EU General Court: Financial Investors Liable for Anticompetitive Conduct of Portfolio Companies

The General Court of the European Union recently held, in Goldman Sachs v. Commission,¹ that purely financial investors such as investment funds may be held jointly and severally liable for competition law violations implemented by their portfolio companies when they can exercise “decisive influence” over the company, irrespective of whether they were aware of the infringement or actually influenced the market behaviour of the subsidiary. This decision has several major practical implications for investment funds and private equity funds. 

Key Aspects and Consequences 

• The investor was held liable for antitrust violations implemented by one of the portfolio companies held by its private equity division 
• While the legal presumption of parental liability already existed, the General Court has raised still further the bar to rebutting that presumption 
• The financial investor was held liable on the basis of its ability to exercise 100% of the voting rights, even though it did not hold 100% of the share capital 
• The investor's liability continued for a period after the portfolio company went public, until the board was renewed, despite the fact that the investment fund retained less than 32% of the company 
• Private equity owners and financial investors with large ownership stakes should include parental liability for portfolio company actions in balancing the risk and rewards associated with board representation and other forms of involvement in their portfolio companies 
• Financial investors that want to remain involved at board level should also consider adopting antitrust best practices at their portfolio companies, such as conducting antitrust due diligence at the time of acquisition and implementing strict compliance programmes 

Case Background 

In April 2014, the European Commission imposed fines totaling almost €302 million on producers of underground and high-voltage power cables, for engaging in illicit market sharing and customer allocation over a period of almost ten years beginning in 1999 (COMP/39.610 – Power Cables). Notably, the entities fined by the Commission included not only the companies directly involved and their industrial owners but also an investment firm, Goldman Sachs ("the Investor"), whose private equity arm owned Prysmian, one of the producers that was found to have participated in the cartel. The Investor was held jointly and severally liable for €37.3 million of the €104.6 million fine imposed on Prysmian, a share corresponding to the four-year period during which it held a stake in Prysmian. 

An investment fund of the Investor had acquired 100% of the voting rights and control of Prysmian in July 2005. The fund however significantly reduced its stake following Prysmian’s IPO in May 2007, down to 31.69% of the share capital in November 2007. The Commission did not suggest that the Investor's representatives were involved in or had knowledge of Prysmian’s anti-competitive conduct, but nevertheless found the parent company of the group liable on the basis it exercised “decisive influence” for the entire period from 2005 to the end of the infringement in 2009. 

The Investor appealed the decision to the General Court on the sole issue of its liability (Prysmian and other participants in the alleged cartel appealed in parallel to challenge the Commission’s findings regarding the existence of an infringement). 

General Court Ruling 

On July 12, 2018, the General Court affirmed the liability of the Investor both for the period prior to and after the IPO. 

Regarding the period prior to the IPO, the General Court extends the presumption of liability of the parent company over its 100%-held subsidiary that was first established by the Court of Justice in the 2009 Akzo ruling.² According to settled case-law, to establish liability the Commission has to show that the parent company was, by virtue of economic, organisational and structural links, in a position to exercise decisive influence over the conduct of its subsidiary and actually exercised its influence.³ In Akzo, the Court found that in the specific case where a parent company holds a 100% shareholding in a subsidiary that has infringed the competition rules of the European Union, there is a rebuttable presumption that the parent company does in fact exercise such decisive influence over the conduct of its subsidiary and therefore can be held liable for the subsidiary’s conduct.⁴ 

In the present case, although during the pre-IPO period the Investor did not have a 100% shareholding in Prysmian (its share varied between 91.1% and 84.4% of the equity), the General Court found that the fact that it was nevertheless able to exercise 100% of the votes in the company should be considered sufficient to create the same presumption of liability for the shareholder. The Court then quickly dismissed the Investor's attempts to rebut that presumption (the Investor had sought to show that the management of the company was able to act independently). In particular, the Court considered insufficient the fact that Prysmian’s management had, in accordance with Italian law, publicly confirmed during this period that the company was “not subject to the management and coordination by any other company.”⁵ 

Regarding the period following the IPO, during which the Investor held less than 50% of Prysmian’s share capital, the General Court still found that it was able to exert decisive influence over the company, based mainly on the fact that the board of directors appointed by the Investor on February 28, 2007 – prior to the IPO – was theoretically still in office until December 31, 2009, and did not in fact change until April 9, 2009. 

