The recent receipt by Goldman Sachs (“GS”) of a Statement of Objections (“SO”) from the European Commission (“Commission”) is likely to cause some concern throughout the private equity community. The issuance of an SO is a procedural step by the Commission which will allow GS to respond to the Commission’s allegations. No finding of infringement of the competition rules has yet been made by the Commission or by the EU courts.
It is alleged that Prysmian, one of the world’s largest cable manufacturers, participated in a cartel for submarine and underground power cables and related products contrary to the prohibition of anticompetitive arrangements in Article 101 of the Treaty on the Functioning of the European Union (“TFEU”). The Commission is concerned “…that the producers may have colluded to allocate markets and customers for underground and submarine power cable projects and fix prices in the European Economic Area.” The Commission is of the view that GS, through its shareholding, indirectly controlled Prysmian at the time of the alleged infringement.
There is no allegation that GS or any of its personnel actually participated in, or were aware of, the alleged cartel. Prysmian was simply owned by certain GS Capital Partners funds for some of the period during which the alleged infringement occurred.
Should Prysmian be found to have infringed the competition rules following the completion of the Commission’s investigation, GS could, potentially, be held jointly and severably liable with Prysmian under the principle of parental liability for the anticompetitive behaviour of subsidiaries (“Parental Liability”).
Parental Liability – increasing the deterrent effect
The principle of Parental Liability is by no means a new concept under the EU competition rules. However, this is one of the first instances, and arguably the most high profile, in which a private equity house has been pursued by the Commission in such circumstances.
The decisional practice of the Commission in recent years demonstrates that the Commission has progressively sought to increase the level of fines imposed on cartel participants in order to increase the deterrent effect. The Commission utilises, at its discretion, the principle of Parental Liability in order to attribute liability to a parent company for the anticompetitive behaviour of a subsidiary company. In this connection, the Commission has frequently imposed fines on a parent company rather than the subsidiary directly involved in the alleged cartel activity – holding the overall economic entity to which a subsidiary belongs liable for the infringement of the competition rules. The European Court of Justice (“ECJ”) also clarified in the Akzo case that although a parent company does not directly participate in the infringement of the competition rules, this does not detract from the imputation of liability for the infringement.
However, the EU approach stands in marked contrast with the approach under US law, where the presumption is that a parent company is separate from, and not liable for, the acts of its subsidiaries, absent circumstances where the parent company actually controls the actions of its subsidiary.
It is clear too that the Commission will not be limited by territorial boundaries. It has frequently extended its enforcement net to target the anticompetitive behaviour of undertakings not incorporated within the EU, but where their conduct has an effect on trade within the EU1.
The consequences of the Commission’s approach are serious. The Commission has the power to impose fines of up to 10 per cent of worldwide group turnover. The imposition of such a fine also carries with it a significant risk of reputational damage.
Liability will be attributed to a parent company where the parent has the ability to exert “decisive influence” over the commercial policy of the subsidiary and whether the parent has actually exerted such influence on the facts of the case. The ECJ has opined that the parent company must be possessed of the ability to direct the conduct of the subsidiary to the point of “…depriving it of any real independence in determining its own course of conduct on the market”.2
Further, decisive influence is presumed to exist where the parent company owns 100 per cent, or nearly all,3 of the shares of the subsidiary.4 Akzo had argued that “something more than the extent of the shareholding” was required for the attribution of liability, but this argument was ultimately rejected.5 The level of GS’s shareholding in Prysmian at the time of the alleged infringement remains unclear.
In practice, this test is easy to satisfy and liability can be imputed even where there is no parental involvement in the day-to-day running of the subsidiary and where the parent provides high-level strategy input only.
Rebutting the presumption
The presumption is rebuttable. However, established case law clearly illustrates that those seeking to rebut the presumption face an uphill battle. They are required, in effect, to prove a negative, i.e., that decisive influence over the subsidiary’s commercial policy was never exercised.
