In its first ever ruling on damages under the Merger Regulation, the Court of First Instance has ruled that Schneider must be partially compensated for the loss sustained as a result of the illegal prohibition of its merger with Legrand. The Court held that "the grave and manifest failure by the Commission to have regard to Schneider's rights of defence constitutes a sufficiently serious breach of Community law to confer such a right".
The ruling has come as a surprise and strikes a further blow to the Commission's Competition Directorate General, following the string of annulment decisions by the Court in 2002 and the more recent Impala judgment in which the Court annulled a Commission clearance decision. As a result, the Commission may be expected to become more cautious in its analysis of merger cases, potentially leading to more protracted and more expensive procedures for companies involved in mergers.
In October 2001, the EC Commission prohibited Schneider's completed acquisition of Legrand. Schneider and Legrand are the two principal French manufacturers of electrical equipment and the Commission had concerns that the merger would considerably weaken the operation of the market in a number of countries, but particularly in France. The Commission concluded that Schneider failed to put forward in good time adequate undertakings to address these issues and the transaction was blocked.
Schneider appealed to the CFI under the expedited procedure and the Commission's decision was annulled in October 2002. Schneider argued that there was a substantial discrepancy between the statement of objections which was sent to the parties and the Commission's final decision prohibiting the merger. In the statement of objections, the emphasis was placed on the parties' overlapping activities in certain markets, and the strengthening of Schneider in relation to the wholesalers as a result. In the prohibition decision, the Commission referred to conglomerate effects of the transaction. This discrepancy meant that it had not been possible for Schneider to submit appropriate remedies to address these concerns, and the Court upheld Schneider's claim that its rights of defence had been breached and annulled the Commission's prohibition decision.
Schneider subsequently brought an action for damages against the Commission, claiming €1.66 billion as compensation for the harm it suffered as a result of the Commission blocking its merger with Legrand.
The Court starts by looking at the threshold, set out in its caselaw, at which the Community incurs liability for damages for unlawful conduct by its institutions or by its servants in the performance of their duties.
The test is whether there was 'a grave and manifest disregard of the limits of their powers of assessment'. The rule takes into account the complexity of the situations to be regulated, difficulties in the application or interpretation of the legislation and the margin of discretion available to the Commission in its appraisal and in the application of rules such as the competition law provisions.
However, in cases where there is a considerably reduced or even no discretion, the mere infringement of Community law may be sufficient to establish the existence of a sufficiently serious breach.
Article 18 of the EC Merger Regulation provides that, before taking any decision, the Commission must, at every stage of the procedure, give the undertakings concerned the opportunity of making known their views on the objections against them. The Commission shall base its decision only on objections on which the parties have been able to submit their observations. This type of measure does not leave any margin for discretion or interpretation.
The Court finds that the infringement of Schneider's right to be heard before the adoption of the decision under this provision is a straightforward procedural measure, and failure to observe this requirement cannot be justified by any particular constraints to which the Commission was subject or by any margin of discretion. The Commission's failure to respect Schneider's rights of defence is therefore in itself a serious and manifest failure, which entails an obligation to make compensation for its harmful consequences.
Moving to the loss eligible for compensation, the Court considers that Schneider has a right to compensation in respect of two categories of financial loss it incurred:
- expenses incurred in relation to the merger control procedure when the Commission re-examined the merger following the CFI's annulment ruling, and
- reduction in the divestiture price which Schneider had to concede to Wendel/KKR in order to obtain a postponement of the execution of that divestiture. The Court agrees to two-thirds of this loss to be compensated, as it considers that Schneider had itself contributed to its own loss (by assuming the real risk that the merger would subsequently be declared incompatible and that resale of the shareholding in Legrand would be the inevitable consequence).
The parties must inform the Court of the amount of the first category of loss within the next three months. The second category of loss will be assessed by an independent expert.