On 31 March 2017, the German Parliament adopted a reform of the country’s competition act (ARC). Among other amendments, it introduces an additional merger control threshold based on the value of the transaction. This amendment was prompted by a perceived enforcement gap in the current law: according to the explanatory memorandum accompanying the government’s bill (EM), certain mergers of considerable economic significance, in particular in the digital economy and the pharmaceutical sector, may not be captured by the current thresholds because they are exclusively based on revenue. The 2014 Facebook/WhatsApp acquisition, which did not meet the German thresholds, is cited as a prime example.

Notwithstanding its sector-specific genesis, the new threshold will apply across industries and is expected to enter into force during the second quarter of 2017.


Under the existing German merger control rules, a filing requirement is, in principle (subject to limited exemptions), triggered where the following three thresholds are all met:

(i) the combined worldwide revenues of all undertakings participating in the transaction exceeds EUR 500 million (global threshold); (ii) at least one participating undertaking has revenues in Germany exceeding EUR 25 million (first domestic threshold); and (iii) at least one other participating undertaking has revenues in Germany exceeding EUR 5 million (second domestic threshold).

In practice this means that any transaction where the target has German revenues of less than EUR 5 million escapes merger control, even if the target has a high market potential – as reflected in a substantial purchase price – and potential competitive significance. According to the EM, this could be the case, in particular, with start-ups active in the digital economy, whose value may principally consist of a large user base rather than actual revenue. Moreover, some companies provide their services for free and indirectly finance them by other channels. The EM refers expressly to the USD 19 billion acquisition of WhatsApp by Facebook, which met neither the German nor the EU thresholds. The transaction was reviewed by the European Commission only because Facebook had requested an EU review in order to avoid having the deal assessed in three EU Member States (apparently the UK, Spain, and Cyprus, where a transaction may be reviewed independently of the revenue generated). Another example cited in the EM are companies involved in private research and development (e.g., in the pharmaceutical and technology sectors) whose products and technologies may have a high market potential but do not yet generate revenue precisely because they are still in the research or development phase.

The New Merger Control Threshold

The new merger control threshold is designed to close this perceived enforcement gap.

Under the new rules, the participating undertakings must still meet the global threshold of EUR 500 million and the first domestic threshold of EUR 25 million. However, if the target has less than EUR 5 million sales in Germany, meaning that the second domestic threshold is not met, the transaction will nevertheless require a filing if the two following conditions are both met:

(i) the “value of the consideration” for the transaction exceeds EUR 400 million; and (ii) the target is active in Germany to a substantial extent.

The “value of the consideration” includes the purchase price (including all assets and other monetary payments that the seller receives from the acquirer in connection with the transaction) and the value of any liabilities of the seller assumed by the purchaser. In complex M&A transactions, the calculation of that value may not be straightforward—for example, in purchase agreements involving “earn out-clauses”, whereby a portion of the purchase price is made conditional upon the future performance of the target. Other issues may arise where, for example, the purchase price fluctuates over time up until closing.

As regards the second condition that the target be “active in Germany to a substantial extent”, the revised ARC itself does not specify how that condition is to be interpreted and applied. In practice, it would require determining first whether the target is active in Germany, and, if so, whether that activity can be considered to be substantial.

The target must be active in Germany

According to the EM, whether or not a target is “active” in Germany has to be determined by reference to the location of the customer, more specifically the location of the designated use of the products or services. A target would accordingly be “active” in Germany where, for example, users in Germany avail themselves of the services it offers. A target would also be “active” in Germany where it conducts R&D activities in Germany. Whether or not actual customers located in Germany are also required in this R&D scenario is unclear from the EM, but an overall reading suggests that would not be a condition. It would likely be sufficient that there are potential customers, in the sense that the R&D activities are conducted with a view to entering the market in Germany. Importantly, it is clear that being “active” in Germany does not require achieving any revenues in Germany. However, the EM states that only market-related activities are relevant.

The target’s activity in Germany must be substantial

The EM does not specify how to determine whether the target’s activity in Germany is “substantial”. In particular, it rejects the use of any quantitative criterion, suggesting that the relevant factors to consider should vary depending, for example, on the sector or the maturity of the market. The only guidance provided consists of two rather specific examples. According to the EM, the condition would be met where the target markets a software product that is provided for free, but is targeted at all consumers and used by more than 1 million users in Germany (a clear allusion to the WhatsApp transaction); on the other hand, the condition would not be met where the target, despite worldwide revenues exceeding EUR 300 million, achieves German revenues of only EUR 1 million in the sale of products for which industry-wide sales have been consistently high, the low German revenues thereby accurately reflecting a negligible market position. While the reluctance to provide additional guidance may make sense theoretically and gives the Federal Cartel Office (FCO) the desired flexibility, it creates great uncertainty for businesses in an area where certainty and predictability are of particular importance. In this regard, the FCO has indicated its willingness to provide “case by case” guidance to parties and its intention to issue guidelines in relation to the new threshold, which is to be welcomed.

Implications for Businesses

The new threshold further expands the reach of the German merger control regime. How exactly it will be applied and how many transactions will fall under the new threshold remains to be seen, in part because of the uncertainty surrounding the interpretation of the notion of “substantial activity in Germany”. According to the EM, it is estimated that a “low single-digit number of cases” per year will have to be notified under the new threshold. Andreas Mundt, the President of the FCO, made similar predictions during a recent conference. Be that as it may, given that the new threshold is not worded in sector-specific terms, it is also clear that the threshold is capable of applying to any sector, beyond those in relation to which the EM particularly identified a possible enforcement gap.

The German reform of merger control thresholds may well herald a new trend towards alternative, value of transaction-based thresholds in the EU. As a case in point, Austria could introduce shortly a new threshold similar to the one just adopted in Germany. At EU-level, the European Commission is also mulling a similar reform, but developments in this regard are a bit slower. An evaluation Staff Working Document covering, inter alia, the effectiveness of the current revenue-based jurisdictional thresholds is expected to be published in the second half of 2017.