Antitrust Alert: EU Decision May Expand Competition Law Exposure for Private Equity
On 2 April 2014, the European Commission announced significant fines involving what it described as a global cartel in the high-voltage power cable industry. In itself, this is not major news; the fact of an investigation in this industry has long been known. But the decision did make news in one potentially significant respect -- holding that a leading financial investor was liable for having allegedly exercised decisive influence over one of the companies allegedly participating in the cartel.
This is potentially a very significant step for the Commission, and if upheld on appeal (if that takes place) and followed in the future, it would substantially increase the risk exposure for private equity and financial investors that hold controlling voting rights in companies that become entangled in antitrust proceedings in Europe.
In the power cable case, the European Commission refused to differentiate the temporary financial investor from an industrial parent company. It concluded that the presumption of “decisive influence” that rests with any parent holding 100 percent of shares in a company applies equally to financial investors unless rebutted, and in this case concluded that the presumption had not be rebutted.
The Commission’s findings in this case follow recent developments at the level of the General Court. In the 1.garantovana case (2012), the Court upheld the Commission’s decision finding a financial investor company liable for a breach of competition law by its affiliate. The Court ruled that a purely financial investor “holds shares in a company in order to make profit, but…refrains from any involvement in its management and its control.” The Court confirmed its case law that the parental liability must be assessed on the basis of the economic, organizational and legal links that exist within a group which vary from case to case and are not exhaustive. In the power cable case, the Commission concluded that the investor was not a purely financial investor because, in the Commission’s view, it had sufficient involvement in the management of the company found to have committed the violation.
This decision has serious potential consequences for private equity investments in companies that operate in Europe (and thus are subject to EU competition laws). A case by case determination is effectively no standard at all, and certainly not a predictable one for financial investors who do not want to assume this kind of exposure. In addition, placing the burden of proof on the investor, when there are no well-defined standard or criteria, means as a practical matter that no financial investor can know whether it is likely to have direct exposure to Commission sanctions until the Commission issues its final decision. This uncertainty creates significant issues for financial investors, not only with respect to the governance issues related to the company in which it is investing but in how to evaluate and describe the potential risks it is undertaking with the investment.
If this approach is affirmed on appeal (assuming there is one) or otherwise stands, private equity and other financial investors will have to take great care in exactly how they monitor their investments, so that they do not get trapped into potential direct financial exposure where they never in fact intended to exercise direct operational control over the company in which they invested. It is not clear that the Commission has fully considered all of the consequences of this approach, which likely does not enhance the deterrence or appropriate punishment of competitive misconduct but may deter desirable financial investments.
We will report any further developments.
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