Goldman Sachs Case Tests EU Will to Fine Private Equity InvestorAoife White
Goldman Sachs Group Inc. is set to be fined early next year in a European Union antitrust probe into an underwater power cables cartel that tests regulators’ ability to penalize private-equity investors.
Prysmian SpA, an Italian cable maker that Goldman Sachs Capital Partners bought in 2005, and the New York-based bank are among as many as 11 companies that face fines in the four-year-old probe, according to three people familiar with the case who requested anonymity because the process is confidential. The lender has said that the private-equity unit wasn’t aware of efforts to rig prices or share markets by companies that started before it bought the company.
The EU has become more aggressive in holding parent companies liable for bad behavior at subsidiaries, backed by several court rulings. Private equity owners, such as Goldman Sachs, haven’t managed to convince regulators that they should be treated differently.
“There is a tendency of private equity firms to think that because they are financial investors they aren’t in the same category as industrial group parent companies, but so far the case law on parental liability does not distinguish between financial and other investors,” said Jay Modrall, a Brussels-based lawyer at Norton Rose Fulbright LLP.
The EU says companies including ABB Ltd., Prysmian, Nexans SA and NKT Holding A/S conspired to fix the prices of undersea and underground high-voltage power cables sold to energy providers in Europe for at least 10 years. ABB may avoid a fine because it was the first to inform regulators about the cartel, two of the people said.
Antoine Colombani, a spokesman for the European Commission, declined to comment on a possible fine or on the liability of parent companies, saying the commission’s investigation is continuing.
Andrea Raphael, a spokeswoman for Goldman Sachs in New York, declined to comment. ABB and Prysmian also declined to comment. NKT referred to previous statements it made on the case in which it confirmed the receipt of the EU complaint.
Nexans, which booked a 200 million-euro provision in 2011 to cover a potential fine, is waiting for the EU’s decision, said Jean-Claude Nicolas, a spokesman for the Paris-based company. Nexans and Prysmian lost an EU court challenge seeking to restrict the probe over complaints that the scope of investigators’ initial searches was too broad.
Goldman Sachs Capital Partners bought Prysmian from Pirelli & C. SpA in 2005. Prysmian held an initial public offering in 2007 and Goldman Sachs reduced its stake, selling its last shares in 2009. That’s still enough under current guidelines to have to pay fines for the alleged anti-competitive conduct that the EU said started in 1998 and lasted until 2008.
Goldman Sachs will be held “jointly and severally liable for some or all of any fine levied,” the firm said in a 2011 regulatory filing. Pirelli also received a formal complaint from the EU in the case because of “its status as controlling shareholder of Prysmian until July 2005.” Pirelli declined to comment beyond the 2011 statement.
Christof Swaak, a lawyer at Stibbe in Brussels, said in theory parent companies have the opportunity to rebut the EU’s view that they are responsible for a subsidiary’s misconduct, but in reality “it is almost impossible.”
The EU courts have “in practice knocked down all the attempts to argue” that subsidiaries act independently of parent companies, said Romina Polley, a lawyer at Cleary Gottlieb Steen & Hamilton LLP in Cologne. She sees one route for parent companies that seek to challenge such decisions.
“The only thing I could envisage in this Goldman context is the temporary character of the shareholding,” Polley said in a telephone interview. “If it’s clear that it’s a very temporary investment, then it’s an open question for me whether that might be a way out.”
Parent companies can be blamed because subsidiaries don’t make business decisions independently, the EU’s highest court said in 2009 when it rejected an appeal by Akzo Nobel NV. It told Eni SpA in May that it would have to show that its Versalis unit acted with complete autonomy “not only at the operational, but also at the financial level” to escape a fine.
Garantovana, a Slovak investment company, also last year lost a challenge at the EU’s second-highest court over fines for a unit that fixed the price of steel. Even though it was a financial investor, it was liable because it appointed most of the unit’s board members, the court said.
Joaquin Almunia, the EU’s competition commissioner, has said such court rulings allow regulators to “rely on the presumption that the parent exercised decisive influence over its subsidiary” and “it is then for the parent to prove otherwise.”
Modrall says this puts an onus on companies to seek out any possible behavior that could result in cartel fines, which can be costly, time consuming and not always successful for a potential purchaser.
“By and large the people who are engaged in cartel behavior know it’s illegal and take steps to hide it, so it’s difficult to spot in due diligence,” he said in a telephone interview.