Commission Holds Goldman Sachs Liable for Former Portfolio Company’s Antitrust Infringement

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Overview


In Depth


In its decision of 2 April 2014 in relation to the underground and submarine high voltage power cables cartel case, the European Commission (Commission) held the parent companies of the producers involved liable, on the basis that they had exercised decisive influence over the producers. One of the businesses found liable was Goldman Sachs, the former owner of Prysmian, which is one of the companies that allegedly participated in the cartel. This case confirms that, in principle, the Commission does not view private equity funds differently to other businesses for the purpose of the application of the parental liability doctrine.

In its decision of 2 April 2014 in relation to the underground and submarine high voltage power cables cartel case (COMP/39610), the European Commission (Commission) held the parent companies of the producers involved liable, on the basis that they had exercised decisive influence over the producers. The fines levied by the Commission in this case totalled €301.6 million. One of the businesses found liable was Goldman Sachs, the former owner of Prysmian, which is one of the companies that allegedly participated in the cartel.

This case has important implications for private equity funds. It confirms that, in principle, the Commission does not view private equity funds differently to other businesses for the purpose of the application of the parental liability doctrine.

Parental Liability

Under the parental liability doctrine, the Commission can attribute liability to a parent company that exercises a “decisive influence” over a subsidiary entity. Decisive influence is presumed for a wholly-owned subsidiary, and it is extremely difficult for parent companies to rebut the presumption in practice. Any economic, organisational or legal link between the parent and the entity would, in principle, be sufficient to meet the decisive influence test, which is why portfolio companies of private equity funds fall within its scope.

Parental liability may arise even after the disposal of a subsidiary or portfolio company. Goldman Sachs acquired Prysmian in 2005 through its private equity fund and completely divested it in 2010. The fact that Goldman Sachs’ private equity fund no longer owned Prysmian did not prevent the Commission from fining Goldman Sachs, as it was the entity ultimately exercising decisive influence over Prysmian at the time of the alleged infringements.

This is not the first time that the Commission has imposed fines on private equity funds for alleged infringements by their portfolio companies. In 2009, the Commission fined the German company SKW Stahl-Metallurgie (SKW) and its former parent companies, amongst which the investment company Arques Industries, for alleged participation in the calcium carbide cartel from 2004 to 2007. During that period, SKW was owned by several parent companies and the Commission held each one liable for its respective period of ownership. The Commission’s decision was confirmed by the EU General Court in 23 January 2014.

Next Steps

In order to minimise potential risks, private equity firms should take the following steps:

  • Determine whether or not their due diligence processes are sufficient to cover potential antitrust law infringements by prospective subsidiaries.
  • Ensure that existing and prospective subsidiaries have in place tailored and effective antitrust compliance programmes and codes of ethics, and that these are rigorously implemented. Such programs and codes should, amongst other things, provide for the dismissal of employees and directors who fail or refuse to comply with antitrust rules. In Parker ITR and Parker-Hannifin v Commission T-146/09 (currently under appeal), the General Court dismissed Parker’s argument that the conduct of its subsidiary’s directors prevented Parker from exercising its control over the subsidiary. The General Court held that there was nothing to prevent Parker from dismissing the directors who deliberately ignored the group’s code of ethics which, amongst other things, prohibited its employees from taking part in collusive activities.
  • Consider the feasibility of contractual arrangements that provide for allocation of liability between infringers and parent companies, and/or indemnity. It is worth bearing in mind, however, that such clauses might be unenforceable in certain jurisdictions.

Private equity funds are well advised to consider carefully the potential implications of the conduct of their portfolio companies as they may be exposed to potential significant liabilities in case of antirust infringements. The fact that private equity funds are only involved in the high level strategy and commercial policy of their portfolio companies does not exclude them from liability under the parental liability doctrine.