Private Equity Companies and Parental Liability Appeal Court Hands Down Judgement in the Dutch Flour Cartel Pieter van Osch *

Journal of European Competition Law & Practice, 2017 NATIONAL DEVELOPMENTS 1of5 National and International Developments Private Equity Companies and Parental Liability Appeal Court Hands Down Judgement in the Dutch Flour Cartel Pieter van Osch * I. Background and summary In an appeal against the first ever cartel fine imposed by the Autoriteit Consument & Markt (Authority for Consumers and Markets, ACM ) on a private equity investor, the Rotterdam district court had to decide on the question whether the concept of parental liability applies to these firms without restriction. Applying the case law developed by the EU courts and upon a concrete review of the economic, organisational, and legal links between the parties, the court upheld the ACM s decision confirming that the concept of parental liability does not except private equity investors. 1 This case report discusses this recent judgement and its implications for cartel liability of private equity investors in the Netherlands, and perhaps beyond. II. Principles underlying parental liability The ACM and Dutch courts apply EU case law and principles when enforcing Article 6 of the Dutch Competition Act ( DCA ), the equivalent of Article 101 of the Treaty on the Functioning of the European Union ( TFEU ). More specifically as to parental liability, the College van Beroep voor het bedrijfsleven (Trade and Industry Appeals Tribunal, CBb ), the Netherlands highest administrative law court, has confirmed that Dutch law mirrors the concepts applicable and jurisprudence developed under EU law. 2 As background to the discussion of the judgement, it is useful to recall the basic principles underlying the concept of parental liability. The origins of parental liability trace back as far as 1972, when the European Court of Justice (ECJ) in ICI ruled that parental liability exists where a subsidiary, Key Points In its decision in the flour cartel, the Dutch Autoriteit Consument & Markt ( ACM ) for the first time attributed liability to a private equity investor for an infringement committed by one of its portfolio companies. On appeal the Rotterdam district court scrutinised the ACM s assessment of the economic, organisational, and legal links and upheld the decision. The court emphasised that the concept of parental liability does not equate private equity companies with pure financial investors. Building on EU precedent, the judgement provides helpful guidance as to when liability for infringements committed by a portfolio company may be imputed to private equity companies, even in cases where parental liability cannot be presumed. although having separate legal personality, does not decide independently upon its market conduct but carries out, in all material respects, the instructions given to it by the parent company. 3 It is not sufficient for the parent company to have had the ability to exercise decisive influence over the market conduct of the group company, the authority must also show that this influence was in fact exercised. To carry out this assessment, regard must be had to the economic, organisational, and legal links between them. It is well established that for there to be a single economic unit, it is not necessary for the parent to have had actual knowledge of or any degree of involvement in the infringement. 4 * Advocaat, partner with Van Iersel Luchtman 1 Judgement of the Rotterdam district court of 26 January 2017, ECLI:NL: RBROT:2017:588. 2 See e.g. CBb judgement of 18 November 2010, ECLI:NL:CBB:2010: BO5197, para. 3.2. 3 Case 48/69 (Imperial Chemical Industries v Commission), para. 133. 4 See Cases C-90/09 (General Quimica v Commission), para. 103 and C- 521/09 (Elf Aquitaine v Commission), para. 88. The Author 2017. Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oup.com

2of5 NATIONAL DEVELOPMENTS Journal of European Competition Law & Practice, 2017 If the subsidiary does not act independently, parent and subsidiary must be regarded as to constitute a single economic unit and the former can be held to account for the behaviour of the latter. As the cartel prohibition addresses the economic unit comprising the legal entities that together make up an undertaking, the concept of parental liability results in personal liability for the parent in the sense that it derives from the exercise of influence over the infringing entity. The effect of attributing liability to the parent company is to raise the ceiling of the fine, which applies to the undertaking rather than the legal entity. 5 III. The rebuttable presumption The case law of the European courts has developed a presumption on the basis of which parent companies holding all or almost all voting rights in the group company are deemed to have exercised control. 