When Neelie Kroes began her five-year term as the EU's competition commissioner in November 2004, there were more than a few clouds on the regulatory horizon.

To begin with, the EU's Court of First Instance (CFI) had set important precedents in 2002 by reversing three high-profile merger vetoes made by her predecessor, Mario Monti. Four years later and two years into Kroes' term, the court further embarrassed the commission by reversing Monti's decision to allow the Sony and BMG merger.

It seemed like the commission couldn't get anything right. But as many observers acknowledged, it had worked hard to revamp its procedures and Kroes was hopeful a new era was in sight.

Unfortunately, the old era was still lingering. One of the three decisions the CFI reversed involved Monti's order to block France's Schneider Electric's $9.2 billion bid to acquire Legrand, a competing French manufacturer of electrical equipment.

In a stunning July 11 decision, the CFI ruled that the commission should pay damages of up to $545 million to Schneider for denying the company the right to respond to the commission's objections. It was the first time the court had awarded damages to a firm for losses suffered as a result of the commission's prohibition of a merger. And it caught many observers by surprise.

“I and many others who keep abreast of developments at the court have always believed that Schneider's complaint would be rejected,” says Andreas Weitbrecht, co-chair of Latham & Watkins' global antitrust and

competition practice.

Although this decision sounded like a major win for companies doing business in Europe, it wasn't. Most experts expect the commission to be much more diligent in its merger investigations in the wake of the reversal, which may result in increased scrutiny and more onerous

disclosure requirements.

Procedural Mistakes

In October 2001 the commission prohibited the merger between Schneider and Legrand. By then Schneider had already purchased 98 percent of Legrand's shares, as French law required it to do following its initial bid in January 2001.

Schneider appealed, but since the prohibition order required Schneider to divest its shares, Schneider worked out an agreement with Legrand to sell them to a consortium known as Wendel/KKR. The agreement allowed for a delay in closing to Dec. 10, 2002, by which time the CFI was expected to have ruled on Schneider's appeal. If the appeal succeeded, Legrand would allow Schneider to pursue its original merger plan. In return Wendel demanded and received a reduction in the sale price to compensate it for the risk of delay.

In October 2002, however, the CFI annulled the commission's decision. The main ground for annulment was the commission's failure to allow Schneider to respond to the commission's merger objections. Only when it released its formal decision against the merger did the commission inform Schneider it was objecting to the merger on “buttressing” grounds–i.e. although the two companies operated in different market segments, the merger strengthened their position in their individual markets.

After the ruling the commission opened a second investigation and continued to resist the merger. In early December 2002 Schneider abandoned the merger, sold the shares to Wendel and promptly sued the commission for $2.3 billion.

Schneider argued the commission should pay damages because it had denied approval for the merger based on a misapprehension of the economic impact of the merger outside France. It also alleged the commission should face liability for failing to afford Schneider the right to respond to the commission's reasoning for objecting to the merger.

The company got nowhere on the substantive ground, but succeeded on the procedural ground.

Commission's Punishment

“The court's ruling reflects the fact it will forgive almost everything–except grave and manifest errors–in the commission's substantive analysis because of the need for speed in making merger decisions,” explains Sven V?? 1/2 lcker, a partner in Wilmer Cutler Pickering Hale and Dorr.

Here, the econometric models the commission followed were not manifestly contrary to economic discipline, and the commission had applied them logically even if it had chosen them in error.

The court, however, had little difficulty accepting Schneider's procedural argument. It ruled that the commission was liable for failing to inform Schneider of its reasoning for objecting to the merger. That, the court ruled, constituted a serious infringement of the company's fundamental rights.

Because Schneider had been forced to reduce the sale price to Wendel to delay the closing, the company was entitled to damages for the difference between the price it received and the price it could have obtained had the commission let the merger go through. However, because Schneider also had pursued what the CFI described as a “high-risk” strategy in dealing with the merger and negotiating with Wendel, the court ruled the company could only recover two-thirds of its loss.

The CFI also ruled that the commission would have to indemnify Schneider for the costs incurred in the second investigation, which would not have been necessary but for the procedural error the first time around.

Still, the narrow ground on which the CFI based its decision has led some observers to question its impact.

“This is an egregious judgment that may well not survive on appeal,” Weitbrecht says. “Even if it does survive, the fine procedural ground on which Schneider succeeded means that we are not looking at a sea change in terms of the commission's liability.”

Schneider's Impact

The breadth of the Schneider decision will shake out with more certainty when the CFI rules on a pending claim for damages brought by MyTravel Group (formerly known as AirTours). In 1999 the EU blocked the British travel operator's $1.2 billion bid for First Choice Holidays.

In 2002 CFI overturned the prohibition, one of three cases (Schneider/Legrand and Tetra Laval/Sidel were the other two) in which it did so that year. MyTravel is now seeking $1.05 billion in damages.

“The vetoes in 2002 changed the way the commission conducts investigations,” says Marleen VanKerckhove, a partner in Arnold & Porter. “They became much more careful both in approving and prohibiting mergers, and because so many decisions are being appealed, they are very careful to lay a proper record for the court.”

Now that the commission is facing damages as well as reversals, the trend is bound to continue.

“The commission is going to be more careful in the wake of Schneider, and it will be more burdensome to deal with it whenever there is a whiff of litigation in the air,” Weitbrecht says. “So as far as I'm concerned, the case doesn't make life any better on the ground for my clients and may ultimately make things worse.”

