- On 27 January 2021, the Court of Justice of the European Union (CJEU) issued its judgment in Goldman Sachs Group Inc. v European Commission (GS judgment) which confirms that PE sponsors can be held financially liable for competition law infringements committed by indirectly managed portfolio companies under EU competition regimes, including in Ireland.
- Notwithstanding the purely financial nature of portfolio company investments, the GS judgment means that PE sponsors and, by extension, asset/investment managers and other financial investors can be held jointly and severally liable for the payment of eye-watering levels of fines running into the tens and hundreds of millions for portfolio company conduct calculated based on the combined ‘group’ turnover of all managed investments by the PE sponsor/financial investor.
- Ahead of the significant overhaul of the Irish competition regime in the coming months, which will see the Irish competition authority, Competition and Consumer Protection Commission (CCPC), acquire fining powers for the first time, the implications of the GS judgment in the Irish context are therefore far-reaching.
- Since it is now clear that PE sponsors and other financial investors can be held liable for portfolio company conduct in the Irish market, regular competition compliance health checks of the Irish activities of portfolio company businesses with specialist support should now be a clear business priority for PE sponsors and other financial investors.
From a merger control perspective, it has long been known that an indirect acquisition of a 100% or majority stake of a portfolio company by a PE sponsor or other financial investor through funds managed by its General Partner (or equivalent) may give rise to ‘control’ (or ‘decisive influence’) and therefore a mandatory filing obligation. In contrast, as regards potential cartel liability, while it had long been confirmed that ultimate parent entities of industrial companies could be held financially liable for subsidiary conduct, the EU Courts had yet to confirm definitively that the same principle of ‘decisive influence’ extended to PE sponsors and other financial investors for portfolio company conduct.
By way of background, the EU courts have developed the following principles regarding the application of the principle of ‘decisive influence’ to attach parental cartel liability in the industrial company context:
- 100% subsidiaries – in the case of a 100% held subsidiary, a presumption of ‘decisive influence’ giving rise to parental liability applies, which can in principle be rebutted in practice but sets a high threshold having never been rebutted to date.
- Less than 100% subsidiaries – in the case of shareholdings of less than 100%, competition authorities must demonstrate that the parent company (i) was in a position to exercise and (ii) actually exercised ‘decisive influence’ over an infringing subsidiary based on the economic, organisational and legal links between the parent and the subsidiary. Most recently, the application of this test was upheld by the (lower) EU General Court (GC) in 2018 in a case involving a bare shareholding of just 51% held by Deutsche Telekom in a subsidiary (Slovak Telekom) involved in cartel conduct (noting the judgment is under appeal before the CJEU). This was on the basis of the economic, organisational and legal links between Deutsche Telekom and the relevant subsidiary based on a number of Deutsche Telekom actions / structures including: (i) nominating a majority of directors under a shareholders’ agreement; (ii) imposing views at the subsidiary board level via its majority directors for all votes requiring a simple majority; (iii) overlaps in management staff between Deutsche Telekom and Slovak Telekom; and (vii) Deutsche Telekom being deemed to exercise ‘decisive influence’ or control for merger control purposes and thus being referred to as the ‘notifying party’ in a merger filing involving the subsidiary.
- Joint ventures (JV) – the application of the ‘decisive influence’ test to attach parental liability has also been applied in the JV context. Thus, in a 50:50 JV between Dow and DuPont, both JV partners were held liable for joint venture conduct on the basis of a standard 50:50 JV structure, with both parents being able to veto all strategic commercial decisions and the JV following the instructions of its parents in all material respects and thus lacking independence.
- Minority JV interests – the ‘high water mark’ of the application of the ‘decisive influence’ test has arguably been in two cases involving minority shareholdings in JV companies where the minority joint venture partner has been held liable for JV conduct, along with majority JV partner. Thus, Fuji was held liable for the conduct of a JV in which it held a mere 30% shareholding on the basis that (i) it was able to veto key strategic commercial decisions, (ii) there were a number of overlapping directorships between Fuji and the JV, and (iii) Fuji was a significant JV customer. Toshiba Corporation was similarly held liable for conduct by a JV in which it held a 35.5% shareholding.