6 In this situation, and contrary to what may have been thought previously, 7 there is no need for the Commission to advance actual evidence of exercise and is able to rely exclusively on the presumption. 8 The level of the shareholding required for the presumption to take effect is not set in stone and the Commission appears to have been afforded a certain degree of discretion by the Courts as to when to rely on the presumption or to advance a theory that decisive influence was actually exercised. While used mostly in instances of a single shareholder, there have been a number of instances where shareholdings below 100 per cent were deemed to trigger the presumption. 9 Authorities may rely on a combination of direct and indirect participation totalling nearly 100 per cent 10 and as long as there is a chain of near-100 per cent shareholdings, the rebuttable presumption can equally be applied to indirect subsidiaries. 11 The presumption of liability can only be rebutted if the parent shows that it did not, at the relevant time, 12 5 For cartels starting after 1 July 2016, the 10 per cent cap is multiplied by the number of years in which the cartel was in effect, subject to a maximum of four. The maximum fine is, therefore, 40 per cent of the turnover in the calendar year prior to that in which the fine was imposed. 6 Case 107/82 (AEG-Telefunken v Commission), para. 50. 7 Case C-310/93P (BPB Industries and British Gypsum v Commission), para. 11 and Opinion of AG Mischo in Case C-286/98P (Stora Kopparbergs Bergslags v Commission), paras. 40 48. 8 See eg Case C-289/11P (Legris Industries v Commission), para. 62, Case C-521/09P (Elf Aquitaine v Commission), paras. 57, 80 and 96. 9 Case C-520/09P (Arkema v Commission), para. 42, (98 per cent shareholding), Case COMP/38.645 (Methacrylates) para. 265 (96.48 per cent shareholding) and Case COMP/38.543 (International Movers) para. 443 (99.87 per cent shareholding). 10 International Movers, para. 443. 11 Case C-508/11P (ENI v Commission), para. 48. constitute a single economic entity with its group company. 13 To do so, the parent company must adduce evidence that, on the basis of the organisational, economic, and legal links between them, the subsidiary in fact acted independently on the market. It is not sufficient for the parent to show that the group company acted independently when engaging in the illegal conduct, but rather it must show that its overall conduct on the market was independent. The presumption has up till now proven to be rebuttable in theory only, as it has been extremely difficult for defendants to meet the reversed burden of proof and show the absence of actual exercise in sole shareholder situations. 14 IV. Finding of control on the basis of factual evidence In the absence of a shareholding triggering the presumption, it is for the authority to adduce factual evidence that control was in fact exercised, requiring a concrete review of the economic, organisational, and legal links between the parties. In doing so, the authority may rely on a body of evidence, even if each of the individual indicia taken in isolation does not in itself have sufficient probative value. 15 The requirement to show actual exercise is of course pertinent only to situations where there are two or more shareholders with significant holdings in the infringing entity. It has been consistently held by the Courts that 50/50 joint-venture partners can simultaneously exercise control for the purposes of cartel liability. 16 Even in situations where shares are not evenly distributed, both parents may be held liable if both of them have veto rights on the commercial policy of the joint-venture. In addition to the level of the shareholding, which, depending on qualified majority and quorum requirements, will be of particular relevance, there are a number of indicia establishing the economic, organisational, or 12 Parental liability (and hence the rebuttable presumption) can only be used to attribute liability for the period in which decisive influence was (deemed) exercised, not for any preceding period, see Case T-314/01 (Avebe v Commission), para. 109 and Case T-347/94 (Mayr-Melnhof v Commission), paras. 400 403. 13 General Quimica, paras. 50 51, Elf Aquitaine, para. 65 and Case C-97/08 (Akzo v Commission), para. 65. 14 The ECJ ruled in Elf Aquitaine (para. 62) that the difficulty to rebut the presumption is not unacceptable, as long as it is proportionate to the legitimate aim pursued, if it is possible to adduce evidence to the contrary and to the extent the rights of the defence are safeguarded. 15 See eg Case T-132/07 (Fuji Electric v Commission), para. 183. 16 Avebe, para. 141 and C-172/12 (EI du Pont Nemours v Commission), para. 47. This also raises the question whether Article 101 continues to apply to arrangements between the parent and subsidiary. Despite the very precise wording used by the ECJ in EI Du Pont, it may be argued that it does not.

