On January 27, 2021, the Court of Justice of the European Union ("CJEU") issued an important ruling regarding an investment fund's liability for the cartel behaviour of an affiliate. The CJEU confirmed that an investment fund is liable under Article 101 of the Treaty on the Functioning of the European Union based on holding 100% voting rights over an indirect affiliate that participated in a cartel, even though the fund held well below 100% equity in that affiliate during part of the relevant period (see here). This judgement tips the scales towards enforcement and away from key defence principles such as the presumption of innocence, or the requirement to sanction only the actual offender. Nonetheless, it sheds some useful insight for financial investors to mitigate antitrust exposure.
Background
In April 2014, the European Commission ("EC") imposed fines totalling €301 million on 11 producers of high-voltage underground and/or submarine power cables, for their participation in a 10-year worldwide market and customer sharing cartel (see here). The EC sanctioned not only the companies directly involved and their industrial owners, but also an investment firm.
Between July 29, 2005 and January 28, 2009, Goldman Sachs ("GS") indirectly held, through GS Capital Partners V Funds and others, shares in Prysmian SpA and its wholly owned subsidiary, Prysmian Cavi e Sistemi Srl (altogether, "Prysmian"), one of the cartel members. Goldman Sachs held an equity at Prysmian between 100% and 84.4% until May 3, 2007 (pre-IPO), when some of Prysmian's equity was offered to the public through an IPO, and Goldman Sachs' shares fell to 31.69% (post-IPO). Although there was no evidence that GS (or its direct intermediaries) knew about, let alone had been involved in, the cartel, GS was held jointly and severally liable for €37 million of the €104.6 million fine imposed on Prysmian, proportional to its four-year investment at Prysmian.
Parental Liability and the 'Pure Financial Investor' Test under EU Law
In the EU, antitrust fines are limited by a cap set at 10% of the worldwide turnover of the undertaking that committed the antitrust violation. To increase deterrence and support its policy of imposing very large fines, the EC routinely addresses its fining decisions not only to the offending company but also to its ultimate parent. This allows it to calculate the fining cap at 10 % of the group's turnover rather than just the offending subsidiary's own turnover. To support this policy, the EC is able to rely on a presumption that parent and subsidiary constitute one "undertaking", i.e. a single economic unit. Thus, a parent company with direct or indirect equity of 100% (or close) in a subsidiary is presumed to have actually exercised "decisive influence" over its commercial conduct.1 This means that the parent can be held (jointly) liable for the subsidiary's participation in a cartel, even if the parent had no involvement, did nothing to encourage the misconduct, and did not even know about it.2 The parent can—in principle—rebut this presumption by adducing evidence capable of establishing that its subsidiary made its market decisions independently. In practice, however, it is almost always close to impossible to rebut this presumption, because the alleged parent has to prove affirmatively that it was not able to exercise and did not actually exercise decisive influence over its alleged subsidiary. Thus, it is extremely important to define as precisely as possible the circumstances where the EC is allowed to rely on the presumption.
In addition, "pure financial investors" (i.e., those who hold shares in a company to make profits but refrain from any involvement in its management and control) generally cannot be liable for a subsidiary's acts.3
The CJEU Ruling: Broadening the Scope of the "Decisive Influence" Presumption
In the case at hand, the EC (i) presumed that GS exercised a decisive influence over Prysmian pre-IPO due to its equity and voting rights; and (ii) regardless of this presumption, found that GS had actually exercised a decisive influence over the market conduct of Prysmian based on GS's economic, organisational and legal links with Prysmian—taken as a whole—during GS's investment. On July 12, 2018, the General Court ("GC") upheld the EC decision (see here). GS appealed to the CJEU. Interestingly, Prysmian supported the EC before the CJEU since the EC's findings were favourable to its interests (they allowed Prysmian to share liability for its conduct with GS).
As for the pre-IPO presumption, the CJEU broadened the key notion of "decisive influence" beyond its settled case-law, by deciding that "a parent company which holds all the voting rights" is "in a similar situation to that of a company holding all or virtually all the capital of the subsidiary, so that the parent company is able to determine the subsidiary's economic and commercial strategy."4 This ruling requires that only the entity that actually controls the voting rights be considered, while facts pointing to a division of shareholders' rights among different entities can be set aside (e.g. minority shareholders unable to exercise their rights).5 As a result, after this ruling, companies with (direct or indirect) full voting rights but equity way below 100% (here, 84.4%) in the offending company are likely to be held liable for the conduct of their subsidiaries.
