New Winds in the Liabilities of Venture Capital and Private Equity Firms Based on recent European Court Case Practices

Blogs May 14, 2019

M&A and Finance

The European Court (EC) passed a significant ruling on 14 March 2019 in the case C-724/17 specifing the principle of economic continuity test and determination of the undertakings liable to provide compensation. To generalize, the main question is about lifting the corporate veil and does the undertaking have private liability towards third parties due to breach of the Article 101 TFEU (competition law matters).

The facts of the case where about purchased companies, that were initially part of the cartel and were voluntarily liquidated although the commercial activities continued within the purchasers. Hence, the ruling addressed a fundamental question – who are the persons liable for antitrust damages.

The Advocate General, Nils Wahl, stipulated that from an economic perspective therefore, the same undertaking that committed the infringement is held liable for both public sanctions and private law damages. Considering that public and private enforcement are complementary and constitute composite parts of a whole, a solution whereby the interpretation of ‘undertaking’ would be different depending on the mechanism employed to enforce EU competition law would simply be untenable. Based on that, the Article 101 TFEU must be interpreted as meaning that […], in which all the shares in the companies which participated in a cartel prohibited by that article were acquired by other companies which have dissolved the former companies and continued their commercial activities, the acquiring companies may be held liable for the damage caused by the cartel in question.

What about acquiring the target company?

Taking the latter into account, now think about your mergers and acquisition transactions and especially the limitations of liability (including third party’s claims) and the representations and warrants. In practice, I have not seen a target company that has stipulated openly being in breach of competition rules before the breach has been discovered by a public authority. Dependent on the domestic legislation under which the transaction has been concluded, it is quite plausible that the time limits or the limits of liabilities are applicable if the competition breaches are not specifically addressed (without any time or compensation limits).

What about managing the target company?

The before mentioned court case has effect also on managing companies as the breaches of antitrust laws pierce the corporate veil (as ruled in the beforementioned EC C-724/17 case) and the investor may have joint liability for damages. The notion of investor’s liability comes down to the definition of control - decisive influence - over the target company. This matter was addressed in last year’s significant ruling of the EC: case T-419/14: “The Goldman Sachs Group Inc versus the European Commission” .

In that case, the Goldman Sachs Group Inc Fund (hereinafter “Goldman Sachs”) was a shareholder of a company that was part of a cartel and Goldman Sachs was held jointly liable for the damages due to having a decisive influence over the company.

Burden of Proof and Decisive Influence

Starting from the burden of proof, the EC stated the following:

a) it is sufficient for the Commission to prove that the subsidiary is wholly owned by the parent company in order to presume that the parent exercises a decisive influence over the commercial policy of the subsidiary. The Commission will then be able to regard the parent company as jointly and severally liable for the payment of the fine imposed on its subsidiary, unless the parent company, which has the burden of rebutting that presumption, adduces sufficient evidence to show that its subsidiary acts independently on the market (see judgment of 10 September 2009, Akzo Nobel and Others v Commission, C‑97/08 P, EU:C:2009:536, paragraph 61 and the case-law cited) ;

b) As the Commission observes in the context of this complaint, the applicant does not mention specific emails or minutes which substantiate its claim. However, as is clear from the case-law cited in paragraph 45 above, in order to rebut the application of the presumption of actual exercise of decisive influence, it is for the applicant to adduce evidence showing that, in reality and contrary to what the Commission presumed, the interveners determined their commercial strategy independently.

Therefore, the burden of proof is reverse and the company itself must prove that it has not breached the antitrust laws or as in this case, has not had decisive influence over the company.

What was regarded as decisive influence?

a) The Commission was entitled to base its conclusion that Goldman Sachs exercised decisive influence over the interveners on,

  1. first, its power to appoint the members of the various boards of directors of company,

  2. second, its power to call shareholder meetings and to propose the revocation of directors or of entire boards of directors,

  3. third, the delegated powers of the PIA Employee Directors on the boards of directors and their participation in the strategic committee,

  4. fourth, the receipt of regular updates and monthly reports,

  5. fifth, the measures listed by the Commission to ensure continuation of decisive control by the applicant after the initial public offering and,

  6. sixth, the evidence that the applicant acted as an industrial owner.

  7. Accordingly, it must be held, following an in-depth review, that the Commission was entitled to consider, without making any error, that Goldman Sachs exercised decisive influence not only before the IPO date but also during the entire period from 29 July 2005 until 28 January 2009.

As the burden of proof is reverse, the (actual or implicit) knowledge of the investor (Goldman Sachs) about the antitrust activities of the target company is furnished with the concept of decisive influence. Therefore, it is utmost crucial for any venture capital or private equity company to evaluate the extent of influence they have over a company regardless of the actual information received.