On 27 January 2021, the Court of Justice of the European Union (“CJEU”) confirmed in Goldman Sachs Group Inc. v European Commission that financial investors can be liable where they hold 100% voting rights over an indirect entity that participated in a cartel, even though the investor does not own 100% of the share capital during the relevant infringement period. Crucially, the judgment highlights the importance of conducting careful due diligence and ensuring competition law compliance for all investors, including financial investors, during the acquisition process.

Background

Between 29 July 2005 and 28 January 2009, the Goldman Sachs Group (“GS”), was the indirect parent company through GS Capital Partners V Funds (“GSCP V Funds”), of Prysmian SpA and of the wholly owned subsidiary of that company, Prysmian Cavi e Sistemi Srl. While GSCP V Funds’ holding in Prysmian was initially 100% of the shares, this decreased following two divestments made in September 2005 and July 2006, initially to 91.1% and then to 84.4% until 3 May 2007 (the date on which some of the shares in Prysmian were offered to the public in an initial public offering on the Milan Stock Exchange (“the pre-IPO period”)). In the post-IPO period (at the end of 2007), GSCP V Funds’ share fell further to 31.69%.

On 2 April 2014, by way of Decision, the European Commission (“Commission”) found that GS and 25 other undertakings participated in a single and continuous infringement in the sector for (extra) high voltage underground and/or submarine power cables during the period of 29 July 2005 to 28 January 2009, contrary to Article 101 TFEU. The Commission imposed a fine of approximately EUR 104.6 million on Prysmian. GS was held jointly and severally liable for approximately EUR 37.3 million.

In its appeal before the General Court, GS argued that it could not be held liable as a parent, since it was a “pure financial investor,” namely one 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. However, the General Court did not agree and confirmed that the “pure financial investor” is not a legal criterion, but an example of a situation in which it is open to the parent company to rebut the presumption of decisive influence (see Covington’s previous commentary here).

GS appealed to the CJEU.

The concept of parental liability

According to established EU case-law, a parent company and its fully owned subsidiary form one economic entity (CJEU in Akzo Nobel v Commission, para 58). Akzo established that where a company has a 100% shareholding in a subsidiary which has infringed competition rules, the parent company can exercise decisive influence over the conduct of its subsidiary. Further, there is a presumption that such a parent company does indeed exercise such influence. This presumption is rebuttable, and has been challenged on numerous occasions. To date, however, no 100% parent has been able to successfully rebut the presumption of parental liability. Therefore, the bar to rebut the presumption is set high.

Notably, parent companies have previously been found jointly and severally liable for the anticompetitive behaviour of their joint ventures where each party had a 50% shareholding (CJEU in Du Pont v Commission, Dow Chemical & Commission). Du Pont and Dow had both exercised decisive influence on their joint venture’s commercial conduct and policies, resulting in the joint venture being held as part of both of their respective undertakings. The subsidiary was not independent as it carried out in all material respects the instructions given to it by the parent companies. This was established through economic, organisational and legal links between the entities concerned. The CJEU noted that, while there is no need to establish the parent’s personal involvement in the anticompetitive conduct, it must actually establish decisive influence. This is in contrast with the rebuttable presumption for fully owned subsidiaries as per Akzo above.

The General Court has also considered the factors indicative of a parent holding decisive influence despite a bare majority shareholding of 51% (see Deutsche Telekom v Commission, Slovak Telekom v Commission). The General Court detailed the cumulative economic, organisational and legal links: (i) imposing views for all votes requiring a simple majority; (ii) nominating a majority of directors under a shareholders agreement; (iii) staff overlap between undertakings; (iv) parent instructions and corresponding compatible director decisions; (v) the parent being informed of the subsidiary’s intended commercial policy; (vi) influence exercised over relationships with other companies; and (vii) the parent being the notifying party in a related merger filing of the subsidiary by a third party. It is worth noting that Deutsche Telekom and its subsidiary Slovak Telekom lodged appeals before the CJEU on 21 and 22 February 2019. There has not yet been a ruling.

