Definition and legal overview of conglomerates
Ein Conglomerate is a corporate group formed of several legally independent companies from different industries, which are economically connected through a common parent company. The group companies are not usually directly, but rather only indirectly related in economic terms. A key characteristic of conglomerates is that there is no industry-specific focus; instead, there is diversification into various business areas. In a legal sense, a conglomerate constitutes a form of business concentration that affects various national and international legal systems.
Forms of formation and structure
Various forms of formation
Conglomerates can be established through various processes, including:
- Mergers: Combination of existing companies from different industries into a new, larger company.
- Acquisitions: Acquisition of companies by an existing corporation from one sector, whereby the acquired company typically continues its operations.
- Start-ups: Establishment of new subsidiaries by an existing company, often in new markets or sectors.
Organizational structure
Structurally, conglomerates consist of a parent company (holding company) and several subsidiaries. The holding company typically assumes strategic management and control functions, while operative business activities are located within the subsidiaries. This legal independence leads to complex, occasionally cross-border structures.
Corporate law aspects
Legal form of the parent company (holding)
The parent company of a conglomerate is often structured as a stock corporation (AG) or a limited liability company (GmbH). The choice of legal form is based on economic considerations as well as on corporate law and tax framework conditions in the respective country.
Equity interests and control agreements
A conglomerate is typically formed through majority shareholdings of the parent company in its subsidiaries. Corporate group law regulations, especially under German law in §§ 15 ff. AktG, govern the relationship between parent and subsidiary. Sometimes, control or profit transfer agreements (§ 291 AktG) are concluded, allowing the parent company extensive control over subsidiaries.
Co-determination and employee rights
In connection with national co-determination regulations, such as the Co-Determination Act (MitbestG) or the One-Third Participation Act (DrittelbG), conglomerates may be required to appoint employee representatives to the supervisory board of the parent company or its subsidiaries. This affects corporate governance and oversight of the group management.
Competition and antitrust law
Merger control
Conglomerates, like other corporate groups, are subject to national and European merger control. In Germany, the Act against Restraints of Competition (GWB) governs the notification and examination of mergers, wherein the definition of relevant markets is broadened for conglomerate mergers, as various markets may be affected. The European Commission reviews such mergers under the EU Merger Regulation (EUMR).
Conglomerate effects in antitrust law
Conglomerate mergers pose the risk that cross-market dominant positions may arise or be strengthened. This may especially be the case with portfolio companies, which, by bundling different products or services, can raise market entry barriers for competitors. Antitrust assessment pays particular attention to the effects of such portfolio constellations.
Tax and accounting law
Tax treatment
Conglomerates generally utilize structured tax planning models to generate tax benefits, for example through national and international profit shifting. In Germany, various regulations allow for so-called ‘tax integration’ (§§ 14 ff. KStG) to achieve far-reaching corporate tax consolidation.
Group accounting and consolidation
According to international accounting standards (IFRS) as well as the German Commercial Code (HGB), conglomerates are obligated to prepare consolidated financial statements. The obligation to fully consolidate applies regardless of the industry affiliation of the subsidiaries and extends, due to diversification, across various sectors and markets.
Compliance and transparency obligations
Disclosure obligations
Conglomerates are subject to extensive disclosure obligations. These include requirements regarding ownership structure, reporting on the results and developments within subsidiaries, as well as the publication of annual financial statements and management reports at the group level.
Corporate governance
The many different business fields within a conglomerate impose high demands on internal governance. The implementation and control of legally compliant business processes, adherence to industry-specific regulations, and group-wide risk management are key management responsibilities.
International law and cross-border aspects
European corporate and competition law
Conglomerates with headquarters or activities in several EU countries are subject to European corporate law (in particular, the SE Regulation) and European Union competition law. This includes specific regulations on merger control, market dominance, and protection against distortion of competition.
Foreign participations and investment control
An increasing number of countries, including Germany, have adopted investment control regulations subjecting the acquisition of subsidiaries by foreign parent companies to certain reporting requirements and approval conditions where security-sensitive sectors are involved.
Liability issues and risk aspects
Liability at the level of parent and subsidiary companies
As a rule, the legal independence of group companies is preserved despite their economic connection. The parent company is generally not liable for the obligations of its subsidiaries, unless it has given specific guarantees or so-called ‘piercing the corporate veil’ applies (especially in exceptional cases of existence-destroying interference).
Compliance violations and group responsibility
If a subsidiary violates legal regulations (e.g. environmental law, anti-corruption law), this can, under certain conditions, also trigger liability for the parent company, for example, if the violation results from group-wide binding instructions. Due diligence obligations may also become relevant in the context of supply chain regulations.
