On 2 April 2014, the European Commission imposed fines totaling EUR 301.6 million on eleven producers of underground and submarine high-voltage power cables, including the Italian cable maker Prysmian, a company held in the portfolio of Goldman Sachs Capital Partners. The Commission's decision is noteworthy as the fund manager, Goldman Sachs Capital Partners, was held jointly and severally liable for a portion of the EUR 104.6 million fine imposed on Prysmian.
In 2010, the Dutch competition authority (ACM) imposed fines totaling EUR 81 million on 15 flour producers which had participated in a cartel. One of the producers was fined EUR 9 million for its alleged involvement. During the cartel period, the flour producer in question was held by two different investment funds. In December 2014, the ACM ruled that both investment funds were liable for the producer's antitrust violations for the period the company was held in their respective portfolios.
These cases are amongst the first examples of application of the parental liability doctrine to private equity funds for antitrust violations committed by their portfolio companies and demonstrate a growing trend to fine private equity funds for antitrust violations by their portfolio companies at both the EU and national levels.
The Parental Liability Doctrine
At the EU level and in the 28 Member States, competition rules are addressed to "undertakings", defined as entities or groups of entities operating as a single economic unit. When a violation of competition law is committed by a group company, the Commission and the national competition authorities have drawn on this technical definition to impose fines not only on that company, but also, under joint and several liability, on its ultimate parent company. This approach, which is known as the "parental liability doctrine", aims to enhance the deterrent effect of fines and prevent parent companies from allowing their subsidiaries to go bankrupt in order to avoid paying fines.
It should be noted that the parent company is not fined due to independent, direct or indirect, involvement in or awareness or encouragement of the violation, but merely because it forms part of the same "undertaking" as the subsidiary which committed the antitrust violation. This approach has been validated by the EU courts (see e.g. AEG v. Commission, C-107/82, para. 50) and is applied by the Commission and national competition authorities in all 28 Member States in antitrust cases involving subsidiaries.
Extending the parental liability doctrine
A parent company and its subsidiaries will constitute a single economic unit when the parent can exercise "decisive influence" over the subsidiary, the standard of proof being that the subsidiary carries out, in all material respects, the instructions of the parent company.
In principle, it is not sufficient for an EU competition authority to find merely that a parent company is in a position to exercise decisive influence over its subsidiary. Rather it must demonstrate that influence is actually exercised. In practice, however, this threshold is relatively easy to meet, and the parent may be held liable even if its influence relates only to high-level strategy or commercial policy and does not entail the provision of day-to-day instructions to the subsidiary on how to run its business.
The parental subsidiary doctrine has been extended in various ways.
Firstly, the EU courts recognise that a shareholding of 100% or close to 100% gives rise to a rebuttable presumption that the parent company exercises decisive influence over its subsidiary (Akzo Nobel et al v. Commission, C-97/08 P). As a result, it is sufficient for the competition authority to prove that the subsidiary's capital is (practically) wholly owned by the parent company in order to hold the latter liable. (In the absence of a close to 100% stake, the competition authority must prove actual decisive influence.) This presumption can in theory be rebutted by showing that the subsidiary has acted independently of its parent, but it should be noted that no such defence has ever been accepted by the EU courts.
Secondly, the EU courts have accepted that when the company committing the antitrust violation is a joint ven-ture, both partners can be held liable, on the ground that the joint venture vehicle acts as a single economic unit along with its parent companies (see Du Pont de Nemours v Commission, C-171/12 P, and Dow Chemical v Commission,C-179/12 P).
Thirdly, the directive on antitrust damages also uses the word "undertaking" when defining the claims concerned, which is certain to open the door to parental liability claims in private damages actions.
Application of the parental liability doctrine to financial investors and private equity companies
The parental liability doctrine has been applied, in particular, to entities participating in a company solely for financial reasons, i.e. financial investors. In Calcium Carbide, the Commission held Arques and 1. garantovaná, private equity firms specialising in the direct acquisition and restructuring of distressed companies, jointly and severally liable for antitrust violations committed by their respective subsidiaries SKW and NCHZ (Commission Decision of 22 July 2009 in case COMP/39.396). Both companies argued that they had merely acted as financial investors and were not involved in the management decisions of SKW and NCHZ, but their arguments were dismissed by the Commission and subsequently on appeal by the General Court (1. garantovaná a.s. v. Commission, case T-392/09, publication pending, para. 52, and Gigaset AG v. Commission, T-395/09, publication pending, para. 26 et seq.).
