On 12 July 2018, the General Court of the European Union (the GC) published its judgments in the power cable cartel cases. One of the cases relating to this cartel is the case between the European Commission (the Commission) and the investment bank The Goldman Sachs Group, Inc. (Goldman Sachs). For part of the cartel infringement, Goldman Sachs’s private equity division held an interest in one of the power cable producers (Prysmian) as an investor, which caused the Commission to hold Goldman Sachs liable for EUR 37.3 million of the EUR 104.6 million fine imposed on Prysmian. This amount is in proportion to the period of time Goldman Sachs held an interest in Prysmian compared to the total duration of the cartel infringement.
In its judgment of 12 July 2018, the GC upheld the fine imposed by the Commission on Goldman Sachs, confirming that, like “ordinary” parent companies, financial investors can be fully liable for cartel infringements committed by the companies in which they invest. Moreover, in this judgment the GC seems to have somewhat increased investor liability risk for cartel infringements committed by their portfolio companies, as we will discuss further in the paragraphs below.
Although this decision will most likely be appealed before the European Court of Justice (the ECJ), this case has already provided a few important indications for investors concerning the connection between the manner in which they exert control over their portfolio companies and liability for cartel infringements of said portfolio companies. The Goldman Sachs case confirms that investors must find a proper balance between control and liability. In particular, this will pertain to the following aspects:
- even minority shareholders can be liable if they can have their influence felt in other respects, including being able to appoint a majority of the board of directors;
- appointing directors formally or informally affiliated with the investor increases the risk of liability;
- Allowing the directors affiliated with the investor to take on a more active role regarding the commercial policy of the portfolio company, and to receive more market-specific information in connection with that role, contributes to the influence that the investor exerts, or is deemed to exert, on the portfolio company.
In any event, investors must carefully monitor the competition law compliance of their portfolio companies and proactively enforce compliance with competition rules. The investigation into possible competition infringements by portfolio companies should already start at the acquisition stage. Goldman Sachs acquired its interest in Prysmian when the cartel infringement was already in progress and became jointly and severally liable for a proportionate share of the Prysmian fine as that infringement continued.
The due diligence investigation prior to the actual investment should therefore also focus on identifying possible competition law infringements. In addition, investors can set up a come clean arrangement, whereby employees of a new portfolio company can come clean about their involvement in competition law infringements within a specific period of time, without facing any consequences.
In the following paragraphs we will provide further background to investor liability for the conduct of their portfolio companies under the relevant case law and the application of that case law by the GC in the Goldman Sachs case.
Investor liability for conduct of portfolio companies
Financial investors can be held liable for cartel infringements by their portfolio companies in the same way as “ordinary” parent companies. Such liability exists where, in view of the ties with the parent company, the subsidiary did not determine its own market conduct, but acted on the instructions of the parent company. Put differently, the parent company must have had a decisive influence on the subsidiary’s commercial conduct at the time of the cartel infringement. It should be noted that it is not sufficient for such influence only to exist in theory; it must have been actually exercised. However, there is no need to demonstrate that the parent company directed or gave instructions in relation to the specific cartel infringement; parental liability can be based on influence on the general commercial policy of the subsidiary.
In European case law, a legal presumption of parental liability has been developed. If a parent company held 100% of the shares in the subsidiary at the time of the cartel infringement, it is presumed that it was able to exert – and in fact did exert – a decisive influence on the subsidiary (in this respect, see the ECJ’s judgment in Akzo). This presumption is rebuttable, but the burden of proof lies with the parent company.
As stated, the parental liability doctrine has already been applied to financial investors. In the Netherlands, the private equity investor Bencis was held liable for a fine imposed on one of its portfolio companies in connection with the flour cartel. This fine was upheld by the Rotterdam District Court in 2017.
It should be noted that pure financial investors can under certain circumstances be exempted from liability for cartel infringements by their portfolio companies. To be exempted, the investor must demonstrate that it only participates in the portfolio company concerned to make a profit, and is not in any way involved in the management of and in control over the portfolio company. This was determined by the GC in the Garantovaná case.
Interpretation of investor liability by the GC in the Goldman Sachs case
One of Goldman Sachs’s investment funds acquired 100% of the shares in Prysmian in July 2005, but this stake was quickly reduced, initially due to two new shareholders joining in September 2005 and July 2006, after which the Goldman Sachs shareholding declined to 91.1% and 84.4%, respectively. A subsequent initial public offering in May 2007 caused the Goldman Sachs shareholding to decline to a mere 31.7%. For the purpose of this case, Goldman Sachs’s position as an investor in Prysmian can be divided into two periods: the period before the IPO (July 2005 to May 2007) and the period after the IPO until the end of the cartel infringement (May 2007 to January 2009).
For the entire period before the IPO, during which the Goldman Sachs shareholding was only briefly 100% and then declined to 91.1% and 84.4%, the Commission applied the presumption of liability described above. In this respect, the Commission noted that Goldman Sachs still held 100% of the voting rights after the two new shareholders had joined, which is why – as regards the control over Prysmian – it was still in a position comparable to that of a 100% shareholder. The GC followed the Commission’s reasoning and dismissed Goldman Sachs’s attempts to rebut the presumption of liability. The GC thus allowed the Commission’s application of the presumption of decisive influence to a shareholder holding less than 100% of the shares in the subsidiary.
As stated, after the IPO in May 2007 Goldman Sachs’s shareholding decreased considerably, to less than 32%. However, in its decision the Commission reached the conclusion that Goldman Sachs had exerted a decisive influence on Prysmian both before and after the IPO. The Commission based this decision, inter alia, on the following circumstances:
i. Goldman Sachs’s power throughout the infringement period to appoint members of Prysmian’s board of directors, which power it also exercised, and to call shareholders’ meetings in which it could propose the revocation of individual directors or the entire board of directors;
ii. the fact that, both before and after the IPO, at least half of Prysmian’s board members were formally or informally associated with Goldman Sachs in some way; and
iii. the fact the board of directors appointed by Goldman Sachs right before the IPO remained unchanged until more than two years after the IPO, indicating a continuous influence on the board of directors.
The Court held that, based on these and several other circumstances, the Commission had rightly established that Goldman Sachs had exerted a decisive influence on Prysmian both before and after the IPO.
Finally, Goldman Sachs argued that it should be considered a pure financial investor, as both the managers of the investment funds and its representatives on Prysmian’s board of directors lacked the knowledge and expertise to direct Prysmian’s commercial conduct on the power cable market. However, the Court held that the Commission had not based Goldman Sachs’s decisive influence on Prysmian on interference in the latter’s commercial conduct on the market, but rather on Goldman Sachs’ influence on Prysmian’s commercial decisions. Moreover, the Court noted that a number of relevant circumstances did in fact point towards influence on Prysmian’s market conduct.
As indicated above, Goldman Sachs is likely to appeal this judgment before the ECJ. However, investors would be wise to take the conclusions from this case to heart.