Private equity firms: liability for anti-trust fines title

person signing a piece of paper Print publication


It has long been established under EU competition law that parent companies can be held liable for the anti-trust fines imposed on subsidiary entities. In a recent decision, the European Commission (EC) confirmed that investors (be they industry or private equity investors) can also be found liable where they exercise “decisive influence” over a company and its decisions.


On 2 April 2014, the EC fined 11 producers of underground and submarine high voltage power cables a total of €302 million for participation in a ten-year market and customer sharing cartel. The cartel involved the world’s largest producers of high voltage power cables. The EC decided that the participants had reserved their home markets from competition, allocated other territories between them, and agreed price levels to effectively fix tender outcomes.

The decision is noteworthy because it also held that one of the parent companies (Goldman Sachs, the investment bank) was liable for actions of its subsidiary (Prysmian). Prysmian was acquired by Goldman Sachs Capital Partners in 2005 from Pirelli. Goldman Sachs sold down its investment in Prysmian during its ownership.

The EC imposed a fine on Goldman Sachs of €37.3 million. This reflects the application by the EC in the private equity context of the long established principle that one undertaking may be held jointly and severally liable for the anti-competitive conduct of another where they formed part of a “single economic unit” during the period of the infringement (or part of that period).

Legal analysis – why was the investor fined in this case?

Whether two undertakings formed part of a single economic unit turns on whether one of the undertakings exercised “decisive influence” over the other’s conduct on the market at the relevant time. In the case of a 100% shareholding (direct or indirect) the EC will apply a rebuttable presumption that the shareholder exercised decisive influence over the market conduct of its subsidiary and therefore that the two formed part of a single economic unit. In the case of a shareholder with an interest of less than 100% it will be for the EC to show that the shareholder in fact exercised decisive influence over the conduct of the subsidiary.

In the high voltage power cables cartel, the EC pointed to several factors which showed that Goldman Sachs exercised decisive influence over Prysmian:

  • Goldman Sachs had been involved in the management decisions of Prysmian through voting rights and board representation.
  •  Goldman Sachs held, for almost two years, 100% of the voting rights in Prysmian, which enabled them to remove and nominate the board of directors at any time.
  • Goldman Sachs was supposedly regularly updated on Prysmian’s business through monthly reports.

However, there was no suggestion that Goldman Sachs or its employees had knowledge of or involvement in, the anti-competitive behaviour.

The impact of the decision and what to do to avoid the risks

The EC decision is a strong reminder that private equity houses are not immune from anti-trust liability. They may be held liable for the anti-competitive conduct of companies in which they invest, where they are deemed to exercise decisive influence over the company and its decisions during the period of ownership.

In a speech delivered on 2 April, Joaquin Alumina, Vice President of the EC responsible for competition policy, stated that:

In line with the Commission’s well established practice, the liability for these fines also extends to the parent companies that exercised a decisive influence over their subsidiaries. This applies, among others, to Goldman Sachs, which exercised such influence on the cable producer Prysmian for several years when the infringement was committed. I would like to highlight the responsibility of groups of companies, up to the highest level of the corporate structure, to make sure that they fully comply with competition rules. This responsibility is the same for investment companies, who should take a careful look at the compliance culture of the companies they invest in.”

The implications for private equity houses are clear: a risk of fines, reputational damage and, potentially, third party claims for damages for loss suffered as a result of the cartel activity.

When making an investment, the private equity buyer should consider the following:

  • It will be liable for ongoing (and maybe even past) infringements of any entity acquired by share purchase.
  • Ensure antitrust compliance is considered as part of the overall transaction.
  • Investigate and test the target’s risk profile at pre-approach and due diligence stage of a transaction. Is anti-trust compliance taken seriously by the target? Is there a compliance programme? Is competition law on the Board agenda?
  • We recommend asking specific questions regarding the seller’s knowledge of any anti-trust risks / breaches and in an appropriate case seeking specific warranties / indemnities.
  • Post acquisition, to uncover hidden violations, conduct a thorough compliance “audit” including interviews with managers and document reviews.

When a private equity investor exits an investment, it should consider:

  • That it could remain liable for any infringements of the portfolio company during its ownership.
  • In practice there could be difficulty in defending actions after the business has been sold along with personnel and records.
  • There is therefore value in knowing that the business is in good shape from a compliance perspective and an exercise to “get one’s house in order” prior to putting up the for sale sign may provide some comfort
  • If asked to provide competition law warranties / indemnities and in circumstances where this is difficult to resist, a liability cap for breach of the warranties may assist, although that will not protect the seller against fines or third party claims.

As an immediate step, we advise private equity houses to put in place an effective compliance programme, both internally – so that their own personnel involved in managing / advising portfolio companies understand competition law – and within each portfolio company, and consider conducting an audit where risks are identified.

Goldman Sachs is reportedly considering an appeal. While it may hope to convince the European Courts that it should not be liable for Prysmian’s conduct, we note that previous (lesser known) decisions have found investors liable for anti-competitive behaviour by their portfolio companies, even though the investors did not participate in the anti-competitive conduct themselves.

If you have any questions in respect of this briefing note or require further information or assistance, please contact Trudy Feaster-Gee, Partner (Barrister).