French Competition Authority imposes €20 million fine for non-compliance with a structural commitment given as part of a Phase II merger clearance
Published on 21st Nov 2018
On 28 July 2018, the French Competition Authority (FCA) imposed a €20 million fine for non-compliance with a structural commitment consisting of asset divestment, given in an approved merger operation in the consumer electronics and home appliance retail sector. This recently published decision shows the FCA's strict position on how Phase II merger clearance commitments should be implemented.
On 27 July 2016, the FCA cleared a merger between two major French players in the consumer electronics and home appliances retail industry (the Group) subject to commitments. This operation was approved after in-depth examination (Phase II), in which the FCA, for the first time, took into account as part of its relevant market analysis the competition pressure of online sales on retail of IT products ("grey products") and consumer electronics ("brown products").
However, based upon an analysis of local markets and an assessment of every point of sale's (including franchisees') catchment area, the FCA observed that although the merger would not raise concerns outside Paris, where many alternatives (online and offline) were available to consumers, the situation was more problematic in the Paris area.
As a remedy, the FCA accepted the Group's commitment to divest 6 shops located in Paris (Belleville, Italie, Wagram and Beaugrenelle) and its suburbs (St Ouen and Velizy). This commitment was, however, subject to the FCA's prior approval of the acquirer, who should operate in the same industry and be capable of maintaining competition pressure on the Group in the considered areas.
The deadline to implement this commitment was set for 1 August 2018 and an independent representative was appointed to watch over the commitment's implementation.
The implementation of commitments
At the end of 2016, the Group launched the bidding process and identified several potential acquirers. In this respect, three shops (Italie, Velizy and Wagram) were sold to competitors, which were approved by the FCA without it raising specific concerns.
However, the situation was more complex for the three remaining shops. Indeed, potential acquirers identified in the first place stepped out and a third party that was not identified in the first place (the "Acquirer") expressed its interest for the three shops, subject to a condition precedent of being able to operate the Beaugrenelle shop under franchise in accordance with on-going discussions with a certain franchisor.
As from April 2017, the approval process was launched by the Group and the designated representative provided the FCA with a report which stated that the Acquirer was suitable and could be approved.
However, on 26 June 2017 the considered franchisor refused operation of the Beaugrenelle shop under its brand. Therefore, the Group decided not to present the Acquirer for FCA's approval regarding this shop and proceeded with the two other shops. Nonetheless, the Group requested on 11 July 2017 a six-month postponement of the commitment deadline so that it could substitute the Beaugrenelle shop with another shop that was better suited to the Acquirer's contemplated operations.
By a decision of 28 July 2017, the FCA refused to approve the Acquirer and to postpone the deadline. The Group challenged this decision before the courts on several grounds, but in vain.
In the wake of this decision, the FCA initiated proceedings to assess the Group's implementation of the commitments taken in 2016 and finally took the view on 27 July 2018 that the Group had not complied with these commitments, which resulted in a €20 million fine.
A strict view on compliance with structural commitments
The FCA considered that the Group had breached its commitments by failing to present a sales agreement or acquirer for Beaugrenelle and by presenting for St Ouen and Belleville an acquirer that could not be approved within the timeframe set forth by the clearance decision.
Regarding the absence of a sales agreement for the Beaugrenelle shop, the FCA considered that in the event of difficulties in finding an acquirer, it was the Group's responsibility to request in due course a postponement or for a change in commitments.
In particular, the franchisor's decision not to approve operation of the Beaugrenelle shop under its brand one month before the deadline could not be regarded as "exceptional circumstances" justifying its request for postponement within the last month of implementation.
Indeed, this decision could have been foreseen given the "uncertainty surrounding a third-party approval prior to a shop acquisition", which should have been included in the Group's negotiation strategy. The Group should have made sure to have the condition precedent lifted to be in a position to present an agreement in due course or, in view of the risk, to provide for an alternative.
In any case, the Acquirer did not meet the criteria for approval so that a postponement would not have solved the identified competition concerns.
Indeed, the FCA did not regard the Acquirer in this case as "appropriate" to address the identified competition concerns since it did not "necessarily specialise in brown and grey products" but rather in home appliances ("white products") and submitted a business plan that the FCA regarded as questionable from a commercial perspective.
The FCA also denied that the Acquirer could be regarded as an "emerging player in the Parisian market that could debut or develop (its) activity in Paris through shops of sufficient size in high-end locations", since the clearance decision targeted players emerging in the Parisian market and not players emerging in the market of brown and grey products.
Finally, the FCA reiterated that a potential positive opinion on approval from the appointed representative is not binding on the FCA and did not exempt the Group from complying with its commitments.
In this case, the Group's non-compliance was firmly criticised by the FCA as a result of its risky and "exaggeratedly optimistic behaviour" on the potential success of a transaction with a business partner that was almost "unknown" regarding the sale of shops that "were not the most attractive for the potential acquirers". The FCA found that the Group had disregarded an anticipated risk and had not requested in due course substitute commitments or a postponement of the deadline.
Taking into account the efforts made by the Group to comply with the commitments, the FCA imposed a fine of €20 million (approxiumately 0.3% of the Group's turnover) and ordered the Group to sell two other shops in different areas within nine months.
This is the first time that the FCA has fined a firm for non-compliance with structural commitments consisting of divesting assets by a given deadline. This case highlights the importance of early and continuous contacts with the FCA with respect to the implementation of commitments.
The Group may appeal this decision before the Paris Court of appeal.