The EU's General Court yesterday handed down an important judgment that confirmed that companies that consummate mergers, acquisitions, and other transactions without compliance with merger control rules risk fines. The Court fully dismissed Electrabel's appeal of a European Commission decision to fine Electrabel Euro 20 million for acquiring control over Compagnie Nationale du Rhône (CNR) without prior approval under the EU Merger Regulation (Case T-332/09).
This judgment serves as an important reminder to business that competition authorities around the world apply a zero tolerance policy to companies who fail to identify transactions which require merger control notification and to observe mandatory waiting periods prior to completion.
What are the rules?
Under the EU Merger Regulation, transactions must be notified to the European Commission where a party obtains control of another party and certain turnover thresholds are met. If a transaction is notifiable, a standstill obligation arises which prevents the parties completing their transaction prior to approval from the European Commission. The test for control is whether a party has the possibility of exercising "decisive influence" over another party. In assessing decisive influence, the European Commission looks beyond the level of shareholdings, and also examines whether control has been acquired on a de jure and/or de facto basis. For its de facto assessment, the European Commission will consider whether the shareholder is likely to achieve a majority at the shareholders' meetings, given the level of its shareholdings and the evidence resulting from the presence of shareholders in the shareholders' meetings in previous years. It will assess whether the remaining shares are widely dispersed, whether other important shareholders have structural, economic or family links with the large minority shareholder or whether other shareholders have a strategic or purely financial interest in the target company.
Electrabel's failure to notify
In 2003, Electrabel acquired shares in CNR, with a resulting shareholding of less than 50%. This transaction was not notified to the European Commission. In 2008, Electrabel notified its proposal to acquire the remaining shares in CNR. The transaction was cleared by the European Commission, but the European Commission then investigated whether Electrabel had in fact obtained control over CNR through the 2003 acquisitions so as to trigger a merger notification obligation under the EU Merger Regulation.
In June 2009, the European Commission found that Electrabel acquired de facto sole control of CNR through the 2003 acquisitions, and fined Electrabel Euro 20 million for implementing a merger without seeking its prior approval in breach of the EU Merger Regulation. The 2003 transactions led Electrabel to increase its shareholding in CNR from 17.68% of the shares and 16.88% of the voting rights to 49.95% of the shares and 47.95% of the voting rights. Despite the fact that these percentages were less than 50%, the European Commission considered that Electrabel had acquired de facto sole control of CNR in 2003. The Commission looked at shareholder voting patterns at CNR's AGMs, and concluded that Electrabel, due to the wide dispersion of the remaining shares and past attendance rates, 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, notably 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.
Electrabel appealed the European Commission's decision before the EU's General Court.
The General Court judgment
The General Court dismissed Electrabel's appeal in its entirety.
Key findings of the judgment are:
- A minority shareholder must be considered to hold de facto sole control of a company under the EU Merger Regulation if the shareholder is virtually certain of obtaining a majority at future general meetings because the remaining shareholders are widely dispersed, and where this could be shown by attendance at shareholders' meetings in years prior to the relevant acquisition. It rejected Electrabel's argument that it only acquired de facto sole control in June 2007 when it was in a position to analyse the shareholders' meeting over the past three years and confirm that it had achieved a consistent majority of voting rights. This analysis should have applied to the facts prior to 2003.
- De facto sole control can trigger a filing requirement in its own right. The Court rejected Electrabel's argument that the European Commission had failed to take into account a French Law (Loi Murcef), which provided that private companies could not hold more than 50% of CNR's share capital and voting rights. This French law did not prevent Electrabel from acquiring de facto sole control under the EU Merger Regulation.
- Early implementation of a notifiable transaction prior to European Commission approval is liable to bring about significant changes in the competition situation, and is therefore a serious infringement, and not a mere formal or procedural infringement.
- The fact that the infringement was committed through negligence should not give rise to a reduction in fine.
- The fact that Electrabel's acquisition was ultimately found not to raise any competition issues was not a decisive factor for determining the gravity of the infringement.
The European Commission and EU's General Court are sending a strong message that they will not tolerate breaches of the EU Merger Regulation's stand-still obligation, even when this is committed negligently, many years previously, in a transaction which leads to less than a 50% shareholding, and in a transaction where there are no competition concerns.
Caution is required not just for notifications to the European Commission. Many national merger control regimes around the world require the notification of transactions, including transactions involving the acquisition of minority interests, joint ventures, and other transactions, and impose stand-still obligations with serious consequences for breach which are routinely enforced. For example, the U.S. Department of Justice and Federal Trade Commission have enforced breaches of the U.S. waiting period obligations and failures to notify by imposing substantial fines on over 50 transactions. Most recently, in September of this year, the DOJ and FTC filed a lawsuit against Biglari Holdings, Inc., a publicly traded holding company, that it had violated premerger reporting laws in connection with its 2011 acquisition of a stake in the restaurant operator Cracker Barrel Old Country Store, Inc. The US antitrust agencies continue to be vigilant and aggressively enforce violations of the US merger reporting requirements.