However, it is clear that rebuttal evidence must be properly and comprehensively considered by the Commission. Two relatively recent cases are relevant in this regard. The ECJ annulled the Commission’s decision to hold L’Air Liquide SA and Edison SpA 6 liable for the conduct of their wholly owned subsidiaries as, in the ECJ’s view, the Commission had failed to properly consider the detailed evidence proffered by the undertakings concerned in seeking to rebut the presumption of decisive influence.
The parties had provided evidence to the Commission to the effect that the parent and subsidiary lacked common managers, that there was an executive director at the helm of the subsidiary who had full autonomy to run the subsidiary and that the subsidiary had an autonomously operated commercial policy. Statements from former presidents attesting to the independence of the subsidiaries were also provided. Unfortunately, in ultimately deciding to annul the Commission’s decision, it was not necessary for the ECJ to opine on the suitability or otherwise of the rebuttal evidence in issue. 7
The ECJ in Akzo emphasised the fact that the absence of a single commercial policy can be established only on the basis of an assessment of the totality of all the economic, organisational and legal links which tie the parent and the subsidiary. Accordingly, to rebut the presumption of decisive influence, a parent company must provide cogent evidence that it did not exercise decisive influence over its subsidiary’s commercial policy and that the subsidiary was free to determine its own course of conduct on the market. The type of evidence offered in the L’Air Liquide and Edison cases, highlighted above, may well have been sufficient in this regard. Unfortunately, there exists little guidance on what evidence would be sufficient to rebut the presumption and each case will ultimately turn on its own facts.
Effective competition compliance
It is not suggested that GS directly or indirectly controlled Prysmian at the time the SO was issued by the Commission. Rather, it is alleged that GS indirectly controlled Prysmian at the time of the alleged infringement of the competition rules. The decisional practice of both the Commission and the EU courts confirms that a parent company can be held liable for a competition breach by its subsidiary where the parent’s interest in the subsidiary has since been divested, but where the infringement occurred during the watch of the parent company. Further, where there has been a change of control after the infringement has taken place, liability under the competition rules may also be imputed to the relevant purchaser. 8
Accordingly, in considering any potential acquisition, it is important to ensure that due diligence processes are both robust and effective and that antitrust risk is mitigated through securing appropriate antitrust warranties and indemnities. Exit strategies will also be informed by such considerations.
1 See Joined Cases 89, 104, 114, 116, 117 and 125 to 129/85 , A. Ahlström Osakeyhtiö and others v Commission of the European Communities (Wood pulp Case) where the ECJ imposed fines on wood pulp producers situated outside the EU for price-fixing arrangements contrary to Article 81 EC (now Article 101 TFEU).
2 See paragraph 97, Case C-196/99 P, ECR I-11005, Aristrain Madrid SL v. Commission 
3 See Case T-190/06, Elf Aquitaine SA v European Commission.
4 It remains an open question whether the presumption would withstand challenge on human rights grounds and it appears that such a challenge has been recently lodged before the European Court of Human Rights.
5 See paragraph 62. Case C-97/08, Akzo Nobel NV v Commission.
6 See Joined Cases T-185/06, L’Air Liquide SA v Commission and T-196/06, Edison SpA v Commission.
7 See also the decision in Case T-45/07, Unipetrol v Commission where it was suggested that a contract, whichprevents a parent company from exercising control, couldrebut the presumption. However, the ECJ ultimately held thatthere was insufficient evidence to support the conclusion thatthe subsidiary actually participated in the cartel.
8 See joined cases C-125/07 P, C-133/07P, C-135/07P, C- 137/07P, Erste Bank der Osterreichischen Sparkassen AG et al v. Commission, Sept 24, 2009, where the fact that the infringing subsidiary was controlled by a different company at the time of the competition breach did not preclude the new parent company from being responsible for the subsidiary’s conduct before the acquisition.