The General Court also took into account the following criteria: 

i. The Investor had rights to appoint and dismiss board members, including the power to call shareholder meetings and to revoke directors or the entire board of directors, and as a result of a change implemented prior to the IPO (as required by Italian law), the Investor could potentially retain a majority at board level after the IPO; 

ii. More than half of the directors appointed to the board had actual links with the Investor group; those directors participated, after the IPO, in a Strategy Committee reporting to the board (even though that committee had “no voting or veto powers”⁶ and played merely a consulting role within Prysmian); in addition, all board members received regular updates and monthly reports; and 

iii. On two occasions the Investor contemplated cross-selling between Prysmian and another of its portfolio companies, which the Court considered to be “behaviour typical of an industrial owner.” 

For the whole period (before and after the IPO), the Investor claimed in its defense that it acted as a pure financial investor. In a 2012 precedent, the General Court had found that the imputation to the parent company of liability for the infringement committed by its subsidiary is not applicable to pure financial investors, i.e., in “the case of an investor who holds shares in a company in order to make a profit, but who refrains from any involvement in its management and in its control.”⁷ 

However, in the present case, the General Court considered as “irrelevant” the claim that neither the fund as a whole nor the directors appointed by the fund to the board of Prysmian had the expertise or resources actually to influence the market behaviour of Prysmian, and only aimed at protecting their investment. The Court also ignored the fact that Prysmian was never perceived externally to be part of the Investor group nor included in that group for accounting purposes. The Court emphasized that “the contested decision does not find that the applicant was involved in Prysmian’s commercial management, but that it exercised decisive influence over that company’s business decisions,”⁸ which was deemed sufficient to reject the “pure financial investor” argument. 

Practical Implications 

The judgment is likely to have a significant impact for investment funds, private equity firms and other financial investors.⁹ In a brief public statement, the European Commission welcomed the confirmation that “institutional investors can be treated like other corporate parents, by attributing parental liability to them in exactly the same way.” The judgment makes it increasingly difficult, if not impossible, for a shareholder to escape liability for one of its subsidiaries, irrespective of the actual purpose of the investment. 

The decision is likely to be appealed to the European Court of Justice. Pending the outcome of any appeal, the practical implications of this decision include: 

• Participations held by investment funds and private equity firms should be structured and managed taking into account the antitrust risk, e.g., investors should consider appointing directors who have no direct links to the shareholder, and limiting the level of reporting received by board members to purely financial information, to the exclusion of business reviews. 
• Considering the difficulty of rebutting the parental liability presumption, financial investors should in any event consider adopting the kinds of best practices that have become increasingly frequent in the context of industrial mergers, including conducting antitrust due diligence at the time of the acquisition and implementing strict compliance programmes at all of their portfolio companies, notwithstanding the risk of appearing to exercise decisive influence over the companies. 
• Selling one’s stake in a portfolio company or reducing it to less than 50% may not be enough to avoid a finding of decisive influence within the meaning of EU antitrust rules, especially if the directors appointed by the financial shareholder prior to the sale retain a majority on the board. Minority investors should therefore carefully evaluate the risks and rewards of continued board representation, and at a minimum, ensure that their board presence accurately reflects their minority participation. 

Footnotes 

_{1) Case T-419/14, The Goldman Sachs Group, Inc. v. Commission, July 12, 2018.
2) Case C-97/08, Akzo Nobel and Others v. Commission, September 10, 2009.
3) See e.g., Cases C‑189/02 P, C‑202/02 P, C‑205/02 P, C‑208/02 P et C‑213/02 P, Dansk Rørindustri and Others v. Commission, June 28, 2005, para. 117.
4) Ibid., para. 60.
5) Para. 72 et seq. of the judgment.
6) Para. 110 of the judgment.
7) Case T‑392/09, 1. garantovaná v. Commission, December 12, 2012, para. 52.
8) Para. 152 of the judgment.
9) Interestingly, the European Private Equity and Venture Capital Association (EVCA) had requested leave to intervene in support of Goldman Sachs in the case, but the Court rejected the application.}