A regular briefing for the alternative asset management industry.
Since the well-publicised 2014 case involving the Goldman Sachs portfolio company, Prysmian, the private equity industry has been acutely aware that European competition law can impose liability on private equity funds and fund managers for infringements by their portfolio companies. This is a harsh doctrine, potentially applying to any investment – even a significant minority investment – where the financial investor has "decisive influence" over the underlying company. Such influence can arise in a variety of ways, including significant shareholdings, the appointment of board directors and the provision of certain types of business support. Liability does not require the investor to be at fault, and can continue even after a company is sold.
The doctrine of parental liability has been widely criticised, especially as it applies to financial investors. In particular, many argue that the rules are unfair because they can impose liability on separate legal entities when those entities were not involved in the infringing conduct and even if they took reasonable precautions to prevent the infringements. Indeed, there was no allegation of wrongdoing by Goldman Sachs in the Prysmian case, or by many of the parent companies in the more traditional cases that established the doctrine in the first place. However, the European Commission has stood firm in the face of these objections – supported by many decisions of the European courts, who rejected Goldman Sachs' final appeal in the Prysmian case earlier this year. In addition, many national competition authorities have taken a similar approach in the application of their domestic competition law.
In UK national law, the approach in analogous policy areas has been different. Generally, the legal boundary between different companies is respected and, even within any one company, it is clearer that taking reasonable steps can, in appropriate circumstances, act as a liability shield. For example, in the UK Bribery Act, companies may have a defence if they can show that, even though a bribe was in fact paid or received by associated parties, there were "adequate procedures" in place designed to prevent corrupt behaviour. The government has even provided guidance on how companies can design procedures that are good enough. A similar (although subtly different) approach applies where companies are alleged to have "failed to prevent" the facilitation of tax evasion. The policy is clearly designed to encourage businesses to do the right thing – and does not punish those that do.
However, UK domestic competition law has not followed that approach. In general, UK competition law follows the EU – although until recently the application of liability to financial investors had not been tested in the domestic setting. That may be about to change.
...these cases have been brought under UK law and could provide the UK court - or, perhaps, the government - with an opportunity to shift UK competition law away from the approach adopted in the EU...