Keeping the trustbusters happy

Goldman's antitrust fine over Prysmian is a cautionary tale for all financial sponsors. How can GPs avoid a similar fate?

There’s a few cautionary lessons to be learned from the Goldman Sachs antitrust fine that came out this month. First, the bank was hit with the €37 million penalty because EU antitrust regulators felt it had enough control over Prysmian to stop the undersea cable company from allegedly colluding to fix prices. Second, even if Goldman had no direct involvement in or even awareness of the cartel, it could still be held liable. And third, EU antitrust regulators are flexing their muscle in order to let parent companies know they have a responsibility for the anticompetitive conduct of their subsidiaries.

For private fund advisors, this is a warning shot. And while each antitrust case will rest on specific facts and circumstances, the type of control Goldman held over Prsmian was not all that different from that which fund advisors typically have at portfolio companies (the firm held majority voting power, nominated individuals to its board of directors and participated in the company’s strategic decisions).

So with antitrust regulators baring their teeth, how does a private fund manager avoid Goldman’s unfortunate fate with Prysmian?

Goldman’s own competition lawyers tell us the best thing to do is simply factor in more antitrust considerations into the due diligence process – for instance, reviewing key business contracts for antitrust compliance, digging in to the group’s relationship with competitors and requesting disclosure of past or ongoing dealings with competition authorities. GPs could also consider asking for warranties and indemnities that allow the buyer to recover losses caused by the target’s breach of competition law.

There’s also a need to dive deeper into the activity of current portfolio companies, legal experts warn. Here GPs need to consider whether the right policies and procedures are in place at the portfolio company to prevent and detect competition law infringements. For instance, the company could set up a system for employees to report contacts with competitors, so that these can be more easily monitored. Other compliance measures might include pre-approving membership of any industry or sector associations; providing staff with job-specific compliance training; and drafting employment contracts to include competition compliance provisions.

In the event that the team does discover a breach of competition law, legal sources advocate owning up early. Approaching competition authorities and offering testimony in exchange for leniency could mean immunity or reduced fines. And even if a GP isn’t the first to “blow the whistle”, reaching out to regulators with more information often results in a reduced fine.

Considering that EU antitrust fines can reach up to 10 percent of a group’s total turnover (which in the case of private funds, could mean the entire portfolio’s turnover) honesty may not only be the best policy, but also the cheapest.

But before it even gets to the point, and in light of Goldman’s experiences, fund advisors will likely be taking more evasive action to keep clear of the trustbusters’ crosshairs.