The EU General Court confirmed in its recent judgement (Goldman Sachs Group v Commission, T-422/14, 12 July 2018) the responsibility of investment companies for antitrust infringements committed by their portfolio companies where they exercised decisive influence over such companies. The ruling endorses the concept of parental liability in EU competition law and, thus, it has important implications for financial investors, such as private equity firms, in relation to alleged breaches of competition law by their portfolio companies. We also briefly discuss another case pending at the European Court of Justice with implications for parent company liability in this alert.
Implications for Investor Liability
In Goldman Sachs Group v Commission case, the EU General Court upheld the European Commission’s Power Cables cartel decision made in April 2014 (Case AT.39610 – Power Cables, 2 April 2014), in which Goldman Sachs was held jointly and severally liable with its indirect subsidiary for breaching competition law. In that cartel case, the Commission imposed total fines of EUR 301 million on 11 European, Japanese and South Korean producers of high-voltage power cables for having participated in a worldwide market and customer sharing cartel in 1999–2009.
The entities fined included not only the companies directly involved in the cartel and their industrial owners but also Goldman Sachs, whose private equity arm indirectly owned Prysmian, one of the participants in the cartel. Goldman Sachs was held jointly and severally liable for EUR 37 million of the EUR 104 million fine imposed on Prysmian, a share corresponding to the period during which Goldman Sachs controlled Prysmian. There was no evidence that Goldman Sachs (or its investee vehicles) had been involved in the cartel behaviour.
Goldman Sachs was held liable for the conduct of its portfolio company on the basis that it exercised decisive influence by virtue of the level of Goldman Sachs’ shareholding held through its funds and other intermediate companies in Prysmian (ranging between 84% and 91%) and the economic, organisational and legal links that resulted in Goldman Sachs’ exercising decisive influence over Prysmian’s during the cartel period.
Goldman Sachs appealed the Commission’s decision to the General Court claiming e.g. that the Commission had erred in presuming that Goldman Sachs exerted a decisive influence over Prysmian given that its holding in Prysmian, through intermediate companies, was less than 100% for most of the time during which it held its investment. According to Goldman Sachs, the Commission had also erred in applying the presumption of actual exercise of decisive influence by reference to the voting rights associated with Prysmian’s shares, rather than share capital in the said company. Goldman Sachs also argued that it should be considered “a pure financial investor”, as both the managers of the investment funds and its representatives on Prysmian’s board of directors lacked the knowledge and expertise to direct Prysmian’s commercial conduct.
However, the General Court rejected these claims and held that when a parent company is able to exercise all the voting rights associated with its subsidiary’s shares, particularly in combination with a very high majority stake in the share capital of that subsidiary, the parent company is in a similar situation to that of a sole owner, since the parent is able to determine the economic and commercial strategy of the subsidiary concerned, even if it does not hold all of the subsidiary’s share capital.
The General Court also concluded that the Commission was right to take into account other relevant factors, such as Goldman Sachs’ power to appoint and dismiss board members, actual level of representation on Prysmian’s board of directors, and Goldman Sachs’ ability to call shareholders meetings.
The case serves to underscore that private equity investors and other financial investors are not immune to antitrust risks associated with competition infringements committed by companies within their investment portfolio merely because of their role as financial investors rather than as parent companies in the customary sense. This is the case even after the divestment of the investment made in the portfolio company, which has infringed antitrust law because fines can be imposed for the period of ownership. Goldman Sachs has appealed the case to the European Court of Justice (Case C-595/18 P).
Implications for Economic Succession
Another case currently pending at the European Court of Justice with regard to the antitrust liability of parent companies is Skanska Industrial Solutions Oy e.a. (Case C-724/17). The said case relates to the so-called asphalt cartel, which operated in Finland from 1994 to 2002. The case involves three companies that, after acquiring the entire share capital of certain bid-rigging cartelist companies, dissolved the said companies and continued their business activities unaware of the prior existence of the cartel. Borenius is currently representing one of the defendants in this case.
Based on the doctrine of economic succession, the Finnish Supreme Administrative Court held in 2009 (KHO:2009:83) that the acquiring companies were liable for cartel fines of over EUR 80 million. However, the crucial issue currently pending at the European Court of Justice is whether the doctrine applies to antirust follow-on damages as well.
This case is another instance of a new type of parental liability under EU law, which highlights that, under certain circumstances, parent companies might be held liable for antitrust follow-on damages caused by their liquidated subsidiaries via the doctrine of economic succession despite the fact that the parent company may have been unaware of the actual infringement.
In light of these legal developments, we recommend that the antitrust risks outlined above are properly addressed and documented in all future transactions.