28.04.2015Liability Under Anti-Trust Law for Financial Investors and Private Equity Companies
A large number of financial investors are still unaware of the fact that even purely financial interests run the risk of liability under anti-trust law. If the portfolio company acts contrary to anti-trust law and such action is carried out and not stopped because it is not discovered, the parent private equity company also risks incurring a fine.
I. Introduction
Last year the decision by the EU Commission (Case No. AT.39610 – Power Cables) caused an uproar by imposing a fine on a private equity company. The company itself had not violated the cartel ban but was liable due to its (at least sometime) financial interest in one of the cartel members.
“I would like to highlight the responsibility of groups of companies, up to the highest level of the corporate structure, to make sure that they fully comply with competition rules. This responsibility is the same for investment companies, who should take a careful look at the compliance culture of the companies they invest in.” (Introductory remarks on two cartel decisions: Power Cables and Steel Abrasives by Joaquin Almunia, EU Commission, Brussels, 2 April 2014).
A similar development is now also becoming apparent at national levels. For the first time the Dutch anti trust authority (Authority for Consumers and Markets – ACM) has recently imposed fines on three financial investors due to anti-trust violations by the portfolio companies. Similar action is also becoming apparent in Germany – at least this can be understood from statements by the Bundeskartellamt (BKartA – German Federal Cartel Office). It is to be feared that in future financial investors and private equity companies will be held increasingly responsible for the anti-trust violations of the portfolio companies even if they (only) hold a purely financial interest.
“Investment firms usually manage one or more funds. Funds hold shares of businesses, and these shares are usually resold after a while. However, ACM is of the opinion that investment firms, too, can be held responsible for the behavior of the firms they own (through those funds), particularly if the investment firm in question has decisive influence.” (Press release of the Authority for Consumers and Markets, The Netherlands, 30 December 2014).
II. Status Quo at EU Level
The companies which are initially responsible for anti-trust violations are those which carry out direct actions. However, the European Commission also holds parent companies responsible at a European level through the use of the single economic entity concept. The attribution depends on how much the shareholder was able to influence the portfolio company. It is assumed with a 100 % interest that there is dominating influence and that the parent company and subsidiary form an economic unit.
Yet the specific arrangement of the corporate group can also support liability beyond this general assumption. If the parent company steers the fortune of the portfolio company so that the subsidiary no longer acts in the market independently, the preconditions exist for attribution. It is precisely this which now applies to purely financial interests pursuant to the decision by the European Commission. The financial investor cannot claim ignorance with respect to the conduct of the portfolio company which was contrary to anti-trust law. Selling the respective portfolio company does not release the parent company from liability either.
III. Developments on a National Level
Although the national anti-trust law also recognizes the principle of economic unity, German administrative fine proceedings for anti-trust law, unlike European anti-trust law, can initially only be aimed at the legal entity, to which the actions of a natural person are attributed. Citing the European principles of effectivity and consistency the BKartA has thus been requesting alignment to the European system of liability for some time now already.
It is already possible, however, to consider holding the group parent company responsible with an administrative offense of a breach of its supervisory duty (§ 130 German law on administrative offenses (Gesetz über Ordnungswidrigkeiten - OWiG)).
IV. Recommended Action
A financial investor is exposed to the risk of being held (jointly) liable on a European level but also increasingly at a national level for continued anti-trust violations by the portfolio company.
A legal due diligence investigation before acquiring an interest only offers limited protection since many processes which are relevant under anti-trust law cannot usually be identified in the data room. However, a more reliable assessment of anti-trust violations can be made with a post-merger due diligence investigation – supported by forensic measures, if necessary. Any anti-trust violations which are discovered should be stopped and a whistleblower application should be considered for the past depending on the individual case.
A subsequent due diligence investigation with respect to anti-trust issues should not take place in an isolated manner, however, but be combined with preventative measures, in particular the implementation of compliance structures. This is sensible not only so that any past violations are discovered and stopped but also future misconduct can be prevented. The introduction of effective compliance structures can reduce the risk of liability based on a breach of the financial investor’s supervisory duty, particularly under German anti-trust law. The development and implementation of appropriate compliance structures in the individual portfolio companies are above all also necessary besides raising awareness and offering corresponding training sessions for the investment company (business management, investment management, etc.).
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