When dealing with merger control issues in international transactions, the parties usually concentrate primarily on those jurisdictions where there is the most impact. These are, in general, the jurisdictions where the parties to the transaction have their headquarters and/or achieve most of their sales. Notwithstanding some market peculiarities, a recent decision of the Higher Regional Court of Düsseldorf dated November 26, 2008 demonstrates quite clearly how national merger control issues in jurisdictions at first sight less important can eventually stop international transactions:
In a CHF 3.3 billion transaction, the Switzerland-based Phonak Holding AG (“Phonak”) announced its plan to acquire the business segment “hearing aids” from its Danish competitor GN Nord A/S, consisting of the companies GN ReSound A/S (Denmark), GN ReSound GmbH Hörtechnologie (Germany) and GN US Holdings, Inc. (collectively hereinafter “GN ReSound”).
GN ReSound is a global provider of digital hearing instruments and audiological diagnostic equipment. The company is based in Copenhagen/Denmark with an extensive network of subsidiaries and dealers in 60 countries worldwide. In 2005, the ReSound-Group achieved a total turnover of EUR 450.4 million, of which approximately EUR 50 million or less than 10 per cent was achieved in Germany. Phonak is a holding company whose consolidated turnover for the business year 2005/2006 was EUR 559.2 million of which between EUR 30 million and up to EUR 80 million was achieved in Germany.
As it appears, the Antitrust Authorities involved with this case quickly released the transaction apart from the German Federal Cartel Office (“Bundeskartellamt”): The Bundeskartellamt prohibited the transaction in total by decision dated April 11, 2007 (Bundeskartellamt, B3 – 33101 – Fa – 578/06). The prohibition covered the entire transaction on a global level and not just the German part thereof. This decision was made even though:
- the transaction was carried out between two non-German legal entities,
- less than 10 per cent of the target company’s sales were achieved in Germany, and
- all other Antitrust Authorities had released the transaction.
According to the Bundeskartellamt, the oligopoly existing in Germany already without consideration of the contemplated transaction would have been strengthened. The market for hearing instruments in Germany is already dominated by Siemens, Phonak and Willliam Demant/Oticon who account for more than 80 per cent of the market shares. The next two largest competitors were GN ReSound and Widex who each have a market share between 5 per cent and 10 per cent. As a consequence, the difference in market shares between the top-3 in total and the next two largest companies was already more than 70 per cent in market share figures before consideration of the contemplated transaction.
The parties obviously challenged the decision of the Bundeskartellamt by bringing the case to the Higher Regional Court of Düsseldorf arguing on different levels that the decision of the Bundeskartellamt was wrong, in particular that the Bundeskartellamt was not allowed to prohibit the contemplated transaction in total.
The Higher Regional Court of Düsseldorf confirmed the Bundeskartellamt’s point of view. However, the court admitted that some legal issue had not been decided by a court before and therefore admitted an appeal against its decision to the German Supreme Court (“Bundesgerichtshof”).
While it will be legally interesting to see if the decision of the Higher Regional Court of Düsseldorf will be upheld eventually by the Bundesgerichtshof, it must be clearly stated that the final decision will come too late for this transaction. In situations like these, the parties usually agree to a very limited period of time in which the release of the competent Antitrust authorities must have been granted. Otherwise, the parties have the right to cancel the underlying agreements. The reason for this is that obviously, such transactions must be closed and then integrated quickly in order to become commercially successful. If this is not possible, the parties are forced to cancel the transaction rather than arguing with the courts for years whether their initial opinion prevails. Here, the parties cancelled the entire transaction as announced in a press release in August 2007 which was about four months after the deci-sion of the Bundeskartellamt.
The procedure is now continued to seek clarification of the legal issues. This could be practically important if, for example, there was a risk allocation in the underlying agreements between the parties (e.g. a break-up fee), or if the parties consider asserting damage claims against the Bundeskartellamt.
II. Legal Background of the “Phonak”-Decision
1) Jurisdiction of the Bundeskartellamt
The European Merger Regime did not apply to the Phonak-Decision because the thresholds for assuming a community-wide importance were not exceeded. As a consequence, the national merger regimes applied. As regards Germany, the transaction had to be notified to and released by the Bundeskartellamt in order become legally effective. The sales of the participating companies exceeded the relevant thresholds under German Antitrust Laws.
As already mentioned above, the Phonak-transaction was carried out between two non-German legal entities. So how can the Bundeskartellamt have jurisdiction on this case to eventually stop the entire transaction?