Arques argued that it focused mainly on strategic and restructuring decisions and was not involved in its portfolio company's business decisions, as it lacks the requisite know-how. It acknowledged receiving information on turnover, results, cash flow, and liquidity planning and monitoring the restructuring process, but indicated that it did not consider this to be a decisive influence. The Commission and the General Court dismissed these arguments, finding that (i) Arques closely monitored the restructuring process and (ii) the private equity company had the interests of the group in mind when taking decisions in relation to its portfolio company, such as whether the subsidiary should be sold and if so for which price.
In earlier cases, however, corporate investors were able to avoid parental liability by arguing that they had acted as purely financial investors, without actively being involved in the portfolio company's business decisions (see e.g., Commission Decision of 20 October 2004, Raw Tobacco Spain, COMP/38.238, para. 383). The next step was to take a closer look at portfolio management companies. In November 2013, the Commission fined three North Sea shrimp traders a total of EUR 28.7 million for a price-fixing cartel, while a fourth cartel member received immunity. It refrained, however, from imposing a fine on the private equity firm Gilde Buy Out Partners for the behaviour of its portfolio company Heiploeg (COMP/AT.39633 – Shrimps). Less than a year later, the Commission appeared to have shifted its position and applied the parental liability doctrine in the power cables case.
The parental liability doctrine and the power cables case
GS Capital Partners V is an investment fund managed by GS Capital Partners, a wholly owned Goldman Sachs subsidiary. Pursuant to a management agreement with the fund, GS Capital Partners exercises the voting rights with respect to the fund's portfolio companies. Another Goldman Sachs entity also invests in the fund, having fronted USD 2.5 billion or 30% of the fund's capital.
In July 2005, the fund acquired Prysmian SA from Pirelli. In 2007, Prysmian held an IPO, reducing the shares held by the fund to 31.8%. In 2009, the fund sold its last shares. In its decision in the power cables case (AT.39610), the Commission took the view that Prysmian had participated in a cartel from 1999 to 2009. It applied the parental liability doctrine to hold GS Capital Partners jointly and severally liable for EUR 37 million of the EUR 104.6 million fine imposed on Prysmian. The Commission noted the following in its decision:
- From 2005 through 2007, GS Capital Partners held 100% of Prysmian's voting rights, which enabled it to remove and appoint members of the board of directors at will.
- This decisive influence continued even after GS Capital Partners reduced its stake to 31.8% in 2007 as it still had employees, as opposed to representatives, on Prysmian's board of directors.
- Such board representation and voting rights allowed GS Capital Partners to be involved in Prysmian's management decisions.
- GS Capital Partners was regularly updated on Prysmian by means of monthly reports.
In his introduction to the decision, Competition Commissioner Almunia issued a clear warning to financial investors and private equity management companies: "I would like to highlight the responsibility of groups of companies, up to the highest level of the corporate structure, to make sure that they fully comply with competition rules. This responsibility is the same for investment companies, who should take a careful look at the compliance culture of the companies they invest in." The Commission's decision is under appeal at the General Court.
The parental liability doctrine by the Dutch competition authority in the flour cartel case
In 2010, the Dutch competition authority (ACM) imposed fines totaling EUR 81 million on 15 flour producers which had participated in a cartel. One of the producers was fined EUR 9 million for its alleged involvement. During the cartel period, the flour producer in question was held by two different investment firms. During the cartel proceedings, a number of cartel members claimed that the parent companies of the flour producer should also be fined.
In December 2014, the ACM decided that both investment firms were liable for the flour producer's antitrust violations for the period they held the company in their respective portfolios.
The ACM noted that investment firms can be held liable for the conduct of their portfolio companies, particularly if the investment firm can exercise decisive influence over the company. In the case at hand, decisive influence was established, according to the ACM, based on the organisational, legal and economic ties between the portfolio company and the private equity firms. The ACM applied the parental liability doctrine in accordance with EU precedent.
The ACM used the fine imposed on the flour producer as its starting point to calculate the fines to be levied on the investment firms. It then adjusted the fines, taking into account the period of ownership of the flour producer by each investment firm. The fines ultimately imposed ranged from EUR 450,000 to EUR 1.5 million.
The ACM's decision is under appeal.
Recommendations to private equity firms
Pending clarification, private equity firms should consider appropriate risk mitigation and management strategies to deal with the antitrust risk associated with their portfolio companies.
- An ounce of prevention is worth a pound of cure. Effective competition compliance programmes should be implemented at the level of both the private equity management company and its portfolio companies.
- Risks can also be mitigated by avoiding (close to) 100% shareholdings (and thus the rebuttable pre-sumption of decisive influence) and the appointment of employees as board members and by preferring negative control rights (e.g. veto power) to positive ones.
- When selecting potential investments, a thorough due diligence of competition risks should always be performed.
- Representations and warranties as well as other contractual provisions should be worded in order to take into account antitrust risks.
- Portfolio management companies may take out a separate insurance policy covering antitrust risks.