On 3 July 2014, the Court of Justice of the European Union ("CJEU") dismissed Electrabel's appeal against the EU General Court's 2012 judgment upholding the €20 million fine imposed by the European Commission for infringement of the notification and suspension requirements of the EU Merger Regulation ("EUMR"). Electrabel had failed to notify the acquisition of a minority shareholding to the Commission, and had completed the deal without prior clearance from the Commission. The judgment provides an important reminder of the need for all companies to carefully consider the application of the EUMR to their transactions, and the severe consequences of getting it wrong.
1. Legal background
The parties to a transaction which falls within the scope of the EUMR rules are required to notify the transaction to the Commission, and cannot implement it before clearance is obtained (the so called "standstill obligation").
A transaction falls within the scope of the EUMR rules if (a) it constitutes a "concentration" and (b) the group turnover of the parties meets the EUMR jurisdictional thresholds, regardless of whether the transaction will have any substantive effects on competition in the EU.
The concept of a "concentration" is wide and includes mergers, certain joint ventures, and the acquisition of direct or indirect control over another undertaking (meaning the ability to exercise "decisive influence" over the target). This includes not only 100% acquisitions, but also in some circumstances acquisitions of minority shareholdings, for example where the acquirer obtains veto rights over the strategic decision-making of the target, or can in practice obtain a majority at shareholders' meetings. The Commission is also currently considering whether to extend the reach of the EUMR further, to cover certain non-controlling minority shareholdings, and is due to consult further on this later in 2014.
The Commission has the power to impose fines of up to 10% of annual group worldwide turnover for failure to notify a transaction and for implementation of a transaction in breach of the standstill obligation. The applicable limitation periods are 3 years for formal or procedural infringements of the EUMR, and 5 years for all other infringements. Time begins to run upon the day on which the infringement is committed, or, in the case of continuing or repeated infringements, on the day on which the infringement ceases.
2. Electrabel transaction
Between June and December 2003, Electrabel, a Belgian energy company, increased its shareholding in the French electricity company Compagnie nationale de Rhône ("CNR") from 17.86% to 49.94%. The acquisition was not notified to the Commission.
Subsequently, in August 2007, Electrabel contacted the Commission about its interest in CNR, and ultimately formally notified the transaction to the Commission (the Commission having concluded that the transaction fell within the scope of the EUMR rules). The Commission found that the concentration did not raise any substantive competition law concerns, and issued a clearance decision. However, the Commission left open the question of exactly when Electrabel had acquired control over CNR within the meaning of the EUMR.
3. Commission infringement decision
Following an investigation, in June 2009 the Commission concluded that Electrabel had acquired "de facto" control over CNR in December 2003, thus triggering an EUMR filing requirement.
This was on the basis that, although Electrabel did not obtain a majority of the voting rights in CNR, looking at participation and shareholder voting patterns at shareholder meetings Electrabel would in practice exercise an absolute majority at such meetings, enabling it to exercise control over CNR (which was reinforced by other factors, for example the fact that Electrabel was the sole industrial shareholder of CNR and had a central role in the operational management of CNR, and had appointees to the Board of Directors).
The Commission concluded that Electrabel had failed to notify the acquisition and had breached the standstill obligation by completing the transaction without obtaining clearance. It imposed a fine of €20 million on Electrabel.
Electrabel appealed the Commission's infringement finding and the level of fine to the EU General Court, also arguing that the Commission's action was time-barred under the applicable limitation period.
4. General Court judgment
The General Court dismissed Electrabel's appeal in its entirety: see our ebulletin here.
It upheld the Commission's conclusion that the acquisition resulted in Electrabel acquiring de facto sole control over CNR (taking into account the dispersal of the other shareholders and the pattern of voting at previous shareholders' meetings), and therefore that it fell within the scope of the EUMR.
The General Court also rejected Electrabel's arguments that the Commission's action was time-barred. It found that breach of the standstill obligation cannot be categorised as merely formal or procedural, and that the applicable limitation period was therefore 5 years.
In terms of when the 5 year period began to run, although not strictly necessary to do so (as it found that the limitation period had been interrupted due to the Commission's investigation), the General Court held that the breach of the standstill obligation constituted an "on-going" continuous infringement, rather than single "one-off" infringement (as at the date of completion of the acquisition). It endorsed the Commission's position that a breach of the EUMR standstill obligation constitutes an on-going infringement until clearance is obtained from the Commission (or the transaction is abandoned).
Finally, the General Court upheld the level of fine, given the seriousness of the infringement, noting that it was at the "lower end" of the range of the level of fine which could have been imposed.
5. CJEU judgment
Electrabel appealed the judgment of the General Court to the CJEU on various grounds, including that the General Court made an error of law in categorising the infringement as on-going for the purposes of the application of the limitation period.
The CJEU in its 3 July 2014 judgment (Case C-84/13 P) rejected Electrabel's appeal in its entirety. This was largely on procedural grounds, for example on the basis that Electrabel was raising arguments which it had not raised at the General Court stage, and which were therefore inadmissible.
In relation to the limitation point, it is interesting to note that the CJEU did not explicitly confirm the position of the Commission and the General Court that the infringement was on-going, and therefore that the limitation period did not commence until clearance was obtained.
It was not necessary for it to decide this point, as it held that the 5 year limitation period had in any event been interrupted by a request for information made by the Commission in June 2008, and therefore had not expired, even if it had started to run as at the date of the transaction.
The fine imposed by the Commission on Electrabel, and its willingness to investigate a failure to file from many years ago, signalled a clear message from the Commission that it will not tolerate breaches of the EUMR and that it will impose significant fines where appropriate. The facts of the case demonstrated that the Commission is willing to do so even where the assessment of control under the EUMR is relatively complex, and that the Commission will investigate such jurisdictional infringements even where the transaction does not itself raise any substantive concerns.
The General Court and the CJEU have firmly upheld the Commission's approach. Whilst the CJEU did not expressly deal with the question of when the limitation period starts to run, it also declined to overrule the General Court on this point. On the basis of the General Court's position, which has therefore not been annulled, this exposes companies to the risk of a Commission investigation for breach of the EUMR standstill obligation many years after the transaction has taken place (for example if this comes to the Commission's attention when examining another transaction to which the relevant company is party).
Given the severe consequences of a failure to comply with the EUMR, all acquisitions, including those of minority stakes and those which take place through a series of transactions (which, as in this case, may be considered as one single concentration), must be scrutinised carefully to ensure compliance with the EUMR.