by John Cook, O'Melveny & Myers | Published September 10, 2008 at 3:00 PM
Europe often frowns across the Atlantic at what it sees as the
excessively litigious culture of the U.S., but even those excesses do
not involve the Federal Trade Commission being sued for damages for
getting a merger decision wrong! Yet this was the scenario presented to the EU Court of First
Instance to adjudicate upon Tuesday, Sept. 9, in the final episode of
the Airtours saga.
MyTravel (formerly Airtours) claimed £518 million ($912 million) in
damages from the European Commission for loss of the profits it would
have earned through acquiring First Choice Holidays plc, loss of
synergy savings and abortive bid costs based on the Commission's
catalog of "manifest errors" of assessment in its merger decision
prohibiting the Airtours bid for its rival, First Choice, in 1999 -- a
prohibition which was annulled by the court itself in June 2002.
The court rejected the claim and, unlike in the recent Schneider Electric case, found no grounds for awarding compensation.
A successful claim for maladministration by the Commission --
conferred by Article 288 of the EC Treaty -- requires it to be
established that the Commission has committed a manifest and grave
breach of a principle of EC law conferring rights on individuals. In
Schneider, the Commission had failed to inform Schneider of one of the
Commission's key objections to its takeover bid for Legrand Electric Ltd.
(a possible propensity to leverage dominance from one national market
to another) and, in doing so, had infringed Schneider's basic rights of
defense.
In Airtours the court found that no such individual right had been
infringed. It rejected Airtours' argument that Article 2 of the EC
Merger Regulation conferred an individual right on a company to a
declaration of compatibility (that is, a merger clearance) where the
Commission could not substantiate its competition concerns or where the
EU courts judged that they had not been properly substantiated.
The court interpreted Article 2 as confined to defining the role of
the Commission and the test which it was to apply in carrying out its
merger control function. The Commission had made a wrong decision but
had done so within the discretion allowed to it in making merger
appraisals and in performing its role as the supreme merger control
authority for the EU.
The court emphasized the complexity and urgency of the judgments the
Commission had to make in carrying out that role, and explicitly
recognized the policy consequences of laying the Commission open to
claims for damages for merger decisions that were quashed, either in
whole or in part, by the court.
The EU courts have always recognized that, in the difficult
prospective judgments needed to determine the probable consequences of
a merger, the Commission had a considerable margin of discretion in
making the complex economic assessments required. The court described
the Commission's role in applying the competition rules as "complex,
delicate and subject to a considerable degree of discretion." Moreover,
even Airtours did not argue that any court annulment of a decision for
manifest error should expose the Commission to an award of damages
against it, which, as the court said "would risk compromising the
capacity of the Commission fully to function as a regulator of
competition."
As a matter of public policy and EU jurisprudence the judgment is of
immense interest. However, its practical value is likely to be
extremely limited. The procedural and other amendments that followed
the Airtours debacle -- the creation of the office of the Chief
Economist, the introduction of review teams, increased vetting by the
Legal Service and procedural improvements such as regular "state of
play" meetings with the merger parties and their advisers -- means that
there is unlikely to be a merger decision in the future that repeats
the errors of the original Airtours prohibition. This is not to say,
however, that there might not be a repeat of the slip-up, which
occurred in Schneider's failing to respect the company's rights of
defense, although this also is increasingly unlikely.
In 1999 the climate for Airtours' bid for First Choice was not
propitious. It was a little before the U.K. Competition Commission had
completed a thorough investigation of the U.K. "package holiday"
market. Its key conclusion was that effective competition depended on a
sufficient number of vertically integrated travel groups in the market
and the Airtours bid took out the perceived maverick, First Choice, in
a 4-to-3 merger. At the time there was also considerable doubt about
whether the EC merger regime could adequately counter merger activity
in oligopolistic markets -- doubts which ultimately led to the
abandoning of the original "dominance" test for prohibition and its
replacement in new legislation with what is effectively the U.S. merger
test -- that is, does the deal involve a substantial lessening of
competition?
In 1999 the outgoing competition commissioner was certainly on the
lookout for a merger target to prove the regime's credentials as a tool
to regulate oligopolistic industries -- this was a priority on the
Commission's agenda. Arguably, however, the new merger regulation and
the EU courts' judgments in Airtours itself, Impala and, most recently,
Sony Corp.-Bertelsmann AG have not made it easier for the
Commission to prohibit mergers, which may involve "coordinated effects"
-- a situation not dissimilar in the U.S. The ultimate irony is that
last year the Commission cleared, in Phase 1 decisions, MyTravel to
merge with Thomas Cook Group plc and TUI/Thomson to merge with
First Choice in moves that consolidated the U.K. traditional package
holiday groups into a duopoly -- but a duopoly very exposed to the
impact of the low-cost airlines and "self-packaging" of holidays
through the Internet.
Of course, none of this will come as any comfort to MyTravel. No
company has done more to help the EC merger regime develop to maturity!
And the innocent bystander will think it rough justice on Airtours that
a merger decision riddled with errors cannot sustain a damages claim
whereas an isolated infringement of the rights of defense can do so.
But it remains to be seen whether the Airtours saga is laid to rest
here or whether David Crossland, the rags-to-riches holiday
entrepreneur who built up Airtours from a single travel agency in
Manchester, England, will, uncharacteristically, throw good money after
bad by pursuing an appeal to the ultimate arbiter, the European Court
of Justice.
Goldman, Sachs & Co. veteran Tracy Caliendo will join Bank of America Merrill Lynch in September as a managing director and head of Americas equity hedge fund services. For other updates launch today's Movers & shakers slideshow.
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Europe often frowns across the Atlantic at what it sees as the
excessively litigious culture of the U.S., but even those excesses do
not involve the Federal Trade Commission being sued for damages for
getting a merger decision wrong! Yet this was the scenario presented to the EU Court of First
Instance to adjudicate upon Tuesday, Sept. 9, in the final episode of
the Airtours saga.
