25 June 2009
In January 2001, Schneider Electric, a French manufacturer of equipment in the electrical distribution, industrial control and automation sectors, launched a EUR 6 billion bid to acquire Legrand S.A., another French company, active in the area of low-voltage electrical installations. The European Commission (Commission), which was called to review the deal under the EC Merger Regulation, decided that the acquisition should be prohibited. While the Court of First Instance of the EC (CFI) in its turn found that the Commission was wrong in prohibiting Legrand’s acquisition by Schneider, the multi-billion deal eventually collapsed.
After the dust cleared, Schneider sought compensation for the Commission’s wrongful conduct that in its view led to the collapse of its deal. The CFI largely agreed with Schneider. But then, the Commission appealed the CFI judgment to the European Court of Justice (ECJ). In February of 2009 the Advocate General (AG) delivered his opinion on the appeal. This article reports on the AG’s conclusions, which are not binding on the ECJ judges but, nonetheless, constitute a substantiated and strong recommendation for overturning the CFI’s ruling.
The Schneider case against the Commission - When it all started
On 16 February 2001, Schneider informed the Commission that it had acquired the entire control in Legrand by means of a public offer. On the basis of the derogation granted by the EC Merger Regulation for transactions completed by means of public bids, Schneider had completed the acquisition of the shares in Legrand before receiving clearance by the Commission.1
By its decision of 10 October 2001, following an in-depth investigation, the Commission prohibited the acquisition of Legrand’s control by Schneider on the grounds that the transaction would create a dominant position and would significantly impede effective competition in several electric equipment markets in France (Prohibition Decision).2 Shortly after that, the Commission adopted a second decision ordering Schneider to divest itself of Legrand within a set period of nine months, which expired on 5 November 2002 (Divestiture Decision).3
On 18 March 2002, Schneider brought an action for annulment before the CFI against both the Prohibition Decision and the Divestiture Decision, while the Commission extended the deadline for the implementation of the Divestiture Decision to 5 February 2003.
In the meantime, as an extra measure of caution, Schneider made arrangements for the sale of Legrand in case the CFI did not annul the Commission’s decisions. For that purpose, on 26 July 2002, Schneider concluded a contract of sale with the consortium Wendel KKR, which had to be implemented by 10 December 2002 at the latest (i.e., almost two months before the expiry of the set deadline by the Commission for the Divestiture Decision). The contract contained a clause under which, in the event the Prohibition Decision was annulled by the CFI, Schneider would have had the option to cancel the contract with Wendel KKR, upon payment of compensation of EUR 180 million and provided that notice of this fact was given to Wendel KKR by 5 December 2002.
By two judgments of 22 October 2002,4 the CFI indeed annulled the Prohibition Decision and, consequently, the Divestiture Decision. The CFI found that the Commission’s analysis was vitiated by omissions and errors in the assessment of the impact of the transaction on the national sectoral markets, outside France. With regard to French sectoral markets, the CFI also found that the Commission did not respect the rights of the defence of Schneider, by including in its prohibition decision objections, other than those expressed by the Commission in its statement of objections that was sent to Schneider in the course of the administrative process. Therefore, the CFI also found that Schneider’s rights of defence throughout the process were not respected.
The Commission did not appeal these judgments, which became final. On 15 November 2002, the Commission re-launched its investigation on the Schneider/Legrand transaction and again expressed concerns about its effects on competition. On 2 December 2002, Schneider finally informed the Commission that it intended to sell Legrand to Wendel KKR, a sale which took place on 10 December 2002. That was the end of the deal.
Almost one year later, on 10 October 2003, Schneider brought an action for damages against the Commission before the CFI, seeking compensation of approximately EUR 1.7 billion as reparation for the losses that it had allegedly sustained because of the illegality of the Prohibition Decision.
At this stage it should be noted that, according to settled case law, in order for the European Community to incur non-contractual liability under the EC Treaty5 for unlawful conduct of its institutions, the following conditions must be satisfied: (i) the institution’s conduct must be unlawful; (ii) actual damage must be suffered; and (iii) there must be a causal link between the conduct and the damage pleaded.6 The burden was on Schneider to prove that the Commission’s conduct in the review of the notified transaction met all three conditions.