The CJEU’s assessment

First, the CJEU considered the argument that GSCP V Funds was not liable for the pre-IPO period as the case-law’s presumption of decisive influence was not applicable because GSCP V Funds did not hold all of Prysmian’s capital during the  pre-IPO period, although they did hold all of the voting rights. The CJEU reiterated that the case-law recognises where the parent company holds (directly or indirectly), all or almost all of the capital in a subsidiary which has committed an infringement, the parent is able to exercise decisive influence over the subsidiary’s conduct and there is a rebuttable presumption the parent does exercise such influence (para. 32). However, the CJEU found that as the relevant test was one of decisive influence, for which ownership of the share capital is an indicator, then a parent company who holds all of the voting rights associated with the subsidiary’s shares is in a similar position of influence to that of a company holding all, or virtually all, of the capital of the subsidiary (para. 35). In this manner, the parent company is able to determine the subsidiary’s economic and commercial strategy. The CJEU thereby recognised that a parent company who holds all of the voting rights associated with the subsidiary’s shares is able to exercise decisive influence over the conduct of the subsidiary, regardless of whether the parent owns all of the capital stock. The CJEU further agreed with the General Court’s findings that the burden to rebut this presumption fell on GSCP V Funds, and in any case it had not managed to do so (paras. 47-54).

Second, the CJEU considered the argument that, with respect to the post-IPO period, the General Court erred in relying on factors relevant for the pre-IPO period and by merely asserting that the IPO had not changed anything. The CJEU rejected this argument and agreed with the factors taken into account by the General Court in finding that GSCP V Funds held decisive influence over Prysmian’s activities (paras. 67-72). In particular, it noted that the exercise of decisive influence by a parent over its subsidiary’s conduct can be inferred from a body of consistent evidence, even if some of that evidence when taken in isolation, is insufficient to establish the existence of such influence. The CJEU found that the General Court had carefully took into account the elements relied upon by the Commission, drawing a clear distinction between the pre-IPO and the post-IPO period. Among the elements relating to the entire infringement period, the General Court examined: (i) the power to appoint the members of the various boards of directors of Prysmian; (ii) the power to call shareholders to meetings; and (iii) the power to propose the revocation of directors or of entire boards of directors. The CJEU held that the General Court was therefore correct in relying on elements relating to the prior period in establishing decisive influence.

Third, GS submitted that the General Court was wrong to find that GSCP V Funds had the required level of representation on Prysmian’s board of directors to influence Prysmian’s market conduct. The CJEU disagreed and found that the General Court had sufficiently identified the links between GSCP V Funds and the members of Prysmian’s board of directors (para. 89). These links could be regarded as one of the elements on which the Commission could rely upon to demonstrate that GSCP V Funds had exercised decisive influence over Prysmian. The CJEU also noted that existence of an economic entity formed by the parent company and its subsidiary can be based not only on the formal relationship between the two, but also on informal relationships (para. 93). This can consist of personal links between the legal entities comprising such an economic unit – though the Court gave no examples of what such personal links might be.

Consequences

The judgment is significant as it further extends the parental liability doctrine to an investment held through an investment fund structure. The CJEU has clarified that the presumption of decisive influence applies where the parent company holds all or virtually all of the voting rights associated with the subsidiary, and not only where the parent holds all or virtually all of the capital.

In light of the CJEU judgment, investors, including financial investors and private equity businesses, should bear in mind the following:

• Investors should carefully undertake due diligence during the acquisition process, with a particular focus on cartel activity. Investors should keep a close eye on competition law compliance and best practices throughout the acquisition phase and consult antitrust counsel. Effective procedures will assist to mitigate potential antitrust risks and allocate liability up-front where issues are exposed.
• Investors should recognise the risk that the best due diligence efforts might not uncover such conduct, particularly if some of those involved are not fully cooperative or transparent.
• The Share Purchase Agreement should contain strong indemnity language as to potential competition issues, this can enable the Purchaser to claim compensation in the event that the existence of a past infringement subsequently comes to light.
• Upon closure of the acquisition, full competition due diligence should be completed as soon as possible. If potential infringements are found, any such continuing should be terminated immediately and consideration should be given to leniency applications where appropriate.