Pieter van Osch. Private Equity Companies and Parental Liability in the Netherlands NATIONAL DEVELOPMENTS 3of5 legal links required by the case law. These indicia usually relate to some degree of management power (overlapping directorships, consolidation of accounts, 17 or capital interdependence) or influence on commercial policies 18 (distribution relationships or information sharing arrangements). As Portielje 19 has shown, the existence of mere personal links between the boards of the two entities may suffice, even if the parent did not have any activities of itself or any involvement with the subsidiary whatsoever. V. The ACM s decision The flour sector was the subject of investigations in a number of Member States, including Belgium, France, and Germany. In the Netherlands, the ACM imposed fines totalling 81.6 million euro on 14 Dutch, Belgian, and German milling companies found to be involved in a single and continuous infringement involving a number of anti-competitive agreements, including a no-poach of each other s customers. 20 Meneba, one of the milling companies, was during the relevant period owned by two private equity companies. Capital Investments Group Limited ( CIGL ) indirectly held just over 41 per cent of the shares and strategic veto rights for a period of more than 3 years. Bencis Capital Partners B.V. ( Bencis ) through one of its funds subsequently acquired CIGL s stake in Meneba and held 92 per cent of the shares and voting rights. The ACM initially did not address its statement of objections to CIGL and Bencis but backtracked after two of the other defendants whose controlling shareholders were fined objected invoking the principle of equality. In a supplemental statement of objections, the ACM held that both CIGL and Bencis had successively exercised decisive influence over Meneba s conduct on the market and fined them EUR 450.000 and EUR 1.3 million, respectively. 21 Meneba s ownership structure was typical of investment funds as described in the Commission s jurisdictional notice. 22 Bencis Capital Partners B.V. ( BCP ) isthe ultimate parent company within the Bencis group. During the relevant period BCP held 100 per cent of the shares and voting rights in Bencis Buyout Fund (BBOF) II GP, one of its investment vehicles. BBOF II GP was the general partner in two limited partnerships (BBOF II A and BBOF II B) which held 36 and 47.8 per cent of the shares and voting rights in Bencis Meneba Investments B.V. ( BMI ), the remaining shares being held by external investors unrelated to the Bencis group. BMI in turn held 92 per cent in Meneba Holding B.V. ( Meneba Holding ) with Stichting Meneba, a foundation under Dutch law, holding the remaining 8 per cent. Meneba Holding held the entire share capital in Meneba Beheer B.V., which held 100 per cent of the shares in Meneba B.V. ( Meneba ). Meneba was the operational entity involved in the infringement. External investors 16.2% General Partner BBOF II A BCP BBOF II GP BMI 36% 47.8% 92% Meneba Holding B.V. Meneba Beheer B.V. Meneba B.V. BBOF II B General Partner Stichting Meneba As a result of Meneba s corporate structure, the ACM could not build its case solely on the rebuttable presumption to attribute liability to BCP. The ACM, therefore, resorted to a very detailed and careful analysis of the economic, organisational, and legal links between first, BBOF II GP and BBOF II A and BBOF II B and second, between BMI and Meneba Holding. With respect to the two funds, the ACM took account of the following factors. BBOF II A and BBOF II B together held nearly 84 per cent of the voting rights in BMI. In accordance with BMI s articles of association, the general meeting of shareholders had the right to appoint the management board and approve strategic decisions by simple majority. The two limited partnerships did not have legal personality and were represented by BBOF II GP as general partner, which exercised the rights in the shareholders meeting on their behalf. BBOF 8% 17 Case T-587/08 (Fresh Del Monte v Commission) para. 260. 18 Fresh Del Monte, para. 106. 19 Case C-440/11P (Commission v Stichting Administratiekantoor Portielje), paras. 66 68. 20 ACM decision in Case 6306 of 16 December 2010. 21 ACM decision in Case 6306_20 of 20 November 2014. The amount of Bencis fine was relatively low, due to it having divested its interest in Meneba in 2011. As a result Meneba s turnover was no longer taken into account when calculating the applicable 10 per cent statutory maximum. 22 See Commission Consolidated Jurisdictional Notice under Council Regulation (EC) No 139/2004 on the control of concentrations between undertakings, para. 15.

4of5 NATIONAL DEVELOPMENTS Journal of European Competition Law & Practice, 2017 II GP was also appointed as managing director of BMI and as a result controlled the latter both directly as a director and indirectly as general partner in the two funds. The ACM s assessment of the relationship between BMI and Meneba Holding is more detailed and particularly instructive. The factors on which the ACM relied in order to conclude that BMI had in fact exercised decisive influence over Meneba Holding s conduct on the market can be divided into four categories: (i) Veto rights on strategic decisions in the shareholders meeting. (ii) Influence over strategic decisions through the supervisory board. (iii) Overlapping directorships. (iv) Consolidation of Meneba Holding s financial results in its annual accounts. A. Veto rights on strategic decisions in the shareholders meeting At any given time during the relevant period BMI held at least 92 per cent of the voting rights in Meneba Holding. As Meneba Holding s articles of association did not contain a qualified majority requirement, BMI could autonomously determine strategic decisions, including relating to the number of supervisory board members and the approval of annual accounts. In accordance with its articles of association management board decisions relating to acquisitions were subject to prior approval by BMI as a priority shareholder. The ACM held that BMI s influence was further borne out by the fact that it had itself decided on the rights accruing to majority shareholders when it incorporated Meneba Holding in 2004. B. Influence on strategic decisions through the supervisory board In its capacity as majority shareholder, BMI had the authority to nominate two out of four supervisory board members, including the chairman, and to veto nominations by the other shareholder. Throughout the relevant period, several matters relating to Meneba Holding s policies were discussed in meetings of the supervisory board, including strategic plans, budget, and the subsidiary s commercial strategy. While it cannot be gleaned conclusively from the ACM s decision that the supervisory board 23 Judgements in Case T-24/05 (Alliance One v Commission) paras. 