On 28 September, the German cabinet agreed to implement a set of amendments to the German Act Against Restraints of Competition (ARC). This ninth amendment to the ARC since its inception in 1958 will introduce a number of small but significant changes to the existing merger control thresholds, as well as some changes to the toolbox available to the FCO in relation to the substantive assessment.
New additional merger control threshold: size-of-transaction value
The new draft supplements the current filing thresholds – based on turnover of the parties in Germany – with an alternative size-of-transaction, or "value of consideration" (Wert der Gegenleistung), threshold:
"The provisions on the control of concentrations shall also apply in cases where [...] the value of the consideration for the transaction is more than EUR 400 million [...] and the Target is active in Germany to a considerable extent [in erheblichem Umfang im Inland tätig ist]."
Once the act as amended is in force, transactions would need to be notified in Germany if four cumulative criteria are met: (i) the combined worldwide turnover of all companies exceeds 500 million, (ii) one of the parties to the transaction has a turnover in Germany of more than 25 million, (iii) the value of the consideration for the transaction exceeds 400 million and (iv) the target is active in Germany to a considerable extent.
The new test is in part inspired by other jurisdictions that already have a size-of-transaction test in place (such as the United States), and by a concern that the current rules appear have a blind spot when it comes to transactions in the digital economy where the target may not yet have sufficient turnover to trigger the thresholds, but where its acquisition may nevertheless threaten competition.
Proponents of the thresholds cite the case of Facebook/Whatsapp as a prime example of such cases. When Facebook sought to acquire Whatsapp for USD 22 billion, the transaction would not have been notifiable in Germany (nor the European Commission, for that matter). It was ultimately reviewed by the Commission because the notification thresholds in three European member states had been met – in most cases by virtue of market shares – and the transaction thus qualified for a referral up to the European Commission.
What the new thresholds mean for businesses
The proposed amendments are aimed at closing the “Whatsapp-gap”.
But there is a real risk is that the threshold as currently drafted would render too many “false positives”, i.e. notifications that are not necessary at all because the cases do not raise any competitive concerns.
The most prominent issue in practice turns on establishing whether the target (even without or insignificant domestic revenues) meets the local nexus test, i.e. that it is “active to a considerable extent” in Germany.
Crucially, this requirement is industry-agnostic, it applies to all industries and sections (and not just to internet companies). As a practical matter, any major acquisition of a company with sufficient turnover in Germany may technically have to notify any significant foreign-to-foreign transaction – provided that there is a local nexus.
Just when the local nexus requirement is met, and what “active to a considerable extent” means already is the subject of much debate among practitioners.
The explanatory notes published with the proposed amendments to the ARC give some guidance on the “local nexus” requirement.
“Marginal activities” would not be enough to trigger the threshold. This is a circular description that does not help much in the interpretation of the provision.
The notes also state that the factors relevant to determine local nexus would vary between industry and the development and maturity of the market. Alas, what this means in practice remains shrouded in mystery. When is a market (to the extent a market exists) mature enough to render the target’s activities sufficiently “considerable” to merit a filing? Indeed, what factors determine the “maturity” of a market?
The explanatory notes give two examples: one million active users in Germany on an online messaging platform (read: Whatsapp) would be enough to trigger local nexus; conversely, a Canadian conglomerate selling its motors business (read: a mature, stable market low on innovation) that has never had revenues exceeding EUR 1 million in Germany would be insufficient to trigger a local nexus.
The examples make clear that Facebook/Whatsapp would have been notifiable under this rule. But they do little to giving businesses clear, binary guidance as to whether a filing in Germany is required (as, arguably, is the case under the current turnover-based rules). The rule is intended to catch primarily transactions relating to early technology and pharma, but other industries may inadvertently be caught: for example, the acquisition of real estate portfolios may trigger a filing requirement even if only a small part of the target portfolio is situated in Germany. Businesses have little choice but to consult with local German counsel to advise on whether a filing is required in their particular case.
What happens next?
It is far from clear that the draft adopted by the government will enter into force as currently drafted. The current expectation is that the new law will come into force in the first quarter of 2017 after a series of negotiations in both chambers of parliament.
Following adoption by government, the proposal now moves to the upper chamber (the Bundesrat) representing the individual Länder. Following its initial review, the act may be subject to further amendments, which will ultimately have to be approved by both chambers.
Looking beyond Germany: potential wider impact (EU, other countries)?
The German initiative could well be seen as a test case by the Commission and other national authorities before taking steps to change their rules as well. There is precedent to the FCO taking this leadership role: the Commission’s ongoing investigation into e-commerce practices and geo-blocking follows on the heels of a series of cases by the FCO into restrictive online sales practices by hotel booking platforms, Amazon, Asics, and others.
Margarethe Vestager, European Commissioner for Competition, has already been sounding out whether the introduction of a similar size-of-transaction test under the EU Merger Regulation would be feasible. The Commission has started a consultation on the issue, with stakeholders able to comment until mid-January. Time will tell if, once again, the German initiative will spark a wave of regulatory alignment across the European continent.
II. Changes to the substantive analysis
Recognition of Markets for "Free" Services or Goods
The proposal establishes that the finding of a "market" does not depend on the exchange of pecuniary consideration (s.18(2a) ARC). The proposal thus aims to capture situations of two- or multi-sided markets in which goods or services on one side are offered "for free" (or, are paid for in exchange for the user’s data); this is also the subject-matter of the FCO’s ongoing investigation into a potential abuse of dominance by Facebook.
The change may be significant in particular for the acquisition of early-stage technology companies in two-sided markets, where users receive the service for free, which is refinanced through (targeted) advertising or commission sales. The natural focus of any substantive analysis would be on whether the transaction entails any loss of competition on the "free" side of the market.
Network effects and access to data
The proposal (amending s.18(3a) ARC) also spells out the substantive criteria to assess the market position of companies in multi-sided or network markets. In the future, when assessing dominance, the FCO is to consider (i) direct and indirect network effects, (ii) multi-homing behavior of, and switching costs for, consumers, (iii) economies of scale in connection with network effects, (iv) the company's access to data, and (v) innovation-driven competitive constraints.
It is unclear whether the codification of these factors will result in a different assessment of mergers, or the allegedly dominant position of a company suspected of an abuse. The FCO argues (to some extent, correctly) that the factors listed in 18(3a) ARC have already been inherent to the toolbox of the FCO’s substantive assessment, and been put to good use in relation to a number of cases (e.g. in online dating or real estate platforms). Indeed, the proposal acknowledges that none of these factors individually could raise competitive concerns, and that the FCO needs to assess every case considering the specific circumstances.