UK: Blocking Mergers Unlawfully - Retreat From The High Water Mark In Schneider Electric?

Last Updated: 23 July 2009
Article by SJ Berwin's EU & Competition Team

On 22 October 2002, the European Court of First Instance ("CFI") for the first time confirmed that the European Commission ("Commission") could be tortiously liable in damages in the event that the Commission blocked a merger unlawfully. This principle was established in the Schneider Electric v Commission case that arose out of a decision the Commission took in October 2001 to prohibit the merger of Schneider Electric ("Schneider") and Legrand, two large French industrial groups.

Today, the European Court of Justice ("ECJ") has, whilst leaving the important point of principle (that the Commission can be tortiously liable for unlawfully blocking mergers) intact, partially annulled the CFI's judgment on a reasonably narrow but important ground. The ECJ held that one of the key requirements for liability to arise, namely that the claimant can show a causal link between the unlawful conduct and the loss caused, was not fulfilled in this case. This result has a significant financial impact on Schneider, as it has now lost the possibility of recovering what was estimated to amount to more than €1bn of loss allegedly caused by the Commission's illegal prohibition of its acquisition of Legrand. Schneider has this afternoon put out a short statement acknowledging the judgment.

However, although no doubt the outcome will be welcomed by the Commission and serves as a valuable reminder to claimants as to what they need to prove in order to succeed in obtaining damages, one should not read too much into this judgment as it appears to turn on its specific facts.

Factual background

The Schneider/Legrand deal was notified to the Commission on 16 February 2001 and completed in August 2001. On 10 October 2001, the Commission found the merger to be incompatible with the common market, mainly in relation to the markets for electrical switchboards and wiring accessories. On 13 December 2001, Schneider applied to the CFI to annul the 10 October 2001 incompatibility decision, but this was dismissed by the CFI on 23 January 2002. Shortly thereafter, on 30 January 2002, the Commission ordered Schneider to divest itself of Legrand in order to deal with the competition concerns identified.

On 18 March 2002, Schneider brought a further action before the CFI to annul both the divestment order and the October 2001 decision that the merger was incompatible with the common market. While the appeal was pending, Schneider took preparatory steps to divest Legrand in the event the Commission's decision was upheld. To this end, Schneider entered into a contract of sale with Wendel/KKR on 26 July 2002. This contract was due to expire on 10 December 2002, and in the event that Schneider pulled out of the deal, a break fee of €180m was payable to Wendel/KKR.

CFI's judgment and the divestment of Legrand

The CFI, on 22 October 2002, found that the Commission had committed a serious (and illegal) procedural irregularity in waiting until the decision to advance one of its key objections to the merger, rather than in its Statement of Objections, thereby denying Schneider its right of defence. Both the prohibition decision and the divestment order were annulled and the Commission reopened its investigation into the merger, starting its investigation from Phase I.

However, as the Commission continued to assert in the second investigation that a combination of Schneider and Legrand was likely to give rise to significant competition issues, and as Schneider wished to avoid paying the break fee to Wendel/KKR, Schneider chose to abandon the merger and sell Legrand to Wendel/KKR at a loss of €2 billion.

The damages action

Schneider sued the Commission for damages resulting from its illegal prohibition decision, relying on Article 288(2) which deals with the non-contractual (i.e. tortious) liability of Community institutions. This is a difficult legal hurdle to satisfy. First, the conduct alleged against the Community institution in question must be unlawful - and established jurisprudence indicates that "unlawful" for the purposes of Article 288(2) equates to a "sufficiently serious breach" of a legal rule designed to confer rights on individuals, and that the Community institution in question has "manifestly and gravely" disregarded "the limits of its discretion". Secondly, the party alleging loss must prove the extent of the loss caused by the unlawful behaviour and thirdly (and as it now turns out, crucially), it must prove a causal link between the unlawful behaviour and the loss suffered.

The CFI agreed with Schneider that the "flagrant and unjustifiable failing" of the Commission to give Schneider an ample opportunity to defend itself was "sufficiently serious" to be considered unlawful.

The CFI therefore concluded that the Commission had an obligation to compensate Schneider two thirds of the loss caused by the divestment (the reduction reflecting the risk that the merger would be declared incompatible, which Schneider was deemed to have taken on).

The ECJ's judgment

The ECJ dismissed the Commission's first argument, namely that the breach of Schneider's rights of defence was not "sufficiently serious" to give rise to liability.

The ECJ agreed with the CFI that Schneider should be allowed to recover all expenses related to its participation in the second merger control procedure - one that Schneider would not have had to go through had the Commission fully respected Schneider's rights of defence during the first merger review procedure. As regards the loss resulting from the sale of Legrand to Wendel/KKR at a reduced price, the ECJ found that there was no direct causal link between the loss and the Commission's conduct. At the time of the sale, Schneider was already aware of the CFI's annulment of the two decisions and of the Commission's extension of the divestment period to February 2003 - and yet Schneider still decided not to exercise its cancellation option and thus permitted the sale to continue at a loss. The loss was therefore, in the ECJ's view, a direct result of Schneider's decision - a decision it was not required to take.

Any parallels to the MyTravel case?

It is important to contrast the ECJ's reasoning here with that of the CFI in the MyTravel case. MyTravel dealt with an alleged Commission mistake in the substantive review of a proposed concentration. MyTravel failed to recover its alleged loss as it could not show that the Commission's breach satisfied the first limb of the Article 288(2) test - a sufficiently serious breach of a provision conferring rights on an individual - because the Commission is awarded with a significant amount of discretion when evaluating complex economic questions (such as those that arise in a Phase II merger review).

Key points to take away from today's judgment

  • The principle that the Commission can be liable in damages for blocking mergers unlawfully has not been overruled by the ECJ;
  • It is more likely that a "sufficiently serious breach" by the Commission arises with regard to procedural questions (where the Commission must ensure that its conduct is beyond reproach) than with regard to substantive questions (where the CFI and the ECJ grant the Commission more discretion to deal with complex economic assessments);
  • It is vital for claimants to make sure that they can prove each requirement under Article 288(2), including proving the causal link between the illegal conduct and the alleged loss.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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