Significance and assessment
Conglomerates play a major role in international business, as diversification allows risk distribution and strengthening of strategic market positions. Legally, however, conglomerates represent complex structures subject to numerous regulations in corporate law, antitrust law, tax law, accounting law, as well as international law. Careful legal analysis and continuous monitoring are essential to manage risks and fulfill comprehensive obligations.
See also:
- Group (Konzern)
- Holding company
- Merger control
- Company merger
- Competition law
References:
- Baums, Theodor / Hopt, Klaus J.: Handelsgesetzbuch (HGB) Großkommentar, Konzernrecht
- Immenga/Mestmäcker: Competition Law, Commentary on the GWB and European Antitrust Law
- Lutter, Marcus (ed.): Rights and obligations in the group
Web links:
Frequently asked questions
What legal requirements must be observed when setting up a conglomerate?
When setting up a conglomerate, various legal requirements must be observed, deriving from corporate law, antitrust law, and other special legislation. Under corporate law, national regulations concerning the establishment and investment in companies must be adhered to. This includes, in particular, the German Commercial Code (HGB) and the Stock Corporation Act (AktG) in Germany. Additionally, merger control regulations from the EU and German competition law (especially the Act against Restraints of Competition – GWB) play a central role where mergers or acquisitions may create dominant market positions or impair competition. Further industry-specific regulations may also apply, such as those in the banking or energy sectors. For international conglomerates, compliance with foreign laws and, if applicable, investment control legislation is required.
What antitrust risks do conglomerates face?
Conglomerates, regardless of whether the individual companies operate in different industries, are subject to strict antitrust reviews. The main risks are that forming a conglomerate may result in restraints of competition, especially if this creates or reinforces market dominance. What is especially relevant is the control of corporate mergers under national and European law. The European Commission and the German Federal Cartel Office examine whether combining companies creates anti-competitive structures, even if they do not operate directly in the same market segment. Conglomerates may also raise market entry barriers for competitors through tying arrangements or bundling strategies, which may be considered abuse of a dominant position. Non-compliance with these rules can result in substantial fines and reversal of mergers.
How is liability structured within a conglomerate?
From a legal perspective, each company within a conglomerate generally acts independently, meaning each company is liable with its own assets for its obligations. Piercing of the corporate veil to the parent or other group companies only occurs in exceptional cases, for example, in the event of existence-destroying interference, culpable conduct, or so-called de facto group. Exceptions may also arise in the event of contractual or economic joint liability, such as comfort letters. For deliveries and services within the conglomerate, the general principles of group law (especially §§ 291 ff. AktG) must be observed. In the event of a subsidiary insolvency, the assets of the parent and other group companies are generally protected, unless the aforementioned exceptions apply.
What notification and disclosure obligations apply to a conglomerate?
Conglomerates are subject to a variety of notification and disclosure obligations. In acquiring or selling equity interests, reporting duties to the relevant regulatory and competition authorities frequently arise, for example under the Securities Trading Act (WpHG) or under §§ 39 ff. GWB in the context of merger control. In addition, conglomerate companies are required to publish consolidated group accounts in line with commercial or international accounting standards (e.g. IFRS). These financial statements must transparently disclose information about all entities included and their business relationships. There is also a disclosure obligation for so-called affiliated entities, and—depending on the industry—additional information and audit requirements may apply, for example through the Federal Financial Supervisory Authority (BaFin).
Are there special regulations for corporate governance in conglomerates?
General organizational and corporate law requirements apply to conglomerates, supplemented by special compliance obligations especially in regard to managing and monitoring risky activities within the various subsidiaries. The management board or managing directors of the parent company must implement control and steering mechanisms, such as functioning risk management systems and group oversight according to § 91 para. 2 AktG. With majority shareholdings, the rights and duties of shareholders or stockholders also need to be observed, including instructions rights and profit transfers. Particular attention must be paid to identifying and avoiding conflicts of interest between individual companies, which is typically addressed by corporate governance guidelines.
How does group law affect internal transactions within a conglomerate?
Under German group law, the provisions of the AktG on affiliated companies (§§ 291 ff. AktG) are of particular importance for transactions within a conglomerate. For example, if control or profit transfer agreements are concluded, these must be notarized for the protection of minority shareholders, entered in the commercial register, and are subject to special approval requirements. Group law also regulates the compensation and settlement claims for external shareholders and imposes strict transparency requirements for group management and control. All contracts and transactions must be conducted at arm’s length to prevent hidden profit transfers or abuse of group structures. Civil and criminal sanctions may result from violations of these requirements.