Restraints on competition are generally measured with their market influence in Germany. As a general rule, German Antitrust Laws are applicable with regard to all restraints on competition that have an impact within the territory of the Federal Republic of Germany. This applies even if the restraints on competition have been initiated outside of the territory of Germany.
The German Antitrust Laws therefore establish the jurisdiction of the Bundeskartellamt even if the parties to a transaction do not have a domestic base or any kind of business activity in Germany. The potential impact of a transaction on local German trade is considered a sufficient reason for the jurisdiction of the Bundeskartellamt.
The Bundeskartellamt assumes an impact on the German market and so may establish its jurisdiction on cases if only one of the parties to the transaction is active on the German market and there are additional elements that have or could have within a limited period of time an impact on the competitive situation. The following categories illustrate examples where there is some likelihood that the competitive situation is or may be influenced:
- new products are likely to be supplied to Germany after the contemplated transaction:
- the know-how of subsidiaries in Germany is increased as a consequence of the contemplated transaction;
- the contemplated transaction includes the transfer of intellectual property rights to subsidiaries in Germany;
- the contemplated transaction increases the financial strength of the German subsidiaries.
In this particular case, two Phonak subsidiaries were doing business on the German market. Both legal entities are apparently marketing companies for hearing instruments and accessories. After the contemplated transaction Phonak would have acquired several German legal entities of the GN Resound-Group.
These facts provided sufficient reason for the Bundeskartellamt to assume that the contemplated transaction would have an impact within the territory of Germany and thus to establish its jurisdiction over the case.
2) Substantiation or Reinforcement of a Dominating Market Position
According to the general principles, the Bundeskartellamt has to prohibit a contemplated transaction if this transaction results in or enforces a market dominating position. In the opinion of the Bundeskartellamt, the contemplated transaction between Phonak and GN Resound would have enforced the already existing oligopoly.
As already stated, the top three producers already had about 80 per cent of the market shares before the contemplated transaction. As outlined in the decision of the Bundeskartellamt, Siemens, Phonak and Oticon are furthermore members of a European- and worldwide oligopoly. Their market shares on the European market accounts to 70 per cent and worldwide to 65 per cent. The weak competition on the market for hearing instruments would have been of no significance anymore if the contemplated transaction had been approved. Consequently, the Bundeskartellamt was of the opinion that the contemplated transaction would have reinforced an already existing dominating market position.
3) Prohibition of the Entire Transaction?
The prohibition of a contemplated transaction usually covers the entire transaction. If transactions are implemented outside the territory of Germany, it is questionable whether a German governmental body can prohibit a transaction between two non-German parties concluded outside of Germany and likely subject to non-German law.
In such cases, it is generally assumed that the prohibition of the contemplated transaction has to be restricted in so far as anticompetitive practices have influence on the German market. If there is a German part in an international transaction and this German part has influence on the German market, German Antirust Laws may apply with regard to this part leaving the remaining part of the transaction unregulated under German law. This approach of course only works if the transaction can be divided into a German and a non-German part. For example, a transaction is regarded as not divisible if the market is not divisible.
In the present case, the Bundeskartellamt was of the opinion that a reasonable separation of a “German part” of the contemplated transaction was not possible as the GN ReSound-business in Germany consists of a mere distribution structure. Thus, according to the Bundeskartellamt and the confirming decision of the Higher Regional Court of Düsseldorf, the transaction had to be prohibited in total.
4) Imposition of Conditions?
With a transaction of this volume, issues are usually addressed proactively and if the Bundeskartellamt indicates that it sees issues, the parties try to deal with these issues by making concessions. During the merger control procedure, the parties apparently made several offers with regard to commitments which, from their perspective, could have allowed the Bundeskartellamt to approve the transaction. For example, there was an offer to exchange custom-designed technology or a consent to sell (“Veräußerungszusage”). The Bundeskartellamt was nevertheless of the opinion that these covenants by far were not suitable to compensate the negative impact of the contemplated transaction and thus refused to release the transaction by imposing respective conditions.
While there are some peculiarities caused by the oligopoly market situation in the Phonak/Resound case, the decision of the Bundeskartellamt and the confirming decision of the Higher Regional Court of Düsseldorf should remind parties engaged in international M&A activity painfully clear that they should very carefully seek for compliance with appli-cable Antitrust Laws at any time. Any negligence here can jeopardize the closing of the entire transaction if it turns out eventually that merger clearance can not be obtained in all relevant jurisdictions. Situations like these can only be avoided if respective expertise is sought right from the beginning of the M&A-process.