Thus, it is now long-standing practice that industrial parent companies / JV partners can be held liable for subsidiary/JV cartel conduct where ‘decisive influence’ can be presumed/established. In such circumstances, parents/JV partners can be held liable for colossal fines calculated based on combined group turnover running into the tens and hundreds of millions. While it has been assumed that such principle could be extended into the PE context, such extension had yet to be upheld by the CJEU and so the GS judgment remained a test case for such proposition.
Overview of GS judgment
On the facts, GS, through GS Capital Partners V Funds (GSCP V) and other intermediate companies, indirectly managed Prysmian SpA and its wholly-owned subsidiary, Prysmian Cavi e Sistemi Srl (Prysmian):
- Pre-IPO Period – prior to September 2005, GSCP V indirectly held a 100% shareholding in Prysmian, then following divestments in 2005 and 2006, GSCP V held 91.1%, then 84.4% until 3 May 2007. Critically, however, GSCP V indirectly controlled all of the voting rights in Prysmian through this period.
- Post-IPO Period – following an IPO in late 2007, GSCP V held 31.69% of a shareholding in Prysmian.
In 2014, the European Commission (Commission) found that Prysmian (along with a number of other companies) had participated in a power cables cartel from July 2005 to January 2009 contrary to the EU competition rules and found GS jointly and severally liable for the fine of €37.3 million on the basis that GS had exercised ‘decisive influence’ in both the Pre-IPO Period and the Post-IPO Period based on its organisational, economic and legal links with Prysmian, in particular the power to appoint the board of directors and call for shareholder meetings.
GS appealed to the EU Courts against this Commission finding on the basis that, as a sponsor, it was a pure financial investor in Prysmian. The GC rejected its appeal in 2018 upholding the Commission findings in respect of both the Pre-IPO Period and the Post-IPO Period. GS appealed further to the CJEU which issued its judgment on 27 January 2021.
In its appeal, the CJEU considered the varying level of shareholdings and voting rights held by GSCP V in both the Pre-IPO Period and the Post-IPO Period and applied the relevant principles regarding the ‘decisive influence’ test for parental liability in the PE context as follows:
- Pre-IPO Period – notwithstanding its varying level of shareholdings, the CJEU upheld the application of the presumption of ‘decisive influence’ on the basis that GSCP V indirectly held all of the voting rights in Prysmian throughout this period. The CJEU upheld the finding that GS had failed to rebut the presumption of ‘decisive influence’ given the organisational, economic and legal links. The primary argument that GS was a pure financial investor was deemed insufficient to rebut the presumption.
- Post-IPO Period – the CJEU upheld the finding that the following factors relied on by the Commission to establish the existence of ‘decisive influence’ by GSCP V over Prysmian during this period:
- The power held by GSCP V to appoint the members to Prysmian’s boards of directors
- The power of GSCP V to call shareholders meetings at the Prysmian board level
- The power of GSCP V to propose the removal of Prysmian directors, and
- The receipt by GSCP V of regular updates and monthly reports from Prysmian board/management.
The GS judgment is clearly hugely significant for all PE sponsors and, by extension, asset/investment managers and other financial investors. The judgment now confirms that, notwithstanding the purely financial nature of portfolio company investments, PE sponsors and other financial investors can be held jointly and severally liable for portfolio company conduct and for the payment of eye-watering levels of fines which can be calculated based on the combined ‘group’ turnover of all managed investments by the PE sponsor/financial investor.
Implications in the Irish context
The GS judgment is also particularly relevant in view of the significant overhaul of the Irish competition regime in the coming months:
- Significantly, the Irish competition authority – CCPC – will obtain standalone fining powers enabling it to directly impose fines on companies as well as their parent groups where findings of competition law infringements are made (which power the CCPC lacked to date). This step-change in the Irish competition enforcement regime is expected to lead to significantly increased CCPC competition enforcement from the outset.
- The GS judgment therefore now confirms the ability of the Irish CCPC to impose fines on PE sponsors and other financial investors for portfolio company conduct. Noting Irish portfolio company involvement in some CCPC investigations to date, this will clearly become a very live issues in view of increased CCPC enforcement.
Since it is now clear that PE sponsors and other financial investors can be held liable for portfolio company conduct in the Irish market, regular competition compliance health checks of the Irish activities of portfolio company businesses with specialist support should now be a clear business priority for PE sponsors and other financial investors.