Earlier this month, the European Commission imposed fines totaling nearly EUR 302 million on producers of underground and high-voltage power cables, based on allegations that the producers had engaged in illicit market sharing and customer allocation for a period of almost ten years beginning in 1999 (COMP/39.610 – Power Cables). Notably, the list of entities fined by the Commission includes not only the companies directly involved and their industrial owners but also an investment firm, Goldman Sachs, whose private equity arm, GS Capital Partners (GS), formerly owned Prysmian, one of the producers that allegedly participated in the cartel. In this case, the private equity investor is to be held jointly and severally liable for EUR 37.3 million of the EUR 104.6 million fine imposed on Prysmian.
A GS investment fund had acquired substantial ownership and control of Prysmian in 2005, but significantly reduced its stake following Prysmian’s IPO two years later and eventually sold its remaining shares in the company in 2009. There is no suggestion that GS representatives were involved in or had knowledge of Prysmian’s alleged anti-competitive conduct. Instead, it appears that the Commission’s decision (which has not yet been published) is based on a number of factors indicating that GS exercised “decisive influence” over Prysmian’s general commercial conduct during the relevant period. Competition Commissioner Almunia is quoted as saying that GS had extensive rights relating to the composition of Prysmian’s board and that GS employees were represented in the company’s decision-making bodies.
This approach is generally in line with the very broad case law of the European Courts regarding the imputation of liability to an industrial parent company for its subsidiary’s participation in a cartel. In order to establish parental liability, the Commission is not required to demonstrate that the parent company was involved in or aware of competition law infringements or encouraged its subsidiary to commit them. Instead, it suffices that the parent company was, by virtue of economic, organizational, and structural links, in a position to exercise decisive influence over the conduct of its subsidiary and actually exercised its influence. Where a parent company (directly or indirectly) holds (close to) 100% of the shares in a subsidiary, there is a presumption that the parent exercises decisive influence. While a parent company theoretically can rebut this presumption by demonstrating that the subsidiary acted autonomously in the market, making such a showing has proven to be extremely difficult in practice.
Private equity investors whose portfolio companies were involved in cartels have on occasion successfully argued that they acted as purely financial investors and therefore did not meet the Commission’s “decisive influence” test. Nevertheless, the Commission’s 2009 decision in the Calcium Carbide case (COMP/39.396) dismissed a purported distinction between operative decisions concerning the cartelized business (in which the investor was not involved) on the one hand and strategic decisions regarding the structure of the company (in which the investor was involved) on the other. The Commission called the suggested distinction “artificial” and “academic” and held Arques, a firm specializing in the acquisition, turnaround, and restructuring of distressed companies, liable for an infringement committed by its portfolio company. The Calcium Carbide decision has since been affirmed by the EU’s General Court.
It is too early to say whether the Power Cables decision – which is subject to appeal – is part of a general trend to interpret the notion of a purely financial investor more narrowly than in the past. Recent statements by Commissioner Almunia indicating that GS’s involvement in Prysmian may have gone beyond that of an “average” financial investor could present grounds for distinguishing the case based on its unusual facts. In any event, the decision should be understood as a stark reminder that private equity firms cannot afford to turn a blind eye to potential antitrust risks associated with businesses in which they invest as they will not be able automatically to avoid cartel fines on the basis of a “financial investor defense.” As can be seen from this scenario, fines may also be imposed (long) after a private equity investor has exited its investment.
In order to minimize antitrust risks, private equity firms should ensure that tailored and effective compliance programs are in place at all of their portfolio companies and their subsidiaries, no matter how obscure. Investors should also consider revisiting their standard due diligence processes to ensure that they sufficiently take into account antitrust risks. On the contractual side, investors should consider the feasibility of provisions enabling recourse to the seller in case of antitrust fines and potentially even allocating antitrust risk between the investor and its respective portfolio company.