A recent case found that a private equity firm was liable for
its portfolio company's antitrust violations. This client alert
explains that private equity firms, when selecting potential
investments, need to carry out thorough due diligence of the
competition risks that the investments could expose them to.
Ensuring that the investment has a competition compliance programme
in place is one way to minimise the risk.
In January 2017, private equity firm Bencis lost its court of
appeal case in the Netherlands against a flour-cartel fine. The
Rotterdam District Court agreed with the Dutch antitrust regulator
that it had been correct in extending principles of parental
liability to the private equity firm. In 2014 the Authority for
Consumers and Markets (ACM) fined Bencis for its role in a cartel
by one of its portfolio companies, Meneba, which was one of 14
cartelists in the Netherlands, Belgium and Germany producing flour.
The ACM ruled that the private equity firm was liable for the
producer's antitrust violations for the period the company was
held in its portfolio.
In 2014, the European Commission imposed fines on 11 producers
of underground and submarine high-voltage power cables, including
the Italian cable maker Prysmian, a company then held in the
portfolio of Goldman Sachs Capital Partners. Goldman Sachs Capital
Partners was held jointly and severally liable for a portion of the
fine imposed on Prysmian. The Commission's decision is
currently under appeal at the General Court.
Extension of parental liability
Both decisions highlight the responsibility of investment funds
to make sure that they fully comply with competition rules and take
a careful look at the compliance culture of the companies they
invest in. These decisions show that not only group holding
companies but also private equity investment firms can under
certain circumstances be considered to form a single economic unit
with their subsidiaries.
If a parent company exercises decisive influence over a
subsidiary, there is a single economic unit and therefore a single
undertaking for the purposes of the cartel prohibition. In reaching
its decision on the ACM ruling, the court of appeal considered
whether portfolio companies independently determine their own
conduct or whether private equity firms have decisive influence.
The behaviour and responsibilities of a private equity firm are
different from those of a pure financial investor; for example,
private equity firms may have active management of portfolio
companies, whereas pure financial investors tend to have little or
no involvement with management.
In contrast, Goldman Sachs grounds for appeal include claims
that the Commission did not properly apply article 101 of the TFEU
and article 23(2) of Regulation 1/2003 by holding it jointly and
severally liable for the infringement allegedly committed by
Prysmian and failing to demonstrate to the requisite legal standard
that Goldman Sachs actually exercised decisive influence over
Prysmian over the relevant period. It also claims that the
Commission violated the principle of personal liability and the
presumption of innocence.
General attribution of parental liability
A stream of European Commission cases, particularly the landmark
2009 ECJ judgment in Akzo Nobel, BASF and UCB for participation in
an animal-feed vitamin cartel, provide clear confirmation that,
where a parent company owns 100 per cent (or near to 100 per cent)
of the share capital of a subsidiary, there is a rebuttable
presumption that it actually exerts decisive influence over that
subsidiary. This is because, in such a situation, the parent
company and its subsidiary are seen to form a single economic unit
for the purposes of article 101 of the TFEU. The legal burden is
then on the parent company to present sufficient evidence to
reverse that presumption by showing that its subsidiary acts (or
acted) independently of it.
In practice, the bar to rebutting the presumption of decisive
influence in the case of a parent company that holds all (or nearly
all) the shares in an infringing subsidiary is set extremely high.
However, the factors that may be relevant in rebutting the
presumption vary from case to case. In essence, the question is
whether, overall, the facts indicate that the parent company does
(or did) not direct the conduct of the subsidiary to such an extent
that the two must be regarded as one economic unit.
These recent cases highlight the possibility of private equity
firms inadvertently taking on responsibility for the illicit
behaviour of a purchased portfolio company, but the risk can be
mitigated. Proper due diligence can reduce the risk that a private
equity firm be held responsible for activities of its portfolio
company in which it played no part.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
The CAT in the UK heard on 17 January 2017 an application by Flynn Pharma Ltd and Flynn Pharma (Holdings) Ltd to suspend the Competition and Markets Authority's direction to reduce the price of an epilepsy drug.
The Competition and Markets Authority (CMA) has issued fines totalling Ł44.99 million to a number of pharmaceuticals companies for engaging in anti-competitive conduct and agreements in relation to the supply of paroxetine.
Online travel agencies which greatly helped maintain occupancy rates during the difficult years in the 1990s have been accused of exploiting their position of strength in a manner that contravenes the rules of fair competition.
On 20 December 2012, the UK Competition Appeal Tribunal handed down its judgment on Tesco’s appeal against an earlier Office of Fair Trading decision concerning dairy products retail pricing in the UK.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).