Goldman Sachs : Parental Liability And EU Competition Law - What Should Financial Investors Keep In Mind?
May 14, 2021 at 04:08 pm EDT
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The highest court of the EU, the European Court of Justice (the "ECJ"), confirmed in a recent judgment (C- 595/18 The Goldman Sachs Group / Commission) that financial investors (just like any other parent company) can be held liable for antitrust infringements committed by their subsidiaries if they exercise decisive influence over them.
For the actual exercise of decisive influence, there is a (rebuttable) presumption where the parent company holds all or almost all of the capital in a subsidiary.
The ECJ has now expanded this presumption in a case where the parent company held all the voting rights instead of capital in a subsidiary. It held that it does not depend on the exact amount of the shareholding, but on the degree of control it confers to a parent company over its subsidiary to decide on the subsidiary's economic and commercial strategy. A sufficient degree of control could also exist where the financial investor holds all the voting rights.
The presumption is rebuttable: investors would have to show that the subsidiary acts independently on the market. This is a high hurdle to jump over.
Without a rebuttal, there is no need for an authority to find indicia relating to the actual exercise of decisive influence in order for the presumption to apply
Background of the case
In 2014, the European Commission imposed a fine of €37.3 million on the Goldman Sachs Group (GS) and its (indirectly held) subsidiaries Prysmian Cavi e Sistemi Srl and Prysmian SpA (Prysmian).
Prysmian was involved in the power cables cartel for several years. GS was held jointly and severally liable as the parent company for the fines imposed on Prysmian under the concept of parental liability for the period from July 2005 to January 2009. The applicability of parental liability was under dispute in this case, because GS's (indirect) capital investment in Prysmian changed significantly during the period from 2005 to 2009. In the pre-IPO period (before May 2007), GS indirectly held a majority stake in the share capital of Prysmian (roughly between 84% and 91%). In the post-IPO period, this stake decreased.
In 2018, the General Court dismissed GS's appeal against the European Commission's decision in its entirety, and concluded that parental liability was applicable for both the pre- and post-IPO periods.
In January 2021, the ECJ dismissed GS's appeal against the General Court's decision in its entirety.
In relation to the pre-IPO period, GS had argued that the General Court erred in relying on the presumption for the actual exercise of decisive influence. For the post-IPO period, GS had argued that it did not exercise decisive influence over Prysmian.
Presumption applied during the pre-IPO period
The ECJ, relying on previous case law, clarified:
That the conduct of any subsidiary may be imputed to the parent company where it does not decide independently upon its own conduct on the market, but carries out the instructions given by its parent company. This assessment depends in particular on the economic, organisational and legal links between the parent and its subsidiary; and
Where a parent company has a 100% shareholding in a subsidiary, it is able to exercise such decisive influence. Even more importantly, there is a rebuttable presumption that such a parent company does in fact exercise decisive influence over the conduct of the subsidiary (see Akzo judgment).
The ECJ than considered that
The presumption does not depend on the exact amount of the shareholding, but on the degree of control it renders to a parent company over its subsidiary to decide on the subsidiary's economic and commercial strategy. A sufficient degree of control can also exist where the financial investor holds all the voting rights.
During the pre-IPO period GS controlled all the voting rights in Prysmian - even following the divestments of some of Prysmian's shares. Hence, the ECJ concurred with the General Court that the presumption of actual exercise of decisive influence applied.
While the ECJ acknowledged that this presumption is rebuttable, it clarified that in order to do so:
The parent company would have to adduce sufficient evidence to show that its subsidiary acts independently on the market - a pretty high hurdle;
Unless the presumption is rebutted, the authority relying on it does not need to provide additional indicia relating to the actual exercise of influence by the parent company.
For the post-IPO period, the ECJ regarded GS's claim as partially inadmissible and partially unfounded.
Practical takeaway
It is commonly accepted that checking competition compliance before acquiring a target is important. While it may be difficult to detect undisclosed cartel activities during due diligence, the health check of existing competition compliance measures is a first step. Assessing the structural conditions of the given product markets to identify inherent risks, reviewing the history of cartel investigations and incorporating contractual protections such as warranties and indemnities are other tools for mitigating risks of potential competition law infringements. Another strategy may be to ensure that the rights over a portfolio company granted by the investment does not amount to decisive influence, although in practice competition law challenges may not dictate the transaction strategy.
Looking ahead
While this judgment concerns the question of when a parent company can be held liable for antitrust infringements committed by their subsidiaries, another important question is currently pending before the ECJ: Can a subsidiary also be held liable for the parent company's competition law infringement (C-882/19 Sumal, S.L./Mercedes Benz Trucks Espańa, S.L)? We will keep you updated.
Originally published 29 April 2021
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.
The Goldman Sachs Group, Inc. specializes in investment services. Revenues break down by activity as follows:
- investment services (47%): involved in the stock, interest, exchange, raw material, and other;
- asset and wealth management (22.7%). The group is also makes investments in fast growing technology companies;
- investment banking (18.5%): consulting for merger-acquisitions, stock operations, etc.;
- others (11.8%).
Revenues are distributed geographically as follows: Americas (60.5%), Europe/Middle East/Africa (27.2%) and Asia (12.3%).
THE GOLDMAN SACHS GROUP, INC. 
