Cartel liability: financial investors beware

Liability of Goldman Sachs for power cables cartel 

On 27 January, the EU Court of Justice confirmed a €37m European Commission fine on Goldman Sachs for the anti-competitive conduct of one of its indirectly held investments which had participated in a power cables cartel.

This will certainly give the European Commission further confidence to hold financial investors liable more regularly in the future. It also represents a notable departure from US law.

Why was Goldman fined?

The fine was based on the significant stake which Goldman held in Prysmian from 2005 to 2009. Prysmian had in 1999 become involved in a decade-long cartel of eleven manufacturers of underground and submarine high voltage power cables. Goldman acquired its ownership in Prysmian in 2005 and in 2007 it floated Prysmian and gradually sold off its stake, finally exiting in 2010. It held the investment for only four years, including one year where its equity stake was less than 50%, and did not even know of the existence of the cartel prior to the Commission’s investigation. Still, it was held liable by the European Commission.

What does this mean for financial investors?

Financial investors acquiring significant stakes in target companies may be exposed to antitrust liability if that target is later found to have engaged in anti-competitive behaviour during the investor’s period of ownership:

• liability will be presumed (i) if the investor owns all, or nearly all, the shares in the investment company or (ii) if it exercises all the voting rights, even if it does not hold all the share capital - these presumptions are extremely hard, if not impossible to rebut;
• liability can also arise where the investor “controls” the company in question - in this case, the Court of Justice confirmed that the Commission could rely on factors including the power to appoint board members or propose their revocation, and to call shareholders’ meetings, the role played in the boards of directors and strategic committee, and the provision of regular updates and reports on the business. This is a fact-specific assessment by the Commission, but, again, challenges to it are rarely successful; and
• liability can arise even if:
  • the equity holding is less than 50%;
  • the holding was only for part of the cartel period; or
  • the financial investor did not participate in, or even know of, the unlawful conduct.

How best can these risks be managed?

Investors taking significant stakes in businesses, where any anti-competitive conduct is suspected, are advised to:

• conduct detailed due diligence targeted at the right people in the business, with advice from specialist antitrust lawyers, before signing transaction documents or agreeing any valuations;
• examine their standard M&A language to see how group-wide liability for an individual investment company’s misconduct is addressed;
• consider indemnities to cover potential antitrust fines: these can be difficult to enforce in some jurisdictions, so a purchase price reduction or money set aside in escrow can be a more pragmatic solution; and
• where they have already acquired such a business, consider an audit so as to at least be able to comply with the obligation to end any antitrust infringement and to decide whether or not to self-report to the authorities.

For further information, please do get in touch.