In the wake of the Facebook/WhatsApp deal, Germany and Austria amended their respective competition laws in 2017 and supplemented the traditional turnover threshold test for pre-merger control notification with a size-of-transaction threshold test. Under the new rules, certain transactions that do not meet turnover thresholds must nevertheless be notified if the transaction value exceeds EUR 400 million (Germany) or EUR 200 million (Austria).
On May 14, 2018, the German and Austrian competition authorities published joint draft guidance on the new thresholds for public consultation (the Draft Guidelines). For the first time, the Draft Guidelines give insight into the authorities’ likely interpretation of the new statute and provide clarification on aspects of the size-of-transaction threshold. In view of the severe consequences of failures to make mandatory filings—potential invalidity of implementation acts and fines for gun-jumping—such guidance is welcomed. The Draft Guidelines, however, do not address all ambiguities of the new test, notably concerning the requirement that the target needs to have “substantial domestic operations” in Germany or Austria. Interested parties were invited to submit comments on the Draft Guidelines until June 8, 2018.
When Facebook acquired WhatsApp in 2014 for about $19 billion, the transaction did not require merger control notification in Germany or Austria because the undertakings concerned did not meet the national turnover thresholds.1
To address a perceived enforcement gap in digital and other evolving markets—in which high transaction values may not correlate with high turnover, but may signal that the parties nonetheless have strong positions in current market(s) or substantial innovation potential—the German Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen, GWB) and the Austrian Cartel Act (Kartellgesetz, KartG) were amended with effect as of June and November 2017, respectively.
Before the amendment, concentrations were notifiable in Germany only if (i) the parties’ combined worldwide turnover exceeded EUR 500 million, (ii) the domestic German turnover of one party exceeded EUR 25 million and (iii) the domestic German turnover of another party exceeded EUR 5 million (Section 35(1) GWB). Pursuant to the new transaction value test, concentrations are now also subject to German merger control if:
- the parties’ combined worldwide turnover exceeds EUR 500 million;
- the domestic German turnover of one party exceeds EUR 25 million, but neither the domestic German turnover of the target company nor of any other party exceeds EUR 5 million;
- the consideration for the concentration ("Wert der Gegenleistung für den Zusammenschluss") exceeds EUR 400 million; and
- the target company has substantial domestic operations in Germany ("in erheblichem Umfang im Inland tätig ist").
The test under Austrian merger control law was amended to the same effect (though the Austrian KartG provides for lower thresholds).
B. The German and Austrian Authorities’ Draft Guidelines
According to the Federal Cartel Office, very few transactions—primarily related to the acquisition of pipeline products in the pharmaceutical industry—have been subject to German merger control as a result of the new transaction value threshold to date. This is unsurprising, as transactions meeting the size-of-transaction threshold typically also meet the turnover thresholds. However, uncertainties about the interpretation of the new test have resulted in several precautionary notifications (i.e., where the parties are notified to ensure that they would not be determined to have failed to meet notification requirements). These uncertainties relate mainly to what constitutes (i) the relevant “consideration for the concentration” and (ii) “substantial domestic operations in Germany.”
To address these uncertainties and some procedural aspects, the German and Austrian authorities published their joint Draft Guidelines on May 14, 2018.2 The public consultation of the Draft Guidelines ended on June 8, 2018, and the authorities are expected to publish their final guidelines later this year.
I. Value of the consideration
Determination of the consideration. According to the Draft Guidelines, the value of the consideration comprises all assets and other monetary benefits that the seller receives from the buyer in connection with the transaction. Thus, in the authorities’ view, consideration includes:
- all items of value received in return for the acquisition, including cash, securities, company shares not traded as securities, other assets (real estate, tangible assets and current assets), intangible assets (licenses, usage rights, rights to the company’s name and trademark rights), and consideration for noncompetition obligations assumed by the seller;
- future and variable purchase price components whose value and time of payment are contingent on the future events, such as earn-out payments (which depend on the development of corporate key figures, such as the EBIT, turnover or sales figures) or payments conditional on milestones (e.g., specific steps in a drug approval process), and future license payments; and
- liabilities assumed by the buyer.
The Draft Guidelines also provide guidance on methods for assessing the consideration value in different scenarios, including asset swaps, a combination of different payment elements, assumed liabilities, payments for noncompetition obligations or the creation of a joint venture. Under the Draft Guidelines, several transactions that are closely connected in material terms and timing will be regarded as a single transaction for the purpose of calculating consideration value. This applies, notably, where the buyer acquires target shares from multiple shareholders, aiming to acquire control over the company.