In addition, the CJEU confirmed that the parent must make a very high showing to reverse the presumption. For instance, Prysmian Board of Directors' own public statements as to the independence of (certain) Directors was deemed insufficient, absent direct evidence supporting these formal statements (such as management team's emails or minutes evidencing commercial autonomy).6
Beyond the Presumption: Factors Showing Actual Exercise of Decisive Influence
The CJEU also endorsed the GC's assessment of the factors the EC cited to show the actual exercise of GS' decisive influence over Prysmian's commercial activities, finding that this influence may be inferred from a body of consistent evidence, even if individual pieces of evidence, by themselves, are insufficient to establish such influence.7
Key factors the CJEU found pointed to GS' decisive influence included: (i) the power to appoint board directors which it had exercised before the IPO, and the board remained the same post-IPO;8 (ii) the power to call shareholders meetings and propose the revocation of directors/entire board (even though GS did it just once);9 (iii) GS's links with at least 50% of the Directors—for some of the Directors, links were inferred from the fact that they had rendered "previous advisory services" to GS;10 11 (iv) the broad powers of GS-appointed Directors, who were systematically involved in strategic decisions, participated in key committees (e.g., compensation), and were regularly informed about Prysmian's commercial strategy;12 (v) the modification of Prysmian's by-laws before the IPO to ensure GS' control (e.g., other shareholders could not vote);13 and (vi) GS behaving as an industrial owner favoring transactions between its subsidiaries and Prysmian regarding power cables sales.14
Key Implications for Businesses
- An investment firm that has reserved to itself the means to control the companies in which it invests will generally be held jointly liable with these companies in case they are found to have violated the EU antitrust rules. This will lead to larger fines on existing groups and also implicate investments firms in cases decided after they have ceased to exercise decisive influence over the offending company.
- Financial firms must carefully assess the structure of their investments, and understand that they may avoid liability for a subsidiary's antitrust violation only in narrow circumstances. In practice, a demonstrable and consistent hands-off approach towards the affiliate may be the only way to avoid antitrust exposure. This may undermine the investment purposes, however.
- If the investment fund deems a hands-off approach as commercially and strategically sound, it must establish permanent and incontrovertible contemporary evidence that it is unable and unwilling to exercise decisive influence. This evidence might include minutes of management teams' meetings on commercial priorities showing that the subsidiary determines such priorities itself and does not report them back to the parent; documents showing the fund and its representatives have involvement in the subsidiary's high-level strategic decisions; and evidence that only a minority of the subsidiary's board has any links to the parent.
- By contrast, strategies based on dividing shareholder rights in the investment target into different entities will not work. If the entities holding all or most of the voting rights are ultimately controlled by the investment firm, the presumption of decisive influence will apply. If these entities hold a majority of the (actually voted) voting rights but fall short of holding all or nearly all of these voting rights, the presumption will not apply but the EC may be able to demonstrate decisive influence by analyzing factors such as voting patterns at the general assembly and/or board of the investment target, board representation, rules and circumstances presiding over adoption of the investment target's investment and business plans.
- Given the likelihood that they may be held liable for the investment target's conduct, investment firms need to ensure that the target has designed and keeps up-to-date effective antitrust compliance programs.
- When considering new investments, firms should conduct due diligence to avoid exposure to any pre-existing antitrust issue and provide for clear liability provision in both investment and exit agreements to anticipate and allocate liability to counterparties in case of antitrust exposure.
- Finally, issues of parental liability can go beyond the realm of antirust fines. First, a decision finding that an investment firm is jointly liable for an antitrust fine with its subsidiary is a sufficient basis for alleged victims of the conduct to seek damages from the parent. Second, other EU compliance rules' fining and liability mechanisms are based on the concept of "undertaking". This is primarily the case for the General Data Protection Regulation, which provides for fines up to 2% or 4% of the worldwide turnover of the "undertaking" concerned.15
Footnotes
1. CJEU, Case C 97/08 P, Akzo Nobel v Commission, at 60.
2. CJEU, Case C-595/18 P, The Goldman Sachs Group Inc. v. Commission, at 32.
3. GC, Case T-419-14, The Goldman Sachs Group Inc. v. Commission, at 151.
4. CJEU, Case C-595/18 P, The Goldman Sachs Group Inc. v. Commission, at 35.
5. EC Decision, Case AT.39610, Power Cables, at 751.
6. CJEU, Case C-595/18 P, The Goldman Sachs Group Inc. v. Commission, at 45-52.
7. Id., at 90.
8. GC, Case T-419-14, The Goldman Sachs Group Inc. v. Commission, at 92-93.
9. Id., at 94-95.
10. Id., at 103-107.
11. Id., at 93-95.
12. Id., at 110-129.
13. Id., at 130-134.
14. Id., at 138-141.
15. Regulation (EU) 2016/679 of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, Article 83.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
