Companies should review all corporate transactions prior to implementation in order to determine whether they involve a de facto merger or acquisition of control.
The Belgian electricity producer, Electrabel, a member of the Suez Group, has been fined EUR 20 million (USD 28 million) by the European Commission for acquiring control of the second largest French electricity producer, Compagnie Nationale du Rhône (“Rhône”), without obtaining prior approval under the EU Merger Control Regulation. This could be viewed as an excessive fine for what seems to be a purely formal offence, because Electrabel in fact notified its acquisition of control over Rhône on 26 March 2008 and the Commission’s Competition Directorate cleared the transaction on 29 April 2008 on the grounds that it would not significantly impede effective competition in any part or all of the European Economic Area.
The heavy fine carries with it two important messages for all companies involved in mergers and acquisitions. First, the case provides a clear warning that all mergers and acquisitions whose size is above the notification threshold must be notified to the Commission for prior approval. ‘Gun jumping’ will not be pardoned, even if it is committed through negligence.
Second, even when companies are involved in what may appear to them to be a partial merger or merely the acquisition of a minority shareholding, they should still assess carefully whether the transaction does not result de facto in a full merger or acquisition of a controlling shareholding. Electrabel learned this to their cost in this latest case.
A third and equally important message can also be added. If the Commission suspects that parties to a merger or acquisition may be ‘gun jumping”, it can send in inspectors to carry out an unannounced inspection or “dawn raid” as it did 18 months ago when it raided the UK premises of two PVC producers. In that case the Commission suspected that the parties were engaging in improper exchange of information prior to clearance of the transaction (“European Commission Dawn Raids Merging Parties for ‘Gun Jumping’” 14 December 2007).
In the Electrabel case, in December 2003 Electrabel acquired the shares of Rhône held by Electricité de France (“EDF”), the leading electricity producer in France. By doing so Electrabel became Rhône’s largest shareholder holding a little less than 50 per cent of the company. Electrabel consulted the Commission in August 2007 about whether or not it had acquired control over Rhône. The Commission reacted by opening a formal investigation into the matter, issuing a statement of objections to Electrabel and giving Electrabel a hearing before deciding to impose the fine. The Commission found that Electrabel had acquired de facto sole control of Rhône as long ago as December 2003 because, from this date, Electrabel enjoyed a stable majority at shareholders’ meetings due to the wide dispersion of the remaining shares and the low historical attendance rate of the other shareholders. In addition, Electrabel was the sole industrial shareholder of Rhône, having taken over the role previously held by EDF. The Commission concluded that Electrabel, a company familiar with EU merger control rules, should have raised the matter back in 2003 rather than waiting more than three and a half years after acquiring its shareholding in Rhône.
In determining the amount of the fine, the Commission took into consideration:
- the fact that the infringement had lasted for a significant period;
- the fact that Electrabel was a large company with experience in EU merger procedures; and
- the fact that the standstill obligation is a cornerstone of the EU merger control system.
In mitigation the Commission took into account the fact that the transaction had not given rise to any competition concerns and that Electrabel subsequently informed the Commission voluntarily of its acquisition of control.
The amount of the fine is low in relation to the legal maximum available to the Commission, namely 10 per cent of the offending company’s worldwide group turnover. However, EUR 20 million is large fine for an offence of this kind. The amount of the fine shows clearly that Competition Commissioner Neelie Kroes intends to send a clear signal to parties involved in mergers and acquisitions that these transactions must be notified when their size is above the notification threshold, and the ‘standstill’ obligation must be respected. It is no excuse for a company to say that it did not realise that it had acquired de facto control. Companies should, therefore, review all corporate transactions prior to implementation in order to determine whether they involve a de facto merger or acquisition of control, so as to be able to respect any size-related notification and ‘standstill’ obligations of EU Merger Control, and thereby avoid disruptive “dawn raids”, substantial fines and bad publicity.