Cross-border transactions often require merger clearance by the German Federal Cartel Office (“FCO”). The size of Germany’s economy, coupled with (relatively) low jurisdictional merger control thresholds, mean that international investors frequently face the need of a German notification. The FCO has now issued new guidance on domestic effects in merger control (the “Guidance”)1, i.e., on when foreign-to- foreign mergers will need to be notified.

The guidance specifically addresses joint venture situations and brings some clarity on filing requirements in this area. Whether the new rules will be practical remains to be seen. Specifically, the requirement to assess the joint venture’s and the parents’ market shares on the joint venture’s markets or upstream or downstream markets will likely result in complex assessment. Particularly, private equity investors with diverse portfolio investments–in Germany or elsewhere–will likely require considerable time and effort to run such a market share and overlap check in connection with a filing preparation.

I.         Notifiability under German merger control rules

Companies need to file a pre-closing merger control notification to the FCO for certain concentrations, if2:

  1. the combined aggregate worldwide turnover of all the parties was more than EUR 500 million;
  2. the domestic turnover of at least one party was more than EUR 25 million and that of another party was more than EUR 5 million; and
  3. the concentration is not subject to a review by the European Commission (this applies to larger transactions, e.g., where the combined aggregate worldwide turnover of all the parties was more than EUR 5 billion and the EU-wide turnover of at least two parties was more than EUR 250 million).

On average, about 1,100 filings are notified to the FCO every year3. By way of comparison, the European Commission reviewed 277 concentrations in 20134.

Even if the above requirements are met, companies can avoid a filing if the concentration does not have a domestic effect in Germany (§ 130(2) ARC).

II.        Summary of the new Guidance

The FCO’s previous guidance on domestic effects was published some 15 years ago and prior to the introduction of the second EUR 5 million turnover threshold in 2009. This left parties to foreign-to-foreign transactions in the dark as to whether a notification was required.

On 30 September 2014, the FCO published the new Guidance.5

1.        German filing required

The Guidance identifies a number of constellations in which domestic effects can clearly be identified (and which hence will have to be notified in Germany):

  • Target exceeds German turnover threshold. Where in concentrations involving only two companies the target company is active in Germany and its turnover exceeds at least the second domestic turnover threshold of EUR 5 million, the merger clearly qualifies as a merger with appreciable domestic effects and needs to be notified6; and
  • Joint venture exceeds German turnover threshold. Where a concentration involves more than two companies (i.e., in joint venture situations), a concentration will definitely have domestic effects in Germany if the joint venture company itself has a German turnover of more than EUR 5 million.
  • In all other cases, a case-by-case assessment is required7.

2.        German filing not required for certain joint ventures with no German activities

The Guidance further identifies conditions under which domestic effects can clearly be ruled out (and which hence will not have to be notified in Germany, even if the turnover thresholds are met) with regard to joint venture situations:

  • The joint venture company is neither currently active in Germany, nor is it a potential entrant (in case of newly established joint ventures, the intended business activity is decisive)8; and
  • The parent companies of the joint venture do not compete with each other on the joint venture’s relevant German product market (or on domestic upstream and downstream markets)9.

3.        Case-by-case assessment for joint ventures with minor business activities in Germany

For joint ventures with minor business activities in Germany, the Guidance contains information on certain relevant factors that will be taken into account in this context:

  • If the joint venture has less than EUR 5 million sales in Germany, but exceeds a domestic market share of 5%, a notification is required. If its sales are below EUR 5 million and its market share is also below 5%, a notification might still be required if resources that are relevant for the company’s market position (such as intellectual property rights and know-how) are transferred to the joint venture10;
  • In the case of a newly established joint venture, the FCO will look at the joint venture’s projected sales and market position during the first three to five years after its establishment to assess whether the respective concentration will have domestic effects11; and
  • Even if a joint venture’s domestic German activities are below the above-mentioned thresholds and thus marginal, a concentration could still have domestic effects in Germany if it would lead to spillover effects between or among the parent companies. This is particularly the case if the parents are actual or potential competitors to the joint venture abroad and/or domestically or are active in markets upstream or downstream to the market in which the joint venture is active. Where, however, the parents combined market shares do not exceed 20%, spillover effects should not be substantial and a domestic effect of the concentration can hence be excluded12.

4.        Impact and application of the FCO’s Guidance

The Guidance offers helpful clarity with respect to the notification requirements of joint ventures with no or limited German nexus. Notably, the German position differs from the approach taken by the European Commission that currently requires a filing even when the joint venture company does not have any local activities (however, the EC is currently reviewing whether to abolish a filing requirement in such a scenario). To that end, the Guidance is a step forward, as it avoids the need to submit a filing if the joint venture cannot raise any competition concerns in Germany.

However, the Guidance requires far-reaching competitive assessments of the joint venture’s and its parents’ activities on the joint venture’s markets, as well as on upstream and downstream markets. Such information is frequently not easily available, e.g., if the parent companies were to be private equity investors with diverse portfolios of investments in Germany or elsewhere.  In addition, the FCO publishes – other than the European Commission – only the minority of its merger control decisions in full text. It will therefore be difficult for parties to assess what the FCO would regard as the relevant markets for establishing the joint venture’s and its parents market shares.

Consequently, the Guidance concludes with inviting parties to a concentration to notify in cases of doubt to avoid any legal uncertainty13. When parties to a concentration are still in doubt following an assessment of the potential domestic effects of a transaction in Germany and following discussions with their external antitrust counsel, only a notification can provide legal certainty and avoid the risk of a fine for breaching the obligation to notify in Germany.