The European Union’s second-highest court upheld a fine of EUR 20 million (approximately USD 26 million) against Electrabel (a division of GDF Suez) for early implementation of a merger without notifying and seeking prior approval from the European Commission (“EC”). The case is one of a few decisions where the EC has imposed penalties for breach of the EU merger rules. It highlights the significance of determining the correct trigger for notification where even acquisitions of a minority interest may be subject to a mandatory filing and suspension requirement.
What triggers a notification under the EU merger rules?
Under the EU merger regulation, acquisitions must be notified to the EC where a party obtains direct or indirect (sole or joint) control of another party and the relevant turnover thresholds are met (so-called “concentrations with a Union dimension”). Where the mandatory filing requirements are met, the parties are required to notify the EC of the proposed merger and are prevented from closing the transaction prior to clearance.
“Control” arises for these purposes where a party acquires the possibility of exercising “decisive influence” over another party. Critically, such decisive influence can arise on the basis of a shareholding of less than 50 per cent. For practical purposes, “decisive influence” means the ability to control commercial policy, including strategic decisions such as approval of the budget, business plan and appointment and dismissal of key management (e.g., Chairman, CEO or CFO).
Early implementation of a merger without European Commission approval
The case before the General Court goes back to Electrabel’s purchase of shares in French electricity generator Compagnie Nationale du Rhone (“CNR”) in December 2003. This acquisition of a shareholding of less than 50 per cent was not notified to the EC or to any national EU authority at the time.
In 2008, Electrabel proposed to acquire the remaining shares in CNR and notified the transaction to the EC on the basis that it would amount to the acquisition of sole control by Electrabel of CNR. The transaction was approved by the EC. However, the EC started an investigation into whether Electrabel had in fact obtained control over CNR in 2003.
The Commission concluded that Electrabel had obtained de facto control over CNR in December 2003 and that this acquisition should have been notified under the EU merger rules at that time. The General Court, in a recent judgment, agreed with the Commission that the EC was right to look behind the level of shareholding to examine the reality of control in light of all the relevant facts.
The General Court agreed that a shareholder can acquire de facto control for EU merger control purposes in a situation where: (a) the shareholder is likely to achieve a majority in the shareholders’ meetings; (b) the remaining shares are widely dispersed; and (c) patterns of shareholders at meetings in previous years are taken into account.
Electrabel argued that before its 2008 acquisition, EDF (as the industrial shareholder) had operational management over CNR. Electrabel argued that it was not clear at the time of its December 2003 transaction for 17.89 per cent of CNR’s shares that it would have de facto control of CNR. The General Court, however, agreed with the EC that as of 1 April 2003 EDF had ceded its rights as a majority shareholder and there was no evidence that other shareholders had confidence that EDF would act on their behalf. After considering participation in CNR shareholder meetings between 2000 - 2003, the EC considered that a shareholder with 47.92 per cent of the voting rights would have a majority.
The General Court rejected arguments as to the public company nature of CNR and the existence of a French law preventing private companies from holding more than 50 per cent of CNR to displace the finding that Electrabel had obtained de facto control over CNR in 2003.
Level of the fine
Electrabel argued that the fine of EUR 20 million should be reduced because the EC had violated principles of proportionality, good administration and protection of legitimate expectations by imposing such a high fine for a late notification (i.e., in 2008 rather than 2003).
The EC considered that it was relevant that Electrabel is a large company with access to substantial legal resources. According to the EC, Electrabel should therefore be familiar with EU merger rules. The General Court noted that the fine represented 42 per cent of the legal maximum that can be imposed for implementation of a notifiable merger without notification and clearance, equating to around 0.42 per cent of Suez turnover in 2007.
When considering the gravity (seriousness) of the infringement, the General Court rejected arguments that the infringement was committed through negligence and that the transaction raised no substantive competition concerns. The General Court noted that the EC has a wide discretion when determining the level of penalties and may increase the level of a fine to reinforce its deterrent effect. Accordingly, the General Court dismissed Electrabel’s appeal on the level of the fine.
The case is one of only a handful of examples where the EC has imposed penalties for failure to notify or late notification in contravention of the standstill obligation. In 1998, Samsung was fined EUR 33,000 (approximately USD 43,000) for notification of an acquisition months after the acquisition was consummated. In 1999, A.P. Møller was fined EUR 219,000 (approximately USD 288,000) for failing to notify three transactions two years earlier. All these fines must be viewed in their historical context and the particular circumstances of the case. It can be anticipated that the EC would not be shy to impose fines at a higher level today and where the breach was intentional. However, it must be said that the circumstances where parties would deliberately conceal a notifiable transaction are likely to be rare. Indeed, the cases reported here are instances of late filings and where the companies did not consider that they were subject to an earlier obligation to file.
Beyond EU merger control and implications for global transactions
The General Court has affirmed that early implementation of a merger subject to EU merger rules is viewed as a serious violation, even where the delayed filing was unintentional and the transaction at issue had no adverse effect on competition. Unsurprisingly, the judgment has been met with criticism from business and advisers, particularly as to the level of the fine and the fact that the breach was not deliberate. It serves as a reminder that a careful assessment is required of filing requirements. Even in a jurisdiction like the EU which has a mechanical turnover-based threshold for determination of notifiable transactions, a determination of what constitutes relevant control can be a more nuanced assessment.
Where there is not a relevant acquisition of “control” or “decisive influence” for EU merger control purposes or the EU turnover thresholds are not met, a transaction may still be subject to review by EU member states. Again, assessments of relevant control or influence may need to be made.
For example, in the UK, control can comprise any of the following: (i) material influence - which arises on the basis of an ability to materially influence another enterprise’s policy and can arise at relatively low levels of shareholding, perhaps as low as 10 to 15 per cent; (ii) de facto control - the ability to control policy, which may arise on the acquisition of a higher level of shareholding, such as 30 per cent of voting rights; or (c) legal control – this is a controlling interest and is unlikely to arise unless one enterprise holds more than 50 per cent of the shares carrying voting rights in the other. Furthermore, the assessment is more complex owing to the fact that the UK adopts a “share of supply” test (as an alternative to a turnover-based test) when determining mergers that qualify for review. It is also of note that the share of supply test is not a market share test in an economic sense and allows a wide discretion in describing the goods or services, which need not amount to relevant economic markets.
Merger control regimes beyond Europe have broadly similar approaches and have imposed penalties for failure to file or late filings. For instance, the U.S. Department of Justice has imposed significant penalties for violation of the waiting period under U.S. merger rules.
Finally the assessment of merger filing requirements can have implications for risk management beyond the individual transaction and may come back to bite several years down the line when the parties seek to file a later transaction. This is because merger control authorities will typically require the parties to provide information on the corporate history of the parties, including transactions taking place in the years up to the merger that is the subject of the notification. Thus, the notification form may bring to light information that prompts an authority to examine previous transactions, as was the case in relation to Electrabel’s acquisition of CNR. As the case makes clear, the familiar adage “better late than never” may not always be viewed as a (complete) mitigating factor when determining penalties for a late filing.