On July 11, 2007, the European Court of First Instance (CFI) ruled that the European Commission must compensate a party to a business combination for certain losses resulting from the Commission’s procedural errors when it blocked a merger between two French electric companies in 2001. This is the first time the CFI has awarded damages arising from a Commission merger decision. The Commission will now be even more circumspect when investigating deals that are serious candidates for a veto. Indeed, merging parties may expect greater Commission adherence to their procedural rights in Phase II reviews, which would be welcomed.
Background
On October 10, 2001, the Commission blocked the merger between Schneider Electric and Legrand after an in-depth Phase II EU merger review. Since Schneider had already implemented the merger before clearance, Schneider had agreed to sell its Legrand shares to a third party. In parallel, Schneider appealed the veto decision to the CFI. In October 2002, the CFI annulled the Commission’s decision on the basis that its economic reasoning for prohibiting the merger was deficient. The CFI also found that the Commission had breached Schneider’s procedural rights by failing to bring the merging parties’ attention to issues which ultimately led to the decision to prohibit the merger. Notwithstanding this annulment, the parties failed to convince the Commission that they could address competition concerns when they re-filed the merger notification with the Commission and the parties eventually decided to unwind the transaction in December 2002.
The Decision
Schneider subsequently brought a claim against the Commission for damages arising from its deficient economic reasoning and breach of Schneider’s procedural rights in the Commission’s original review. The CFI upheld Schneider’s claim, but only in so far as it related to damages arising from a breach of fair process. The CFI rejected Schneider’s claim for damages arising from the Commission’s erroneous merger review. The CFI stated that the Commission enjoyed a wide margin of discretion in carrying out merger reviews, and the nature and extent of the deficient economic reasoning in this analysis did not give rise to a claim for damages. The CFI did not, however, rule out that a grave and manifest error in economic analysis could give rise to compensation in future cases. It will be interesting to see whether the CFI orders the Commission to pay MyTravel Group PLC damages for its veto of the Airtours/First Choice merger on this or on any other basis (MyTravel has reportedly brought a similar damages claim against the Commission for £518 million).
The CFI awarded damages to Schneider for the costs of suspending the divestment of Legrand by Schneider and the re-filing of the merger notification. An expert has been appointed to determine the precise cost of damages arising from the suspension of the divestment order, but this is likely to be a fraction of the original claim by Schneider. The CFI refused to award Schneider other costs, including for lost synergies, which claim (among others) is presently being pursued by MyTravel against the Commission.
Future Impact
Although the damages order is embarrassing for the Commission, the ruling is not likely to open the floodgates for similar damage claims against the Commission in the future. This is because such claims will only be allowed in very specific circumstances, such as when the Commission has blocked a deal and in so doing has breached the merging parties’ fundamental procedural rights. Further, the CFI seems to have raised the bar for merging parties to bring claims based on economic or other substantive Commission errors. The CFI’s damages order does, however, put greater pressure on the Commission to respect the merging parties’ rights to present counterarguments to the Commission and their other procedural rights in the merger review process. The Commission will certainly think very carefully about whether to block a business combination—and about the manner in which it will do so—in the future.
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