The CFI, by a judgment of 11 July 2007, recognized Schneider’s right to obtain compensation, but only in respect of some of the losses alleged.7
More precisely, the CFI found that the violation of Schneider’s rights of defence by the Commission constituted a sufficiently serious breach of a rule of law for which Schneider had the right to compensation in relation to two categories of financial loss: (i) the expenses incurred by Schneider relating to its participation in the resumed merger control procedure; and (ii) the damage suffered due to the reduced divestiture price which Schneider had to concede to Wendel KKR, in order to obtain a postponement of the execution of that divestiture. The CFI found that the Commission ought to compensate two-thirds of this loss to Schneider.8 The CFI then ordered the parties provide estimates for the first category of the costs incurred by Schneider and for an expert to quantify the second category of loss.9
But this was not the end for Schneider’s battle. Following Schneider’s partial but substantial victory before the CFI, on 11 July 2007, the Commission lodged an appeal before the ECJ to set aside the judgment of the CFI.10
The Opinion of the Advocate General
The judgment of the ECJ is not yet delivered.11 On 3 February 2009, Advocate General Ruiz-Jarabo Colomer rendered his opinion on the Commission’s appeal, proposing that the ECJ partially overturns the CFI judgment and reduces the damage awarded to Schneider in the first instance.
The Commission, in its appeal, contested three main issues, namely: (i) that the Commission's unlawful conduct is sufficiently serious; (ii) that Schneider has suffered damage to the alleged extent; and (iii) that there is a causal link between the alleged unlawful conduct and the alleged damage.12
Although the AG agreed with the CFI that the unlawful act committed by the Commission constituted a sufficiently serious breach,13 when examining the causal link between the unlawful act of the Commission and the alleged harm caused to Schneider, the AG found that this was not sufficiently substantiated. More precisely, the AG found that this causal link faded when Schneider agreed on its own initiative to sell Legrand to Wendel KKR at a reduced price that was meant to compensate for the postponement of the sale. In particular, the AG found that Schneider’s loss did not directly, immediately and exclusively arise from the Commission’s unlawful act, in a relationship of cause and effect.14
The AG did not attribute the reduction in the sale price of Legrand to the Commission’s Prohibition Decision. Instead, the reduction was based on the commercial risks that Schneider consciously chose to undertake in the first place, by proceeding to the completion of a transaction that had not received clearance by the competent competition authorities.15 Furthermore, he concluded that Schneider chose to sell Legrand to KKR for a reduced price when it was not legally obliged to do so.16
In addition, the AG found that Schneider rushed, for no obvious reason, into concluding and finalising the contract with Wendel KKR earlier than the expiry of the deadline set by the Commission (5 February 2003), which in any event could have been extended upon Schneider’s request. On this ground, the AG considered that Schneider had already decided to give priority to the transaction with Wendel KKR, and that, at that point, Schneider was not seriously considering proceeding and completing the acquisition of Legrand.17
Finally, the AG also concluded that if Schneider really wanted at that stage to proceed with the acquisition of Legrand, it could have withdrawn from the sale to Wendel KKR, even if it had to pay the EURO 180 million to the latter, since this sum would have been considerably lower than the EURO 1.7 billion that Schneider claims it suffered because of this sale.18
As a result of this analysis, the AG proposed to the Judges of the ECJ that they set aside the judgment of the CFI. He did, however, recommend that the Commission should pay the expenses Schneider incurred in respect of its participation in the resumed merger control procedure, which followed delivery of the judgments of the CFI.
The non-contractual liability of the Community in the context of merger control rules
The legal basis to seek damages from the Commission caused by conduct that has been found wrongful is provided by the EC Treaty,19 where, in Article 288, second paragraph, it is stated that “the Community shall […] make good any damage caused by its institutions or by its servants in the performance of their duties.” Such proceedings are subject to a five year limitation period, from the occurrence of the event giving rise to the non-contractual liability of the Community.20
Although proceedings initiated against Community Institutions on the ground of non-contractual liability of the latter are not uncommon in most areas of EU law, the fact of the matter is that there have not been that many cases brought against the Commission in the field of competition law.21
This is explained in two ways. First of all, the CFI has found that for the Community to incur non-contractual liability there must be unlawful conduct by its institutions amounting to a manifest and grave disregard for the limits on their discretion.22 In the field of merger control, however, the CFI is rather reluctant in holding the Commission liable.
In fact, the CFI has found that it cannot be ruled out that manifest and grave defects, which affect the Commission’s economic analysis in a decision declaring a concentration incompatible with the common market, could constitute breaches that are sufficiently serious to give rise to the non-contractual liability of the Community. However, the complexity of the situations to be regulated in the control of mergers, the difficulties of application connected with the time constraints imposed on the administration in that regard and the margin of discretion available to the Commission must be taken into account in analyzing whether a sufficiently serious breach on the Commission’s part may have arisen.23
Second, it is also relevant to note that Commission “prohibition” decisions in merger cases are the exception rather than the rule.24 Furthermore, even in cases where the Commission has decided to block a notified merger, the parties do not always decide to bring a case before the European Courts to challenge the lawfulness of that decision because of time or cost constraints, their limited resources, the uncertain outcome of the proceedings or other factors. As a result, parties often do not have the opportunity to bring an action for damages on grounds of non-contractual liability of the Community.
