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New merger control threshold in Germany

On 9 June 2017, the 9th amendment of the German Act Against Restraints on Competition (ARC) [Gesetz gegen Wettbewerbsbeschränkungen] entered into force. The amendment has introduced an alternative merger control threshold based on the value of the consideration. If the purchase price exceeds EUR 400 million, a merger filing is now required even if the target company does not yet generate high turnover and thus would not have previously been subject to merger control by the German Federal Cartel Office (FCO). The purpose of this reform is to cover high-value takeovers of target companies, e.g. in the market for digital technologies, that have little or no turnover at the time of the transaction.

Turnover thresholds in Germany

Previously, a notification to the FCO was only required if in the last completed business year the participating undertakings had an aggregate worldwide turnover of more than EUR 500 million, one participating undertaking had turnover of more than EUR 25 million in Germany and another participating undertaking had turnover of more than EUR 5 million in Germany.

Acquisitions of highly valuable start-ups generally do not meet these turnover thresholds. A prominent example is the acquisition of WhatsApp by Facebook for a purchase price of approx. USD 19 billion. Despite its economic significance in terms of valuable customer bases and user data, the transaction did not have to be notified to the FCO as WhatsApp did not meet the domestic turnover threshold.

New threshold: the value of the consideration

Since the reform, merger control is not based solely on the turnover of the companies, but also on the value of the consideration. According to the amendment, filing of a merger notification is also required if in the last completed business year

  • the combined worldwide turnover of all participating undertakings exceeded EUR  500 million,
  • the turnover of at least one participating undertaking exceeded EUR 25 million in Germany,
  • the turnover of neither the acquiring undertaking nor another participating undertaking exceeded EUR 5 million in Germany,
  • the value of the consideration for the merger exceeds EUR 400 million, and
  • the target has significant activities in Germany.

According to the ARC, the transaction value comprises all assets and other monetary benefits which the seller receives from the acquirer (purchase price), including the value of any liabilities assumed by the acquirer. Assets include all monetary payments and the transfer of voting rights, securities, fixed and intangible assets. Bonus payments subject to “earn-out” clauses and payments in the context of a non-compete agreement must also be taken into account.

On the other hand, the law does not provide a definition of when the target is active in Germany “to a significant extent”. According to the legislator´s explanatory memorandum, the “local nexus” test is fulfilled when products or services of the target are used by German customers or when the target undertakes research and development activities in Germany.

Merger control in case of long-term lease agreements

According to a decision issued by the FCO on the wet lease agreement between Lufthansa and Air Berlin of 30 January 2017, besides the acquisition of shares (share deal) and the acquisition of assets (asset deal), also long-term leases can be subject to merger control. A notifiable acquisition of assets does not necessarily mean that the ownership of an asset must be transferred to the acquirer. The transfer of rights of use could also represent an asset acquisition if the transferring party itself only has rights of use and transfers them completely. This can be the case in a lease agreement, but also in the transfer of rental agreements for commercial real estate and in operating and management agreements with regard to hospitals or hotel management.

Comment

It is in the responsibility of the parties to determine by means of self-assessment whether a proposed transaction is subject to merger control or not. This might not be an easy task in certain cases, especially when it comes to assessing the value of the consideration or whether the target company has significant activities in Germany. In cases of doubt as to whether the parties have to notify or not, an informal clarification with the FCO´s responsible decision-making department is recommended. If a merger filing obligation cannot be definitively ruled out, the parties should notify the envisaged concentration as a precaution. The legal certainty provided by the FCO´s approval merits the time and costs required by a merger filing. Closing a notifiable concentration without the FCO's prior clearance constitutes an administrative offence, which may result in a costly fine up to 10 % of the worldwide group turnover. Moreover, the FCO can order the concentration to be dissolved.

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