The Dusseldorf Higher Regional Court recently refused to pre-empt the Federal Cartel Office (FCO) in a preventive action regarding the question of whether a transaction was subject to merger control. According to the court, such actions are inadmissible. If parties are in doubt regarding a filing requirement, they should file.(1)
When it comes to establishing whether a transaction meets the German merger control thresholds, various questions can arise:
- what to include in the turnover;
- whose turnover to include; and
- how to define 'markets' in the case of the de minimis exemption.
While sometimes parties and the FCO can agree on answers to these questions in an informal guidance process, what happens if they do not? What happens if the parties are convinced that thresholds are not met, but the FCO insists that they are and that the transaction must be notified?
Essentially, there are two options. First, the parties can surrender – file, wait and hope for clearance. In the event that the transaction is prohibited, they can fight the prohibition decision before the courts, arguing that the FCO was never competent to assess the transaction in the first place. Alternatively, the parties can be brave – close without filing, accept a fine and possibly a divestment procedure, and then fight the fine decision and divestment proceedings before the courts.
Few companies will be so brave, but surrender is equally unappealing if a company fears that the transaction will be prohibited upon notification. This is why one company has tried a third way: asking a court to rule, in a declaratory judgment and before the FCO decides, that the transaction is not subject to merger control.
The court's reply was clear: this is not an option.
After having made a provisional notification, the notifying parties were in dispute with the FCO as to whether the de minimis market exemption under Section 35 (2), No 2 of the Act against Restraints of Competition applied. Under this exemption, a transaction is not subject to German merger control insofar as it concerns a market with a domestic market volume of less than €15 million. More specifically, the parties disagreed with the FCO on local turnover allocation: they considered that turnover from products invoiced to a central purchasing organisation in Switzerland, but delivered to a production site in Germany, was non-German turnover. The FCO took the view that this was German turnover, in line with Paragraph 198 of the European Commission's Consolidated Jurisdictional Notice. Accordingly, the parties took the view that:
- the domestic market volume was less than €15 million;
- the de minimis market exemption applied; and
- the transaction was not subject to merger control.
The FCO disagreed. The parties, fearing a prohibition decision, withdrew their notification and asked the FCO to confirm in writing why it considered that notification was necessary. The FCO issued an explanatory letter, warning the parties not to close the transaction without clearance.
On this basis, the parties filed an action for a declaratory judgment with the Dusseldorf Higher Regional Court with the aim of establishing that, contrary to the FCO's explanatory letter, the transaction was not subject to German merger control because of the de minimis market exemption.
The court rejected the application as inadmissible without even asserting whether, in principle, such a preventive remedy is available.
First, the court explained that explanatory letters of the FCO do not constitute acts which can be challenged before the court. In addition to various formal arguments specific to this case, the court held that, in substance, such letters merely express the FCO's legal view and do not constitute a reviewable decision or order. While the court accepted that such a letter may exert pressure on the parties to behave in a certain way (ie, not to close without clearance), it found that this still does not make such a letter an order requiring the parties to behave in a certain way. Thus, such letters cannot be appealed.
Second, and more importantly, the court denied the existence of a right to preventive court action in the context of merger control. The court pointed out that, in essence, the parties had asked for a preventive legal remedy, but the remedies foreseen in the Act against Restraints of Competition are all retroactive by nature (ie, parties are allowed to challenge only existing decisions or orders). The court supported its finding by stressing that companies also cannot normally initiate preventive court proceedings based on a statement of objections in order to avoid a subsequent fine decision. Rather, parties must await the fine decision, which they can then challenge before the courts. More generally, the court stated that the Act against Restraints of Competition does not provide for any sort of negative clearance.
The court recognised that in exceptional circumstances, where awaiting the authority's decision or order would lead to irreversible damages or damages which would be difficult to compensate, parties may have recourse to preventive remedies.(2) In such situations, parties can claim a 'special qualitative interest' in preventive protection. The court found that such a special qualitative interest did not exist in this case, mainly as the parties' action was aimed at obtaining a negative clearance decision from the court that the transaction was not subject to merger control. This decision was also intended to bind the FCO. However, the Act against Restraints of Competition does not provide for negative clearance. Thus, parties had from the outset no legal right to seek negative clearance by means of a court decision.
The court further stated that the de minimis market exemption is intended to exempt from merger control only those cases which fall within the scope of this exemption without any doubt at first sight. In such clear-cut cases, however, parties can invoke the exemption without any risk, so there is no special qualitative interest in a confirmatory negative clearance decision.
In all other cases, a residual risk remains. This risk, however, is the same risk which any party always faces under competition law, and merger control in particular. The law allocates this risk to the parties, as all companies are generally required to self-assess compliance with the law. In the court's view, the risks involved in this self-assessment are sufficiently mitigated by the fact that the parties are always free to file a merger control notification with the FCO in case of doubt. The court concluded that on this basis, there is no special qualitative interest in a preventive negative clearance decision.
Finally, the court rejected the argument that the principle of procedural economy supported a right to a preventive decision in this case. Since merger control proceedings are subject to tight timelines, whereas court cases are not, the FCO will usually render even a Phase II merger control decision faster than a court would decide on a preventive action.
Despite having declared the action inadmissible, the court also ruled on the substantive issue – that is, whether the FCO correctly rejected the application of the de minimis market exemption. The court observed that the de minimis market exemption requires an 'at first sight' assessment only. It further stated that at first sight, there was nothing obviously wrong in following the European Commission's approach on local turnover allocation. If, based on such first-sight turnover allocation, the total domestic market volume exceeded €15 million, the FCO did not err in law when it rejected the application of the de minimis market exemption and required the parties to file a notification. The ultimate local turnover allocation could then be made in the actual merger control proceedings.
While the court dealt only with the notoriously problematic de minimis market exemption, it would appear that its reasoning could equally cover all other attempts to bypass the FCO and have a court decide that a transaction is not subject to merger control prior to filing a notification for any other reason.
The court's finding that parties querying a filing requirement do not have a special qualitative interest in exceptional preventive relief, as they are free to submit a notification, has its merits. However, the parties seeking such relief might feel that this creates something of a vicious circle, as it suggests that if they disagree with the FCO on a filing requirement, they do not need the courts' help because they are always free to follow the FCO's view.
In any event, if parties disagree in future cases with the FCO as to whether a transaction must be notified, they will again have only two options: either to be brave or to surrender. Usually, this will mean that they file. Ultimately, this is also what the parties in the present case did: they newly filed their notification after the court's decision.
For further information on this topic please contact Kai Neuhaus or Benedikt Ecker at CMS Hasche Sigle by telephone (+32 2 6500 420), fax (+32 2 6500 422) or email (firstname.lastname@example.org or email@example.com).
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