179 and 180, Case T-77/08 (Down Chemical v Commission), para. 85 and Case C- 90/09 (General Quimica v Commission), para. 106. 24 See judgements of the General Court in Case T-399/09 (HSE), para. 63 and Case T-587/08 Fresh Del Monte v Commission, para. 260. possessed veto rights, it is clear that the supervisory board did issue guidelines on these matters to management. The supervisory board also appears to have had direct involvement in Meneba Holding s pricing policies and production plans, with the chairman having critical influence on strategic acquisitions. Given that decisionmaking in the supervisory board required a simple majority, BMI effectively held a veto right, particularly because the chairman held a casting vote. C. Overlapping directorships BMI had nominated and appointed a high-ranking Bencis official as chairman of the subsidiary s supervisory board. Referencing EU case law, the ACM held that overlapping directorships must be considered not only to illustrate the intent to closely follow the subsidiary s day-to-day business but also that decisive influence has in fact been exercised. 23 D. Consolidation of financial results The consolidation of Meneba Holding s turnover in BMI s accounts and the fact that both entities presented themselves to the outside world as forming part of the same group of undertakings was held to be another indicator of the existence of an economic unity. While in and of itself consolidation cannot constitute a link (every parent company is required by law to do so) it is a factor the ECJ has on previous occasions held to point to the existence of a single economic entity. 24 VI. The judgement of the Rotterdam district court On appeal Bencis argued the absence of a legal basis for the attribution of liability as it had not itself been directly involved in the infringement. The appellants then argued that the parental liability doctrine cannot be applied to themasitsrolemustbeconsideredtohavebeenlimited to that of a pure financial investor. The financial investor defence, re-affirmed by AG Kokott in her opinion in Akzo, 25 makes it possible to rebut the presumption in the situation where the parent is an investment company that investsinothercompanieswithaviewtomakingaprofit but refrains from any involvement in the management or control of the company. 26 25 Opinion of AG Kokott, footnote 67. 26 See eg Case T-392/09 (1. Garantovana v Commission), para. 52.

Pieter van Osch. Private Equity Companies and Parental Liability in the Netherlands NATIONAL DEVELOPMENTS 5of5 In a clear and concise judgement, the Rotterdam district court made short shrift of the arguments of Bencis. Referencing Kendrion 27 and Portielje 28 the court rejected Bencis claim that the ACM had breached the principle of personal liability. The court also held that the parental liability doctrine does not except private equity companies. At the same time the rights of a private equity company do not necessarily equal those of a pure financial investor, the only relevant question being whether the portfolio company decided independently on its conduct in the market. In its assessment, the ACM had shown to the requisite degree that BBOF II GP and BMI had exercised decisive influence over their subsidiaries, establishing the necessary link between the operational entity and ultimate parent company GCP. Notably, the court appears to have given particular weight to the supervisory board s chairman s discretion (but not the obligation) to put matters to a vote in the general meeting. In such an event the supervisory board would be deemed to have resolved on the relevant matter in accordance with the outcome of the vote in the general meeting. Citing Toshiba, 29 the court held that it is immaterial whether the chairman ever made use of this right, the mere fact of this discretion existing necessarily having an impact on the subsidiary. While this may be justifiable if a body of evidence exists, I struggle to see the logic in this reasoning in the absence of other indicia. Rather, this reasoning seems to be circular and results in a situation in which the parent company is damned if they do and damned if they do not. VII. Conclusion This case bears similarity to the 2014 EU power cables cartel case in which the Commission fined Goldman Sachs EUR 37.3 million for involvement of Prysmian, one of its portfolio companies. Information about the power cables case is sparse as the decision has not yet been published but it appears that Goldman also appointed several of Prysmian s management and board members and took part in strategic decision-making. Also in this matter the parties unsuccessfully invoked the financial investor defence. The case is now on appeal before the General Court. 30 The Rotterdam district court s judgement confirms that under Dutch law not only group holding companies but also private equity firms can under certain circumstances be considered to form a single economic unit with their portfolio companies. Building on EU precedents, the judgement provides helpful guidance as to when liability for infringements committed by a portfolio company may be imputed to private equity companies, even in cases where parental liability cannot be presumed. Bencis is likely to appeal the judgement with the CBb and will be closely monitoring any news from Luxembourg in the meantime. doi:10.1093/jeclap/lpx045 27 Case C-50/12P (Kendrion v Commission), para. 47. 28 Case C-440/11P (Commission v Portielje), paras. 37 39. 29 Case T-104/13 (Toshiba v Commission), para. 112. 30 It appears that the arguments between the parties now focus on whether the presumption of liability is triggered by share capital or voting rights. The Commission relied on the presumption of liability even though the parent s shareholding totalled between 84 and 91 per cent of issued share capital only, whereas these shares equalled 100 per cent of the voting rights during the relevant period. See Mlex report of the hearing of 28 March 2017, Goldman Sachs say its investment in cable cartelist did not amount to control, available through www.mlex.com.