When parties notify their transactions to the competent authorities in compliance of their reporting obligations under competition rules, they usually have conducted internally a thorough assessment of any risks involved before deciding to proceed with the notification of their transaction. A Commission decision under merger control rules can make or break a deal and therefore it is of extreme importance to the parties. When this decision is wrong it is perhaps natural for those affected by it to expect that the Commission will do good the damage potentially caused by this.
However, in practice this is not so easy. The AG’s opinion highlights that the biggest challenge for parties in proceedings seeking redress is to prove that there is an adequate causal link between the wrongful conduct of the Commission and the damage suffered by the party. A causal link which is even more difficult to establish considering the commercial reality and the transactional risks parties are often exposed to.
If the ECJ judges decide to follow the position of the AG in the final judgment, this would confirm that this causal link is sensitive and difficult to establish and interested parties would most likely be discouraged to come forward in the future with similar claims.
It is worth remembering that the opinion of the AG is not binding on the judges of the ECJ who are going to deliver the final judgment. The AG’s opinion constitutes a suggestion. Opinions of the AGs at the ECJ are delivered in the spirit of independence and they usually provide a thorough analysis of, and reflections on the matter in question under existing laws and jurisprudence that are offered to the judges to consider when adopting the final judgment.25
It usually takes 3-8 months (and sometimes more than that) to deliver a judgment following the publication of the opinion of the AG. There is no possibility to appeal against an ECJ judgment.
||Article 7(3) and (4) of the Council Regulation (EEC) No. 4064/89 of 21 December 1989 on the control of concentrations between undertakings (previous Merger Regulation). |
||Press Release: “Commission prohibits acquisition of control of Legrand by Schneider Electric”, IP/01/1393, Commission decision, of 10 October 2001, Case No COMP/M.2283, Schneider/Legrand.|
||Commission decision of 30 January 2002, Case COMP/M.2283 – Schneider-Legrand.|
||Judgment of the CFI in Case T-310/01, Schneider Electric/Commission and in Case T-77/02, Schneider Electric/Commission.|
||Article 288 of the EC Treaty. |
||Judgment of the CFI in Case T-383/00 Beamglow/Parliament and others, point 95, Case 26/81 Oleifici Mediteranei/EEC, point 16.|
||Judgment of the CFI in Case of 11 July 2007, in Case T-351/03, Schneider (supported by the French Republic as intervener)/Commission (supported by Germany). |
||OLG Karlsruhe SchiedsVZ 2006, 335 (336), OLG Karlsruhe SchiedsVZ 2008, 47 (48); KGR Berlin 2008, 839.|
||See, CFI Judgment, cited above, point 320 and, 3 of the CFI order.|
||Case C- 440/07 P, Commission/Schneider Electric (judgment pending). It should be also noted that judgments of the CFI can be reviewed by the ECJ on appeal of either of the parties, on points of law only..|
||According to the annual report of the ECJ, the duration of appeal proceedings in 2007 was of an average of 18 months, which is clearly exceeded in the present case.|
||Opinion of the Advocate General m. Ruiz-Jarabo Colomer, presented on 3 February 2009, in Case C-440/07, Commission/Schneider Electric, point 86.|
||Id. point 113|
||Id. point 140. |
||Id. points 148-149.|
||Id. points 145-146, and 175|
||Id. points 144-148 |
||Consolidated versions of the Treaty on the European Union and of the Treaty establishing the European Community. OJ C/321 E/1 of 29.12.2006.|
||See Article 46, of the Protocol No 6 on the Statute of the Court of Justice, annexed to the Treaty in European Union, to the Treaty establishing the European Community and to the Treaty establishing the European Atomic Energy Community. The period of limitation is interrupted if proceedings are instituted before the Court of Justice or if prior to such proceedings an application is made by the aggrieved party to the relevant institution of the Communities.|
||See, Judgment of the Court of First Instance of 9 September 2008 in Case T-212/03, MyTravel Group/Commission in the context of merger control. See also, judgment of the Court of First Instance of 28 January 1999, in Case T-230/95, Bretagne Angleterre Irlande (BAI)/Commission, where the Court rejected the application for damages in the context of a state aid process.|
||See, My Travel Group/Commission, point 37.|
||Id, points 80-85.|
||According to the statistics of the Commission, out of 3936 cases that have been notified and examined by the Commission, since the implementation of the EC Merger Control system in 1990 (excluding cases withdrawn or abandoned by the parties) only 20 have been declared to be incompatible with the Common market and as a result prohibited.|
||It is also worth mentioning that the opinions or the AGs, though not binding, are usually followed by the Judges in the final judgment, in their totality or partially. Of course, the ECJ will undertake a case by case assessment of the case and then decide. |