History of the Matter
On December 12, 2012, the EU’s General Court dismissed an appeal by Electrabel against a €20 million ($27 million) fine imposed by the European Commission (the “Commission”) for failing to notify its acquisition of control over Compagnie Nationale du Rhône (CNR) in accordance with the requirements of the EU Merger Regulation (EUMR).
This story begins in 2003 when Electrabel increased its 17.86 percent share of CNR’s capital to 49.94 percent. This increased Electrabel’s effective voting rights from 16.88 percent to 47.92 percent. The remainder of the shares and voting rights were held by public entities. Other than Caisse des Depots et Consignations (“CDC”), which held 20 percent of the voting rights, the remainder was fragmented, with around 20 percent of the remainder being split among more than 200 local public entities.
By virtue of a shareholders agreement entered into between Electrabel and CDC, which provided that they would vote together when appointing the board, Electrabel held two of the three seats on the board, thereby giving it a majority. In addition, Electrabel was the sole remaining industrial shareholder, meaning that it played an active role in the operational management of CNR’s power plants and the marketing of its electricity.
Moving forward to 2007, Electrabel entered discussions with the Commission to assess whether it had acquired de facto sole control over CNR and needed, therefore, to file a merger notification under the EUMR. The parties concluded that it had, and the merger therefore was notified and duly cleared by the Commission in April 2008. The Commission, however, left open the question of the date on which de facto sole control had, in fact, been attained.
Ultimately, the Commission concluded that the acquisition of de facto sole control had taken place in 2003, and imposed the €20 million fine on Electrabel for failing to notify the merger earlier. The fine, and the Commission’s reasoning, was appealed by Electrabel, leading to the decision of the EU’s General Court against Electrabel.
There are a number of lessons to be learned from the experience of Electrabel. The first is the most straightforward, and confirms the simple proposition that failing to file a mandatory notification to the European Commission is a serious infringement which can result in significant financial sanctions. The limitation period for Commission action for this type of offence is five years, rather than the three‐year limitation period which applies to procedural infringements.
The second is that if a company gets the assessment wrong and does not file when it should, the fact it did so unintentionally, and that the merger itself raised no competition concerns, is irrelevant when it comes to calculating the fine. In this case, the Court considered that €20 million was proportionate given the importance of protecting the integrity of the merger control system, the characteristics of the infringement, and its duration.
Finally, and of most interest, the Court not only looked at the factual situation in 2003, but also placed weight on Electrabel’s subjective assessment of the level of control it held at that point. It found that Electrabel was virtually certain that it would be able to exert control at general meetings, given its own experience of low attendance rates by the fragmented shareholder base in prior years. The Court indicated that it would have concluded differently only if Electrabel had been able to demonstrate that it was not virtually certain that it would have de facto sole control.
This case is a timely reminder to all those engaged in M&A transactions involving the EU that the issue of merger control, and the need to make filings, cannot be dismissed lightly. Even when mere minority shareholdings are being acquired, companies and their advisors should not be complacent about the regulatory implications.©2013 Greenberg Traurig, LLP. All rights reserved.