The European Court of Justice (ECJ) has set aside in part the Court of First Instance's (CFI) judgment which granted Schneider the right to compensation for two heads of damage sustained as a result of the illegal prohibition of its merger with Legrand by the European Commission (Commission). The ECJ ruled that the Commission ought solely to pay compensation to Schneider to cover costs incurred by the latter in order to take part in the recommenced investigation of the transaction following the annulment of the Commission's prohibition decision. The ECJ judgment however reaffirms the principle that parties are able to claim compensation as a result of a serious and manifest failure on the part of the Commission such as a breach of the parties' rights of defence.

Background

In January 2001, Schneider announced a takeover bid for Legrand. Both companies are large French industrial groups active in the production of electrical equipment. The proposed takeover was notified to the European Commission in February 2001. Schneider's public offer resulted in the acquisition by Schneider of 98% of Legrand's share capital in August 2001. The Commission subsequently prohibited the merger and in January 2002 ordered Schneider to divest Legrand within nine months, although this deadline was subsequently extended to February 2003 following Schneider's appeals to the CFI.

Schneider appealed the Commission's decisions to the CFI. The appeals were heard using the expedited procedure. Pending the CFI's judgment, Schneider had entered into an agreement in July 2002 with Wendel Investissement and Kohlberg Kravis Roberts & Co (Wendel/KKR) for them to acquire Legrand.

On 22 October 2002, the CFI annulled the prohibition decision and the divestment decision. The CFI found that the Commission's economic analysis of the competitive effects of the merger was flawed and contained "several obvious errors, omissions and contradictions". The CFI, in particular, upheld Schneider's claim that its rights of defence had been breached as the rationale relied on in the Commission's final decision in one respect differed from that contained in the statement of objections sent to Schneider. Schneider was, therefore, denied the chance to respond or to offer any appropriate remedies to address this objection. This amounted to a serious procedural irregularity and infringement of the parties' rights of defence that required annulment of the decision.

Following the CFI's judgment, the Commission then began a re-examination of the merger. On 3 December 2002, Schneider confirmed to the Commission that it had decided to go ahead with the sale of Legrand to Wendel/KKR. The Commission subsequently informed Schneider that it had, consequently, closed the case.

Action for damages and CFI judgement

On 10 October 2003, Schneider 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 CFI found that the Commission's failure to respect Schneider's rights of defence was a serious and manifest failure, which met the threshold for non-contractual liability and entailed an obligation to make compensation for its harmful consequences. The deficiencies in the Commission's analysis of the impact of the merger were however not held to be a sufficiently serious breach to give rise to damages, and the only unlawful conduct of the Commission which could give rise to damages was therefore the breach of Schneider's rights of defence.

Moving to the loss eligible for compensation, the CFI found that Schneider had 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 agreed to two-thirds of this loss to be compensated, as it considered 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 Commission appealed the CFI judgement to the ECJ.

The AG Opinion

On 3 February 2009, Advocate General (AG) Ruiz-Jabaro gave his opinion on the European Commission's appeal. He concluded that the CFI had not erred in finding that the Commission's procedural breaches were sufficiently serious breaches to give rise to non-contractual liability. However, he did consider that the CFI erred in finding that the Commission was liable for two-thirds of the losses incurred by Schneider due to the need to accept a lower sale price for Legrand in order to defer transfer until after proceedings before the CFI were concluded. He found that Schneider's loses in this regard did not arise directly, immediately and exclusively from the Commission's unlawful act and, further, that Schneider had broken any causal link. The AG considered that the Commission should only pay compensation to Schneider to cover the costs that it incurred in dealing with the Commission's second investigation into the merger

The ECJ Judgement

On 16 July 2009, the ECJ confirmed that the fact that the statement of objections did not make it possible for Schneider to know clearly the grounds on which the Commission objected to its acquisition of Legrand was a breach of Schneider's rights of defence. This was a sufficiently serious breach of a legal rule capable of giving rise to non-contractual liability under Article 228(2) of the EC Treaty.

The ECJ also agreed with the CFI that there was a sufficiently close causal link between the unlawful conduct and the expenses incurred by Schneider in relation to the re-examination of the merger after the CFI's judgment annulling the decision on 22 October 2002. The Commission was, therefore, liable for these losses.

The ECJ however disagreed with the CFI's finding that there was a causal link between the unlawful act and the losses which arose as a result of the fact that Schneider was required to reduce the price of Legrand in order to compensate the purchaser, Wendel KKR, for the depreciation of the Legrand assets due to the delay whilst the CFI's judgments in Schneider's original appeals were awaited.

The ECJ found that it was clear from the documentary evidence that Schneider's decision to go ahead with the sale of Legrand to Wendel/KKR in December 2002 was based essentially on its fear that, on resumption of the Commission's investigation, it would not obtain clearance of its merger with Legrand.

The ECJ considered that the normal legal consequence of annulment of the Commission's negative decision and the divestiture decision would have been for Schneider to participate in the resumed investigation until its conclusion. This would have led to either:

  • A decision finding the merger to be compatible, in which case Schneider would not have been required to transfer Legrand and would not have been subject to the price reduction claimed; or
  • A further incompatibility decision and divestiture decision, in which case the transfer to Wendel/KKR would have been the legal consequence of the incompatibility found and would not have been the cause of damage to be compensated, since such a transfer is among the risks normally associated with completing a merger prior to the Commission's decision on the transaction by relying on the "public bids" exception in Article 7(3) of the EC Merger Regulation.

The ECJ, therefore, ruled that the CFI made an error in the legal characterisation of the facts. The direct cause of the damage claimed was Schneider's own decision, which was freely-made. The ECJ, therefore, concluded that, contrary to the CFI's judgment, Schneider's losses did not directly, immediately and exclusively arise from the Commission's unlawful act and therefore the Commission was not liable for such losses.

The ECJ ordered that the parties should inform the Court of the amount of the damages relating to the expenses incurred by Schneider in relation to the re-examination of the merger within three months