Good News for Clients From Germany: Increased German Merger Control Thresholds in Force

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In a Nutshell

  • What’s new?
    • Significantly increased turnover thresholds for German merger control.
  • The good
    • Many transactions will no longer be subject to German merger control.
    • This will lead to a much smoother process for lots of transactions, specifically for our clients in the tech sector and start-up companies that have not generated more than 17.5 mn in Germany.
  • The ugly
    • Transactions can still be subject to German merger control even if the increased thresholds are not triggered.
    • The Federal Cartel Office can require filings from a company after having conducted a market inquiry.
    • The review period for so-called phase 2 proceedings was extended from four to five months.
    • In 2017, consideration of the transaction threshold with the requirement of the rather vague criterion “substantial domestic operations” was introduced and is still in effect.
  • Action items for our clients
    • Check transactions that are currently being negotiated or that have already been signed – they might benefit from the increased thresholds of not requiring merger clearance in Germany anymore.
    • Going forward: Have a look at the Federal Cartel Office’s approach on the “vague thresholds” and sector inquiries – we will keep you posted.

In Detail

The 10th amendment of the German Act against Restraints of Competition (ARC) does not only introduce a new enforcement tool concerning the control of abusive practices. The amendment also brings a significant increase of the turnover thresholds in merger control. This will lead to a significant reduction of merger control filing requirements – good news for transactions!

New Thresholds

Most transactions in Germany are only subject to a notification if the companies involved achieve certain minimum turnover worldwide and in Germany. With respect to the turnover threshold, from now on, transactions will only be subject to merger control if, among other things, one of the companies involved has annual sales of at least 50 million euros in Germany (instead of 25 million previously) and, in addition, another company involved has annual sales in Germany of at least 17.5 million euros (instead of five million previously). Officially, this increase is intended to ease the bureaucratic burden on companies. However, the fact that the Federal Cartel Office received around 1,200 merger notifications in 2020 and opened in-depth investigations (phase II) in only 7 cases indicates that the Federal Cartel Office intends to focus its resources more efficiently on problematic cases. This is accompanied by the extension from four to five months of the review period for in-depth investigations.

For our business clients dealing with unproblematic transactions from an antitrust perspective, this is certainly good news as there will be no delay due to a merger control filing. However, besides these mere turnover thresholds, there is another threshold that takes into account the value of the transaction and competitive potential that has been in force since 2017 and is particularly important to our tech clients. We will keep you posted if the Federal Cartel Office focuses on this threshold in the future.

Further, the Federal Cartel Office is now able to require companies in certain sectors of the economy to notify mergers even if the companies involved in the transaction do not meet turnover thresholds mentioned above. According to the newly introduced section 39a ARC, the Federal Cartel Office can request notifications from a company if the following conditions are met:

  1. The acquirer must generate a worldwide turnover of more than 500 million euros;
  2. There must be objectively verifiable indications demonstrating that future acquisitions by the acquirer may significantly impede effective competition in Germany in the specified sectors;
  3. The acquirer holds at least a 15% market share in Germany in the specified sector; and
  4. The Federal Cartel Office must have carried out a sector inquiry of the industry in question.

Once a company is subject to such a notification obligation, it is obliged to notify the Federal Cartel Office about any acquisition in the specified sector(s), provided that

  1. the target’s global turnover exceeded 2 million euros in its last fiscal year, and
  2. more than two-thirds of the target’s turnover were generated in Germany.

Sector inquiries are investigations by the Federal Cartel Office of a specific sector of the economy if certain circumstances give rise to the assumption that competition of such a specific sector may be restricted or distorted. In the course of a sector inquiry, the supply and demand structures as well as aspects of market activity which have an impact on competition are analyzed by the Federal Cartel Office. A sector inquiry is not a procedure against specific companies. However, proceedings by the Federal Cartel Office are often a follow-up to a sector inquiry if the sector inquiry raises sufficient initial suspicion of a violation of competition regulations.

Andreas Mundt, President of the Federal Cartel Office, indicated the ambivalence of the new thresholds from an enforcement point of view:

So far, we have controlled around 1,200 mergers year after year; including many cases that are not really relevant from a competition point of view. That is a considerable number, and one that is accompanied by a very heavy workload. In principle, we therefore welcome an increase in the thresholds. However, at the level now selected, one or two questionable cases are likely to disappear. With the resources freed up, we will be able to focus even better on the really critical cases.

This shows the shift in the way the Federal Cartel Office obtains information on critical cases and markets. The previous approach relied heavily on a large number of “unproblematic” merger notifications, which provided the Federal Cartel Office with the parties’ view on markets and competition.

In the future, the Federal Cartel Office will put an emphasis on gaining information through sector inquiries. This shift also results in the elimination of the obligation to inform the Federal Cartel Office about the successful closing of a transaction. Previously, such a notification had to be submitted to the Federal Cartel Office for statistical purposes.

Takeaways

From a company’s point of view, the significant increase of the thresholds is welcomed as it will relieve companies from “pro forma” notifications. This applies, in particular, to PE funds. The new thresholds refer to the last completed business year prior to closing. Thus, transactions that are currently being negotiated or have already been signed but not yet closed could benefit from these new thresholds as well.

The increased thresholds will also free resources at the Federal Cartel Office, which will likely be used to conduct more sector inquiries and, subsequently, to prepare decisions under the new sections 39a and 19a GWB. Companies that are affected by such a sector inquiry and interested third parties will have the opportunity to provide the Federal Cartel Office with their views and arguments on the competitive environment in their market(s) and may highlight potentially controversial market conduct of (rival) market participants. This might be seen as a good opportunity to shine the spotlight in the right direction.

Background

The 10th amendment became necessary due to the implementation of the ECNplus Directive. The implementation of the so-called ECNplus Directive will strengthen the effectiveness of antitrust prosecution. In conjunction with the system in place at the EU level, companies and their employees are now obliged to cooperate by clarifying these facts.

The amendment also contains various innovations in the area of fine regulations. For example, “reasonable and effective precautions taken in advance to avoid and detect infringements” (i.e., compliance measures) can be considered mitigating circumstances in the future assessment of fines. In addition, the leniency program has now been codified into law. The Federal Cartel Office will adapt its announcements in this regard. Leniency applications can of course still be submitted at any time.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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