On 11 July 2007, the European Court of First Instance (CFI) delivered its long-awaited judgment in the appeal of Schneider Electric S.A. (Schneider) against the decision of the European Commission (Commission).1
The CFI ruled for the first time that a merging party can be compensated for losses sustained as a result of the illegal prohibition of its merger.
Background
In October 2001, the Commission prohibited Schneider’s acquisition of Legrand and ordered the divestment of Legrand. Schneider appealed the Commission’s decision. In the meantime, in anticipation of not succeeding in its appeal, Schneider prepared for its divestiture of Legrand. In July 2002, Schneider concluded a contract of divestiture with the Wendell-KKR consortium which had to be executed by 10 December 2002 at the latest.
However, in October 2002, the CFI annulled the Commission’s decision prohibiting the merger. In its decision, the CFI found that the Commission had failed to have regard to Schneider’s rights of defence, since the Commission had advanced for the first time in its decision, an objection to the merger that Schneider had not had an opportunity to comment on. The Commission re-examined the merger and in November 2002, it informed Schneider that it was beginning an in depth (stage two) investigation of the merger. However, this was closed in December 2002 when Schneider voluntarily sold Legrand to the Wendel-KKR consortium.
Standard for awarding compensation
In its judgment on the compensation claim, the CFI considered the standard, set out in its case law, for determining whether the European Community should incur liability for damages for unlawful conduct by its institutions or its officers in the performance of their duties. The standard of review is whether there was ‘a grave and manifest disregard of the limits of their powers of assessment’.
The rule takes into account the complexity of the situations to be regulated, difficulties in the application or interpretation of the legislation, and the margin of discretion available to the Commission in its appraisal and in the application of rules such as the competition law provisions. Where the Commission’s actions can be explained by the objective constraints of the merger control procedure, the Commission is not liable. For example, the CFI reiterated that the Commission shall be afforded some latitude in its forward-looking analysis and in its interpretation of complex economic data, and that logical and consistent application of sound economic theory should not be susceptible to a successful action for damages. Therefore, it is less likely that a damages action would succeed on substantive grounds. However, in cases where there is a considerably reduced or even no discretion, the mere infringement of law may be enough to establish the existence of a sufficiently serious breach.
Basis for compensation award
European law provides that, before taking any decision, the Commission must, at every stage of the procedure, give the parties concerned the opportunity of making known their views on the objections against them. Further, the Commission must base its decision only on objections on which the parties have been able to submit their observations.
The CFI found that the infringement of Schneider’s right to be heard before the Commission made its decision was a straightforward procedural measure, and failure to observe this requirement could not be justified by any particular constraints to which the Commission was subject or by any margin of discretion. The Commission’s failure to respect Schneider’s rights of defence was therefore in itself a serious and manifest failure, which entailed an obligation to make compensation for its harmful consequences.
The CFI decided that Schneider had a right to compensation in respect of two categories of financial loss:
- Expenses incurred in relation to the merger control procedure when the Commission re-examined the merger following the CFI's annulment ruling.
- The reduction in the divestiture price which Schneider had to concede to Wendel-KKR in order to obtain a postponement of the execution of that divestiture. The CFI decided that only two-thirds of this loss should be compensated, as it considered that Schneider had itself contributed to its own loss.
This case is unusual because Schneider had already acquired the Legrand shares at the time of the prohibition decision. In many circumstances, offers are conditional on regulatory approval meaning the second type of loss will not arise.
Next steps
The precise amount of the losses will now be assessed. Schneider initially claimed €1.66 billion (AU$2.77 billion). The CFI gave Schneider three months to submit evidence on the first category of loss and an expert will be appointed to assess the second category of loss.
The Commission has appealed to the Court of Justice on the basis that firstly, it was Schneider’s decision to sell Legrand and secondly, the error was not significant enough to prompt a compensation claim. There is a similar compensation case being brought against the Commission by Airtours (now MyTravel).
While corporations can seek review of merger clearance decisions by the ACCC in Australia, no company has ever been awarded compensation following an adverse ACCC decision.
Footnotes
1 CFI case number T-351/03.