Goldman’s long shot

It is rare for antitrust and private equity to be mentioned in the same sentence, rarer still for them to occupy the headlines in the international media. But this is precisely what happened in April when Goldman Sachs was fined €37.3 million by the European Commission for participation by Prysmian, a Goldman Sachs Capital Partners (GSCP) portfolio company, in a global cartel.

We have seen particular interest, and some head scratching, from private equity clients as to how Goldmans (i.e. the topco in the group) could be held jointly liable alongside Prysmian. The question of control in private equity structures always raises tensions and we are used to considering this issue in the context of whether EU or national merger filings are triggered by new acquisitions. As with antitrust, the usual starting position for private equity firms is that they don't have overarching control that goes beyond the fund/GP making the acquisition: depending on the precise structure this can be the case. From a competition law perspective the question is whether an entity exercises “decisive influence” over the funds – this could be a partnership much higher up the structure than the individual fund/GP.

As expected, last month Goldman lodged an appeal of the Commission's decision with the EU’s General Court in Luxembourg. A summary of the grounds for appeal will appear in the coming weeks, but Goldmans will look to argue that it was merely a financial investor and should not be treated as a parent company to Prysmian for the period of its ownership.

So, is it business as usual then and the hype around this case is wrong?

No. Unless new facts come to light that undermine the decision (a non-confidential version is still being agreed with the parties and could take many months to be published), we would expect the General Court to side with the Commission. Other, smaller, private equity firms have previously appealed such decisions but the court has agreed with the Commission.

In the Commission’s view, Goldmans exercised decisive influence over Prysmian owing to the rights it held, including appointing Prysmian’s management and being directly involved in management decisions through its own employees. This is independent of its shareholding: Goldmans (GSCP) had a majority on acquisition in 2005, but from 2007 to 2009 this reduced to 43 percent before it exited completely in 2010. There is no suggestion that Goldmans or its employees had any knowledge of Prysmian's anti-competitive conduct.

There are two takeaways on competition law for the private equity industry:

1) Thorough due diligence should be conducted at the outset of an acquisition to flush out potential competition law concerns. Portfolio companies should also undergo regular audits and have competition compliance programs in place.

2) Consideration should be given at the outset to the difficult issue of how liabilities should be apportioned and indemnified if a portfolio company is found to have infringed competition law. In this regard the scope and time limitation of the usual indemnity by the fund in favor of the fund manager should be closely examined and carefully negotiated.

Simon Holmes and Stephen Williams are partner and managing associate respectively in the London office of King & Wood Mallesons SJ Berwin. Both specialize in competition law.