The long-running competition law saga between the European Commission and The Goldman Sachs Group Inc. (“GS”) recently concluded with a sharp reminder from the European Court of Justice (“ECJ”) that in EU competition law, liability for infringements can readily be expanded to parent entities, including private equity investors. More unusually, the ECJ confirmed GS’s joint and several liability with its portfolio company even after an IPO where GS decreased its holding in the portfolio company to a minority stake.
A key takeaway is that even actions that are very typical for a parent company can be enough to trigger joint and several liability between the parent and the subsidiary.
The ECJ’s parental liability doctrine
The ECJ has repeatedly ruled in its case law that a parent company can be held jointly and severally liable for its subsidiary’s anticompetitive conduct. The ECJ’s reasoning is that when a parent company exercises decisive influence over a subsidiary, the parent can determine the subsidiary’s economic and commercial strategy. The two companies are therefore considered to form a single economic unit (an ‘undertaking’), and both will bear liability for the subsidiary’s infringements of competition law.
In EU competition law, when a parent owns all or virtually all the shares in a subsidiary, that fact will create a rebuttable presumption that the parent has exercised decisive influence over its subsidiary. In such situations, the competition authority is only required to examine the ownership structures in order to hold the parent company liable along with the subsidiary. Though this presumption is rebuttable in theory, in practice it has proven all but impossible to rebut. If a parent company does not have such a high level of ownership, the competition authority cannot rely on the presumption and has to prove that the parent did in fact exercise decisive influence. However, as the Goldman Sachs judgment demonstrates, the threshold to prove decisive influence is not necessarily high.
Case C-595/18 P, The Goldman Sachs Group Inc. v European Commission
In April 2014, the European Commission fined a number of companies in the submarine and underground power cables sector for their participation in a cartel that lasted from February 1999 to January 2009. GS was among the fined companies due to the fact that from July 2005 it had been the indirect parent, through a number of intermediary companies, of Prysmian SpA and its subsidiary, which had participated in the cartel. There was no indication that GS had even been aware of the cartel but it was still fined EUR 37.3 million based on the doctrine of parental liability. GS was held jointly and severally liable with Prysmian, and the fine covered the period of time after GS became the owner and until the infringement ended. Prysmian’s previous owner was jointly and severally liable for the infringement period before GS’s ownership. GS appealed the Commission’s fining decision but the EU’s General Court dismissed the appeal in a judgment in July 2018. On 27 January 2021, the ECJ’s judgment dismissed GS’s appeal against the General Court’s judgment.
What makes the case important is that GS was fined for the entire period from July 2005 to January 2009 on the basis of parental liability, even though its stake in Prysmian was significantly reduced during that period. Between July 2005 and May 2007, before the IPO, GS’s ownership decreased from an initial 100%, first to approximately 91% and then to approximately 84%. However, GS still retained 100% of the voting rights. Then, in May 2007, Prysmian’s shares were listed on the Milan Stock Exchange in an IPO. As a result of the IPO, GS’s ownership was reduced to approximately 32% by the end of 2007, although GS remained the largest shareholder. How was it that GS was held liable on the basis of the decisive influence required to create parental liability when its ownership decreased so significantly? The ECJ assessed GS’s liability separately for the pre-IPO and post-IPO periods.
Parental liability before the IPO
For the period before the IPO, the ECJ’s judgment contains few surprises. The main point of contention was that GS did not own all or virtually all the shares in Prysmian, which was required in the ECJ’s earlier case law to create the rebuttable presumption of having exercised decisive influence. However, it was not in dispute that GS did hold all the voting rights in Prysmian. The ECJ, unsurprisingly, ruled that holding 100% of the voting rights is equal to holding 100% of the shares as far as being able to exercise decisive influence over a subsidiary is concerned. GS was not able to rebut the presumption, so it was held jointly and severally liable with Prysmian for the competition infringement during the pre-IPO period.
Parental liability after the IPO
While parental liability for the pre-IPO period was quite straightforward because of the presumption, the post-IPO period contains important lessons for both private equity investors and other owners After the IPO, GS’s shareholding in Prysmian dropped to approximately 32%, and it no longer held all the voting rights. Therefore, the Commission was not able to rely on the rebuttable presumption for the post-IPO period. Instead, the Commission had to prove that GS had exercised decisive influence, which in turn showed that GS and Prysmian constituted a single economic unit (undertaking) under EU competition law, and were both liable.
The Commission relied on the following seven factors, which it together considered to prove that GS exercised decisive influence over Prysmian’s conduct. The General Court accepted all of them except the fourth factor as grounds to show decisive influence. The ECJ did not change the General Court’s ruling.
- The power to appoint the members of the board of directors, to call shareholder meetings and to revoke directors
The board of directors determines and monitors the commercial policy of the company. Therefore, being able to decide the composition of the board through appointments and revocations allowed GS to control Prysmian’s market conduct. The members appointed before the IPO, when GS held 100% of the voting rights in Prysmian, remained unchanged until after the end of the competition infringement. There were no other large shareholders that could influence Prysmian’s conduct. All this was found to be evidence of GS’s decisive influence throughout the infringement period. The fact that the board of directors only gathered on a quarterly basis was not relevant.
- High actual level of representation on Prysmian’s board of directors
During the entire infringement period, GS was represented by at least 50% of the members of the board of directors. GS claimed that some of these members were independent directors but the Commission showed that they did in fact have links to GS. The high level of representation implied decisive influence on Prysmian’s conduct.
- GS’s representatives affected strategic and business decisions
GS’s representatives had broad management powers while on the board, and were also involved in the day-to-day management of Prysmian. These management powers were revoked before the IPO, but two of the representatives were assigned to a three-member Strategic Committee. The committee had no voting or veto rights, but had a central role in supporting the board of directors in key strategic and business matters and the members were actively involved in decisions concerning Prysmian’s commercial policy. This was found to be an additional factor indicating GS’s decisive influence over Prysmian.
- GS’s representatives had important roles on the committees established by Prysmian
The Commission argued that, apart from the Strategic Committee, GS had representatives in Prysmian’s other committees as well. However, in the post-IPO period the GS representatives no longer had a majority on the committees or the committees were not able to affect commercial policy in the first place. This argument was dismissed as unfounded because it did not show the exercise of decisive influence in the post-IPO period.
- GS received regular business reports and updates
GS received monthly reports on Prysmian’s business and commercial strategy. These regular updates were considered additional evidence that GS and Prysmian were a single economic unit.
- GS took measures to ensure control after the IPO
Even a minority interest may enable a parent to exercise decisive influence over its subsidiary when the parent company’s rights exceed those normally granted to minority shareholders. The Commission identified certain measures taken by GS, which the Commission considered to exceed normal levels of influence. These included (a) appointing a new board before the IPO with a term extending over two years after the IPO, (b) changing the by-laws to make it easier for GS to nominate the majority of the board in the future, and (c) a contractual agreement with the second largest shareholder to ensure that it would not increase its ownership or voting rights and would not propose any directors. All of this indicated that GS managed to maintain control of Prysmian also after the IPO despite its decreased shareholding.
- GS showed behaviour typical of an industrial owner
It is settled case law that pure financial owners are not subject to parental liability. However, GS’s behaviour was closer to that of an industrial owner. GS favoured cross-selling between Prysmian and its other subsidiaries. Also, other undertakings on the market contacted GS representatives with business opportunities instead of contacting Prysmian directly. This was found to show GS’s involvement in Prysmian’s business.Based on an overall assessment of all the factors mentioned above, the Commission’s decision regarding GS’s liability was upheld in both the General Court and the ECJ.
First, the ECJ’s ruling confirms that the rebuttable presumption of having exercised decisive influence can be triggered not only by a high level of share ownership in a subsidiary but also by voting rights. This comes as no great surprise because, ultimately, voting rights are an even better measure of influence than ownership.
Second, and more interestingly, the ECJ confirmed that the actual exercise of decisive influence can happen even with relatively low levels of ownership or voting rights, such as the approximately 32% ownership held by GS after the IPO. Thus, a partial exit does not necessarily allow an investor to prevent further exposure to competition fines. For example, GS’s liability ended because the infringement ended, not because of changes in ownership or control. Furthermore, some of the six factors that led to GS being held liable were perfectly ordinary parts of corporate governance, such as being able to call shareholders’ meetings, appoint and remove directors and receiving reports and updates on the business. Of course, some of the factors also consisted of actions that allowed GS to continue to hold outsized influence even after the IPO. Because the judgment was based on an overall assessment of the six factors, it is not possible to say which ones were necessary and which ones were perhaps not needed to trigger the parental liability, or what their importance was relative to each other.
For most owners, it would make little sense to limit their involvement in a subsidiary’s business. Whether a private equity investor or an industrial owner, the purpose of acquiring a subsidiary is typically to have control over it and use that control to add value. When that is combined with the fairly low threshold required to trigger parental liability, it is typically not realistic to minimize the risk of parental liability for competition infringements by trying to limit the parent’s control over the subsidiary. Purely financial investors that take no part in the management of a subsidiary are still excluded from parental liability but, as the Goldman Sachs judgment shows, for others it will be difficult to avoid.
A better course of action may be to instead have more and deeper involvement with the subsidiary to improve the possibility of detecting a potential infringement. By that we mean not only implementing formal compliance measures but fostering a culture where potential violations of competition law or other regulations are not tolerated but reported to management. Once the parent company is aware of a possible violation, which GS apparently was not, it will be in a much better position to decide how to control the associated risks. Needless to say, a thorough due diligence should be conducted before the acquisition but the ability to detect cartels that way is limited.
Finally, it is good to recall that the ECJ’s recent case law strongly suggests that parental liability will expose both the parent and the subsidiary not only to fines but also to private damages claims that could even exceed the fines.