Antitrust enforcers have been increasing pressure on institutional investors in recent years in cases where a portfolio company violates the antitrust rules. The 9th amendment of the German competition act (Act Against Restraints of Competition – ARC) which is currently in the legislative process contributes to this development. In addition, the 21st report of the German monopoly commission, an advisory body in the system of antitrust enforcement, indicates that antitrust enforcers will place additional attention on institutional investors.
Institutional investors were caught by surprise when the European Commission imposed a fine of approx. EUR 37 million on Goldman Sachs in 2014 for the involvement of the former portfolio company Prysmian in the so-called power cable cartel. According to the European Commission, the illicit agreements had commenced as early as 1999. Goldman Sachs apparently acquired a minority shareholding in Prysmian in 2005. This was sufficient for the European Commission to hold Goldman Sachs jointly and severally liable for antitrust infringement. The fining decision is currently pending a plea for annulment from Goldman Sachs before the Court of the European Union. For the time being, institutional investors are best advised to review potential acquisition objects carefully for antitrust infringements in the past and to include appropriate clauses in the contract with the seller.
The liability of holding companies for antitrust infringements of their subsidiaries is currently being introduced into German law. The proposed 9th amendment of the ARC will bring a synchronization with EU law. Under the draft new article 81 section 3a) ARC a fine can also be imposed on legal entities or associations of individuals who have had a direct or indirect influence on another legal entity or association of individuals, who in turn committed antitrust violations. The German Administrative Offences Act (Ordnungswidrigkeitengesetz) currently only allows the imposition of a fine on the legal entity which committed an antitrust violation. In the event of an antitrust infringement by a subsidiary, the parent company cannot be held liable. This results in a discrepancy with EU antitrust law, which relies on a broad concept of undertaking encompassing an entire corporate group. While the German Federal Cartel Office calculates fines already on the basis of the turnover of the entire corporate group, it imposes the fine only on the legal entity which has committed the antitrust violation. The legal entity can in turn be financially overwhelmed with the fine as calculations were based on the turnover of the entire corporate group. The liability for a fine now will be extended to parent companies without differentiating whether the parent company is a strategic or institutional investor. After the entry into force of the 9th amendment which is expected for the beginning of 2017, a scenario similar to the Goldman Sachs/Prysmian case could unfold.
Further restrictions are indicated in the 21st major opinion of the monopoly commission of September 20th, 2016. The monopoly commission points out that institutional investors can hold shares in various organizations within one industry. According to the monopoly commission this can present danger to competition, as the interest of diversified investors in the total market returns exceeds their interest in the individual performance of their portfolio companies in many economic sectors. Under such circumstances a fundamental interest in parallel behavior and a less intense competition between the portfolio companies in favor of total market returns could be assumed. Should this assumption become the basis of antitrust enforcement, it would significantly reduce the capabilities of institutional investors to determine the strategy of their portfolio companies. To refute the assumption presented by the monopoly commission, they would have to prove that their portfolio companies are operating independently. The monopoly commission is not the only one who has voiced concern as can be seen in the DOJ’s investigations into alleged antitrust violations in the US aviation industry. It can be assumed that competition authorities will become more active in this field over the next few years. In the words of Achim Wambach, the chairman of the monopoly commission, the participation of institutional investors will even play a role within the realms of merger control. The US investment manager BlackRock is currently holding minority participations in both Bayer and Monsanto. Competition authorities should take this into consideration when reviewing the proposed merger, suggests Wambach.
Dr. Moritz Lorenz, Partner ARNECKE SIBETH