Global Policy Forum

By Eric Pfanner

A European court on Tuesday overturned a decision blocking the merger of two French electrical equipment companies in a ruling that could spur an overhaul of the takeover review process in Brussels and open the door to more Continental mergers. The European Court of First Instance in Luxembourg ruled that the European Commission's decision to block the purchase of Legrand SA by Schneider Electric SA had been "vitiated by errors and omissions."

It was the second time this year that a decision by the EU competition commissioner, Mario Monti, was overturned by the court, but the first time in which regulators' procedures, not just economic issues, played a critical role. "You don't have to be too much of conspiracy theorist to say that the court may be making a more general point here," said Alec Burnside, a partner at the law firm Linklaters. "And that is that the current system is not acceptable."

Analysts said the ruling could speed efforts to reform EU takeover review procedures, which first came under fierce scrutiny when the commission blocked General Electric Co.'s planned purchase of Honeywell Inc. two years ago, making Monti the nemesis of GE's former chief executive, Jack Welch.

Though market conditions are unfavorable at the moment for mergers and acquisitions, Brussels has been eager to stimulate cross-border deals as it encourages the development of a single European market. Yet legislation that would block barriers to such transactions has been held up, largely because of the opposition of Germany.

In the meantime, European courts have taken the initiative. The European Court of Justice this year issued a ruling limiting the circumstances under which governments can hold so-called golden shares, which some have long used to block foreign takeovers of partially privatized companies deemed to be of strategic importance. And the European Court of First Instance dealt a blow to regulators with its ruling in June to overturn a decision blocking the acquisition of First Choice Holidays PLC, a tour operator, by a rival, MyTravel Group PLC. That court will give the commission's competition policy a further test with an expected ruling Friday in another takeover case, involving packaging companies.

The rejection of the ruling in the Schneider case was the first by the court under a new procedure intended to speed up decisions, after criticism that such cases often dragged on for years. Still, differences in European national laws mean even the new procedures may not be fast enough. Because French rules bar conditional takeovers, Schneider was forced initially to acquire Lagrand despite the ongoing regulatory investigation; then, after the commission ruling barring the deal, it had to reach a separate agreement to sell it for less.

Now it could change its mind. Schneider said it was studying the situation and had not decided whether to pull out of its deal to sell Lagrand to Kohlberg, Kravis, Roberts Co. and Wendel Investissements SA. In that case, it would have to resubmit its application to the commission, which said it had not decided whether to review the court's ruling.

"I think what the court is saying is that we didn't spell out the reasons clearly enough," said Amelia Torres, spokeswoman for Monti. "It's not as if the merger could go ahead without strings being attached."

Indeed, the court appeared to agree with the commission's analysis of the possible consequences of the deal in France, the companies' key market. But the court ruled that the companies had not been given a proper chance to defend themselves. The ruling thus is a sharp criticism of the commission's takeover review process, a process that is itself under review. Torres said the commission was recruiting more economists so that it can better assess the effects of potential mergers. And Monti is expected to announce proposals for a reform of the procedures by the end of the year.

Analysts say these probably will include greater scrutiny of the commission's investigations by panels composed of industry experts. There may also be efforts to increase the amount of contact between regulators and the companies involved in a deal during the review process, Torres said.

Burnside said the commission should go further and create an external body to review takeover rulings. Under the current system, he said, the regulators get to act as "judge, jury and executioner" - though the court now appears to be willing to offer stays of those executions. That can discourage companies from even announcing that they are contemplating a merger. In the United States, where merger and acquisition activity is higher, regulators who want to block a deal must make their case in court first.

Torres said the commission was unlikely to adopt the U.S. approach, noting that cases there can drag out for years. Monti would be in favor of further efforts to speed the judicial review process, she added, perhaps through the creation of a special chamber of the court dedicated to reviewing merger decisions.

Though there have been some high-profile merger rejections, European regulators have blocked relatively few deals - only 22 out of more than 2,000 in the last dozen years. "People should not conclude that just because we start an investigation we will block the merger," Torres said.

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