Antitrust and Trade Regulation Alert
August 2007
Author:
Neil A. Baylis
+44.(0)20.7360.8140
neil.baylis@klgates.com
www.klgates.com
European Commission Ordered to Pay
Damages for its Errors in Assessing a Merger
Introduction
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The European Court of First Instance (“CFI”) has ordered that the European Commission
should pay damages to Schneider Electric SA (“Schneider”) for the losses it suffered following
the Commission’s unlawful prohibition of Schneider’s merger with Legrand SA.
This is the first time that the Commission has been required to compensate a company
consequent to a merger prohibition decision.
Legal Background
The EC Merger Regulation (“ECMR”) requires that mergers where the parties’ revenues
exceed a certain size must be pre-notified to the European Commission in Brussels.
Since its introduction, the Commission has reviewed some 4,500 mergers. As in the U.S.,
the Commission adopts a two-stage process. Straightforward cases can be cleared after
an initial 25 working day period. Cases raising concerns are referred for a second phase
of inquiry, which normally lasts 90 working days. The parties may offer commitments to
avoid a second phase inquiry or to avoid a prohibition at the end of the first or second phase
of inquiry.
Since the introduction of the ECMR, only 20 mergers have been prohibited outright by the
Commission (as opposed to cleared subject to conditions).
The Merger
In 2001, Schneider proposed a merger with its competitor Legrand. Both companies were
French and their revenues exceeded the thresholds set out in the ECMR. On examination,
the Commission found that the merger would create the world’s number one supplier of
electrical equipment, industrial controls and automation systems, with prospective sales of
12.4 billion euros and 94,000 employees.
The Commission therefore decided in October 2001 to block the proposed merger.
Accordingly, Schneider was obliged to sell off the 98.2% stake it had acquired in Legrand
to a consortium of investors led by KKR and Wendel Investments.
Council Regulation (EEC) 4064/89 on the control of concentrations between undertakings. Replaced in 2004
by Council Regulation 139/2004/EC on the control of concentrations between undertakings.
The ECMR refers to “concentrations” which are any transactions bringing about a change of control of one or
more business entities. The ECMR therefore applies to acquisitions and disposals, mergers, joint ventures and
restructurings.
There are two revenue tests, if either is met, the merger will qualify for investigation. Test 1: the parties’ combined
worldwide revenues exceed 5 billion euros; and two or more parties have EU-wide turnover exceeding 250
million euros; unless both parties achieve more than two thirds of their EU-wide turnover in one and the same
Member State. Test 2: the parties’ combined worldwide revenues exceed 2.5 billion euros; and two or more
parties have EU-wide turnover exceeding 100 million euros; the parties together achieve more than 100 million
euros in three or more Member States and each party achieve at least 25 million euros of revenue in those three
or more Member States, unless both parties achieve more than two-thirds of their EU-wide turnover in one and
the same Member State.
Antitrust and Trade Regulation Alert
Schneider’s First Court Action
Schneider’s first response was to appeal against
the Decision reached by the Commission under the
ECMR. This appeal was to the Court of First Instance
(“CFI”). The CFI found in favour of Schneider -- it
analysed the Commission’s Decision and found it to
be full of “errors and omissions.” Accordingly, the
Commission’s Decision was annulled, and therefore
Schneider and Legrand were, in principle, free to
re-enter into a merger agreement (although such an
agreement would have required a further notification
to the European Commission).
In practice, the two companies decided not to merge.
Schneider’s Second Court Action
In October 2003 Schneider took the unusual step of
bringing an action for damages directly against the
Commission under Article 288 EC Treaty.
Article 288 states that: “the community, shall, in
accordance with the general principles common to
the laws of the Member States, make good any damage
caused by its institutions or by its servants in the
performance of their duties.”
In the Schneider case, the CFI applied the principle
that, for a damage remedy to be available, a breach
of Community law must be sufficiently serious that
the Commission can be said to have manifestly and
gravely disregarded the limits on its discretion. The
question was how much discretion the Commission
had in assessing mergers under the ECMR.
