The European Court of First Instance (CFI) has decided that Schneider Electric SA should be partially compensated for the losses it suffered following the unlawful prohibition by the European Commission (the Commission) of Schneider’s merger with Legrand SA in 2001. In allowing Schneider’s claim to a partial extent, the CFI appears to have struck a delicate balance between upholding the principle that Community institutions should, in certain circumstances, make good the losses they cause and avoiding a situation in which Commission decision making is paralysed in the future through fear of extensive damages claims.
This briefing looks at the background to the case and discusses its potential implications for the Commission’s future decision making.
Background – CFI quashes three merger prohibitions
Prohibition decisions in European merger cases are extremely rare. Since the introduction of the EC Merger Regulation in 1990, there have been only 20 prohibitions to date (including the recent Ryanair/Aer Lingus decision) out of a total of around 3,500 notifications. It was, therefore, highly unusual when, in 2002, three of the Commission’s prohibition decisions were quashed by the CFI in quick succession: Airtours/First Choice in June 2002, followed by Schneider/Legrand and Tetra Laval/Sidel that October.
Although all three decisions led to a tightening of the Commission’s approach to merger assessment, the practical implications of the CFI’s judgments differed in each case. In Tetra Laval/Sidel, the Commission re-examined the case and ultimately approved the transaction subject to commitments. In the other two cases, the original transactions were ultimately unsuccessful. In Airtours/First Choice, the merger was abandoned following the Commission’s original prohibition decision. In Schneider/Legrand, the original acquisition had already been completed under the French takeover rules then in force. Following the Commission’s prohibition decision, Schneider agreed the terms of a sale of Legrand to a consortium led by KKR and Wendel Investments, but when the decision was annulled by the CFI, Schneider tried again to seek clearance for its original acquisition. After two months of review, Schneider was unable to accept the conditions that the Commission demanded for clearance. Schneider then withdrew its renotification and went ahead with the agreed sale of Legrand to KKR/Wendel.
Damages actions brought against the Commission
Both Airtours (now MyTravel) and Schneider launched damages actions against the Commission during 2003 in relation to the CFI judgments annulling their respective prohibitions. Today’s judgment concerns Schneider’s claim for damages, while the MyTravel action, although older, remains pending.
Both claims were brought under article 288 of the EC Treaty, which provides that, on the basis of non-contractual liability, ‘the Community shall… make good any damage caused by its institutions or by its servants in the performance of their duties’. In the Schneider case, the CFI has applied the principle that the 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. Therefore, the greater the scope of the Commission’s discretion, the less likely it is that such liability will arise.
CFI judgment – Commission bears partial liability
The CFI rejected the majority of Schneider’s individual arguments as to why the Commission should be held liable for damages. However, it accepted that the Commission’s failure to detail in its statement of objections the specific theory of harm on which the Commission relied in its prohibition decision was sufficiently serious to found a claim for damages. This error had denied Schneider the right to respond to those concerns and to propose suitable remedies to alleviate them.
The CFI concluded that only two of the categories of loss claimed by Schneider flowed from this ‘manifest and grave’ breach:
- the expenses incurred by Schneider in relation to the Commission’s subsequent re-examination of the transaction; and
- the difference between the price Schneider achieved in its sale of Legrand to KKR/Wendel (taking account of the fact that Schneider had agreed with KKR/Wendel a price to reflect the commercial uncertainty caused by the delay in awaiting the outcome of the original CFI procedure) and the price Schneider could otherwise have been expected to achieve.
The first category of loss will be limited in quantum to the expenses Schneider incurred. Regarding the second category, the CFI awarded Schneider only two-thirds of the loss as, in proceeding with a transaction that might well create concerns, Schneider had itself assumed the risk that the merger would be prohibited and that Legrand would have to be sold (potentially at a loss).
The precise amount of the losses will now be assessed. Schneider has been given three months to submit evidence on the first category of loss, and an expert will be appointed to assess the second category of loss.
implications – a limited impact for the future?
This judgment has been awaited with interest by both advisers and businesses. Schneider’s action for damages was for C1.66bn (plus interest). Such a sum was sufficiently large to have had budgetary implications for the Community. But potentially even more significant was the deterrent or ‘chilling’ factor that might have been placed on Commission decision making in future cases – a factor strongly emphasised by the Commission itself during the course of the case. As it turned out, the judgment’s key implications are as follows:
First, the CFI has expressly recognised the margin of appreciation the Commission has in its substantive assessment, making it hard for any damages action to be brought on substantive grounds in the future.
Second, the CFI placed strong emphasis on procedural fairness. The loss was caused to Schneider because of a fundamental breach of its rights of defence that could not be justified or explained by the constraints imposed by the EC Merger Regulation on the Commission.
Third, the CFI rejected any suggestion that Schneider should be compensated for the full difference between the price at which it originally purchased Legrand’s shares and the price it achieved from agreeing a sale of the business within the Commission’s required time frame to KKR/Wendel. The CFI considered that, although the Commission’s review procedure was deficient, it did not follow that the merger should have been cleared. Indeed, the CFI expressly took into account the fact that Schneider had assumed a degree of commercial risk in pursuing the transaction and considered it should not be compensated for this.
Fourth, this case is unusual because Schneider had already acquired the Legrand shares at the time of the prohibition decision. Although the rules preventing parties from completing before clearance include an exception for public bids in certain circumstances, many acquirers make their offers conditional on regulatory approval, where local takeover rules so allow. In those cases, the second type of loss for which the Commission will have to compensate Schneider will therefore not arise. In this case, therefore, although the judgment marks an
important milestone – the first time damages have been awarded by the CFI in a merger case – its overall impact may, in fact, be more limited than initial headlines might suggest. The judgment underlines the importance of a rigorous procedural process by the Commission. However, provided the Commission has gone about its substantive analytical work in a fair, transparent and diligent way, it will remain hard for parties to claim damages against the Commission.