Parental liability of investment funds for cartel practices

On 27 January 2021, the European Court of Justice ("ECJ") upheld the General Court's ("GC") ruling of 12 July 2018 (our article on this Judgment can be found here), confirming that the Commission was entitled to hold Goldman Sachs Group ("GS") to be partially jointly and severally liable for the fine imposed on its portfolio company Prysmian (thereby piercing the corporate veil between Prysmian and GS). The judgment can be found here (Case C-595/18 P).

As a reminder, the Commission had imposed on Prysmian a fine of ca. €105 million for its participation in the power cables cartel.  GS was held to be jointly and severally liable for about a third of the fine (€37 million), based on the reasoning that GS had a 'decisive influence' over Prysmian during part of the period of the infringement.  

With regards to the situation of Prysmian before it was publicly listed, the Commission did not rely on the level of GS's indirect holding in Prysmian's capital (GS's ownership of Prysmian was through a fund vehicle (GSCP V Fund) in which GS's interest was only approximately 33%), but rather on the fact that GS controlled all the voting rights associated with Prysmian's shares. This in turn meant that GS was presumed to have exercised control over Prysmian. Such a situation often occurs in private equity structures where portfolio companies are majority owned by third party investors but managed by a fund manager.  For purposes of determining parental liability, the Commission and the GC took the view that such a structure implies that the fund and the portfolio companies are controlled by the fund manager and hence the investment fund (and not by the investors).

On appeal, GS had argued that the GC had wrongly considered that the situation described above is similar to the situation where that parent company is the sole owner of that subsidiary. According to GS, the presumption of decisive influence drawn from the ECJ's landmark ruling in the Akzo case had to be interpreted restrictively.

The ECJ, however, confirmed the GC's ruling that a company can be liable for an infringement of another company if it exercises decisive influence over the conduct of that company during the infringement. According to the ECJ, such exercise of decisive influence is presumed not only in case of ownership of all or virtually all of the capital of the company concerned, but also in case of holding all the voting rights associated with the shares of that company. The ECJ further clarified that it is not the mere holding of the capital that gives rise of the presumption but rather the degree of control of the parent company over the company that results from holding the voting rights.

This decisive influence not only occurred before the public listing of Prysmian's shares but also after the public listing, as GS had personal links with some of the independent board members. GS argued in this respect that neither the Commission nor the GC had established an influence of GS over certain members of Prysmian's board and that, even if such an influence existed, GC had influence over only five out of ten board's members. The ECJ rejected this argument, ruling that the GC (i) had sufficiently identified the personal links with the board members and (ii) had not erred in law by holding these links relevant for the purpose of establishing whether a GS was able to exercise decisive influence over the market conduct of Prysmian. Whether or not GS effectively encouraged Prysmian in its cartel behaviour was deemed irrelevant in this respect.

This Judgment confirms that the decisive influence criterion for parental liability largely mirrors the control criterion that is well known in the context of merger control. Indeed, in the context of merger control, fund managers are regularly held to control the funds and portfolio companies they manage (but not own). The main difference between the two concepts relates to the fact that parental liability requires in principle that decisive influence was actually exercised whereas merger control requires only the mere ability to exercise control. For this reason, 'pure' financial investors cannot be held to be jointly and severally liable (GS was not found to be such 'pure' financial investor in this case) whilst they may be considered to have control for merger control purposes. Nevertheless, the apparent broad application of the presumption to have exercised decisive influence, arguably narrows the difference between the two concepts.

As indicated in our comment on the GC's Judgment, this ruling confirms that companies active in the investment space should be diligent in their management of portfolio companies as they may be held to be jointly and severally liable for the competition law infringements of these companies. They should also be diligent (i) in their acquisitions as also 'new' parent companies may have to bear the financial and legal responsibility for a fine imposed on a portfolio company even for infringements that occurred before the change of control and (ii) in their divestments as parent companies can even after losing control, be held liable for the portfolio company's anticompetitive conduct at the time of control.