A similar case was also brought by the company
Airtours (now called MyTravel) in respect of the
Commission’s Decision to block its merger with First
Choice in 2001 (which was subsequently then annulled
by the CFI). That case still awaits decision.
The Breach of Community Law
Although most of Schneider’s arguments were rejected
by the CFI, it accepted that the Commission had erred
by failing to describe in sufficient detail in its statement
of objections that had been sent to Schneider prior to
the prohibition decision, the theory of harm on which
the prohibition would be based. As such, Schneider
was considered to have been unable to exercise its legal
right to respond to the Commission’s concerns and to
propose suitable remedies to address them.
The CFI identified two categories of loss that could be
recovered by Schneider, at least in part:
1. the expenses incurred by Schneider in seeking the
Commission’s approval of the acquisition by KKR/
Wendel. These expenses would include legal and
economists’ expenses, although as the transaction
had already been notified once, the sums involved
ought not to be particularly high; and
2. the difference between the price Schneider achieved
in its sale of Legrand to KKR/Wendel and the
price Schneider could otherwise have expected to
receive. Bearing in mind the sale to KKR/Wendel
had been akin to a fire-sale given the uncertainty
that surrounded the outcome of Schneider’s first
appeal to the CFI, this was a material sum. The
CFI considered that since Schneider had identified a
material risk of the transaction being blocked by the
Commission, its losses on this sale should be limited
to two-thirds of the actual sums lost.
The Court has invited Schneider to submit details of
its losses on the first ground, while on the second an
expert has been appointed to carry out the assessment.
Schneider’s original claim was for 1.66 billion
euros plus interest. The actual sum payable by the
Commission is likely to be considerably lower than
this, but significant nonetheless.
Key Points
The key concerns for business arising from this case is
that the Commission might now feel unduly hindered
in exercising its discretion under the ECMR and that
otherwise anti-competitive mergers could be cleared
by the Commission, fearing major claims for damages
from companies who can prove a prohibition decision
was unfounded.
A careful reading of the decision makes it clear that the
CFI did not wish its judgment to have this impact. The
CFI went out of its way to emphasise the discretion
that the Commission has in making its assessment
of mergers. This emphasis will make it difficult for
claims to be made in the future based purely on the
substantive aspects of a Commission decision.
The CFI did, however, draw attention to the need for
procedural fairness, in particular the right to a fair
hearing. The Commission was found to have failed to
give Schneider an opportunity to defend itself, and the
August 2007 | Antitrust and Trade Regulation Alert
losses suffered may have resulted from this breach of
duty by the Commission.
The CFI noted that despite the failings in procedural
fairness, this deficiency did not mean that the
Commission was obliged to refund all the losses that
Schneider had suffered. Schneider’s loss was primarily
the difference in the price that the Legrand shares could
have been sold for and the price at which they were
actually sold (in light of it being a forced sale). The
CFI noted that since there was no certainty that the
merger was going to be cleared by the Commission,
and Schneider was aware of this, the company had
taken a conscious risk in pursuing and completing the
original transaction. Accordingly, only a proportion
of these losses were recoverable.
Under French law Schneider had been obliged to
acquire the shares prior to the Commission’s Decision
under the ECMR. In most cases, purchasers will
ensure that their acquisitions are conditioned on prior
clearance being received. Accordingly, the second
head of damages set out above will not arise in most
cases.
Concluding Remarks
The Commission has appealed the CFI judgment to the
European Court of Justice, and the appeal is likely to
be heard later this year. The Commission will seek to
convince the ECJ that damages should be limited to a
greater extent than that proposed by the CFI.
The judgment in the MyTravel case (based on similar
events to the Schneider case) will be published in the
next few months and will give a further opportunity
for the Court to give its views on what procedural
standards are required of the Commission when
assessing mergers under the ECMR.
For companies that have had their mergers blocked
by the Commission, these cases offer the prospect of
pursuing the Commission for significant sums. They
will encourage the Commission to pursue a more
cautious approach with regard to procedures and
ensuring the parties have the right to respond to any
issues which the Commission intends to rely on. As
such, the Schneider case is in the interests of all those
engaged in the EU merger control process.
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