The European Union's merger review policy could face a thorough overhaul after a European court reversed a Commission takeover ruling.

The Court of First Instance in Luxembourg ruled yesterday that the Competition Commissioner, Mr Mario Monti, was wrong to block the merger of the French electrical giant, Schneider Electric, and its rival Legrand.

The EU's merger process has come under mounting criticism in recent month and Mr Monti has promised to outline changes on November 7th, including the engagement of a high-profile chief economist. Some critics argue that Mr Monti is too powerful and want a court review of all mergers before they are prohibited.

This would leave the commissioner in the role of a prosecutor who would need court approval before taking action against companies.

Yesterday's decision cleared the way for Schneider to go back to the Commission and ask again to take control of Legrand. The court said that if the Commission were to re-examine the deal, it must take a different approach, focusing on the effect on the market in France rather than throughout the EU.

"The procedure must recommence with the drawing up of a precise statement of objections and relate only to French markets, which are the only markets to have been identified as being affected by the implementation of the merger," the court said.

Most observers believe it is unlikely that Schneider will attempt to revive the merger plan. The company has agreed to sell Legrand to Wendel Investissement and the US private equity house KKR at a loss of €2.7 billion. It would cost €180 million in penalty fees for Schneider to end that arrangement.

Mr Henri Lachmann, the forceful Schneider chief executive who negotiated the purchase of Legrand last year for €5.4 billion in shares and cash, only to have the takeover quashed by the European Commission, will discuss the dilemma with the board of directors on Friday.

Schneider is still technically the owner of 98 per cent of Legrand's shares. But the Commission's rejection of the takeover, on the grounds that the combined group would dominate parts of the European market, forced Schneider to negotiate the resale of Legrand at a loss.

Mr Lachmann and the Schneider board now have several avenues open to them. Regardless of whether they keep Legrand or not, they are considering the possibility of suing the Commission for damages.- (Additional reporting by the Financial Times)