Goldman Sachs ruling puts investors on guard for competition law liabilities

Out-Law News | 02 Feb 2021 | 10:04 am | 4 min. read

Financial investors face an increased risk of being held liable for breaches of competition law by the companies in which they hold a stake in light of a new ruling by the EU's highest court, an expert in competition law has said.

Alan Davis of Pinsent Masons, the law firm behind Out-Law, was commenting after the Court of Justice of the EU (CJEU) confirmed that Goldman Sachs Group is liable for the infringement of EU competition law by two businesses in the Prysmian Group.

Davis Alan July_2019

Alan Davis

Partner, Head of Competition, EU & Trade

Investors will have to consider carefully how they approach governance and competition law risk and compliance in respect of their portfolio companies

That finding of infringement was announced in 2014 by the European Commission following an analysis of the economic, organisational and legal links between Goldman Sachs and the Prysmian companies during the period of infringement. Goldman Sachs was previously unsuccessful in an appeal against the Commission's decision before the General Court, and the CJEU has now rejected the bank's claims that the General Court had erred in law when it upheld the Commission's decision. The ruling means Goldman Sachs must pay a €37.3 million fine in relation to the Prysmian companies' infringement.

"Following this judgment, financial investors such as private equity firms, hedge funds and investment banks may face an increased risk of potential liability for fines arising from breaches of competition law by their portfolio companies, even if they were not the major shareholder and even if they had no direct knowledge of the anti-competitive conduct," said Davis.

"Going forward, investors will have to consider carefully how they approach governance and competition law risk and compliance in respect of their portfolio companies," he said.

Goldman Sachs was one of 26 undertakings that the Commission determined had participated in a cartel in the sector for extra high voltage underground and/or submarine power cables. The Commission determined Goldman Sachs to have been a participant in the cartel because it was considered to have "exercised a decisive influence" over the market conduct of the two Prysmian companies during the period of infringement.

At the point at which the infringement was deemed to have begun on 29 July 2005, Goldman Sachs held 100% of the shares in Prysmian. Those shares were held through intermediate companies, including private equity arm GS Capital Partners V Funds. However, it subsequently divested some of its shareholding in Prysmian, so that by the time Prysmian engaged in an initial public offering (IPO) for some of its shares on 3 May 2007, its shareholding had fallen to 84.4%. From 3 May 2007 onwards this shareholding reduced to approximately 46%, and further decreased to about 26% on 12 November 2007.

Goldman Sachs raised two grounds of complaint before the CJEU, with the first ground related to the period of infringement up to the Prysmian IPO and the second concerning the period from the point of the IPO to when the infringement was determined to have come to an end, on 28 January 2009. In both cases the investment bank challenged the General Court's assessment of the Commission's basis for determining its level of influence over the Prysmian companies.

The Commission had determined that Goldman Sachs had acted as an indirect parent company to the Prysmian companies during the whole period of infringement. However, Goldman Sachs disputed the level of influence it held over the companies, both during and after Prysmian's IPO.

Davis Alan July_2019

Alan Davis

Partner, Head of Competition, EU & Trade

The effect of the CJEU’s ruling is to widen the rebuttable presumption of ‘decisive influence’ used to establish whether a parent company is liable for its subsidiary’s competition law breaches

The CJEU rejected all of Goldman Sachs' arguments as either inadmissible or unfounded. This included endorsing the General Court's view of the relevance of the fact that Goldman Sachs held all the voting rights for Prysmian prior to its IPO, which it said put Goldman Sachs into a similar situation to if it was the sole owner of Prysmian, regardless of the fact it did not hold all or virtually all of the share capital in the company.

The CJEU also said there was no error in the General Court's finding that the Commission was entitled to determine that Goldman Sachs' decisive influence over Prysmian continued post-IPO. The CJEU rejected Goldman Sachs' claims that the General Court had given undue consideration to matters relevant to the pre-IPO period during its review of evidence relevant to the post-IPO period, and dismissed the suggestion that the IPO represented a "watershed" moment in the relationship between Goldman Sachs and Prysmian.

The General Court had said the Commission had been entitled to factor into its decision that Goldman Sachs retained the power to appoint the members of the various boards of directors of Prysmian, the power to call shareholders to meetings, and to propose the revocation of directors or of entire boards of directors, during both the pre- and post-IPO periods when infringement was determined to have occurred, and to have concluded that, in spite of claims to the contrary, there remained links between some Prysmian directors and Goldman Sachs post-IPO.

Davis said: "The effect of the CJEU’s ruling is to widen the rebuttable presumption of ‘decisive influence’ used to establish whether a parent company is liable for its subsidiary’s competition law breaches."

"Previously, the presumption applied only if a parent company directly or indirectly held all or nearly all of the subsidiary’s share capital. However, this judgment goes further in holding that the presumption will apply even if the parent company holds all or nearly of the voting rights associated with the subsidiary’s shares, even if the proportion of the shares it owns is lower than what would usually be considered as conferring control. It may also be more difficult in the future to rebut the presumption where independent directors serving on a portfolio company’s have certain ‘personal links’ with the investor," he said.

"As the judgment comes after the Brexit transition period has ended, it is not binding on the UK competition authorities or courts, though it is possible that they may have regard to it," Davis said.