As most European private equity professionals will know, the approach taken by the European courts to competition law infringements poses grave dangers for financial investors. Where a “parent company” (which can include a private equity fund) exercises “decisive influence” over a subsidiary (or portfolio company), it can be held jointly and severally liable for the infringements of that underlying company – even in the absence of any blame on the part of the parent, and even if there was nothing that it could have reasonably done to prevent the wrongdoing. And where the portfolio company is wholly-owned (or almost wholly-owned), a presumption is made that decisive influence is exercised by the parent, and that presumption has proved virtually impossible to rebut.

This is not merely a theoretical risk, as Goldman Sachs has found out in the now-famous (and currently under-appeal) case of Prysmian, the undersea cable company that a Goldman fund owned until 2010 (although it gradually reduced its stake from 2007 onwards). In that case, Goldman Sachs was held to have joint and several liability for €37 million of the total fine of €104 million imposed on Prysmian for its alleged participation in a cartel. That cartel pre-dated Goldman’s investment, and there was no allegation that Goldman had any knowledge of, or involvement in, the anticompetitive behaviour.

Although the general legal principles are now well established, many in the private equity industry have joined corporate groups in criticising this European jurisprudence, arguing that it leads to perverse outcomes because it disincentivises active stewardship. But practitioners are not alone in voicing concerns, and a recent academic contribution to the debate makes a compelling case that the European approach is legally incoherent and should be re-evaluated.

The article, written by Andriani Kalintiri at the London School of Economics, argues that the courts have been reluctant to engage in a satisfactory discussion of the theoretical basis for holding parent companies liable for the transgressions of what are – legally speaking – third parties. The author does not argue that there are no theoretical justifications for imposing such liability; rather, she contends that the current basis on which liability has been imposed – that the companies constitute a “single economic entity”, and therefore a single undertaking – does not stack up as a matter of law, and creates a number of practical problems. She urges the courts to choose between two alternative theories in further developing the concept.

The current approach of the European courts to parental liability can be traced back to 2004, and a case involving the Dutch multinational, Akzo Nobel. Dr. Kalintiri argues that this case marked a change in the way that courts approached the question: it established both the principle that no link was required between the parent company and the wrongdoing, and the presumption of decisive influence where a subsidiary was wholly-owned. Dr Kalintiri does not criticise the fact that competition law is addressed to “undertakings”, rather than legal entities. She points out that this is a more satisfactory basis for assessing and controlling the anti-competitive behaviours that are the target of the EU-wide rules. However, in attributing liability only to parent companies (rather than other companies in the group), Dr Kalintiri points out that choosing to treat corporate groups as single economic units (and therefore single undertakings) is not, on its own, enough to explain the courts’ approach: additional considerations must have been brought to bear. It is a failure to articulate those additional considerations in a coherent way that makes it impossible to discern the actual basis of liability.

For example, the fact that the parent is apparently being penalised for the behaviour of a third party would seem to contravene one of the fundamental principles of EU competition law: that liability is personal. The courts have attempted to resolve this contradiction by asserting that the parent is “deemed” to have committed the infringement itself. But that then begs the question: what (deemed) behaviour on the part of the parent has given rise to the liability? That question, in turn, gives rise to the question that many industry practitioners have been asking: What is a private equity firm supposed to do in order to protect itself from inheriting liability? If the law is supposed to serve a deterrence function, deeming a company to have behaved in ways that it did not hardly furthers that purpose (quite apart from being unjust). Indeed, the courts have been consistent in penalising the parent even when that parent has taken steps to eliminate the anticompetitive conduct, or even explicitly instructed the subsidiary not to take an unlawful action and been ignored.

Dr Kalintiri explores other possible grounds for holding parent companies liable, and identifies two front-runners: “failure to exercise vigilance”, meaning that the parent has breached a duty to take steps to seek to prevent the subsidiary from breaching the legal rules; and “enterprise liability”, whereby those that benefit from illegal conduct are also subjected to its risks. The author identifies some issues with each of these, but (rightly) concludes that a formulation based on breach of a duty to exercise vigilance is the more promising – in part because of the difficulty of reconciling the “enterprise” justification with established legal doctrine.

It is fair to say that neither the European Commission nor the courts have yet indicated that they are open to any reform in this area; indeed, they have been trying to steer national competition authorities towards the “notion of undertaking” to impose fines on parent companies. However, to most observers, it is high time for a re-evaluation of this unprincipled line of jurisprudence, and Dr Kalintiri has made a very constructive contribution to that debate.

Andriani Kalintiri, Revisiting parental liability in EU competition law, E.L. Rev.2018, 43(2), 145-166.