The geographic allocation of turnover is critical when assessing whether merger control turnover thresholds are met. German law does not provide for guidance on how to allocate turnover and the European Commission's practice as set out in the Consolidated Jurisdictional Notice under the Council Regulation on the Control of Concentrations between Undertakings (139/2004)(1) is not binding in German merger control cases. The Federal Court of Justice(2) recently provided some guidance when it explicitly endorsed aspects of the commission's practice with regard to geographical turnover allocation.
The Austrian Company Lenzing AG intended to purchase 90% of the German company Kelheim Hygiene Fibres GmbH. Kelheim is an important producer of viscose fibres, which are mainly used for manufacturing tampons. Lenzing is the only competitor. In 2012 Lenzing and Kelheim notified the Federal Cartel Office about the intended merger, but argued that the only market concerned was a de minimis market (ie, a market on which goods or commercial services had been offered for at least five years and which had a German sales volume of less than €15 million in the past year), with the result that the specific transaction in question would not have been subject to merger control.(3)
Kelheim and Lenzing took the view that their combined German sales of approximately €10 million constituted the entire German market volume, and thus the market for viscose fibres in Germany was a de minimis market. Kelheim and Lenzing considered their turnover with Johnson & Johnson to be foreign turnover because Johnson & Johnson's central purchasing department was based in Switzerland. However, viscose fibres worth roughly €10 million, while being purchased by this central purchasing department in Switzerland, were shipped directly from the suppliers to Johnson & Johnson's production site in Germany, without first going through Switzerland.
The Federal Cartel Office decided that the turnover with Johnson & Johnson had to be allocated to Germany, since the fibres were delivered by way of a transfer order directly to the production site in Wuppertal, Germany. Consequently, the total German market volume of viscose fibres was approximately €20 million and thus exceeded the de minimis market threshold. On this basis, the Federal Cartel Office considered that it had jurisdiction and prohibited the transaction on these merits.
Lenzing and Kelheim appealed, arguing that the turnover could not be allocated to Germany because the central purchasing organisation managing the purchases was situated in Switzerland. As a result, according to Lenzing and Kelheim, the German market was a de minimis market and the Federal Cartel Office was not competent to prohibit the transaction.
The Federal Court of Justice confirmed that the respective turnover of around €10 million had to be allocated to Germany. When allocating turnover, the relevant market must be investigated, and thus the place to which the demand for the respective goods can be allocated.(4) If the customer's place of business and the place of delivery are not identical, the place of delivery will prevail.(5) In the present case, although the central purchasing organisation of the multinational company was situated in Switzerland, the respective turnover had to be allocated to Germany because the goods were not delivered to the place of the purchasing organisation, but directly to a production site in Germany. The relevant market was, thus, the German market. In fact, the goods delivered were intended for Germany. This has to be considered when preparing purchase offers and determining purchase prices. The court further observed the particulars of the domestic market to which products were delivered (eg, packaging and import regulations, as well as price levels, delivery costs, product information and safety requirements).(6)
The court pointed out that its findings were in line with the commission practice on allocating turnover of undertakings, as set out in the jurisdictional notice.
The Federal Court of Justice clarified that the German Bedarfsmarkt principle coincides with the commission practice on the geographical allocation of turnover in merger control cases. If products are shipped directly to a customer in Germany, the turnover generated should be considered as German turnover, even if the customer's invoice address or headquarters is not in Germany.
While this decision may increase the administrative burden on the notifying parties (which cannot simply allocate turnover to the country of the invoice address, but will now also have to check where the product was actually delivered to), it should still be welcomed, as it sheds light on a hitherto unclear German practice and in this respect aligns German and EU practices. However, the court did not go so far as to declare generally applicable the principles established in the jurisdictional notice in other aspects.
For further information on this topic please contact Antje Gruneberg at CMS Hasche Sigle by telephone (+49 211 49 34 0), fax (+49 211 49 34 126) or email (firstname.lastname@example.org). The CMS Hasche Sigle website can be accessed at www.cms-hs.com.
(3) Under Section 35(2)1 of the Competition Act, in the version applicable until June 29 2013, transactions which concern only de minimis markets were exempt from merger control. In the law applicable since June 30 2013, concentrations which meet the turnover thresholds must be notified even if they concern only de minimis markets, but cannot be prohibited for competitive concerns arising on the de minimis markets (Section 36(1)2 of the Competition Act).