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Failure to Notify and Gun-jumping - EU and German Updates

July 1, 2009

The EC Merger Regulation and most merger control regimes of the EC Member States require concentrations to be notified and cleared before their implementation ("standstill obligation"). While the enforcement of these prohibitions did not appear to be particularly strict in the past, some recent decisions provide evidence that European regulators intend to become more vigorous.

On 10 June 2009 the European Commission fined Belgian energy company Electrabel EUR 20 million (approximately US$29 million) for acquiring control of French electricity producer Compagnie Nationale du Rhone (CNR) without prior approval. The European regulator approved the purchase of CNR by Electrabel in April 2008 following a notification by Electrabel. However, according to the findings of the Commission, Electrabel should have sought the regulator's approval around four years earlier since Electrabel had acquired close to 50% of CNR’s shares from EDF already in December 2003. This made Electrabel by far CNR’s largest shareholder and put the company in a position to de facto control CNR. The Commission’s investigation found that due to the wide dispersion of the remaining shares and past attendance rates at CNR’s shareholders meetings, Electrabel enjoyed a stable majority at such meetings. Thus, the Commission concluded that Electrabel had acquired de facto sole control of CNR in 2003 which triggered the merger notification requirement.

Competition Commissioner Neelie Kroes said in a statement that the Electrabel decision sends a clear signal that the Commission will not tolerate breaches of the standstill obligation, which is a fundamental rule of EC merger control. The Commission took the view that the infringement lasted for a significant period of time and that Electrabel, a large company with experience in EC merger procedures, should have been aware of its obligation to receive Commission approval before proceeding with the acquisition in 2003. However, the Commission also considered mitigating factors, i.e. that the transaction did not give rise to any competition concerns and that Electrabel subsequently voluntarily informed the Commission of the violation. Under the EC Merger Regulation the Commission can impose a fine of up to 10% of the aggregated turnover of the companies concerned for this type of infringement.

A similar issue, although more serious, was the subject of a decision from the German Federal Cartel Office (FCO) in December 2008. The FCO imposed a record fine of EUR 4.5 million against Mars, Inc., USA, for a willful violation of the prohibition to complete transactions prior to receipt of the required German merger clearance. The FCO’s decision was related to Mars’ intended acquisition of Nutro Products, Inc., a pet food producer based in the US. After obtaining the US approval and with Austrian and German approval still pending, Mars closed the transaction by acquiring the majority of the shares in Nutro. The FCO's decision was adopted despite the fact that Mars had attempted to carve out Nutro's German business by temporarily assigning the respective distribution rights to a separate entity held by the seller. However, the amount of the fine was reduced due to Mars' cooperation in eliminating the domestic effects of the transaction.

In another case the German regulator levied a EUR 4.13 million fine against the German publishing house Druck- und Verlagshaus Frankfurt am Main AG (DuV) on 5 February 2009 for concluding its purchase of another publisher, Frankfurter Stadtanzeiger GmbH (FSG), without notifying the FCO of the transaction. When the authority was analyzing another proposed deal of DuV, it discovered that the company had acquired FSG at the beginning of 2001 and not fulfilled its obligation to notify the deal.

 

In the light of these substantial fines for violations of the standstill obligation, companies should always conduct a thorough merger control analysis, also in cases where only minority shareholdings are acquired. As is shown by the Electrabel decision, under European merger laws the acquisition of a minority shareholding can result in a change of control which triggers merger filing requirements. Some European countries such as Germany and Austria have merger filing requirements even where the transaction does not lead to a change of control. In those countries the acquisition of a pure minority shareholding of 25% of the capital or voting rights of another company is sufficient to trigger a filing obligation.