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Houthoff | Investment banks and private equity investors further exposed to parental liability for competition law infringements by portfolio companies

The Court of Justice of the EU (“CJEU”) has established in case law that a parent company can be held liable for its subsidiary’s competition law infringements. This applies if the parent company exercises decisive control over the subsidiary regarding the relevant activities.

The CJEU ruled in the Akzo case that there is a rebuttable presumption that a parent company exercises decisive influence when it directly or indirectly holds all or almost all of a subsidiary’s share capital. To rebut the presumption, the parent company must provide proof that it acts as a ‘pure financial investor’ and that the subsidiary decides its market conduct independently. Settled case law shows that this hurdle is hard to overcome in practice. There are only a handful of cases in which the presumption was successfully rebutted and most of these on technical grounds.

In a recent judgment in the Power Cable saga, the CJEU confirmed that this presumption applies if a parent company holds all or almost all of a subsidiary’s voting rights, even if it does not hold all or almost all of the share capital. This is particularly relevant for investment banks and private equity firms.

Key takeaways

  • Investment banks or private equity investors that directly or indirectly hold all or almost all shares or voting rights in a portfolio company are presumed to exercise decisive influence over that subsidiary. This means there is a presumption that the investors are jointly and severally liable for the subsidiary’s competition law infringements. Acquiring companies should pay careful attention to warranties regarding competition compliance and due diligence for past and present activities in acquisitions that result in them holding all or almost all shares or voting rights.
  • The CJEU judgment does not resolve the existing uncertainties as to what figure constitutes holding ‘almost all’ capital or ‘almost all’ voting rights in a subsidiary.
  • The judgment may also have implications for private enforcement proceedings. The judgment may encourage claimants that allegedly suffered damage following a portfolio company’s anti-competitive conduct to also bring a claim against the relevant investment firm. This option is potentially attractive, as investment firms generally have deeper pockets than their portfolio companies. This option will also be attractive if the investment firm – unlike the portfolio company – is established in a jurisdiction with a more claimant-friendly private enforcement regime. This may result in more claimants using investment firms as anchor defendants to bring claims in ‘friendly’ jurisdictions.

European Commission decision in the power cable cartel case

In April 2014, the European Commission (“Commission”) fined 26 undertakings for taking part in anti-competitive agreements in the power cable sector. Prysmian was one of these undertakings. The Commission found that Goldman Sachs, as Prysmian’s parent company, was jointly and severally liable for Prysmian’s competition law liability for the duration of its shareholding in Prysmian.

The Commission established Goldman Sachs’s parental liability in part based on the rebuttable presumption, and in part based on evidence that Goldman Sachs effectively exercised decisive influence over Prysmian. The Commission only invoked the presumption of liability for a period before Prysmian’s initial public offering (“IPO“). In this period, Goldman Sachs’s shareholding in Prysmian was initially 100%, but later decreased to 91% and then to 84%.

CJEU judgement

In its appeal before the CJEU, Goldman Sachs argued, among other things, that the Commission did not correctly apply the standard of proof on the rebuttable presumption of liability. Goldman Sachs argued, more specifically, that the rebuttable presumption did not apply because Goldman Sachs did not hold all or almost all of Prysmian’s shares in the relevant period – i.e. before Prysmian’s IPO.

The CJEU dismissed Goldman Sachs’s appeal. The CJEU accepted that Goldman Sachs did not hold all or almost of Prysmian’s shares in the relevant period and that the rebuttable presumption could therefore not be applied on that basis. However, the CJEU found that the Commission had applied the standard of proof – the rebuttable presumption of liability – in light of the shareholding and associated voting rights. The CJEU thereby confirmed that this presumption also applies if a parent company holds all or almost all voting rights associated with its shareholding even if those voting rights are associated with a lower percentage of the total share capital. This means that the key test for applying the rebuttable presumption of liability is the degree of actual control the parent company can exercise over the subsidiary’s relevant activities – whether that is based on control of capital or voting rights, or a combination of both. In terms of liability for competition law infringements, investment banks and private equity firms are therefore far from off the hook.

Contacts:

  • Weijer VerLoren van Themaat, Advocaat | Partner, HOUTHOFF
  • Rick Cornelissen, Advocaat | Partner, HOUTHOFF

Compliments of Houthoff – a member of the EACCNY.