Relevant date. The relevant date for determining the consideration value is the date of the completion of the transaction. If parts of the consideration are to be paid at a later time, such as payments resulting from an earn-out, the value of such payments must be determined at the time of the completion of the transaction, based on assumptions and discounting methods commonly used in the financial sector.
The Draft Guidelines stress that transactions do not become reportable ex post if the calculated value did not exceed the transaction value threshold at the time of closing but exceeds the threshold at a later stage. On the other hand, a notification requirement arises if the valuation assessment changes in the time between the filing analysis and closing and the increased value exceeds the transaction value threshold.
Validation and documentation of the valuation. The Draft Guidelines require that the parties document their valuation in a transparent manner to enable the authorities to verify it. This applies both in cases in which the transaction is notified—the German and Austrian authorities ask the notifying parties to demonstrate the applicability of the notification requirement—and in cases in which the parties conclude that no notification is required. While the parties are not required to submit any information to the authorities on their own initiative, the authorities may request them.
According to the Draft Guidelines, a written confirmation of the value and its assessment submitted by the parties’ management may improve the reliability of the information and simplify the investigation of the consideration value. If necessary, the value of the consideration must be determined by a valuation report.
II. Substantial domestic operations
To determine whether the target company has substantial domestic operations, the German and Austrian authorities state that they will apply an analytical approach aimed at eliminating transactions from the scope of the provisions, which “at their core” relate to companies “only operating abroad.” In this respect, the authorities will analyze whether the target’s activity (i) has a local domestic nexus, (ii) has a “market orientation” and (iii) is sufficiently significant.
The authorities will measure domestic nexus primarily based on indicators other than turnover, which may vary from industry to industry. In the digital sector, for example, user numbers or the access frequency of a website may constitute possible indicators.
Pursuant to the Draft Guidelines, the domestic activities must have a “market orientation.” That requirement is met if the target company already provides a service against payment on an existing market, but may also be met if (i) a service is remunerated by means other than monetary payment, (ii) a service is offered free of charge but is monetized in a different way or can be expected to require payment in the future or be monetized in a different way in the future, or (iii) the activity consists of research and development of (future) products or services.
With regard to the statutory requirement that the domestic activities need to be “substantial,” the authorities will not apply hard quantitative limits but rather a qualitative test. While the Draft Guidelines include several (rather straightforward) case examples of what constitutes “substantial domestic operations” in the areas of the digital economy, mechanical engineering and the pharmaceutical industry, the general language remains rather vague and unspecific. For example, the Draft Guidelines state that the German authority will conclude that there is no significance if the target company generated a turnover below EUR 5 million in Germany “if this turnover adequately reflects its market position and competitive potential.” In view of the authority, this is likely the case if the company’s products generate significant turnover abroad, while domestic turnover may not be an adequate indicator in other cases, e.g., because the company is active in a market that is not characterized by turnover or because a product has only recently come onto the market.
The Draft Guidelines emphasize that it remains the responsibility of the parties to analyze transaction value and potential filing requirements for their transactions. In cases where the application of the new threshold is unclear (including scenarios in which the parties disagree whether the transaction value exceeds the thresholds), the authorities invite the parties to submit a precautionary notification to avoid a later infringement of the standstill obligation. It is unclear whether, in response to precautionary notifications, the authorities will initially determine the transaction value or proceed directly to an overall analysis of the competitive effects of the transaction, without specifying whether the transaction actually was notifiable. In addition, the authorities state that they are prepared to discuss on an informal (though, in accordance with their general practice, usually not on a no-names) basis any issues arising from a specific transaction and not covered by the Draft Guidelines.
While the final guidelines will not be binding on German and Austrian courts, they will illustrate the authorities’ practice and contribute to greater legal certainty. The current Draft Guidelines, however, leave some uncertainties and remain particularly vague on what constitutes “substantial domestic operations.” It remains to be seen whether the final guidelines will contain more clarifications in this regard.
Moreover, the Draft Guidelines impose far-reaching documentation requirements on the parties, and the determination of the transaction value as of the closing date means that companies will have to monitor the value assessment in the time between their filing analysis and closing (with the possible outcome of a filing requirement arising “in the last minute”). The authorities would be well-advised to consider the implications of these aspects of the Draft Guidelines as they prepare the final guidelines.