Some first observations
In the second half of 2017 both Austria and Germany introduced transaction value based thresholds as alternatives to purely turnover based thresholds that trigger the obligation to obtain merger control approval. The Austrian test pursuant to section 9 (4) Austrian Cartel Act ("ACA") requires, amongst others, the consideration for a transaction to exceed EUR 200 million, and that the target must have significant domestic activities.
Both requirements led to uncertainty and raised several questions. To answer these, the Austrian and German competition authorities have taken the unprecedented step of publishing a joint guidance paper on the new value based threshold (the German version can be found here; "Guidance Paper") The paper follows a consultation process on a draft, which the two authorities published beginning in May 2018 (see the English version of the draft here; "Consultation Paper").
The main aspects of the Guidance Paper from an Austrian perspective are the following:
A. Computation of the transaction value
The Guidance Paper clarifies what types of payments and contributions are relevant for the computation of the transaction value. These include (fixed or variable) cash payments, the transfer of assets, securities and voting rights as well as interest-based liabilities (both liabilities which the acquirer assumes from the seller, as well as liabilities existing in the target company). Conditional considerations (e.g. earn-out clauses) have to be factored in as well.
The authorities elaborate in detail in the Guidance Paper on the different means to establish the value of the transaction (the Consultation Paper's proposal that the burden of proof rests with the parties has been abandoned).
The Guidance Paper clarifies that the transaction value threshold does not apply to establishments of green-field JVs pursuant to section 7 (2) ACA. As to JVs which are established by way of the JV partners contributing existing assets, these are considered mutual acquisitions of control over the JV partner's assets.
In line with the general principle that the closing date reflects the relevant date for establishing jurisdiction in Austria, the transaction value threshold must be met at closing (even if the values may fluctuate between signing and closing).
B. Significant domestic activity test ("SDAT")
In order for the new threshold to apply, the target must have significant domestic activities, already at the time when the transaction is closed. In this regard, the Guidance Paper establishes a three-pronged test, 1. local nexus, 2. marketability and 3. significance of the activities.
Importantly, the Guidance Paper clarifies that the SDAT requires the target to have current activities at the time of closing, i.e. the target needs to be present on the market already before the transaction is consumed. Thus, future or anticipated activities in Austria do not suffice. However, activities preparing market entry are considered to be current ones.
- Local Nexus The Guidance Paper sets out that local manufacturing activities, local R&D activities and local sales are all possible criteria for establishing a relevant nexus to Austria. In general, the activity of a company is attributable to the place where the customer is located, a domestic company that merely holds foreign entities with sales outside Austria would not meet the SDAT.
- Marketability of domestic activities The Paper makes clear that any type of activity must have a (domestic) market orientation. Such a market orientation exists if the target company provides a service against payment on an existing market. However, the SDAT also captures services that are remunerated by means other than monetary payment. This includes considerations that consist, for example, of a user supplying data or consuming advertising.
- Significance of domestic activities The (domestic) activities of the target must be significant. The "significance" can be assessed against different industry specific proxies. For instance, in the digital industries, the Guidance Paper suggests considering local monthly active users or unique users. Unfortunately, the Guidance Paper does not include safe harbors for most of the various activity criteria to fall short of relevant substantiality. The notable exception relates to local sales, regarding which the FCA notes that revenues below EUR 500,000, as a rule, are not considered substantial. However, this rule only applies in traditional, long-established industries where actual sales may be considered to properly reflect the current local activity level of an undertaking. The requirement of a significant domestic activity means greater local nexus than the general extra-territorial principle of appreciable domestic effect for the turnover threshold to apply. Hence, examples for the lack of significant domestic activity cannot be applied mutatis mutandis to the notion of appreciable domestic effect, lack of which would rule out a filing obligation for transactions that meet the turnover thresholds in Sec 9 (1) ACA.
The Guidance Paper provides welcome clarifications. At the same time, some interpretations of the authorities seem overreaching and difficult to reconcile with existing law or court practice. The most controversial points seem to be:
- Interest-based liabilities of the target should not be included in the computation of the transaction value (unless taken-over from the seller).
- The approach in the Guidance Paper regarding staggered transactions risks unlawful double counting of the consideration and their market value, respectively.
- Management statements on the transaction value are only deemed reliable if they have been drawn up not more than 90 days before submission to the authorities. This approach is questionable and likely to create an extra burden for companies when investigated for a breach of the suspension clause more than three months after closing.
- The Austrian competition authority ("FCA") interprets the notion of an undertaking broadly. For example, in the pharma industry companies that are active in phase III of clinical studies are already qualified as undertakings with relevant market activities. This is partly at odds with the requirement that a transaction is only a relevant concentration if it allows the acquirer to absorb the target's existing market position, thereby leading to a change in the market structure.
Even though the authorities indicate that they will keep the Guidance Paper updated based on their experiences and the decisional practice, several questions centred on the computation of relevant consideration as well as the significance of domestic activity will require clarification by courts. Until then, companies will have to continue making well-advised judgment calls on whether to submit filings in Austria, even if on a fail-safe basis.