Buyer beware!

European Commission confirms private equity investors’ potential cartel liability for portfolio companies.

A recent European Commission decision found financial services giant Goldman Sachs liable for the cartel activities of a company that was part of Goldman Sachs’s investment portfolio. 

Goldman Sachs’s liability was based on the decisive influence exerted over the company through voting rights and board representation. 

The decision can be seen as a signal from the Commission that it is prepared to hold private equity investors liable for competition law infringements of portfolio companies. 

On a practical level, this means private equity companies may have to look closely at their due diligence processes before making an investment.

Members of power cable cartel fined by the European Commission

On 2 April 2014, the European Commission imposed fines totalling EUR 301.7 million on eleven producers of underground and submarine high voltage power cables. The companies had operated a global cartel from 1999 to 2009. 

According to the Commission, the companies involved had agreed on price levels, shared markets and allocated customers between themselves. In addition to the actual cartel participants, the Commission found companies exerting decisive influence over them to be jointly and severally liable for the fines.

One of the companies held liable was Goldman Sachs. A fund managed by Goldman Sachs Capital Partners owned a stake in an Italian cartel participant, Prysmian. According to the Commission, Goldman Sachs had decisive influence over Prysmian through its control of Prysmian’s board of directors. 

On these grounds, the Commission held Goldman Sachs jointly and severally liable with Prysmian for a fine of EUR 37.3 million. This is not the first Commission decision holding a private equity investor liable for the actions of its portfolio companies, but the previous cases have dealt with much smaller cartels and investors.

The Commission imposed the highest individual fine in the case, totalling EUR 104.6 million, on Prysmian. This was based on the volume of Prysmian’s sales, the length of its participation and its central role in the cartel. 

The joint and several liability of Goldman Sachs covered approximately one-third of the fine. A previous owner was held similarly liable for the rest of the fine.

Fines based on decisive influence by Goldman Sachs

According to Joaquín Almunia, the Commission member responsible for competition policy, Goldman Sachs was involved in the decision-making of Prysmian in a way that was “not [the] normal involvement of a financial investor”. 

The Commission held that Goldman Sachs essentially controlled Prysmian through its appointments in the latter’s board of directors. The Commission emphasised the fact that Goldman Sachs was updated on the business of Prysmian through monthly reports and could have replaced the board of directors at any time. 

Even though Goldman Sachs reduced its stake in Prysmian from 2005 onwards, the Commission found that it continued to exert de facto decisive influence over the company at least between 2005 and 2007.

Goldman Sachs has announced that it is considering appealing the decision.

The Commission has consistently held parent companies liable over the actions of subsidiaries in cases where the subsidiary has not been operating independently in the market and the parent company has exerted decisive influence over it. In these circumstances, the Commission does not have to prove that the parent company itself participated in the infringement. 

When assessing whether the parent had such decisive influence over the subsidiary, the Commission takes into account all economic, organisational and legal connections between companies. 

Typically, these connections include shareholdings, voting rights and rights to appoint members of the board. The Court of Justice of the European Union has confirmed that a shareholding of 100% gives rise to a rebuttable presumption of such decisive influence. 

What does this mean for private equity investors?

Holding Goldman Sachs liable does not in itself constitute a major change in the Commission’s practice. EU courts have confirmed that private equity investors may be fined for the actions of their portfolio companies. 

However, the decision makes it clear that the Commission does not see any difference between private equity investors and other owners with regard to liability for competition law infringements. 

The Commission’s decision signals that it is advisable for private equity investors to exercise caution and to carefully assess the competition law compliance culture in their target companies, both when making investment decisions and during ownership. 

A failure to do so may result in an infringement fine of up to 10% of the annual worldwide turnover of the entire group concerned. The liability remains even if the stake is later disposed. 

These issues should be taken into account in conducting due diligence reviews of potential target companies, as well as in drafting purchase agreements.