A European court has overturned the European Commission's merger approval of Sony’s music business and Bertelsmann’s BMG which created the world’s second largest music company in 2004.

In a surprise blow to Europe’s competition watchdog’s authority, the Court of First Instance (CFI) said the commission had carried out an "extremely cursory examination" of the deal.

After the unprecedented move the European Commission will now have to reconsider the merger for a second time. The body has the power to unwind the Sony BMG joint venture if it finds it hurts consumers by limiting competition.

Lawyers gave warning that the decision to annul the merger approval creates a dangerous precedent for future mergers and acquisitions.

Johan Ysewyn, competition partner at Linklaters in Brussels, said: "The decision throws the Sony BMG merger into major uncertainty. The businesses can continue operating as a merged entity but now face the prospect of being forced to de-merge at the end of the European Commission’s new investigation."

For further legal coverage of the Sony BMG story click here.

The ruling by Europe’s second-highest court also casts into doubt a possible $4.6 billion tie-up of Britain’s EMI Group and Warner Music.

EMI said in a statement that today’s judgement would "require detailed study before any wider conclusions can be reached."

In a damning criticism of the original 2004 competition enquiry, the CFI said in today's ruling that the Commission "did not demonstrate to the requisite legal standard ... the non-existence of a collective dominant position".

In particular, it singled out the Commission's reasoning that promotional offers to consumers would prevent power being concentrated in the hands of record labels as a "manifest error of assessment".

It noted that in May 2004, the Commission said it had reached the provisional ruling against the deal that created Sony BMG as "it would reinforce a collective dominant position on the market for recorded music."

The Commission later reversed that decision.

Jonathan Todd, spokesman for EU Competition Commissioner Neelie Kroes, said: "The Commission’s new analysis will be based on today’s market conditions and take full account of the CFI’s ruling today."

The Commission will have to decide within one month from the notification date whether to hold an in-depth investigation, extendable to six weeks if the companies suggest remedies.

An in-depth investigation would last four months and the Commission has just over two months to decide whether to appeal the ruling, Mr Todd added.

Bertelsmann said in a statement: "Today’s judgment does not affect the validity of the Sony BMG joint venture, which has been up and running since August 2004 - after having been notified and investigated by the European Commission under the Merger Regulation."

The independent producers’ association Impala had protested that the Sony-BMG tie-up would hit consumers and artists by handing the music majors more power and asked the court to review the 2004 decision to allow the joint venture.

The creation of Sony BMG left only four major record labels: Vivendi’s Universal Music is the largest; Warner and EMI are in third and fourth places.

Together the four companies account for around 75 per cent of global CD sales, but are coming under increasing pressure as more consumers download music over the net.

The impact of today's ruling could be felt far beyond the media industry, Mr Ysewyn said.

"What will happen if large and complicated deals on the scale of Vodafone/Mannessman and GlaxoWellcome/Smithkline Beecham get blocked on a second investigation several years after having been approved by the EC? A u-turn like that would be disastrous for the merged company," he said.

For further legal coverage of the Sony BMG story click here.

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