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10 February 2021 / article

It’s final: private equity investors can be held liable for cartel infringements

The Court of Justice of the European Union has issued a judgment upholding an earlier judgment by the EU General Court, confirming that (investors in) private equity funds can be held liable for the cartel infringements by their portfolio companies.

On 27 January 2021 the Court of Justice of the European Union (the ‘ECJ’) issued a judgment regarding the appeal against an earlier judgment of the  EU General Court (the ‘GC’) dated 12 July 2018 (please refer to our earlier Newsflash regarding this judgment). The ECJ confirmed the finding of the GC that the Investor in question can be held liable for the cartel infringement and a proportionate part of the associated fine of its former portfolio Company, since it had exercised decisive influence over the Company during a part of the infringement period.

Commission decision

Between 29 July 2005 and 16 January 2007, four private equity funds founded by the Investor (the ‘Funds’) indirectly held between 84 and 91% of the shares in the Company and the Investor could exercise 100% of the voting rights. On 16 January 2007, a part of the stock in the Company became publicly listed through an initial public offering (‘IPO’), which reduced the Funds’ shareholding to 46%. The Funds did nonetheless remain by far the largest shareholder in the Company.

The exact legal relationship between the Investor and the Funds does not follow from the Commission’s decision. However, the Commission does mention that through several interposed companies, the Investor solely and fully controlled the investment decisions of the Funds.

On 2 April 2014, the European Commission (the ‘Commission’) had issued a decision in which it established that the Company and various other manufacturers of power cables had participated in a market and customer allocation cartel between February 1999 and January 2009, for which it imposed a total of fines in excess of € 300 million. The Company received the highest fine (nearly € 105 million). The Investor was held jointly and severally liable for this fine for an amount of € 37.3 million (equivalent to the period of its shareholding in the Company). The Investor appealed against the decision, claiming that it could not be held liable for the Company’s infringement. The GC however dismissed the action (see again our earlier Newsflash), which led the Investor to appeal before the ECJ.

Period before the IPO

The Investor argued that the GC had based itself on an assumption that the Investor had influenced the conduct of the Company, which the GC may only do in case a shareholder holds 100% of the shares. The Investor also brought forward that whilst the Funds held between 84 and 91% of the shares in the Company, the Investor only participated for 33% in the Funds’ capital.

The ECJ however disagreed that the GC had based itself on an assumption that the Investor could exercise decisive influence over the Company, because the Funds held almost all of the Company’s capital. By contrary, the GC had performed an analysis of the actual facts, by establishing that the Investor was entitled to exercise 100% of the voting rights over the Company. The ECJ ruled that in case a parent company holds all voting rights in its subsidiary, the Commission is also allowed to rely on the presumption that the parent company exercises decisive influence over its subsidiary’s market conduct. Additionally, the ECJ observed that the Commission is not obliged to merey rely on such a presumption: it may also rely on evidence or on combination of the presumption and evidence.

Period after the IPO

The Investor further argued that the GC had based its finding that the Investor had a decisive influence after the IPO, on circumstances relating to the situation before the IPO. The ECJ once again disagreed and concluded that the GC had carefully looked at the Commission’s findings relating to the situation after the IPO. In particular, the ECJ found that the GC had carefully established that the Investor factually had the right the nominate all of the Company’s board members after the IPO.

The Investor finally argued that the GC had wrongfully concluded that the Investor’s level of representation on the Company’s board of directors was sufficiently large to enable the Investor to influence the Company’s market conduct. The Investor pointed out in this regard that only three out of a total of ten directors had (direct) links with the Investor.

The ECJ however concluded that in fact, none of the other board members was (entirely) independent from the Investor. The relevance of personal links lies in the fact that they may suggest that a person, although active for a given company, actually pursues, in view of his or her links with another company, the interests of the latter. That may also be the case where a person who sits on the board of directors of a company is connected to another company by means of ‘previous advisory services’ or ‘consultancy agreements’, as the GC also noted in paragraph 106 of the judgment under appeal. However, the ECJ furthermore found that the Commission had sufficiently proven that in fact, all ten directors still had ties with the Investor during the relevant period after the IPO, although only three of them were actually employed by the Investor at the time. The ECJ found that even though they were no longer employed by the Investor, the other board members should still be deemed to pursue the Investor’s interests in view of their previous services for the Investor.

In view of the above, the ECJ concluded that also after the IPA, the Investor still had a decisive influence on the Company and could therefore be held liable for the Company’s cartel infringement. The Investor’s liability for the fine is now final.

Implications of the judgment: compliance is crucial!

 The ECJ’s judgment is the first confirmation from the highest court in EU competition cases that private equity investors can be held liable for cartel infringements of their (controlled) portfolio companies, just like strategic investors. The judgment also confirms that the fact that an investor only owns a minority stake in the company in question does not rule out that a competition authority can still hold such an investor liable for a competition law infringement of that company. In addition, such liability can also be assumed on the basis of personal ties with the investor at the level of the management board, even in case the managers are no longer employed by or otherwise directly associated with the investor.

The judgment does not directly address or answer the question whether management companies of investment funds can be held liable for cartel infringements of portfolio companies of these funds. We are also not aware of any precedents where a competition authority attempted to hold management companies liable for cartel infringements of portfolio companies. However, to the extent that such companies exercise control over a fund and the fund in question would have control over the infringing portfolio company, competition authorities may take the view that management companies could be held liable for cartel infringements of portfolio companies of their investment funds. It may therefore worthwhile for investors to carefully look at new governance structures they implement, in particular when setting up new funds or when restructuring existing funds and examine the risks to which their management companies are exposed.

What does appear to clearly follow from the judgment is that the only way to avoid liability with certainty, may be for investors to suffice with a minority interest with only the usual minority protection rights attached to it. However, for most private equity investors, such a governance structure would run contrary to their business model and it may therefore be commercially unacceptable in many cases.

The judgment is therefore another wake-up call that underlines the importance for an investor to ensure that its portfolio companies are fully compliant with the applicable competition rules. A pro-active compliance programme that is specifically tailored to each individual portfolio company is essential in this respect. Such a programme should usually include a code of conduct, one or multiple compliance trainings, a compliance officer, a monitoring protocol and a whistle-blowers’ programme. In certain cases, it may also be appropriate to carry out a legal audit and look for possible on-going cartel infringements.

For new acquisitions, it is also crucial to perform a thorough due diligence investigation into potential competition issues and to negotiate robust warranties and if necessary, indemnities with regard to potential or identified competition risks.

The Loyens & Loeff Competition Team is happy to advise on tailor-made compliance solutions.



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