The European Commission has imposed a €20 million fine on Electrabel for having completed a deal without prior authorisation by the European Commission. Under the EC Merger Regulation (ECMR) parties to a concentration, e.g. an acquisition of control through purchase of shares, which is caught by the EC rules are required to notify their transaction to the Commission and cannot implement the transaction before approval is granted ("standstill obligation"). Reviewing a subsequent transaction, the Commission found that Electrabel had failed to notify a series of previous transactions resulting in a minority stake which, according to the Commission however, had already granted Electrabel "de facto" sole control. The decision sends a clear message to companies that the process under the ECMR must be respected – breach of the rules can result in hefty fines.

In April 2008 the Commission authorised the acquisition of sole control of the French company Compagnie nationale du Rhône (CNR) by the Belgian electricity producer Electrabel. Although the deal did not raise any competition issues and was cleared in a Phase I procedure without remedies, it had become apparent during the course of the Commission's investigation that Electrabel already had significant influence over CNR before the transaction was notified in March 2008. This raised the question as to when exactly Electrabel first gained control over CNR so as to trigger a merger notification obligation under the ECMR. In its clearance decision, the Commission left open the precise date at which Electrabel acquired control, but opened a separate investigation into this matter.

The Commission has now completed this investigation and concluded that Electrabel acquired 'de facto' sole control over CNR in December 2003, more than four years before it notified the transaction. Between June and December 2003, Electrabel acquired a series of stakes from various shareholders in CNR, resulting in a total stake of 47.88% in CNR. This series of transactions within a short period would qualify as one concentration under the ECMR. Control for the purpose of the ECMR consists of the ability to exercise decisive influence over an undertaking and this includes de facto ability to do so. Looking into shareholder voting patterns at CNR's AGMs, the Commission concluded that Electrabel had consistently obtained an absolute majority enabling it to have resolutions passed and that this constituted de facto control. This was reinforced by other factors, such as the fact that Electrabel was the sole industrial shareholder of CNR and had taken over the role previously held by EDF in the operational management of the power plants and the marketing of electricity of CNR.

Under Article 14 of the ECMR, the Commission has the power to impose fines of up to 10% of the aggregate annual turnover of the undertakings concerned for failure to notify a concentration prior to its implementation, either intentionally or negligently. The Commission can also fine parties for implementing a transaction before merger clearance is granted (so called gun-jumping) and for providing misleading or incorrect information. So far, there have only been two previous fining decisions under the ECMR for failing to notify and implementing a transaction without merger clearance, in Samsung/AST in 1998 and A.P.Møller in 1999.

In determining the level of the fine, the Commission must take into account the nature, gravity and duration of the infringement. In cases where the companies involved had reasonable grounds for overlooking the obligation to notify a transaction, the Commission has generally not imposed fines. In this case however, the Commission held that Electrabel is a sophisticated company with relevant experience of the EC merger control process and should have been aware that the 2003 transactions should have been notified and could not have been implemented without clearance from the Commission. The level of the fine reflects the seriousness of the infringement as well as the duration.

The standstill obligation is one of the key features of the EC merger control regime and the Commission is sending a clear message that it will not tolerate breaches of this fundamental rule and will impose significant fines in appropriate situations. Given the severe consequences which include not only fines but also potentially invalidity of the transactions in question, 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 that they are structured effectively and in compliance with the EC rules.