In April, the European Commission issued its eagerly anticipated decision in the Power Cables investigation, and imposed fines of over €300m on 11 producers of high voltage cables who were found to have engaged in cartel activity for a ten year period between 1999 and 2009. What was particularly significant about this decision is that the Commission found Goldman Sachs to be liable for the behaviour of one of its former portfolio companies, Prysmian, through the investment of its private equity arm, GS Capital Partners. Prysmian was fined €104.6m and the Commission found that Goldman Sachs was jointly and severally liable for around €37m. Goldman Sachs has appealed the decision.
Why was Goldman Sachs found liable for a portfolio company’s behaviour?
In 2005, GS Capital Partners acquired 100% of Prysmian through one of its funds, GS Capital Partners V Fund LP. After an IPO in 2007,GS Capital Partners retained 54% and then divested its remaining interest in stages between then and 2010. As a result, the Commission found that GS Capital Partners had “decisive influence” over Prysmian through its varying degrees of investments between 2005 and 2009 (which was the date the investigation started and the infringement stopped) and so Goldman Sachs was ultimately responsible and liable for Prysmian’s behaviour during this time. It is important to note that liability was imputed to Goldman Sachs despite there being no suggestion of Goldman Sachs (or GS Capital Partners) being complicit or having involvement in or knowledge of Prysmian’s illegal behaviour.
What is Decisive Influence?
In general, liability for a competition law infringement will be imposed on undertakings that form a “single economic entity”. Parent and subsidiary companies will be found to be a single economic entity where the parent company exercises “decisive influence” over the subsidiaries. This is presumed for wholly- owned subsidiaries, but will be open to debate for shareholdings of less than 100%. There is no lower level of shareholding where decisive influence may not be found, but for liability, it will be necessary to prove that influence did in fact take place, not simply that the parent company was in a position to do so.
Decisive influence will be found where the subsidiary is unable to determine its own commercial strategy or conduct, taking account of the legal, economic and organisational links between the two companies. In Goldman Sachs’ case, while the decision has not yet been published, we understand that Goldman Sachs was able to appoint members to Prysmian’s board and between 2005-2007, it had 100% shareholding and therefore 100% of the voting rights. This gave Goldman Sachs the ability to revoke the board of directors and appoint a new one at any time, allowing it to influence the behaviour of Prysmian. We further understand that Goldman Sachs was represented on the board and obtained monthly reports of Prysmian’s business, all of which were found to give Goldman Sachs involvement in its portfolio company’s management and strategic decisions. As a result, Goldman Sachs was found to have decisive influence over Prysmian from 2005- 2009 and therefore was liable for its conduct.
While this decision does not deviate from the Commission’s standard practice of holding a parent company liable for its subsidiary’s behaviour, it is one of the first cases where liability has been attributed to a private equity firm for the behaviour of one of its investments. Consequently, private equity firms should be aware that they are not exempt from competition law and should therefore consider the levels of, firstly, their shareholding and, secondly, their involvement in the affairs of their investments to establish whether they may be found to be liable for their portfolio companies’ behaviour.Private equity firms should also try to minimise the risk of liability for competition law infringements by, for example:
- ensuring competition law is covered in any due diligence process when considering whether to invest in a company; and
- requiring portfolio companies to have a detailed competition compliance policy and training to understand the law.