The German government has recently published a bill that would significantly amend the criteria for determining whether an M&A transaction is subject to German merger control.
Currently, the applicability of the German merger control rules depends primarily on the revenues of the firms participating in a transaction. A concentration needs to be notified to the German competition authority – the Bundeskartellamt – where all the following three turnover thresholds are met: (i) EUR 500 million worldwide, (ii) EUR 25 million in Germany, and (iii) EUR 5 million in Germany. The 500 million threshold (i) refers to the sales achieved by all of the parties combined in their last completed financial year. The other two thresholds (ii) and (iii) refer to the individual sales of two parties to the transaction (e.g., the acquirer, on the one hand, and the business being acquired, on the other). Where the notification thresholds are met, the parties are subject to a standstill obligation. They must not consummate the transaction until it has been cleared (or is deemed to have been cleared) by the Bundeskartellamt.
The purpose of merger notification thresholds is to screen out transactions that are unlikely to result in anticompetitive effects and should not, therefore, be subject to costly and time-consuming notification procedures. When Germany introduced its first merger control rules in 1973, market shares and the number of employees were used alongside the parties’ turnover as notification criteria. However, market share data is notoriously unreliable since it depends on subjective views of what is the relevant market. And, in many industries, employee numbers are not indicative of the economic significance of a firm. By contrast, the turnover criterion is now generally recognised as a suitable indicator for measuring the economic strength of a firm since it is directly linked to its performance in the market. It is also in line with the recommendations for merger notification procedures of the International Competition Network: turnover thresholds are relatively clear and are based on objectively quantifiable criteria, and the required information is readily accessible to the parties. For these reasons, many jurisdictions, especially in Europe, use turnover criteria for determining whether or not a transaction should be reviewed by the authorities. A notable exception is, of course, the U.S. where the Hart-Scott-Rodino Antitrust Improvements Act focuses on the transaction value, i.e., the value of assets, voting securities or non-corporate interests that the acquirer will hold as a result of the transaction.
However, the prevailing view on turnover as the most suitable notification test has been questioned in Germany since Facebook acquired WhatsApp in 2014. Despite a record purchase price of USD 19 billion and despite the high number of users that both companies have in Europe, the deal almost escaped scrutiny by the European competition authorities. In the end, the European Commission was able to carry out a merger review solely because Facebook requested such a review of its own volition. For the German government, this transaction has shown that an “enforcement gap” exists in the current system. To close the gap, it now proposes to introduce a new test that would coexist with the current turnover based notification thresholds. Under the new test, a concentration would have to be notified to the Bundeskartellamt if:
(i) the combined aggregate worldwide turnover of all the undertakings concerned was more than EUR 500 million in the last financial year preceding the concentration, and
(ii) the German turnover of at least one undertaking concerned was more than EUR 25 million in the last financial year preceding the concentration, and
(iii) the value of the consideration for the concentration is more than EUR 350 million, and
(iv) at least one undertaking concerned other than (ii) is active or is expected to be active in Germany.
The term “value of the consideration” used in (iii) is defined as “all assets and services of a monetary value that the seller receives from the acquirer in connection with the concentration”. Unlike the size-of-transaction test used in the U.S., this test does not take into consideration the value of interests that the acquirer already holds in the acquired business prior to the concentration.
The new bill was published on 1 July 2016. It still has to go through the parliamentary process where it may be subject to changes. Currently, it is expected that the new rules will come into force at the beginning of 2017.