The EU's top court has recently confirmed that a financial investor can be liable for a competition infringement of its investee company regardless of whether or not the investor is aware of that company's anticompetitive behaviour. In so doing, it has also clarified when the European Commission can presume an investor to be parentally liable for its investee company without considering further the level of control that investor in fact exercises – holding all the voting rights in a company is sufficient, even if the investor does not hold all of the capital.
Private equity and antitrust: liability for investee company presumed below 100% stake
Overview
Goldman Sach's final appeal
In 2018, we reported how, at the first level of appeal before the European General Court, Goldman Sachs (GS) had not been able to overturn the European Commission's decision to fine GS €37m for the conduct of Prysmian, an Italian manufacturer which was acquired by GS private equity funds in 2005 (but divested by the time of the European Commission decision). Prysmian had participated in a cartel since 1999 regarding the production of high voltage cables.
GS had been held liable for Prysmian's conduct for the time period over which it was deemed to exercise "decisive influence" over the commercial policy of Prysmian, even though there was no suggestion that GS had any knowledge or involvement in the cartel. Dismissing GS's appeal, the European General Court agreed with the European Commission's stance that it:
- could presume that GS exercised "decisive influence" over Prysmian prior to its initial public offering (IPO) in 2007 – despite the fact that, prior to the IPO, GS had already sold down its funds' shareholding to 91.1% and then 84.4% (and despite GS funds, as distinct from GS, being the legal owners of these shares); and
- had adequately demonstrated that GS still exercised "decisive influence" over Prysmian post its IPO – despite GS funds holding only successively smaller minority interests following the IPO and subsequent sell-downs (as little as 26%) – based on a range of economic, organisational and legal links between GS and Prysmian.
GS appealed both of the above findings to the EU's supreme court, the Court of Justice of the EU (CJEU).
The Court's ruling
The CJEU has now issued its decision, rejecting GS's appeal and endorsing the European General Court's judgment.
The CJEU clarified that the liability of a financial investor can be presumed if the investor exercises all of the voting rights in its investee company. The Commission is not limited to presuming parental (i.e. investor) liability only in circumstances where the investor owns all or nearly all the share capital of the investee company.
The CJEU clarified that the liability of a financial investor can be presumed if the investor exercises all of the voting rights in its investee company. The Commission is not limited to presuming parental (i.e. investor) liability only in circumstances where the investor owns all or nearly all the share capital of the investee company.
GS had conceded that it exercised 100% of the voting rights in Prysmian prior to its IPO. As such, pre-IPO, the Commission did not have to investigate further whether GS exercised, or was able to exercise, "decisive influence" over Prysmian – regardless of the fact that the relevant GS funds did not own all/nearly all of Prysmian's share capital and GS itself had only a 30% interest in the GS funds which were invested in Prysmian.
Further, the CJEU confirmed that GS was liable for the post-IPO period – despite the GS funds holding a minority stake only – on the basis that (amongst other things):
- the majority of Prysmian's Board continued to be employed by or had other "informal relationships" with GS;
- Prysmian's "Strategic Committee", which received regular updates and supported the Board in key strategic matters, was also majority staffed by GS;
- GS retained the power to call shareholder meetings and propose the revocation of directors; and
- the fact that GS continued to act as "an industrial owner" post-IPO, being interlocutor between Prysmian and potential customers.
The CJEU also rejected GS's arguments that the Commission could not establish its liability for the post-IPO period by reference to: either "personal links" between GS and Prysmian Directors (e.g. "previous advisory services" and "consultancy agreements"); or factors relevant to the pre-IPO period (on the basis that IPO had not changed matters in practice as regards GS's involvement).
The implications
Responsibility to pay
Having failed in its final appeal, it is now finally determined that GS is jointly and severally liable with Prysmian for the fine attributable to GS's period of ownership. In other words, both GS and Prysmian will hold the primary responsibility to pay the €37.3 million. It is not the case that GS only has to step in to pay the fine where Prysmian is unable to do so.
Expansive approach to investor liability confirmed
The CJEU's judgment is not necessarily surprising from a competition law perspective. It confirms the existing General Court judgment and reflects the logical application of general competition law principles regarding how to determine the economic group relevant for fining purposes. Nonetheless, it does provide definitive confirmation that, in respect of liability for fines, no special approach to cater for the specific ownership structures of private equity can be expected.
Linked to this, the judgment underlines the particularly expansive approach that the Commission can take as regards financial investors' liability for the conduct of their portfolio companies. Even in the post-IPO period during which GS held a minority stake only, the European Commission did not need to demonstrate how GS specifically exercised its control over Prysmian to make GS liable for the latter's cartel behaviour. Nor was it necessary to show GS was actually involved in, or even aware of, the cartel. The judgment also shows how minority stake investors can face a high hurdle to demonstrate they are not liable for the conduct of their investee companies in circumstances where other economic and informal links exist between the two.
The upshot is that, in most majority investments, a private equity house is likely to be deemed to have decisive influence over its portfolio companies and will therefore be potentially liable for breaches of competition law by those companies. Even on minority investments, the rights that the sponsor may have, for example, to appoint directors and control voting rights may mean that the sponsor becomes liable.
Financial investors more likely to be in the crosshairs?
It remains to be seen whether this judgment will prompt the European Commission to include more financial investors in the scope of its fining decisions for investee company cartel behaviour.
Post Brexit this decision does not bind the UK Competition and Markets Authority (CMA). However, the relevant UK competition laws are substantially the same as those in the EU and so there is no obvious reason for a difference of approach. Indeed, we are aware of at least two ongoing investigations in the pharmaceutical sector in which the CMA has issued 'statement of objections', alleging that the relevant private equity house is liable for the infringement of its portfolio company (see here and here).
Take caution – mitigating the antitrust risk
This judgment is another reminder of the importance of private equity investors taking steps to mitigate the antitrust risk of their investments.
When entering an investment, private equity investors should consider whether their due diligence processes are sufficient to cover potential ongoing competition law breaches by prospective portfolio companies, and also that appropriate warranties are secured on the acquisition. If there is a specific concern, it will be necessary to consider whether to seek an indemnity (or a purchase price reduction) from the sellers to cover potential antitrust investigations and fines.
During the period of investment, private equity investors should satisfy themselves that they have asked the right questions about competition law compliance and the portfolio company has a sufficiently robust compliance programme in place, covering all jurisdictions in which it operates.
Finally, when selling down, private equity investors should bear in mind that they may still remain liable for the conduct of the investee company during their prior period of ownership. If selling down to a minority stake, as per the position of GS, the investor may also continue to be liable during the minority ownership period, depending on the control rights they retain.