When Neelie Kroes began her five-year term as the EU's competition commissioner in November 2004, there were more than a few clouds on the regulatory horizon.

To begin with, the EU's Court of First Instance (CFI) had set important precedents in 2002 by reversing three high-profile merger vetoes made by her predecessor, Mario Monti. Four years later and two years into Kroes' term, the court further embarrassed the commission by reversing Monti's decision to allow the Sony and BMG merger.

It seemed like the commission couldn't get anything right. But as many observers acknowledged, it had worked hard to revamp its procedures and Kroes was hopeful a new era was in sight.

Unfortunately, the old era was still lingering. One of the three decisions the CFI reversed involved Monti's order to block France's Schneider Electric's $9.2 billion bid to acquire Legrand, a competing French manufacturer of electrical equipment.

In a stunning July 11 decision, the CFI ruled that the commission should pay damages of up to $545 million to Schneider for denying the company the right to respond to the commission's objections. It was the first time the court had awarded damages to a firm for losses suffered as a result of the commission's prohibition of a merger. And it caught many observers by surprise.

“I and many others who keep abreast of developments at the court have always believed that Schneider's complaint would be rejected,” says Andreas Weitbrecht, co-chair of Latham & Watkins' global antitrust and

competition practice.

Although this decision sounded like a major win for companies doing business in Europe, it wasn't. Most experts expect the commission to be much more diligent in its merger investigations in the wake of the reversal, which may result in increased scrutiny and more onerous

disclosure requirements.

Procedural Mistakes

In October 2001 the commission prohibited the merger between Schneider and Legrand. By then Schneider had already purchased 98 percent of Legrand's shares, as French law required it to do following its initial bid in January 2001.

Schneider appealed, but since the prohibition order required Schneider to divest its shares, Schneider worked out an agreement with Legrand to sell them to a consortium known as Wendel/KKR. The agreement allowed for a delay in closing to Dec. 10, 2002, by which time the CFI was expected to have ruled on Schneider's appeal. If the appeal succeeded, Legrand would allow Schneider to pursue its original merger plan. In return Wendel demanded and received a reduction in the sale price to compensate it for the risk of delay.

In October 2002, however, the CFI annulled the commission's decision. The main ground for annulment was the commission's failure to allow Schneider to respond to the commission's merger objections. Only when it released its formal decision against the merger did the commission inform Schneider it was objecting to the merger on “buttressing” grounds–i.e. although the two companies operated in different market segments, the merger strengthened their position in their individual markets.

After the ruling the commission opened a second investigation and continued to resist the merger. In early December 2002 Schneider abandoned the merger, sold the shares to Wendel and promptly sued the commission for $2.3 billion.

Schneider argued the commission should pay damages because it had denied approval for the merger based on a misapprehension of the economic impact of the merger outside France. It also alleged the commission should face liability for failing to afford Schneider the right to respond to the commission's reasoning for objecting to the merger.

The company got nowhere on the substantive ground, but succeeded on the procedural ground.

Commission's Punishment

“The court's ruling reflects the fact it will forgive almost everything–except grave and manifest errors–in the commission's substantive analysis because of the need for speed in making merger decisions,” explains Sven V?? 1/2 lcker, a partner in Wilmer Cutler Pickering Hale and Dorr.

Here, the econometric models the commission followed were not manifestly contrary to economic discipline, and the commission had applied them logically even if it had chosen them in error.

The court, however, had little difficulty accepting Schneider's procedural argument. It ruled that the commission was liable for failing to inform Schneider of its reasoning for objecting to the merger. That, the court ruled, constituted a serious infringement of the company's fundamental rights.

Because Schneider had been forced to reduce the sale price to Wendel to delay the closing, the company was entitled to damages for the difference between the price it received and the price it could have obtained had the commission let the merger go through. However, because Schneider also had pursued what the CFI described as a “high-risk” strategy in dealing with the merger and negotiating with Wendel, the court ruled the company could only recover two-thirds of its loss.

The CFI also ruled that the commission would have to indemnify Schneider for the costs incurred in the second investigation, which would not have been necessary but for the procedural error the first time around.

Still, the narrow ground on which the CFI based its decision has led some observers to question its impact.

“This is an egregious judgment that may well not survive on appeal,” Weitbrecht says. “Even if it does survive, the fine procedural ground on which Schneider succeeded means that we are not looking at a sea change in terms of the commission's liability.”

Schneider's Impact

The breadth of the Schneider decision will shake out with more certainty when the CFI rules on a pending claim for damages brought by MyTravel Group (formerly known as AirTours). In 1999 the EU blocked the British travel operator's $1.2 billion bid for First Choice Holidays.

In 2002 CFI overturned the prohibition, one of three cases (Schneider/Legrand and Tetra Laval/Sidel were the other two) in which it did so that year. MyTravel is now seeking $1.05 billion in damages.

“The vetoes in 2002 changed the way the commission conducts investigations,” says Marleen VanKerckhove, a partner in Arnold & Porter. “They became much more careful both in approving and prohibiting mergers, and because so many decisions are being appealed, they are very careful to lay a proper record for the court.”

Now that the commission is facing damages as well as reversals, the trend is bound to continue.

“The commission is going to be more careful in the wake of Schneider, and it will be more burdensome to deal with it whenever there is a whiff of litigation in the air,” Weitbrecht says. “So as far as I'm concerned, the case doesn't make life any better on the ground for my clients and may ultimately make things worse.”