10 August 2011
Antitrust,
Competition & Trade
Regulation
Liability for Anti-Competitive Behaviour
of Subsidiaries: A Real Risk for
Investment Banks, Private Equity and
Hedge Funds?
Introduction
Under EU competition law, a parent company is deemed responsible for the behaviour of its
subsidiaries, and fines can be attributed directly to a parent company whose subsidiary is found to
have infringed EU competition laws. This is because of a rebuttable presumption that a parent
exercises decisive influence over its subsidiary. This principle has now been applied by the
European Commission to a company held by a leading investment bank, meaning the bank itself
may be fined for the activities of an investee company.
The presumption that the parent exercises decisive influence can only be rebutted if it can be
shown that the subsidiary acted independently on the market. This is determined on the basis of
the subsidiary's conduct, and the relevant organisational, economic and legal links between the
two companies. In practice, however, it is very difficult for a parent company to rebut the
presumption, since it involves proving a negative fact: the lack of exercise of control. (Where a
subsidiary is not a wholly-owned subsidiary, the Commission must prove that the parent company
did exercise a decisive influence over the subsidiary. In such a case the burden of proof rests with
the Commission.)
Application to Private Equity Funds
Whilst the European Commission has frequently applied the doctrine of parental liability, and
fined parent companies for the infringement of a subsidiary, examples of the Commission fining
banks or private equity funds for the anti-competitive behaviour of their investment entities are
scarce. However, recent case law suggests that the Commission will actively target such financial
entities where a company under their control is involved in a cartel.
On 5 July 2011, the Commission issued a formal statement of objections to 12 firms it suspected
of involvement in an under-sea cable cartel. One of the first firms to confirm that it had received
the statement of objections was Prysmian S.p.A. ("Prysmian"), an Italian company active in the
manufacture and installation of under-sea cables. On 21 July 2011, a leading investment bank
confirmed that it had also received a statement of objections, as a result of an interest in Prysmian
that had been held by certain of the bank's funds (the "Funds") when the cartel behaviour is
alleged to have taken place.
If the Commission is able to demonstrate that the Funds exercised a decisive influence over
Prysmian, then the Funds and Prysmian may be found jointly and severally liable for Prysmian's
involvement in the under-sea cartel and any resulting fine (which could be as much as 10% of the
parties' combined worldwide turnover).
The impact of any such ruling from the Commission would be particularly far-reaching for
investment banks, private equity and hedge funds. Such investors are often far removed from the
day-to-day running of their investments, thus making it difficult for them to monitor and prevent
anti-competitive behaviour. Notably, investors could be found jointly liable for the anti-10
competitive behaviour of their investments, even if they have since sold their stake in the
offending company.
Damages Actions
Also worrying for private equity funds is the increasing trend for victims of a cartel to sue the
participants for damages. Case law and Council Regulation 1/2003 have both confirmed that in
cases before a national court, a Commission decision is binding proof that anti-competitive
behaviour took place and was illegal. Even though the Commission may have fined the
companies involved in the cartel, damages may still be awarded by national courts to any person
or firm affected by the anti-competitive behaviour without such damages being reduced on
account of the fine imposed by the Commission. As a result, if an investment bank or private
equity fund was held responsible by the Commission for the anti-competitive behaviour of an
investment, the bank or fund could then be held jointly liable in any subsequent damages claim.
Conclusion
The doctrine of parental liability for anti-competitive behaviour of subsidiaries is well established
in European law and the Commission appears now to be actively seeking to use the doctrine in
order to find private equity funds liable for any cartel behaviour engaged in by their investments.
In the meantime, investment banks and private equity funds would be well advised to ensure that
all investee companies over which they exercise decisive influence have received competition law
compliance training and take all reasonable steps to minimize the risk of infringements taking
place.
If you have any questions as a result of the information contained in this article, please contact
Neil Baylis of K&L Gates LLP.
Authors:
Neil Baylis
neil.baylis@klgates.com
+44.(0)20.7360.8140
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