The European Commission (the “Commission”) has again reaffirmed its willingness to hold parent companies jointly liable for the competition law infringements of their subsidiaries when the parent exercises a “decisive influence” over the subsidiary. 

In recent decisions, the Commission has analysed the factors that constitute a “decisive influence” in a fairly extensive way and, in a decision that has not yet been made public, has required Goldman Sachs (“GS”) to pay a fine of €37m as a result of a company under its control being involved in a cartel.

This decision is of potentially wide ranging importance as it implies that private equity firms, which are usually quite removed from the everyday management of their investments, may now be held jointly liable for the infringements committed by a company partly owned by one of its funds, despite not participating directly in the cartel themselves, if they exercise a “decisive influence” over that company.

Liability of holding companies for group company infringements...

In a recent ruling, the General Court of the European Union upheld the fine imposed by the Commission on the holding company of an entity that had participated in a cartel in the calcium carbide and magnesium sector[1]

The holding company owned 74.44% of one of the cartel participants, but took no active part in the cartel itself.  In the original decision, the Commission ruled, in line with well established case law on the concept of “single economic entity”, that the parent company should be held jointly liable for its subsidiary’s fine.  In this respect, the Commission noted that:

  • the holding company presented the cartel participant as being part of its group and, specifically, of its “multi-services” division (the subsidiary’s turnover was encompassed in the group accounts);
  • the holding company controlled the cartel participant’s supervisory board (“conseil de surveillance”);
  • the cartel participant provided the holding company with reports on its commercial activity; and
  • the holding company influenced the nomination of the members of the cartel participant’s management.

The General Court ruling upheld the Commission’s analysis and further added that:

  • the mere fact that the holding company and the cartel participant are not active in the same sectors does not preclude a finding that the holding company exercises a “decisive influence”; and, crucially,
  • the mere fact that the legal entity is a holding company does not preclude it from being held liable for the infringements of its subsidiaries provided they form a single economic entity.

On the basis of the above, the Commission established that the holding company had exercised a “decisive influence” on the cartel participant thereby justifying its joint liability.

Liability of private equity firms for the conduct of portfolio companies

The Commission detected an international cartel by which manufacturers shared markets and allocated customers in the underground and submarine cable sector, including large infrastructure projects and offshore wind farms from 1999 to 2009. The Commission imposed total fines of €302 million on the cartel participants[2]

One of the cartel participants was Prysmian, a company owned during the time of the cartel by a GS fund, GS Capital Partners.  The GS fund acquired Prysmian in 2005 and divested its stake gradually until final exit in 2010.

Having found Prysmian guilty of participating in an illegal cartel, the Commission started its assessment of the relevant fines to be imposed, by assessing the fine to be applied to Prysmian itself.  Based on Prysmian’s role in the cartel, the duration of its participation and the volume of products sold by it in the context of the cartel, the Commission imposed a fine of €104.6 million. 

The Commission then set about determining which entities exercised a “decisive influence” over Prysmian’s business.  The Commission found that, as successive owners of Prysmian, Pirelli and Goldman Sachs had both exercised “decisive influence” over Prysmian for at least part of the period that the cartel was operating and were therefore jointly liable for the fine in varying proportions[3].  Following its analysis, the Commission required GS to pay around €37m of Prysmian’s fine.     

The Commission based its decision that GS had exercised “decisive influence” on Prysmian, on the following factors:

  • individuals on Prysmian’s board were from GS itself;
  • for almost two years during the decade-long cartel, GS held 100% of the voting rights in Prysmian;
  • GS could remove an incumbent board of directors and could nominate a new board itself; and
  • GS was regularly updated on Prysmian’s business through monthly reports.

It is clear from the above, that any management companies of private equity or hedge funds holding such rights of control over companies in their asset portfolio may be found to exercise “decisive influence” and could be held liable for competition law infringements by those companies.

Conclusion: Risks and compliance for private equity firms

This  decision shows that the behaviour of portfolio companies may generate significant risks for an investment bank, hedge fund or private equity fund depending on the extent of the influence the bank or fund exercises on such companies.  Where these banks or funds exercise “decisive influence” over the management and strategic decisions of portfolio companies, they will be held equally liable for any infringements of competition law by those portfolio companies. 

The consequence of this for banks or large private equity funds is potentially huge.  Fines for involvement in anti-competitive conduct can reach a maximum of 10% of the worldwide turnover of the entire group of the undertaking concerned.  In the case of financial institutions or private equity firms, this will include the turnover of controlled companies in their portfolio and could thus potentially result in substantial fines. 

These cases illustrate the importance of conducting a thorough due diligence process during any acquisition, whether by a private equity fund or not, and also the value of instigating a firmwide culture of compliance throughout a corporate group, underpinned by effective training and compliance programmes, to prevent potential future infringements.