Merger Control Update: Redefinition of Revenues and Extension to Start-ups?

Mergers or acquisitions of shares in companies that exceed the relevant turnover thresholds are subject to the provisions of merger control law. The relevant factor for the application of merger control law is the turnover of the parties involved in the transaction in question. Since 2015, the relevant definition of turnover for the purposes of balance sheet reporting was that stipulated in Section 277 of the German Commercial Code (Handelsgesetzbuch – “HGB”). Moreover, the legislator plans to adopt a transaction value as an additional merger control threshold, in order to also subject economically significant start-up acquisitions to antitrust regulation even if they do not reach the turnover thresholds.

Redefinition of turnover for the purposes of balance sheet reporting

Since 23 July 2015, a new definition of the concept of turnover for the purposes of balance sheet reporting contained in Section 277(1) of the HGB has applied, pursuant to the German Act implementing the EU Accounting Directive (Bilanzrichtlinie-Umsetzungsgesetz – BilRUG). Prior thereto, the turnover from ordinary business activities was relevant, i.e. atypical turnover was not taken into account. Following the amendment of the provision, this limitation no longer applies; all proceeds from the sale and rental or leasing of products or from the provision of services are now to be taken into account as revenues. Companies will only have to make allowance for this change in their annual financial statements as of the financial year commencing after 31 December 2015 (Art. 75(2) of the Introductory Act to the German Commercial Code (Einführungsgesetz zum Handelsgesetzbuch – EGHGB)); they will have the choice whether or not to do so with regard to previous financial years commencing after 31 December 2013. However, this redefinition of the concept of turnover is already of great significance in the merger control context, as it could potentially result in the disclosure of significantly higher amount of revenues than was the case pursuant to the previously applicable legislation. Thus, the profit and loss statement drawn up in line with current accounting practice pursuant to German commercial law will no longer be a sufficient indicator of whether a merger or acquisition is subject to a notification requirement; rather, the amount of turnover will (where applicable, additionally) have to be calculated in accordance with the new accounting legislation.

9th Amendment to the GWB: Introduction of transaction value as a further merger control threshold

According to current German antitrust law, a merger or acquisition only has to be notified to the regulatory authorities if the turnover thresholds are exceeded. This is the case if, in the most recently completed financial year, the companies involved jointly realized a turnover of more than €500 million worldwide, one of the companies involved realized a turnover of more than €25 million in Germany, and another of the companies involved realized a turnover of more than €5 million in Germany. Despite high purchase prices, start-up acquisitions generally do not reach these turnover thresholds, with prominent examples from the past year being Facebook’s acquisition of WhatsApp for a purchase price of approximately US$19 billion, and Microsoft’s acquisition of the Berlin start-up 6Wunderkinder GmbH for a price of between US$100 and 200 million. Although both transactions are of great significance in economic terms due to the valuable customer bases and user data involved, the low turnover of the target undertaking in each case meant that they did not have to be notified to the German Federal Cartel Office (Bundeskartellamt – BKartA). There is thus some debate at both the German and the European level as to whether the scope of merger control should be extended to cover such companies. At the beginning of the year, the German Federal Government announced in its 2016 Annual Economic Report that, in addition to the revenues of the parties to the merger, the purchase price (transaction volume) would also be taken into consideration by way of merger control threshold, with a view to enabling the antitrust authorities to carry out an assessment of the market situation and prevent the establishment of dominant market positions at an early stage, particularly in the case of the acquisition of innovative start-ups by established large-scale enterprises.

Currently, it seems likely that this plan will be realized before the end of the year, by way of the 9th Amendment to the German Act against Restraints on Competition (Gesetz gegen Wettbewerbsbeschränkungen – “GWB”), the main purpose of which being the transposition into German law of Directive 2014/104/EU on antitrust damages actions, which must be effected by the German legislature by 27 December 2016. A draft bill is expected to be presented soon, in order to enable the legislation to be brought before the Bundestag before the German Parliament’s summer recess begins in July.

Implications for start-up companies: Amendment does not constitute “anti-exit legislation”

The proposed amendment, at times dubbed as “anti-exit legislation”, has caused some disruption in the German start-up scene, where assessment of mergers and acquisitions by the antitrust authorities would hinder if not actually thwart the exit strategies of many company founders and investors. However, these concerns as yet appear to be unfounded. The transaction value which will trigger a notification requirement pursuant to merger control law has not yet been determined; however, the Germany Monopolies Commission in its Special Report proposed a threshold of €500 million, if the turnover in Germany of one of the companies involved in the merger or acquisition amounts to at least €25 million, while in the US, a merger with a transaction value of more than US$312.6 million must currently be notified to the antitrust authorities. The transaction value is unlikely to fall greatly below this level, given that the overall goal is to ensure that only mergers which are of economic significance will be subject to assessment and that the BKartA is not required to assess each and every acquisition of a shareholding in a start-up company, with the result that most such transactions will continue to fall outside of the scope of merger control law in the future.