Introduction

Under European Union (the “EU”) law, a parent company can be liable for anti-competitive conduct of its subsidiary when the parent exercises decisive influence over its subsidiary, and case laws have provided for a rebuttable presumption of such decisive influence where a parent company holds, directly or indirectly, all or almost all of the capital in a subsidiary that has committed an anti-competitive infringement. In the recent European Court of Justice (the “ECJ”) case of The Goldman Sachs Group v European Commission (C-595/18P, EU:C:2021:73), it was further confirmed that a company holding all the voting rights in its subsidiary could similarly incur parental liability for cartel activities undertaken by that subsidiary, even where the parent company does not hold all or almost all of the share capital in the subsidiary.

The relevant EU law on the
prohibition of cartel activities

Article 23(2) of Council Regulation (EC) No. 1/2003 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty establishing the European Community provides that the European Commission (the “Commission”) may impose fines on undertakings and associations of undertakings where, either intentionally or negligently, they infringe Article 101 or 102 of the Treaty on the Functioning of the European Union (the “TFEU”). Article 101 of the TFEU provides that agreements between undertakings, or decisions by associations of undertakings that have the object or effect of preventing competition in the EU internal market, such as price fixing or the limiting of production and technical development, shall be automatically void. Article 102 of the TFEU prohibits “undertakings of a dominant position within the internal market” from taking part in such activities in general.

Background of the case

The Goldman Sachs Group (“Goldman”) was the indirect parent company of Prysmian SpA (“Prysmian”) and its wholly-owned subsidiary (together with Prysmian, the “Prysmian Group”), which were established in Italy. Goldman initially held 100% of the Prysmian Group through its subsidiary fund, the GS Capital Partners V Funds (the “Funds”). Such holding decreased to 84.4% in July 2006 following two divestments. In May 2007, Prysmian went public on the Milan Stock Exchange (the “Listing”), though Goldman still held 100% of the voting rights in Prysmian up until the Listing. Additionally, Goldman was also able to, inter alia:

1.        appoint the members of the various boards of directors of Prysmian;

2.        call Prysmian shareholders to meetings and propose the revocation of directors; and

3.        participate in Prysmian’s Strategic Committee through Goldman’s own directors in the Merchant Banking Division.

The decision by the Commission

In 2014, the Commission found that Goldman and 25 other undertakings, including the Prysmian Group, had participated in a cartel, constituting a single and continuous infringement of Article 101 of the TFEU (the “Infringement”). In making its decision, the Commission presumed that Goldman had a decisive influence over the market conduct of the Prysmian Group during the period prior to the Listing, and also in fact had such an influence over the Prysmian Group. The relevant factors considered included Goldman’s economic, organizational and legal links with the Prysmian Group, such as its shareholding and voting rights in the same. Goldman was thus held liable for the Infringement as the parent company of the Prysmian Group and was fined roughly €37 million jointly and severally with the Prysmian Group.

Procedural history below

Goldman appealed to the EU General Court, but it was held that where a parent company holds all the voting rights associated with its subsidiary’s shares, that parent company is akin to the sole owner of that subsidiary. This is because that parent company would be able to determine the economic and commercial strategy of the subsidiary concerned. The appeal was therefore dismissed.

Goldman’s appeal to the ECJ

In its subsequent appeal to the ECJ, Goldman argued that the General Court was wrong in finding the Commission had not erred in relying on the presumption of decisive influence Goldman had over the Prysmian Group. It submitted that its interest in the Funds was only approximately 33%, and the holding of the Funds in Prysmian’s capital was only approximately 91% and then approximately 84% prior to the Listing. As such, Goldman argued that the presumption of actual exercise of decisive influence laid down by EU case laws is applicable only where the parent company holds “all or virtually all” the capital of its subsidiary, but does not apply to Goldman’s holding of voting rights in Prysmian. As a result, Goldman should not be liable for the anti-competitive behaviour of its investee company.

To this argument, the ECJ held that the Commission arrived at the presumption of decisive influence not because of Goldman’s holding in Prysmian’s capital, but because of its 100% voting rights associated with Prysmian’s shares. The ECJ affirmed that a parent company holding all the voting rights associated with its subsidiary’s shares is able to exercise decisive influence over the conduct of the subsidiary, just like a parent company holding all or virtually all the capital of its subsidiary. Further, the Commission was not bound to rely exclusively on such a presumption, but instead may also make inference from the evidence showing Goldman in fact exercised a decisive influence over Prysmian. As a result, the ECJ held that the General Court did not err in law and the Commission was entitled to rely on the presumption that a parent company exercises decisive influence over its subsidiary’s market conduct.

Application to the parent/subsidiary
cartel situations in Hong Kong

Similar to Article 101 of the TFEU, section 6(1) of the Competition Ordinance (Cap. 619, the Laws of Hong Kong) also prohibits the making of agreements between undertakings that have the object or effect of preventing competition in Hong Kong (the “First Conduct Rule”). As such, the above principles laid down by the ECJ may have implications on the application of the First Conduct Rule in Hong Kong in relation to the parent/subsidiary cartel situation in two contexts.

First, paragraph 2.6 of the Guideline on the First Conduct Rule (the “Guideline”) provides that the First Conduct Rule does not apply to conduct involving two or more entities if the relevant entities are part of the same undertaking. Paragraph 2.9 of the Guideline further provides that an agreement between a parent company and its subsidiary will not be subject to the First Conduct Rule if the relevant controlling companies exercise “decisive influence” over their respective subsidiaries. Applying the ECJ’s judgment in the above case, any anti-competition agreement between a parent company and a subsidiary in which the parent holds all the voting rights may in fact fall outside the scope of the First Conduct Rule.

Another context for the application of the judgment in the above case is whether certain entities will together form an undertaking, so that the infringing conduct of one entity is attributable to the other entities on the basis they are comprised within the same undertaking as in the above case. The EU case of Akzo Nobel and Others v Commission (Case C 97/08P, EU:C:2009:536), which laid down the parental liability doctrine and the rebuttable presumption of decisive influence, has already been applied in the Hong Kong case of Competition Commission v W Hing Construction Co Ltd & Ors [2019] 3 HKC 486. Accordingly, it is also likely that the expansion of the presumption of decisive influence by the ECJ in the above case will be adopted by the Competition Tribunal in the future.