Hands-off private equity owners of European businesses may be faced with a rough new legal reality.
Private equity firms CVC Capital Partners and Bencis Capital Partners are facing fines from the Dutch competition authority after it charged their former portfolio company, Dutch flour maker Meneba Beheer, with breaking competition rules through price-fixing.
In December, Autoriteit Consument & Markt (ACM) ruled that the two firms must pay between €450,000 and €1.5 million as a penalty for Meneba’s role in a collective agreement with competitors to keep prices stable between 2001 and 2007.
The fines themselves seem modest. But the ruling is important, as it has relevance for private equity investors across Europe. In making their decision, the regulators took the view that although the GPs themselves hadn’t been directly involved in any price manipulation, they still had parental liability for the actions of their investee company.
The Dutch authorities are not alone in their stance on this kind of matter. According to Amanda Howlett, a partner in the EU and competition law practice at Shoosmiths in the UK, the European Commission also wants to underline that investment managers are at least partially responsible for misdemeanor in the portfolio – and therefore liable to be fined if wrong-doing is discovered. ?
The December ruling in the Netherlands also has implications for the most high-profile parental liability case involving private equity to date: the ruling of the EU’s General Court in Luxembourg in April of last year, which saw Goldman Sachs be found liable for the activities of a former portfolio company of its private equity arm.
At the time, the European Commission announced penalties totalling €302 million for several companies that it said had created a cartel in the market for undersea electrical cables used worldwide to connect parts of the power grid. Of that total, €37 million was pinned on Goldman for the role played by Prysmian, which Goldman Sachs Capital Partners had owned between 2005 and 2010.
In a statement provided to PEI at the time, 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).”
Goldman appealed in an attempt to walk back the penalty by insisting it didn’t have “decisive influence” over the company, meaning that while Goldman had owned the business, it claims not to have acted as a hands-on manager, and that collusion had been going on without Goldman’s involvement or knowledge. However, the judges contended that Goldman did have decisive influence by virtue of owning it.
Howlett notes that in the flour case it is not surprising that the Dutch body followed the opinion of the European Commission. The Goldman case wasn’t mentioned directly, but the views held by the respective courts are consistent. “The trend of recent cases has been [toward] increased parental liability, so I think any appeal will be difficult for Goldman,” Howlett says. “Put simply, the competition authorities want financial investors to take responsibility for ensuring competition compliance by their investee companies – and are prepared to punish investors who don’t.”
The GPs in the flour cartel case can appeal their fines just like Goldman did. If they do, Howlett predicts that any decision will likely come after the EU’s anti-trust authorities rule on the Goldman appeal.
The implications for general partners are clear: this is another legal risk they need to be ready for. Best to brush up on European competition law now. Then audit your portfolio. It may well be clean – but as a manager, you want to be sure about that.