Introduction of a “Size-of-Transaction” Test for Merger Notifications in Germany

SUMMARY

On 1 July 2016, the German Federal Ministry for Economic Affairs (Bundeswirtschaftsministerium) published a proposal for the amendment of the German Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen) that will supplement (and partially replace) the current filing thresholds with a EUR 350 million size-of-transaction test. The proposed change is likely to increase significantly the number of transactions that require pre-closing approval under the German merger control rules.

STATUS QUO AND PROPOSED NEW THRESHOLD

At present, merger transactions require prior notification to, and approval by, the Federal Cartel Office (“FCO”) if, during the previous business year:

  • all parties to the transaction together had global turnover of more than EUR 500 million;
  • at least one party had turnover in Germany of more than EUR 25 million; and
  • at least one other party had turnover in Germany of more than EUR 5 million.

If adopted, the new thresholds will also give the FCO jurisdiction over transactions if:

  • all parties to the transaction together had global turnover of more than EUR 500 million;
  • at least one party had turnover in Germany of more than EUR 25 million; and
  • the value of the consideration for the transaction exceeds EUR 350 million.

According to the Ministry’s explanatory note, the “value of the consideration” will be interpreted very broadly and will include all tangible and intangible assets, shares and other payments in kind or otherwise that the seller receives from the purchaser in connection with the transaction. The value of all liabilities assumed by the purchaser will also be included (contrary to the treatment of such liabilities under the U.S. merger filing rules applicable to stock and non-corporate interest acquisitions).

In addition to the size-of-transaction test, the amendments require the target to have sufficient local nexus through either being, or becoming, active in Germany. According to the Ministry’s explanatory note, it will be sufficient that the target carries out research or development activities in Germany or simply engages with customers in Germany (i.e., it is sufficient to establish a local nexus if customers located in Germany are generally able to access the target’s (free or fee-based) product or service offerings, for example, through the target’s website). The target is not required to generate any turnover in Germany. Regarding the time period for “becoming active” in Germany, the Ministry’s explanatory note says that it would be sufficient if the target is planning to carry out business in Germany within a timeframe of three to five years.

The proposed amendments also state that the de minimis exemption does not apply if the size-oftransaction threshold is met. Pursuant to this exemption, a merger does not require German merger control if the target is not controlled by another company and has worldwide turnover of less than EUR 10 million.

BACKGROUND

Recent transactions concerning start-up businesses in the digital economy have fallen outside the scope of the German merger control rules. The most prominent examples are Facebook’s USD 19 billion acquisition of WhatsApp and Microsoft’s acquisition of 6Wunderkind GmbH for EUR 100–200 million. 6Wunderkind GmbH is a company that generates its turnover mainly through a to-do list app named “Wunderlist”. Both transactions fell below the German merger filing thresholds because the target did not have German turnover exceeding EUR 5 million (although the Whatsapp transaction was reviewed by the European Commission at the request of Facebook).

The aim of the proposed amendments is to close the perceived review gap for acquisitions of small innovative companies that are developing business models with great economic significance for purchasers that are “big players” that could have market power. The Ministry has concluded that the current merger filing thresholds, which look only to the parties’ turnover, may not adequately take account of the economic relevance of such transactions because, in these transactions, the target’s turnover is often low because the business is in a start-up phase, but the transactions may still have significant economic impact due to the business and technology that the target is developing.

IMPLICATIONS

The introduction of the new size-of-transaction threshold is likely to significantly increase the number of merger notifications in Germany, thus increasing the administrative burden on parties to international mergers and acquisitions, and in particular, foreign-to-foreign transactions that have limited impact in Germany.

Although the primary goal of the amendments is to catch acquisitions of early stage start-up businesses in the digital economy, the proposed size-of-transaction test is not limited to any specific industry or sector. If the amendments are implemented, not only acquirers of technology start-up businesses but also companies operating in other industries will be caught by the new test. In essence, any company with worldwide turnover of more than EUR 500 million and German turnover exceeding EUR 25 million will have to notify the FCO of any major acquisition anywhere in the world if the value of the consideration for the transaction exceeds EUR 350 million and the target is already active or expected to become active in Germany.

The German merger control rules will remain inapplicable to transactions that lack so-called “appreciable domestic effect”. This concept was never clearly defined and led to uncertainty over whether a transaction required notification when the target only had marginal activities in Germany. Careful analysis will be required when determining the appreciable domestic effect of transactions in which the target has insignificant turnover but is active in Germany or intends to be active there. The extended three-to-five year timeframe may also lead to uncertainty when determining whether approval is required because the parties’ post-closing business planning may not allow predictions so far into the future.

The proposed size-of-transaction threshold may also raise difficulties regarding the determination of the value of the consideration. Transactions with a fixed purchase price (including any assumed liabilities) should be unproblematic because, according to the Ministry’s explanatory note, the purchase price can generally be presumed to represent the value of the transaction. However, uncertainty will arise, for example, in transactions where the precise consideration may depend on certain conditions being met, will be determined partially at a later point in time, or is in the form of options to receive the purchaser’s shares linked to agreed holding periods, where their value may be difficult to determine.

TIMELINE FOR THE LEGISLATIVE PROCESS

It is currently anticipated that the proposed amendments will be adopted by the German Federal Government in early August and will then be debated by the German Parliament (Bundestag) and the Upper House of Parliament (Bundesrat) in September and October. It is currently expected that a final version of the amendments will be adopted in October and will enter into force no later than 27 December 2016 following publication in the German Federal Gazette (Bundesgesetzblatt)