European court deals blow to Monti's mergers policy

The European Commission's adjudication record on big mergers received another stinging blow yesterday when a court threw out its decision to block Schneider's planned takeover of its rival Legrand.

Mario Monti's Competition Directorate was heavily criticised by Europe's Court of First Instance in its ruling, finding the Commission at fault on both legal and procedural points in opposing the French deal. It is the second high-profile court case to go against the Commission in recent months, after the shock over-ruling of its decision to prevent the acquisition of First Choice by Airtours, now called MyTravel. The latest setback for the Commission will fuel calls for a radical over-haul of the Commission's powers over mergers.

The court said: "The Commission's economic analysis is vitiated by errors and omissions which deprive it of probative value ... a serious infringement of the rights of the defence." The Commission faces another test of its anti-trust policy this Friday when the court will pronounce on another large deal, the packaging group Tetra Laval's acquisition of Sidel, a French bottle maker. In the next few months, GE's acquisition of Honeywell, blocked last year by the Commission to a chorus of US outrage, will also come up for judicial review.

David Hull, a competition partner at the law firm Covington & Burling's Brussels office, said: "This shows up an institutional problem and it increases the pressure for reform [of the mergers regime]. This is about the Commission being prosecutor, judge and jury, in having no check on its powers." The Airtours court judgment, delivered in June, came three years after the Commission's verdict on the case, with the deal long since having been dropped. Similarly, the GE case will seek to make a legal point over a transaction that is no longer on the cards.

Companies have complained that judicial review of Commission decisions is so lengthy a procedure that it is worthless in acquisitions, which can rarely be put on hold for long periods.

Alastair Gorrie, a competition lawyer at Coudert Brothers, said: "The Commission's decisions had not been subject to the rigour of judicial review [before Airtours]. One of its errors here was to change the case but not give enough time for the parties to respond."

It was unclear whether the Schneider ruling had come in time to save the company's deal. The French electricals group was ordered to sell off its ¤6.4bn (£4.1bn) Legrand acquisition earlier this year after the Commission said the transaction, which had already gone through, was anti-competitive.

As a result, Schneider has agreed to sell Legrand to Wendel Investissement and the US private equity house KKR at a loss of ¤2.7bn. It would cost ¤180m in penalty fees for Schneider to cancel that sale now.

While the Airtours investigation preceded Mr Monti's tenure as Competition Commissioner, the Schneider case was handled entirely on his watch. Next month, Mr Monti will outline reforms to merger procedures, though this is not expected to involve radical changes. He is expected to boost his economics unit by hiring a high-profile chief economist.