Q&A: Competition law

Why are investors and fund managers focused on competition laws now more than ever?

Girardet: Portfolio companies who are found to have breached competition laws can be subject to lengthy investigations, large fines and reputational damage. That has clear and direct consequences for the fund. However, the consequences can go beyond the portfolio company concerned. In recent years, the European Commission has made increasing use of its powers to fine parent companies for the anti-competitive conduct of their subsidiaries and, although so far relatively rare, private equity structures are not immune from this practice. 

The test under competition law is whether a “parent” has exerted ‘decisive influence’ over the “subsidiary”. This is a low threshold and liability can be triggered even if the parent had no involvement in or awareness of the breach and did not encourage the subsidiary to commit such a breach.

What are the risks for fund managers?

As well as the value loss for the fund caused by a portfolio company being held liable, it is also possible that a fund manager could itself be held liable for the activities of one of its portfolio companies.

Penalties will also be accompanied by wide publicity and serious reputational damage.The fact that a subsidiary has been sold does not release the parent from liability. In 2011 it was reported that Goldman Sachs is being pursued by the European Commission in connection with the anti-competitive activities of one of its former investment companies, Prysmian. GS Capital Partners Funds owned Prysmian for part of the period during which the alleged cartel activity took place. The Commission has yet to rule on this case.  

Fund managers could also potentially be involved in any private action brought by third parties seeking damages as a result of loss arising from the cartel.

What potential ramifications are there?

Involving parent companies can have a significant impact on the amount of fine imposed, as the fine can be based not only on the turnover of the subsidiary itself, but on the worldwide turnover of the whole group. For a fund manager, this could potentially include the turnover of all portfolio companies.

There is also a risk that investor directors could face proceedings for disqualification. Investor directors are not expected to be experts in competition law; however, all directors (including non-executives) are expected to know that cartel activity is a very serious infringement of competition law (such as arrangements with competitors to fix prices, engage in bid rigging or disclose commercially sensitive information).

Further a director could be held responsible where they have reasonable grounds to suspect a breach but have not taken steps to prevent it or ought to have known that the conduct amounted to a breach.  

What can fund managers do to prevent this?

The most effective mitigation strategy is prevention.  

In relation to existing portfolio companies, fund managers should consider whether there are appropriate systems in place throughout the group to prevent and detect competition law infringements. A core requirement of any programme is a clear commitment from all directors and managers to adhere to competition law. Funds should also consider appointing a senior executive to ensure that suitable compliance procedures are in operation.

In relation to prospective portfolio companies, fund managers should consider whether their due diligence processes are sufficient to catch potential competition law breaches and that appropriate warranties and indemnities are in place.

What can GPs on portfolio company boards do if they spot risks?

Where areas of risk have been spotted, the company should consider implementing specific riskmitigation procedures.  For example, the company could create a system for employees to report contacts with competitors so that these can be monitored. Other compliance measures 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. 
If an infringement is detected, GPs should consider ‘blowing the whistle’ and approaching the competition authorities under a leniency programme to benefit from immunity or reduced fines.