With antitrust enforcement expected to make a strong come-back in 2022, the evolving EU practice on “no fault” liability for shareholders and subsidiaries will be important to keep in mind. Managing portfolio company compliance and conducting detailed due diligence are important tools to manage potential exposure.

The last quarter of 2021 saw a wave of dawn raids undertaken across the EU with competition chief Margrethe Vestager describing this as “just the start” of things to come. With this renewed focus EU antitrust enforcement action is expected to rise and it is more important than ever to understand potential liability for portfolio company conduct.

As a prelude to this sabre rattling, 2021 saw several competition authorities’ infringement decisions and court judgements highlight the potentially far-reaching nature of “no fault” shareholder liability for subsidiary conduct under antitrust laws. 

• The UK Competition & Markets Authority (CMA) conducted a number of investigations in the pharmaceutical sector in which financial sponsors were held liable for the conduct of their subsidiaries (during the period of their ownership). This resulted in the CMA fining one of the companies – under the parental liability doctrine – in three separate investigations. 
• In a flour cartel case, Dutch courts confirmed that a private equity investor (Bencis) can be held liable for the anticompetitive conduct of their subsidiaries not only by virtue of their economic links but also their personal and legal links. Bencis subsequently applied to claw back its fine from the subsidiary on the basis that the subsidiary responded incorrectly to due diligence questions on competition law infringements. However, this was rejected as the alleged questions and incorrect responses of the subsidiary were not proven.

At European level, the ECJ also confirmed Goldman Sachs’ joint and several liability for an infringement committed by its subsidiary, Prysmian S.p.A.. While recognising that the bank played no part in the conduct (it did not even know it existed) Goldman Sachs was held liable on the basis that it was able to exercise corporate control via its significant voting rights.

Separately, in confirming Deutsche Telekom’s liability for an abuse of dominance by one of its subsidiaries, the ECJ further clarified that anticompetitive conduct can be imputed to the parent company where that parent company gave instructions to the infringing subsidiary on the market concerned by the conduct. 

These cases address important questions on the potential application of the parental liability doctrine to financial sponsors:

• Does parental liability apply to a purely financial investor?
  
  The doctrine can apply to a financial sponsor as to any other parent company which exercises decisive influence over the subsidiary. This applies for the period in which the parent held such influence (even if the subsidiary has subsequently been sold).
  
  The only exception is in the case of a “purely financial investor” who does not have any involvement in the management or supervision of the management of the subsidiary.
• Can decisive influence be established based on instructions provided by the parent to the subsidiary?
  
  Liability of a parent company for its subsidiary’s antitrust conduct does not require proof that the infringing subsidiary actually followed the parent company’s instructions as long as the parent company did actually exercise decisive influence with respect to the affected market by giving specific instructions.
• Can a financial investor be presumed to exercise decisive influence over a company in which it holds no or limited equity? 
  
  The presumption of control, which typically applies when the parent company holds all or most of the shares, has been expanded to capture situations where the parent holds or controls all voting rights associated with that subsidiary. Accordingly, financial investors who hold a small number of shares but can exercise all the voting rights based on (i) the level of (indirect) shareholdings and/or (ii) contractual arrangements with third party shareholders can be presumed to exercise decisive influence. If this presumption applies (and is not successfully rebutted), an authority does not need to provide evidence of the parent having actually exercised decisive influence by e.g. giving instructions.
• When the presumption clearly does not apply, can control be attributed on the basis of other links with the subsidiary? 
  
  For anything less than full capital or voting rights ownership, “decisive influence” over the infringing subsidiary must be established before imputing the latter’s conduct to the parent Such influence can arise based on “links” between the parent and the subsidiary, including economic, organisational, legal but also personal links (e.g., between a member of the infringing subsidiary’s board and the parent company). This is not negated by the fact that the board members must act independently under applicable laws. 

Finally, in its preliminary ruling in the Sumal case, the ECJ confirmed that the “no fault” liability also operates downwards. This means that “controlled” subsidiaries of infringing parent companies can be held jointly and severally liable for the anticompetitive conduct of the parent company to the extent that subsidiary’s economic activity is linked to the subject matter of the infringement. While it is yet to be seen how this will be applied in practice, it creates uncertainty as to whether such “downwards” liability may be transferred with a subsidiary following a disposal by the infringing parent company. It also may enable claimants to “forum shop” in which jurisdictions they may wish to bring a damages claim (i.e. not simply the jurisdiction of the infringing parent but also relevant subsidiaries).

These developments have serious implications for financial investors given that such “no fault” – downwards and upwards – liability entails very significant exposure to antitrust fines and potential damages claims. Accordingly, it is crucial for financial investors to be aware of these risks and take all necessary precautions to mitigate potential exposure:

• Bidders should undertake thorough antitrust due diligence during the acquisition process (including detailed questions regarding pending or threatened investigations and other compliance matters) and conduct a detailed review of not only the competition compliance records of the target but also the wider market to spot any inherent antitrust risks or history of cartel infringements.
• Beyond this, bidders will need to consider how to mitigate any risks arising from an infringement in deal documents – most prominently in the SPA – by incorporating, as a minimum, appropriately scoped warranties and indemnities.
• Following closing, bidders should carefully assess whether an in-depth compliance audit is warranted to identify potentially infringing conduct and take steps to address this as means to limit on-going / future liability. 
• Throughout the investment cycle, bidders will need to engage in greater compliance monitoring and risk control by ensuring that appropriate antitrust protocols and policies are put in place and supported by senior management.