European Union: Resurgence Of Protectionism – Can European Member States Really Do Whatever They Want To Foreign Takeovers?

EU Competition Commissioner Joaquín Almunia recently cited the French initiatives to block the GE-Alstom deal as an example of "worrying signals of protectionist threats" in Europe.1 France is not, however, to be singled out. EU Member States have sought to protect their national champions for decades, relying, among others, on an EU merger provision which allows Member States to take measures to protect their legitimate interests.

France's Extended Powers to Intervene in Foreign Takeovers

In May 2014, the French government adopted a decree extending its powers to block foreign investments in strategic activities relating in particular to energy supply, water supply, transport networks, electronic communication services, and public health. This measure cannot be detached from the government's initial opposition to GE's bid for Alstom's power and grid businesses. After lengthy discussions, an update to GE's offer received support from the French government at the end of June. Under the terms of the agreement, France would purchase a 20 per cent stake in Alstom to ensure, in particular, that the State would retain a say in job-related decisions and decision-making at the company.

Commenting on the French measure, Mr. Montebourg, the then Economy and Industry Minister, said that the new decree was a "choice of economic patriotism" and that blocking sales was "an essential rearmament of public power."2 Such a stand gives the impression that EU Member States can take the steps they wish to protect their national champions. This is not the case however. EU merger rules do allow Member States to take certain measures to protect their legitimate interests, but these powers are not unlimited.

Merger Control in the European Union

The EU Merger Regulation ("EUMR") is articulated around the principle that mergers with an EU dimension, i.e., meeting certain turnover thresholds, have to be cleared by the Commission. Article 21 EUMR provides that the Commission has sole competence to review such mergers and that EU Member States shall not apply their national competition rules in respect of these transactions.

The allocation of jurisdiction between the Commission and the Member States is, however, subject to a number of exceptions, and Member States may review transactions which initially fell under the exclusive competence of the Commission.

Thus, pre-notification, the parties may opt for a case referral to a national competition authority instead of notifying their operation to the Commission. Similarly, post-notification, notified cases may be referred from the Commission to a national competition authority.

Another exception is Article 21 EUMR. This clause provides that Member States can adopt measures which could prohibit, submit to conditions, or in any way prejudice transactions with an EU dimension in order to protect legitimate interests in so far as they are compatible with the general principles and other provisions of EU law.

The "Legitimate Interests" Clause

The "legitimate interests" clause does not create new rights for Member States. Member States have the ability to intervene on grounds other than those covered by the EUMR in order to prohibit a transaction or make it subject to additional conditions and requirements. However, they are not allowed to authorize concentrations which the Commission has prohibited under the EUMR. It is also essential that prohibitions or restrictions placed on transactions do not amount to any form of discrimination or any disguised restriction in trade between Member States. Finally, in application of the EU general principles of necessity and proportionality, the measures taken by Member States must be limited to the minimum of action necessary to ensure the protection of the legitimate interests in question.

A distinction is drawn between two types of legitimate interests.

The "Recognized" Interests

Three categories of legitimate interests are expressly recognized by the EUMR and may be freely invoked by Member States: public security, plurality of the media, and prudential rules.

Public security interests include internal and external military security. Other interests such as the protection of the population's health or the security of supply of a product that is of fundamental importance for a Member State may also be considered as a public security interest. However, the requirements of public security are to be interpreted strictly. Thus, public security may be relied on "only if there is a genuine and sufficiently serious threat to a fundamental interest of society."3

The reference to the plurality of media recognizes the legitimate concern of maintaining diversified sources of information. In Newspaper publishing4 and NewsCopr/BSkyB, the Commission did not oppose the additional review of media plurality issues by UK authorities. Thus, even if the Commission cleared the NewsCorp/BSkyB transaction without remedies, considering that NewsCorp's increased shareholding would not significantly impede effective competition, NewsCorp offered undertakings to the UK Secretary of State to "remedy, mitigate or prevent the potential threats to media plurality identified by Ofcom."5

Prudential rules can also be – and have regularly been – invoked by Member States. Attempts by some European banks to acquire credit institutions in other Member States have caused EU governments and national supervisory authorities to invoke prudential rules. Thus, for instance, when Banco Santander, a Spanish bank, announced that it would acquire joint control over a group of Portuguese financial institutions, the Portuguese government vetoed the deal, claiming that it was violating national prudential rules and was incompatible with the "national interest." The legitimate interest invoked by Portugal was not, however, communicated to the Commission. The Commission reviewed the deal under the EUMR and approved it in August 1999. In light of the inaction of the Portuguese government to reverse its veto, the Commission initiated infringement proceedings against Portugal, arguing that "none of the reasons allegedly justifying Portugal's continued attempts to derail the operation ha[d] any factual or legal basis."6 The matter gained political attention from a number of countries, including France and Italy, which sided with Portugal in arguing that foreign meddling in national financial issues should not be allowed. Finally, changes were brought to the structure of the transaction to lift Portugal's concerns, and the Commission cleared the "revised" deal in January 2000.7

Measures genuinely aiming to protect one of these interests, which are liable to block, submit to conditions, or in any way prejudice transactions with an EU dimension, but which are in compliance with the principles of non-discrimination and proportionality, can be adopted by Member States without prior communication and approval by the Commission. Conversely, measures must be notified to the Commission when there are reasonable doubts that they genuinely aim to protect one of these interests or that they comply with the principles of non-discrimination and proportionality.

Other Legitimate Interests

Member States may also take measures to protect other legitimate interests. Before doing so, Member States are invited to communicate the interests invoked to the Commission. The Commission will assess the "legitimate" nature of these interests and decide whether the intervention of the Member State is justified. Upon approval by the Commission, Member States can implement the measure.8 If a Member State breaches the "standstill" obligation, the Commission is empowered to issue a decision on the compatibility of the measure with Article 21(4) of the EUMR and, if need be, order the Member State to cancel the relevant measure.

