Parent company liability in Europe
August 2014 | EXPERT BRIEFING | FRAUD & CORRUPTION
The potential liability faced by parent companies for competition infringements committed by their subsidiaries has recently come into focus following a decision by the European Commission to fine Goldman Sachs €37m for the behaviour of an investee company.
On 2 April 2014, the European Commission announced that it had fined 11 producers of underground and submarine high voltage power cables a total of almost €392m for participation in a cartel. The Commission found that the cartel, which ran for almost 10 years from 1999, involved agreements between European and Asian producers to allocate markets and exchange pricing information on bids.
As well as imposing fines on the producers, the Commission also fined many of the parent companies, including Goldman Sachs, the former parent company of Prysmian. Whilst the Commission has long taken the approach that the anti-competitive conduct of a subsidiary company may also be attributed to its holding company, this principle is limited to circumstances where the subsidiary does not decide its conduct independently but instead operates under the ‘decisive influence’ of its parent, which has rarely been found to apply in the context of a financial investment. As such, the case is an important reminder of the need for an investment portfolio to be carefully reviewed for competition law risk with regard to the principles set out below.
In particular, the risks for the parent company of being found jointly and severally liable for its subsidiary’s infringement may be significant. This is because where the parent exercises decisive influence the turnover of the parent (and so potentially the whole group) will be taken into account when calculating the maximum ‘cap’ for any fine to be imposed. This may obviously lead to a larger fine, whilst in practice the Commission may also impose increases in the fine if it considers that a smaller fine would have an insufficient deterrent effect on the group as a whole.
The Commission considers the question of ‘decisive influence’ with regard to the following tests summarised below: (i) if the parent owns 100 percent, or close to 100 percent, of the subsidiary, the European Courts have confirmed that the parent is presumed to exert decisive influence (it is open to the parties to present evidence illustrating the operational independence of the subsidiary to seek to rebut the presumption); and (ii) where smaller shareholdings are involved, the presumption does not apply and the Commission has to produce sufficient evidence to demonstrate that the parent can in fact exercise decisive influence.
The situation becomes particularly complex when the parent is just a financial holding company, with a suite of shareholdings, which are not in and of themselves designed to confer operation control over investee companies.
In this regard, the Commission has previously held non-operational parent companies jointly and severally liable for the anti-competitive conduct of their subsidiaries, but have had decisions annulled by the Community Courts where it could be shown that the parent’s interests in the subsidiary were purely financial.
For example, in October 2010, the General Court overturned a Commission decision attributing liability to an intermediate parent company for its subsidiary’s actions in the Spanish raw tobacco cartel (Case T-24/05 Alliance One and others v Commission). Although the immediate parent company and the ultimate beneficiary were found to have decisive influence (including through board representation), the General Court found that the holding company identified by the Commission as jointly and severally liable held a purely financial interest and therefore did not exercise decisive influence. In particular, the applicants successfully argued that the holding company within the group structure had no activity of its own, played no part in making management appointments and had no communications with the subsidiary (or other relevant holdings) within the group.
In contrast, in the present case, when announcing its decision to fine Goldman Sachs for Prysmian’s activities, the Commission contended that Goldman Sachs had exercised greater influence than simply as a pure financial investor. In this regard, GS Capital Partners, a fund managed by Goldman Sachs, initially purchased a stake in Prysmian in 2005 and reduced its investment over the next three and a half years. In that time, the Commission asserted that although the interest was held as an investment, Goldman Sachs had been actively involved in the management decisions of Prsymian, in particular through voting rights and its representation on the board. It also received monthly reports on the Prysmian business. Moreover, for almost two years, Goldman Sachs held 100 percent of the voting rights and effectively controlled the board (although by the end of the period of ownership the holding had been reduced to some 30 percent). As a result, the Commission concluded that Goldman Sachs did exercise decisive influence over Prysmian.
It is important to note that Goldman Sachs has appealed the Commission’s decision. However, pending the outcome of that appeal, the case should act as a warning to private equity and other financial investors as an illustration of the Commission’s willingness to fine investors, funds and other holding entities in circumstances where the Commission considers that the investor has exercised ‘decisive control’ over a subsidiary that has infringed competition law. In this regard, when announcing the decision, the EU Competition Commissioner, Joaquin Almunia, commented “I would like to highlight the responsibility of groups of companies, up to the highest level of the corporate structure, to make sure that they fully comply with competition rules. This responsibility is the same for investment companies, who should take a careful look at the compliance culture of the companies they invest in”.
The outcome of Goldman Sachs’ appeal should hopefully provide some welcome clarity for financial investors on how they may structure and manage their investments to avoid being found to have decisive influence. It is clear, however, that investors cannot simply assume that a minority shareholding will protect them from a finding of joint and several liability. In particular, the ability to appoint directors to the board and especially when these directors may, alone or in conjunction with other appointees, have de facto control over the board is likely to be viewed as strong evidence of decisive influence.
Potential risk mitigation measures that are often discussed are: (i) ensuring subsidies are subject to well-run competition law compliance polices; (ii) where appropriate, limiting board appointments to non-executive directors and otherwise taking steps to ensure that investors are not directly responsible for board decisions; (iii) limiting the receipt of unnecessary financial and management information from investee shareholdings; and (iv) ensuring extensive due diligence is carried out when investee holdings are acquired and/or that adequate contractual protections obtained to ensure liabilities are left with the appropriate vendor.
Euan Burrows is a partner and Christopher Eberhardt is an associate at Ashurst LLP. Mr Burrows can be contacted on +44 (0)20 7859 2919 or by email: email@example.com. Mr Eberhardt can be contacted by email: firstname.lastname@example.org.
© Financier Worldwide
Euan Burrows and Christopher Eberhardt