United States: Private Equity Funds At Higher Risk Of Antitrust Fines (Focus On Private Equity

Recent trends in competition law enforcement in Europe show that private equity funds are increasingly exposed to potential liabilities for alleged infringements of their portfolio companies.  Therefore, private equity funds investing in companies that operate in Europe should consider putting in place adequate measures to minimize such risks.

Breach of competition laws may result in serious fines of up to 10 percent of the group turnover of the company in question being imposed on those companies which are found to have participated in alleged infringements by the European Commission (the Commission) and/or the applicable national competition authorities in the European Economic Area.  In addition, decisions of the Commission and/or national competition authorities are binding proof of a breach of competition law, which, in turn, can result in follow-on damage claims being brought before the national court of the applicable jurisdiction within the European Economic Area.

Under what is known as the "parental liability doctrine," competition authorities can attribute liability to entities that exercise a "decisive influence" over a company or group of companies that have participated in an alleged infringement.  As a consequence, the controlling entity or entities are considered jointly and severally liable for the fine imposed on the infringing subsidiaries.
Decisive influence is presumed by the competition authorities where there are wholly-owned or almost wholly owned subsidiaries, and it is extremely difficult for parent companies to rebut such presumption in practice.  Where this is not the case, the competition authorities are required to prove that the parent company exercised decisive influence.  Any economic, organizational or legal link between the two entities would, in principle, be sufficient to meet the decisive influence test and would, in principle, equally apply in cases of minority shareholdings.  In addition, parental liability can be found between two entities even after the subsidiary involved in the infringement has been disposed of by the controlling entity and may arise even if the controlling entity was not involved in or aware of the infringement.

Past decisions of the Commission and the case law of the European courts show that private equity funds are not considered any differently from other businesses for the purposes of the parent liability doctrine.  The fact that private equity funds are only involved in the high-level strategy and commercial policy of their portfolio companies does not exclude their potential liability, with respect to alleged infringements.  To the contrary and as we expand on below, recent trends in competition law enforcement seem to indicate that private equity funds are increasingly exposed to potential liabilities for competition law infringements of their portfolio companies. 

In its decision of April 2, 2014, in relation to the underground and submarine high-voltage power cables cartel case (COMP/39610), the Commission held the parent companies of the producers involved liable, on the basis that they had exercised decisive influence over the producers.  The fines levied by the Commission in this case totalled €301.6 million.  One of the businesses found liable was Goldman Sachs, the former owner of Prysmian, which is one of the companies that allegedly participated in the cartel.

Goldman Sachs had acquired a (minority/majority) stake in Prysmian in 2005 through its private equity fund and completely divested of it in 2010.  The fact that Goldman Sachs no longer owned Prysmian did not prevent the Commission from fining the bank, holding that it was the entity ultimately exercising decisive influence over Prysmian at the time of the alleged infringements.
This is not the first time that the Commission has imposed fines on private equity funds for alleged infringements by their portfolio companies.  In 2009, the Commission fined the German company SKW Stahl-Metallurgie (SKW) and its former parent companies, amongst which was the investment company Arques Industries, for alleged participation in the calcium carbide cartel from 2004 to 2007.  During that period, SKW was owned by several parent companies, and the Commission held each one liable for its respective period of ownership.  The Commission's decision was confirmed by the General Court of the European Union on January 23, 2014.  However, the judgment was appealed on May 8, 2014, and the case is now pending before the Court of Justice of the European Union.

Private equity firms investing in companies operating in the European Union should take note of the recent decisions in competition law enforcement handed down by the Commission.  In order to minimize potential risks, private equity firms would be advised to ensure that:

  • Adequate due diligence is carried out that is sufficient to capture potential competition law infringements by prospective subsidiaries
  • Existing and prospective subsidiaries have in place tailored and effective competition law compliance programs and codes of ethics, and that these are rigorously implemented.  Such programs and codes should, amongst other things, provide for the dismissal of employees and directors who fail or refuse to comply with antitrust rules.  In Parker ITR and Parker-Hannifin v. Commission T-146/09 (currently under appeal), the General Court dismissed Parker's argument that the conduct of its subsidiary's directors prevented Parker from exercising its control over the subsidiary.  The General Court held that there was nothing to prevent Parker from dismissing the directors who deliberately ignored the group's code of ethics, which, amongst other things, prohibited its employees from taking part in collusive activities.
  • Consider the feasibility of contractual arrangements that provide for allocation of liability between the portfolio companies and parent companies and/or an indemnity in favour of the parent companies

Private Equity Funds At Higher Risk Of Antitrust Fines (Focus on Private Equity - July 2014)

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