In a number of cases, the Commission, but also sometimes the Court, made it clear that Article 21(4) of the EUMR did not allow Member States to intervene and block transactions in order to protect national champions.

This was the case, for instance, in E.ON/Endesa. After E.ON announced its intention to launch a bid for Endesa in February 2006, the Spanish government adopted new legislative measures aiming to increase the supervisory powers of the Spanish energy regulator and make the bid conditional upon the energy regulator's approval. E.ON notified the acquisition to the Commission on 16 March 2006 and requested the energy regulator to authorize the transaction on 23 March 2006. The Commission cleared the deal on 25 April 2006. A few months later, the energy regulator adopted a decision making the transaction subject to a large number of conditions. Subsequently, the Commission adopted a decision by which it declared that the energy regulator's decision breached Article 21(4) of the EUMR as (i) the decision was adopted without the prior communication of the legitimate interests and the approval by the Commission, and (ii) a number of conditions were contrary to the EU Treaty rules on free movement of capital and freedom of establishment.9 The energy regulator reviewed its decision. Despite the modifications brought to the conditions, the Commission remained unsatisfied and brought the matter to the Court in Luxembourg. In March 2008, the Court confirmed that Spain breached its obligations under the EU Treaty by not withdrawing the decision imposing illegal conditions on the transaction.10

In the last few months, besides the GE-Alstom case, another case was likely on the Commission's surveillance radar. Indeed, after Pfizer walked away from the AstraZenaca takeover, UK Business Secretary Vince Cable told the press that the UK government's powers to intervene in a bid should be extended to cover takeovers of companies that own critical infrastructure and receive public funding to conduct research and development. He added that foreign bidders should also be forced to make legally binding commitments they offer during takeover negotiations when national interests are at stake.11 In response, the House of Lords Economic Affairs Committee asked him to clarify his position as Vince Cable formerly indicated that such extended powers would be incompatible with EU law. No doubt the Commission will closely follow any legal initiative and ensure that the UK communicates the invoked legitimate interest to allow the Commission to check it complies with EU law.

No Reason for the Commission Adopting a Softer Approach

The first EUMR, dated 1989, represented a watershed improvement in the EU competition policy as the Commission became exclusively competent to review certain transactions. Through the existence of the "legitimate interests" clause, Member States arranged a way out. Governments finding their legitimate interests engaged can intervene and even prohibit – under certain conditions – transactions even if the Commission previously cleared them. EU Member States have sought to protect their national champions through this clause but have consistently faced the Commission's uncompromising position. Indeed, the Commission has only rarely recognized the legitimate nature of the interests invoked by the Member States (besides the three interests explicitly mentioned in Article 21(4) EUMR). Furthermore, the Commission does not hesitate to launch infringement proceedings in cases where Member States fail to communicate the legitimate interests allegedly engaged and/or block transactions without sufficient factual or legal basis to do so.

It is difficult to evaluate whether the approach defended by the Commission will – in the longer term – deliver "net benefits" to Europe. What is certain however is that jurisdictions such as the US or Canada have protectionists tools which go beyond what EU Member States have at their disposal and do not hesitate to block takeovers by foreign buyers when the independence of their national champions is deemed to be at risk.

Footnotes

1. "Almunia voices concern over rising protectionism, cites debate over GE-Alstom deal," MLex, 24 June 2014, referring to Joaquín Almunia's speech delivered at the Forum Observatory on Europe in Brussels, on 24 June 2014.

2. "France takes 'nuclear weapon' powers to block foreign takeovers", Financial Times, 15 May 2014.

3. Case COMP/M.4685, Enel/Acciona/Endesa, Commission decision of 5 December 2007, para. 57. In this case, Spain failed in justifying measures restricting Enel's and Acciona's freedom of establishment and the free movement of capital by referring to the risks or negative effects that the conversion of Endesa into a company jointly controlled by Enel, an international group, could bring to the Spanish public interest in the field of security of energy supply.

4. Case COMP/M.423, Newspaper Publishing, Commission decision of 14 March 1994. The Commission acknowledged the power of the UK Secretary of State to grant formal consent under the UK Fair Trading Act as the transaction involved issues such as the accurate presentation of news and free expression of opinion. The Commission stressed, however, the need for the UK authorities to keep the Commission informed about the conditions which they might deem appropriate to attach to the transaction (see para. 22 and 24).

5. See undertakings given by News Corporation pursuant to paragraph 3 of schedule 2 of the Enterprise Act (protection of legitimate interests) order 2003, available at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/72994/News_Sky_1_March_UIL_for_consultation.pdf

6. "Commission overrules Portuguese measures against BSCH/Champalimaud operation", IP/99/774, 20 October 1999.

7. Case COMP/M.1799, BSCH/Banco Tottay CPP/A. Champalimaud, Commission decision of 11 January 2000.

8. In Lyonnaise des Eaux/Northumbrian Water, the Commission recognized the legitimate interest of the UK authorities in applying certain provisions of the Water Industry Act 1991 to ensure a sufficient number of independent water companies. The Commission also verified the proportionality and the non-discriminatory nature of the measures the UK intended to take. Lyonnaise des Eaux/Northumbrian Water, M.567, decision of 21 December 1995, para. 7-8; "Commission approves takeover of Northumbrian Water by Lyonnaise", IP/95/1469, 22 December 1995.

9. "Commission rules against Spanish Energy Regulator's measures concerning E.ON's bid for Endesa", IP/06/1265, 26 September 2006.

10. Case C-196/07, Commission v. Spain, para. 39.

11. Maintaining jobs is an example of such commitments.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions