03 September 2018 by Robert Bell
A timely reminder that majority investors can be liable for cartel behaviour of investee companies
Investors got a nasty shock when, on 12 July 2018, the General Court of the European Union handed down its judgment in a number of appeals against a series of decisions taken by the European Commission in relation to a ‘power cables cartel’. The appeals were all dismissed but the importance of the court’s judgment centred particularly upon one specific appeal by the investment bank Goldman Sachs (Goldman Sachs Group v Commission (T-422/14)).
The judgment in that case established the clear principle that where a parent company, in this case an investment bank, is able to exercise all voting rights in connection with a very high majority stake in the share capital of a subsidiary company, it can be presumed that the parent company determines the economic and commercial strategy of the subsidiary. This applies even if it does not hold all or virtually all of the subsidiary’s share capital. Accordingly, where that subsidiary is engaged in cartel behaviour the investment bank was as liable as the parent company.
This ruling confirms that investors will need to take a more hands on approach to their investee companies, even if they insist that they hold the stake for investment purposes and are not involved in the day-to-day running of the company.
On 2 April 2014, the Commission announced that it imposed fines totalling €302 million on 11 producers of underground and submarine high voltage power cables (as well as their relevant respective parent companies) for their participation in a market-sharing cartel. The Commission’s decision was addressed to 26 legal companies in total.
As a result of its investigation, the Commission found that the main producers of underground and submarine power cables shared markets and allocated customers between themselves on a worldwide scale.
Under the cartel, Japanese and Korean producers refrained from competing for projects in the home territory of the European producers, while European producers stayed out of Japan and Korea.
“Should a parent company be joint and severally liable for a subsidiary’s cartel behaviour?”
In addition, the European producers allocated territories and customers for projects inside the European home territory or allocated to the European producers.
The Commission also found that the participants in the cartel had established a system to exchange information in order to enable the allocation agreements to be monitored.
Most of the addressees of the Commission’s decision brought actions to challenge the decision and/or the fines imposed before the General Court, with the court handing down judgments on the appeals on 12 July 2018.
The appeals raised a number of issues but the most important was lodged by Goldman Sachs and related to the imposition of joint and several liability of parent undertakings for the acts or omissions of their subsidiaries.
Should a parent company be joint and severally liable for a subsidiary’s cartel behaviour? This was the question at the heart of the appeal.
Between 29 July 2005 and 28 January 2009, Goldman Sachs was the indirect parent company, through a number of funds and other intermediate companies, of Prysmian and of another wholly owned subsidiary. This group was one of the leading businesses worldwide in the submarine and underground power cables sector.
Goldman Sachs was found liable for engaging in the cartel on the basis of the exercise of decisive influence, as parent company, on these subsidiaries during the time period.
The Commission arrived at their decision as a result of an analysis of Goldman Sachs’ economic, organisational and legal links with its subsidiaries. In addition to its voting rights, Goldman Sachs appointed members to the board of directors and sat in on strategic discussions and decisions.
Goldman Sachs claimed that the Commission erred in presuming that it exerted a decisive influence, given that its holding in Prysmian, through various funds and other intermediate companies, was much less than 100% for most of the time during which it held its investment.
It argued that, leaving aside 41 days, its holding in Prysmian was no more than between 84.4% and 91.1%, until 3 May 2007, the date on which shares in Prysmian were offered to the public in an initial public offering on the Milan Stock Exchange.
Goldman Sachs argued that the Commission had never before applied the presumption of actual exercise of decisive influence in a case involving a shareholding of less than 93% and therefore was incorrect in doing so now.
In response, the Commission argued that they did not base the application of the presumption of actual exercise of decisive influence on the level of Goldman Sachs’ holding in Prysmian’s share capital, but on the fact that, despite the divestment of some equity, it controlled 100% of the voting rights associated with that company’s shares. According to the Commission, that placed it in a situation similar to that of a sole owner of the Prysmian group.
The General Court decided in its judgment that, according to settled EU case-law, the Commission was entitled to apply the presumption of decisive influence where the parent company is in a similar situation to that of a sole owner. In that case it had the power to exercise a decisive influence over the conduct of its subsidiary.
Where a parent company is able to exercise all the voting rights associated with its subsidiary’s shares – in particular, as in the present case, in combination with a very high majority stake in the share capital of that subsidiary – that parent company is in a similar situation to that of the sole owner of that subsidiary. In this situation, the parent company is able to determine the economic and commercial strategy of the subsidiary, even if it does not hold all or virtually all the share capital of that subsidiary.
“The subsidiary was not able to determine its own market conduct independently”
Accordingly the Commission was right to presume on the grounds of objective factors the existence of decisive influence where a parent company holds all or virtually all the share capital of its subsidiary.
There was no need for the parent company to take into account the interests of other shareholders when adopting strategic decisions or in the day-to-day business of that subsidiary, as the decisions were taken in accordance with the wishes of the parent company. So the subsidiary was not able to determine its own market conduct independently.
The court did concede that in circumstances where minority shareholders with no voting rights but with certain minority protection rights exercise those rights to have an influence over the conduct of that subsidiary, the parent company may then rebut the presumption of actual exercise of decisive influence. However, this was not the case in the present appeal.
Therefore, the Commission did not err in holding that the presumption of
actual exercise of decisive influence over Prysmian’s market conduct and Goldman Sachs appeal was dismissed.
This decision underlines the need for companies that make substantial majority investments taking a very hands on approach to the management of those investee companies. It is not enough to state that your stake is for investment purposes only.