Competition Alert – Goldman Sachs Ruling – The Importance of Antitrust Due Diligence in M&A
A recent judgment involving Goldman Sachs has key implications for UK private equity and other investors: antitrust needs to be a key part of the M&A due diligence process.
On 27 January 2021, the European Court of Justice (ECJ) handed down its ruling in Goldman Sachs’ appeal, challenging the Commission’s decision that had found it liable for the participation of its investee company, Prysmian, in the power cables cartel.
The ECJ dismissed Goldman Sachs’ appeal in its entirety, upholding it as liable for a serious breach of EU competition law as the ultimate parent of the entity that participated in the cartel. The fine of €37 million imposed on Goldman Sachs jointly and severally with Prysmian was also upheld.
The judgment is important as it extends the rebuttable presumption that a parent has decisive influence over a subsidiary to where it holds all the voting rights in the subsidiary.
Investors should be cautious. Voting rights, not just share capital, may be taken into account in the assessment of parental liability for a subsidiary’s infringing conduct. It therefore remains crucial for careful due diligence to be carried out in order to identify if a potential investment target has engaged in cartel activity and that suitable warranty and indemnity protections are put in place.
In 2014, the Commission imposed fines totalling €302 million on 11 producers (together with respective parent companies, as relevant) of underground and submarine high voltage power cables for participating in a market-sharing cartel.
Goldman Sachs was the indirect parent company (through intermediate companies) of Prysmian SpA and its wholly-owned subsidiary. Goldman Sachs’ interest in Prysmian was at first 100% and subsequently it decreased to 91.1%, then 84.4% until Prysmian’s initial public offering (IPO).
Pre-IPO, the Commission relied on a presumption that Goldman Sachs had exercised decisive influence. The Commission also found Goldman Sachs had exercised decisive influence over Prysmian over the period of the infringement. The Commission’s findings that Goldman Sachs was liable, as a parent company, on the basis of the exercise of decisive influence over Prysmian were upheld by the General Court.
Presumption of decisive influence
In summary, the ECJ upheld the General Court’s ruling upholding the Commission’s decision finding Goldman Sachs liable for Prysmian’s participation in the cartel on the basis of parental liability.
With regard to the period pre-IPO, the ECJ confirmed that the Commission was entitled to rely on a presumption of decisive influence. Goldman Sachs had controlled 100% of the voting rights in Prysmian. This led to a rebuttable presumption that Goldman Sachs exercised decisive influence over Prysmian’s market conduct. The voting rights enabled the parent company to determine the subsidiary’s economic and commercial strategy (i.e. the subsidiary’s behaviour on the market).
The ECJ also dismissed as unfounded or inadmissible Goldman Sachs’ various grounds of appeal in relation to the General Court’s assessment of its exercise of decisive influence. This included upholding the General Court’s assessment of the role of board representation.
Implications of the judgment
In previous case law, it was held that there was a rebuttable presumption of decisive influence where a parent company holds all or almost all of the capital in a subsidiary (Akzo Nobel). The Goldman Sachs case is significant as the ECJ has extended the presumption of decisive influence based on the parent company holding 100% of the voting rights (as opposed to ownership of all or almost all of the share capital).
It is now clear that a parent company which holds all the voting rights associated with its subsidiary’s shares is presumed to exercise decisive influence over the conduct of the subsidiary (and therefore may be liable for its infringements of competition law on the basis of parental liability). The degree of control the parent company has over its subsidiary is relevant. The greater the parent company’s influence, the higher the likelihood of parental liability for the infringing conduct of a wayward subsidiary.
Post Brexit, the UK is no longer bound by the ECJ’s judgments and decisive influence is not a UK concept. It remains to be seen if the UK would follow the ECJ’s expansive view of parental liability for subsidiary conduct.
Nevertheless, it remains crucial for careful due diligence to be carried out in order to identify if a potential investment target has engaged in cartel activity and that suitable warranty and indemnity protections are put in place. Post-acquisition, we recommend carrying out internal competition audits to ensure there has not been any infringing activity by the target in order for appropriate steps to be taken where necessary.
The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
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