CJEU: Investors are liable for portfolio non-compliance
For a long time already, (inter-)national antitrust regulation bear the notable risk for parental liability. It is based on the long-established European-law doctrine of the ‘economic unit’ (wirtschaftliche Einheit): Parent companies may be held liable for the payment of antitrust fines (jointly and severally with affected subsidiaries), even if they did not actually participated in the antitrust infringement itself.
Presumption of Decisive Influence
On January 27, 2021, the European Court of Justice (“CJEU“) now amplified previous rulings by confirming Goldman Sachs’ investment fund’s (“GS“) liability for an indirect affiliate’s participation in a cartel. The liability was based on the fund’s 100% voting rights over the affiliate, even though it held equity well below 100% during part of the relevant period. Although there was no evidence that GS was involved in, encouraged, or even knew about the cartel, it was held jointly and severally liable for EUR 37 million of the about EUR 100 million cartel fine imposed (the fine was proportionate to GS’ four-year investment).
Years of European case law have resulted in liability-relevant ‘decisive influence’ being (reputably) presumed if a holding company fully/predominantly owns an affiliate. In the case at hand, the CJEU reemphasised that a holding company, including a financial investor, must provide a significant level of proof to reverse this presumption. In the case at hand the court derived GS’ ‘decisive influence’ from a set of consistent evidence, explicitly mentioning indicators such as, e.g.,:
- the power to appoint board directors, and
- such board directors’ broad powers within the affiliate (g., in strategic decision-making, by serving in key committees);
- the power to call shareholder meetings and propose the removal of individual board directors or the entire board;
- existing ties of the parent company with board directors (here: at least 50% of the board); and
- the parent company generally behaving as an ‘industrial owner’ favouring transactions between its subsidiaries.
Compliance Management and Group Oversight
From an antitrust and compliance governance perspective, the ruling clearly highlights
- the importance of having an effective (antitrust) compliance program in place within an controlled portfolio companies; as well as
- the need to conduct dedicated (antitrust) compliance due diligence upon acquisition of portfolio companies to avoid taking over unknown antitrust exposure.
Following current compliance developments, corresponding regulations, and their enforcement in Germany and globally it is, however, important to think outside of the box: The ‘economic union’ doctrine (or similar concepts) and derived parental liability are likely to be applied in other compliance areas as well. For example, the General Data Protection Regulation (GDPR) provides for a comparable fine concept. For business corporations and portfolio management groups having `decisive influence’ will not even be questionable but a given factor.
This makes effective compliance management and related group oversight an important topic overall. Parent companies need to ensure that their controlled affiliates stay compliant. Not only must operating companies maintain risk-adequate compliance programs, but parent companies must also have in place effective governance structures and monitoring mechanisms to gain proper oversight on their portfolios’ compliance exposure as well as on the effectiveness of their compliance programs.
In case of any questions, contact us! As globally experienced sparring-partner we are happy to support you in establishing, testing, and improving your compliance management and group oversight.
See Appeal Case before the European Court of Justice C-595/18 P