Draft for the 9th amendment of the ARC: Increased liability risks for investors in transaction business

Introduction of corporate liability (independent of negligence) for antitrust fines

In currently still applicable German antitrust law, the so-called separation principle and/or personality principle applies. If a person responsible for a legal person commits an antitrust breach, an administration fine can only be imposed on “this” legal person (section 30, para. 1 of the German Administrative Offences Act, OWiG). No liability (independent of negligence) has existed for parent companies or investors to date in Germany. Punishment of group companies other than the “perpetrating” companies can only be considered according to applicable law if a reproachable infringement of supervisory duties can be proven (section 130 of the German Administrative Offences Act).

With the introduction of section 81, para. 3a of the ARC government draft, the ninth amendment of the ARC provides for abandonment of this principle and corporate liability according to the Union model. If the managing person of a legal person has committed an antitrust breach, an administrative fine can also be determined “against further legal persons”, if they have “formed the company [...]” and have exercised “directly or indirectly a controlling influence” on the perpetrating company at the time of committing the offence .

According to the draft, private equity investors and/or  group parent companies are also liable 

The draft would thus enable the parent and/or group parent company of a subsidiary and/or  portfolio company involved in an antitrust breach to be fined, provided that the companies constitute a single company (“economic entity”) and that the parent company exercised controlling influence on the subsidiary/portfolio company. In this case, the parent company and the subsidiary/portfolio company should be jointly and severally liable for the fine. In this respect, a distinction is not is made between whether the parent is a strategic or an institutional investor.

Adjustment of Union law and antitrust law practice of the European Commission: the case of Goldman Sachs

The intended change aims at further adjusting the German antitrust law to EU antitrust law practice. The reasoning of the draft bill expressly provides for the definition of undertakings to be construed in accordance with the Union legislation. 

In accordance with EU antitrust law practice, it is difficult (if not even actually impossible) to refute the existence of an “economic entity” and “controlling influence” of a parent company in case of a wholly-owned subsidiary. In case of lower participation, it must be proven based on the economic, organisational and legal circumstances whether the parent company manages the subsidiary in a way that the subsidiary no longer operates independently from the parent company in the market. The same principles also apply to (minority) financial participations. Goldman Sachs made this experience in April 2014 due to a decision made by the European Commission (“Commission”). The Commission imposed fines totalling to a little more than EUR 300 million on eleven companies, since they had agreed priced for undersea cables between 1999 and 2009. The cable producer Prysmian was part of the Goldman Sachs portfolio between 2005 and 2010. In this respect, Goldman Sachs was  imposed a fine of EUR 37 million. The Commission made Goldman Sachs partly responsible for the anti-competitive behaviour of Prysmian, since the bank exercised controlling influence on Prysmian. In the view of the Commission, the fact that Goldman Sachs knew nothing about the arrangements and only had a participation of a little a more than 40% was of no consequence.¹

No avoidance of liability by means of restructuring - the so-called “sausage gap” should be closed

By introducing corporate liability, the previous legal structures to escape payments of fines by internal restructuring or transfers of assets would to a large extent no longer be possible. In addition, the draft bill provides for that fines can also be imposed on successors in case of legal and economic succession. This way, the legislator seeks to close a legal loophole, the so-called “sausage gap”, which helped a company participating in the sausage cartel to escape payment of fine by means of various restructurings. 

In accordance with the GWB, “those” who have infringed the antitrust law are obligated to compensate the damage arising therefrom. For example, a customer may thus claim damages for excessive prices as a result of the cartel from the  “perpetrating companies” participating in the cartel, however, not from the parent company or the investor of the perpetrating company, pursuant to the previously applicable law. It is questionable as to whether the EU Directive on damages for the infringement of antitrust law and the 9th amendment to the ARC will change anything in this respect.  The ninth amendment to the ARC does not include the wide European definition of undertaking in the provision on damages. It cannot however be excluded that injured parties, based on EU law and the extension of liability for fines to group parent companies, argue that group parent companies can also be held liable for the antitrust damage caused by their subsidiaries.

Conclusion and Recommendations for Action

With the draft bill on the ninth amendment to the GWB coming into effect, the liability risk for group parent companies and investors for antitrust infringements by their portfolio companies would considerably increase. The sanctions for such infringements can be serious. A thorough and careful antitrust examination of an investment object would be more important than ever.

In this case, it would be strongly recommended to carry out an extensive and detailed antitrust due diligence check prior to intended participation purchases. Also, within the framework of a purchase agreement, greater attention would have to be paid to comprehensive guarantees, security and indemnities. Should an extensive investigation not be possible before the acquisition of a participation, this would have to be undertaken subsequent to the transaction.

¹ Goldman Sachs is currently challenging the decision to impose a fine before the court of the European Union.