In April, the European Commission announced fines totaling €302 million of several companies that it said had created a cartel in the market for undersea electrical cables, which are used worldwide to connect parts of the power grid.
This followed a four-year investigation into several undersea electrical cable providers that the European Commission believed were colluding to allocate customers, fix the supply of power equipment, and rig bid pricing for undersea cable projects. Most of the world´s largest cable producers were implicated – although ABB, which prompted the investigation by turning whistleblower, received immunity for offering up the information.
In the Commission’s April statement announcing the fines, Joaquín Almunia, vice-president in charge of competition policy, said: “These companies knew very well that what they were doing was illegal. This is why they acted cautiously and with great secrecy.”
Of the €302 million in total fines, €37 million was pinned on Goldman Sachs for the activities of one of its private equity arm’s portfolio companies, Prysmian, which was owned by Goldman Sachs Capital Partners between 2005 and 2010.
The collusion started before and ended after this period – but the Commission is levying fines against Goldman Sachs under its parent company liability rules. The argument is that during the time Goldman owned Prysmian (which was known as Pirelli prior to the acquisition), it had “decisive influence” over the board. That makes it liable for any antitrust fines.
In a statement provided to Private Equity International, Goldman Sachs said: “It is important to recognise that the Commission has chosen to hold GS jointly and severally liable with Prysmian solely under its parental liability doctrine (on the basis that certain GS-sponsored funds acquired Prysmian in 2005 and divested their interest gradually until their final exit in 2010). Notably, there is no suggestion that Goldman Sachs or its people had any knowledge or involvement in the purported collusive behavior. Goldman Sachs is considering its rights of appeal.”
Goldman has a range of options, including trying to bump responsibility for the fine down to Goldman Sachs Capital Partners – although it’s true that previous appeals by (smaller) investment funds hit by similar Commission fines have been unsuccessful.
One potential ray of hope comes from Naxans, one of the cable providers. Much of the Commission’s case was based on several thousand documents that had been deleted by an employee of Nexans, which the Commission was able to recover using forensic IT technologies. Most of these documents were closely linked to the illegal cartel activities, and thus and relevant for the Commission’s investigation.
However, Naxans has since argued that the Commission’s investigation was an unjustified fishing expedition that was too broad in scope. Nexans ultimately won some concessions, and this precedent could help Goldman’s own appeal effort.
Either way, private equity firms will rightly be nervous about the idea that they have such strict liability for nefarious goings-on at their portfolio companies.
“This decision serves as a reminder to corporate investors that they can face direct risks arising from competition law infringements carried out by their investee business,” says Amanda Howlett, a partner at British law-firm Shoosmiths, who recently authored a client alert on the implication of this decision. “Investment funds should be checking to see if their investee businesses are compliant with competition law.”