On 2 April 2014, the European Commission fined 11 producers of underground and submarine high voltage power cables 302 million euro for participation in a market and customer sharing cartel.
The decision is remarkable since it also held the investment company Goldman Sachs liable for a fine of 37 million euro as the former owner of Prysmian, one of the alleged participants in the cartel.
Whilst holding parents liable for the antitrust infringements of subsidiaries is common in the EU, the parents that have been held liable have typically been industrial owners. Fines on private equity houses are relatively new.
What are the EU rules on parental liability?
Under EU competition law, liability is imposed on "undertakings". An "undertaking" is an entity or group of entities which effectively function as a single economic unit. A parent and its subsidiaries will form such a unit when the parent exercises "decisive influence" over the subsidiary. Decisive influence may be established where the subsidiary carries out, in all material respects, the instructions given to it by the parent company, regard being had in particular to the economic, organisational and legal links between those two legal entities. Parental liability can be triggered even if the parent had no involvement or awareness of the breach and did not in any way encourage the subsidiary to commit it.
Attributing liability to the parent is part of a deliberate European Commission policy intended to focus group management on the need to ensure compliance by their subsidiaries.
Why was the investor fined in this case?
The European Commission has not claimed that Goldman Sachs was itself involved in any unlawful activities, or indeed that it was aware of any. Rather, the Commission's decision was based on the structural links that it identified between Goldman Sachs and Prysmian. Specifically, the Commission found that Goldman Sachs held decisive influence over Prysmian for part of the period in which Prysmian was alleged to have participated in the cartel. The European Commission's full decision has not yet been published and – it should be emphasised – is subject to appeal. That said, according to statements made by EU Competition Commissioner Almunia this week and to media reports, the following elements appear to been taken into account by the Commission:
- GS Capital Partners, a fund managed by Goldman Sachs, had purchased a stake in Prysmian in 2005, which it had reduced over a three and a half year period and finally sold in 2009.
- Individuals from Goldman Sachs sat on Prysmian's board.
- Goldman Sachs held, for almost two years, 100 per cent of Prysmian's voting rights. They could apparently revoke the board of directors and nominate the new board at any time.
- Goldman Sachs were supposedly regularly updated on Prysmian's business through monthly reports.
The Commission imposed a total fine 104.6 million euro on Prysmian, of which it found Goldman Sachs jointly and severally liable for 37.3 million euro and Pirelli (a company which had been an owner for some of the infringement period) for 67.3 million euro.
This fine serves as an important reminder to private equity houses that they are not immune from antitrust fines imposed as a result of the behaviour of companies within their investment portfolio. This is the case even after the disposal of the company which has infringed antitrust law.
Private equity houses should consider appropriate risk mitigation strategies for dealing with the antitrust risk raised by their investment portfolio. Components of this strategy could include the introduction or strengthening of antitrust compliance programmes throughout the investment portfolio, only taking rights over portfolio companies amounting to "decisive influence" where the investor is in a position to ensure antitrust compliance, devising indemnity provisions in fund documents to deal with antitrust risk, and specific approaches to due diligence and antitrust warranties and indemnities.