August 27 2009
On June 10 2009 the European Commission announced that it had imposed a fine of €20 million on a company which infringed its obligation to file a transaction prior to implementation.
In 2003 Electrabel – an electricity producer and retailer belonging to GDF Suez – increased its shareholding in Compagnie Nationale du Rhône (CNR) to a large minority shareholding of nearly 50%, without notifying the commission of the deal prior to its implementation. According to the commission, Electrabel thereby gained de facto sole control over CNR. Due to past attendance rates at CNR's shareholders' meetings and the fact that the shares owned by the remaining shareholders were widely dispersed, the company enjoyed a stable majority at shareholders' meetings. Moreover, Electrabel was the only industrial shareholder of CNR and took over several responsibilities with regard to the operational management of its power plants and certain marketing activities.
In 2008 Electrabel acquired a majority share, notified the transaction to the commission and received clearance (IP/08/658). In that decision the commission left open the precise date at which Electrabel acquired de facto control over CNR and initiated a further investigation of the 2003 transaction. Finally, the commission came to the conclusion that Electrabel, through the minority shareholding, had acquired de facto control as early as December 2003 and imposed a fine of €20 million for infringement of the so-called 'standstill obligation' under Article 7 of the EU Merger Regulation prohibiting the implementation of transactions prior to clearance.
The commission argued that the implementation of any transaction which has an EU dimension without its prior approval is a serious breach of a basic principle of EU merger control. The turnover thresholds, which give rise to such a notification duty, are set out in Article 1 of the regulation. The standstill obligation gives the commission the opportunity to examine whether a concentration would significantly impede effective competition in the European Economic Area or any substantial part thereof.
The commission also argued that Electrabel and GDF Suez are large companies which are very familiar with the EU merger control rules and that the standstill obligation constitutes a cornerstone of the EU merger control system. Moreover, according to the commission, the infringement lasted for a long time: the acquisition of the minority shareholding took place in December 2003, but Electrabel did not consult the commission until August 2007.
As mitigating circumstances the commission took into account the fact that Electrabel voluntarily disclosed the situation to the commission and that, according to the commission, the transaction did not raise competition issues.
The company is entitled to appeal. Doing so may make sense due to the relatively small costs of an appeal in comparison to the heavy fine.
The commission can impose fines of up to 10% of the aggregated turnover for infringing the obligation to file a transaction prior to implementation. The decision against Electrabel follows this rule. Nevertheless, a possible fine of 10% of aggregated turnover is, as such, already excessively high and a fine of €20 million in a case which was reported voluntarily and which raises no competition concerns is disproportionate.
According to Article 14(3) of the EU Merger Regulation, in fixing the amount of the fine the nature, gravity and duration of the infringement should be taken into account. Within those guidelines the commission will then determine the fine at its discretion. However, in fining companies for breach of the duty to notify a transaction, the commission is bound by the principle of proportionality. According to the European Court of Justice, the principle of proportionality is generally applicable and recognized as a fundamental principle within the European Union. Moreover, the principal of proportionality is established in Article 5(3) of the EC Treaty and in Article 49(3) of the Charter of Fundamental Rights of the European Union (although this is not yet binding).
In Electrabel the commission seems to have failed to comply with the principle of proportionality by imposing such a heavy fine. Obviously, if there are no competition concerns, the failure to notify has not been used to circumvent the EU Merger Regulation in order to avoid prohibition of the transaction. Previous cases of failure to notify involved fines of only €33,000 and €219,000.(1)
Although a minority shareholder may have de facto sole control, especially when it is likely to achieve a majority at the shareholders' meetings,(2) sometimes it may be difficult to draw the line, because a prospective analysis based on past voting patterns is required. Uncertainties may arise over the question of whether the shareholder already has de facto control or the moment at which de facto control was acquired.
If the commission wants to encourage companies to disclose possible failures to notify a transaction voluntarily, immunity from fines should be granted – at least in cases which raise no competition concerns and which are the first infringements of this obligation of the respective companies. The commission could apply different penalties according to the company's history of non-filing. For first infringements, a warning combined with a request to comply strictly with the EU Merger Regulation in future would be sufficient. In response to second infringements, the commission could threaten the company with a certain fine and for any further infringement the commission could impose a moderate fine.
The underlying purpose of the imposition of fines is to deter against future violations – not just by punishing the undertakings concerned (specific deterrence), but also by preventing other undertakings from engaging in or continuing unlawful behaviour (general deterrence).(3) Since Electrabel approached the commission voluntarily, the aim of specific deterrence cannot be met, because Electrabel was likely aware of notification requirements and it had shown willingness to comply with its obligations. Nevertheless, an excessively heavy fine against one company might draw the attention of other companies to the issue and thereby increase general deterrence.
However, a fine which is totally out of proportion with regard to the undertaking on which it is imposed cannot be justified by reasons of general deterrence.
This decision implies that the fine might have been even higher had competition concerns been raised by the transaction. Therefore, companies should be extremely careful in examining their filing duties under the EU Merger Regulation in the future, given the recent trend of imposing ever-increasing fines, even for procedural breaches.
For further information on this topic please contact Harald Kahlenberg or Janine Weinhold at CMS Hasche Sigle by telephone (+49 711 97 64 303), fax (+49 711 97 64 939) or email (email@example.com or firstname.lastname@example.org).
(1) Samsung, February 18 1998 (M920) and Møller, February 10 1999 (M969).
(2) Arjomari, February 10 1990 (M025) and Anglo American, April 23 1997 (M754), Consolidated Jurisdictional Notice, Paragraph 59.
(3) See Paragraph 4 of the commission's Guidelines on the method of setting fines, available at: http://ec.europa.eu/competition/antitrust/legislation/fines_en.pdf.
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