István Csővári

A cartel case of key importance is currently awaiting a decision from the General Court of the European Union (GC). If the GC approves the decision of the European Commission, this will open the door for declaring financial investors liable, under cartel law, for the illegal practices of businesses in their portfolio companies, regardless of whether or not the investor was aware of the cartel activities.

It has long been standard practice, among European competition authorities, to apply the principle of parental liability – i.e. that a breach of competition law by a subsidiary gives grounds for establishing the mother company’s liability. This practice is based on the fact that the competition watchdogs look at the corporate group as a whole when investigating breaches of competition law. A multinational corporation cannot put up the defence that a cartel activity had nothing to do with it because it took place at the level of its subsidiary; the fine may still be imposed on the parent company.

But, based on a recent decision of the European Commission which is currently pending review by the GC, it appears that financial investors may also be liable for the cartel activities of their portfolio companies if they hold a ‘decisive influence’ over the company involved.

The Goldman Sachs case

In the case investigated by the Commission, it was established that the company Prysmian, which belongs to the portfolio of investment bank Goldman Sachs, participated in a cartel. The EU competition authority, in addition to penalising Prysmian itself, imposed a substantial EUR 37 million fine on Goldman Sachs as well for the cartel involvement. The Commission took the position that Goldman Sachs was responsible for the cartel involvement of the company in its portfolio, because it exercises a decisive influence over it.

The competition authority did not examine whether Goldman Sachs knew about the competition-law breaches of its portfolio company, and by the same token it was not necessary for Goldman Sachs itself to have participated in the cartel in order to receive the fine. The Commission found it sufficient to establish that Goldman Sachs had a decisive influence over Prysmian, and that it exercised such influence.

Lessons of the case

Up to now, competition law liability has been far from the mind-set of a venture capital or a private equity investor, either when obtaining their shareholding or during the course of the operation. If the GC approves the Commission’s decision, this attitude will no longer be sustainable.

If, after the blessing of the GC on the Goldman Sachs case, the competition authority finds that a company in the portfolio is involved in a cartel, this would open the door for establishing the liability of the financial investor as well, regardless of the fact that the investor has never taken part in the company’s operational decision-making. Simply the fact that the investor can exercise a decisive influence over its investment and actually exercises this power – even if this only takes the form of participating in strategic decisions or electing senior officers, or through the information regularly received from the company – will be enough for competition law liability to be established. And what is more, in the light of the Commission’s decision it won’t even be necessary for the financial investor to have a majority shareholding; it will be sufficient for it to hold a minority stake if that stake confers additional rights (for example, if the investor can nominate more than half of the members of the target company’s management board).

How can the risks be reduced?

Given the Hungarian Competition Authority’s track record of imposing cartel fines running into billions of HUF, the stakes are high. So it appears certainly advisable for venture capital and private equity investors to think carefully about how they can reduce the competition law risks.

It’s likely that the investigation of competition law issues will be given a more important role in future legal due diligence procedures. It will also become important for financial investors, when designing their processes for the monitoring of operations, to place a greater emphasis on checking for compliance with competition law. This could include drawing up and putting into effect competition law compliance policies, holding training sessions on competition law, or in certain cases conducting random ‘spot-check’ audits of compliance with competition law.

It’s likely to take several months for the General Court of the European Union, and – in the event of an appeal – for the Court of Justice of the European Union, to pass its decision in the case. However, in view of the fact that the Commission’s decree fits seamlessly with the logic of the European competition authority’s decisions, any early efforts to prepare for more challenging times ahead from a competition law perspective are unlikely to be wasted.