sheets, tubes and mouldings. The share capital in that
company was owned by three individuals, A, B (the spouse of A) and C, who held
respectively 24.8%, 62.8% and 12.4% of the shares. A and C were managing directors of that
company. In addition, A and his mother D had equal shares in X, a company of which A and
C were also the managing directors.

X acted as guarantor for HaTeFo during its launch, and also concluded a business
management contract with HaTeFo, pursuant to which all of HaTeFo’s orders were to be
taken by X, which would be the only company with a presence on the market. That business
management contract also stipulated that a representative of X was to take charge of
HaTeFo’s technical management. Furthermore, HaTeFo transferred its research and
development activities and its computer management to X, and it used one of X’s bank
accounts for the purposes of its activities.

Considered in isolation, HaTeFo could be qualified as an SME. However, in view of both the
number of X’s employees and its annual turnover, that would not hold true if HaTeFo were
to be regarded as linked to X.

The judgment

The Court explained that in order to determine whether personal relationships can confer
the status of “linked enterprises” to two or more enterprises it is necessary to interpret the
SME Recommendation “by taking into account the reasons for its adoption”. [paragraph 30]
This is because “it cannot be concluded from formal non-compliance” with the various
criteria of the SME definition that it “precludes, in all cases, a finding that the enterprises
concerned are linked”. [paragraph 29] In other words, the Court does not consider itself to
be limited by formal wording when it is obvious that the intention of the SME definition is to
prevent enterprises from pretending to have little economic power when in reality they can
mobilise more resources through personal ties.

The Court turned to the stated intentions of the SME recommendation. “It is apparent from
recitals 9 and 12 of the preamble to that recommendation that the definition of linked
enterprises aims to gain a better understanding of the economic position of SMEs and to
remove from that qualification of SMEs groups of enterprises whose economic power may
exceed that of genuine SMEs, with a view to ensuring that only those enterprises which
really need the advantages accruing to the category of SMEs from the different rules or
measures in their favour actually benefit from them. Those recitals also state that in order
to limit to the strict minimum the examination of relations between enterprises which pass
through natural persons, the account taken of such relationships must be restricted to cases
where those enterprises engage in activities in the relevant market or in adjacent markets.”
[paragraph 31]

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“Therefore the fourth subparagraph of Article 3(3) of the Annex to the SME
Recommendation must be interpreted in the light of that objective, so that enterprises
which do not formally have one or other of the relationships referred to [in Article 3(3)], but
which, because of the role played by a natural person or group of natural persons acting
jointly, nevertheless constitute a single economic unit, must also be regarded as linked
enterprises for the purposes of that provision, since they engage in their activities or in part
of their activities in the same relevant market or in adjacent markets”. [paragraph 34]

“Moreover, the condition that natural persons are acting jointly is satisfied where those
persons work together in order to exercise an influence over the commercial decisions of
the enterprises concerned which precludes those enterprises from being regarded as
economically independent of one another. Whether that condition is satisfied depends on
the circumstances of the case, and that is not necessarily conditional on the existence of
contractual relations between those persons or even a finding that they intended to
circumvent the definition of an SME.” [paragraph 35]

The Court observed that X sold all of HaTeFo’s production, while HaTeFo was not visible on
the market. A representative of X was responsible for the technical aspects of HaTeFo’s
production. HaTeFo transferred to X its computer and procurement management, and its
research activity and HaTeFo used one of X’s bank accounts for the purposes of its business
activity.

Then the Court noted the family relationship between A, B and D, who owned the two
enterprises, and that A and C simultaneously managed both. According to the Court, “those
links appear to be such as to give those persons the opportunity to work together in order
to exercise an influence over the commercial decisions of the enterprises concerned which
precludes those enterprises from being regarded as economically independent of one
another.” [paragraph 37]

The Court concluded that “in view of the foregoing, it seems that two companies … may be
regarded in fact as constituting, through a group of natural persons acting jointly, a single
economic unit, so that they should be regarded as linked enterprises for the purposes of th e
fourth subparagraph of Article 3(3) of the Annex to the SME Recommendation”. [paragraph
38]

It therefore decided to give the following answer to the German court:

“Enterprises may be regarded as ‘linked’ … where it is clear from the analysis of the
legal and economic relations between them that, through a natural person or a
group of natural persons acting jointly, they constitute a single economic unit, even
though they do not formally have any of the relationships referred to in the first
subparagraph of Article 3(3) of the annex [of the SME definition]. Natural persons
who work together in order to exercise an influence over the commercial decisions
of the enterprises concerned which precludes those enterprises from being regarded
as economically independent of each other are to be regarded as acting jointly”.
[paragraph 39]