In a recently published decision1 the Higher Regional Court of Düsseldorf provided interesting guidance on how to deal with jurisdictional uncertainties of German merger control. The Court took the opportunity to clarify controversial topics concerning the de-minimis market notification exemption, and geographic turnover calculation. The Court also made very clear that merging parties rather than calling the courts have to go through the administrative procedure with the Bundeskartellamt (Federal Cartel Office, “FCO”) first.
The background of the case
The envisaged transaction would combine the two main suppliers of viscose rayon in Germany. According to the decision, the combined domestic market share of the merging parties amounts to more than 90 percent. In August 2011, the transaction was notified to the FCO for reasons of precaution as the parties believed that the FCO had no jurisdiction to review the case. According to the parties’ opinion, the total turnover value of the market concerned by the transaction was less than EUR 15 million in Germany in the last calendar year preceding the transaction in which event, generally speaking, the German cartel law provides a de-minimis exemption from the notification obligation.
The problem was, however, that the FCO did not agree with the parties’ method of calculating the total turnover volume on the market concerned. Contrary to the parties’ view, the FCO concluded that the total market value exceeded EUR 15 million and that the FCO had jurisdiction to investigate the merger. The parties thereupon withdrew their notification. The FCO addressed a letter to the legal representative of the parties – under the letterhead of the head of the competent decision department – in which it reiterated its position that a consummation of the transaction prior clearance by the FCO would violate the standstill obligation which may lead to fines.
The parties filed an appeal against the letter of the FCO before the Higher Regional Court of Düsseldorf. The Court dismissed the appeal as inadmissible and unfounded.
The case involves mainly one procedural and two substantial issues.
From a procedural point of view, the Court stated that the FCO’s letter does not constitute an administrative act that can be appealed. As a result, the claim was inadmissible because the German merger control regime does not foresee a possibility for “preventive legal protection” to solve disputes on the obligation to notify. The risk of non-filing has to be borne by the parties. To avoid this risk, parties can always notify a transaction out of precaution. The Court however did not rule out the possibility of seeking legal protection in exceptional circumstances if the parties otherwise would suffer from irreparable damages or losses that could not be recovered. The risk of the parties of being investigated for infringement of the standstill obligation, reputational damage and economic risks would not amount to such severe negative effects.
The first substantial issue concerned the applicability of the de-minimis market exemption. As stated earlier, such notification exemption applies if the transaction only concerns a minor market, that is, broadly speaking, a product market with a total annual turnover value in Germany of less than EUR 15 million. The Court confirmed that such exemption plays a role both for the assessment of jurisdiction and the substantial assessment of the transaction. It can be difficult to determine whether a case qualifies for the de-minimis exemption. The analysis of the total market value requires necessarily the definition of the product market and the calculation of the turnover, and such analyses may not always be clear-cut. Therefore, the assessment of the de-minimis clause for the purpose of determining jurisdiction requires the FCO only to conduct a mere cursory review of the total market size. This means that the FCO, in order to decide whether it is competent to review a transaction, does not have to conduct a thorough analysis. It can assume jurisdiction for cases that do not obviously fall under the de-minimis exemption. If in the course of the investigation the FCO finds that the relevant markets do fall within the scope of the de-minimis clause, it cannot prohibit the transaction because of the creation or strengthening of a dominant position on such minor market.
The second substantial issue concerned the method of turnover calculation. The parties to the transaction and the FCO disagreed on how the total turnover value of the market concerned in Germany should be determined. One of the parties’ customers had production sites in Germany and France. Supplies for these production sites were ordered from a branch in Switzerland, but the purchased products were directly delivered to the production sites in Germany and France. The parties argued that such sales have to be attributed to Switzerland, where the orders were placed. In their view, this is where competition in relation to the purchased products took place. The FCO referred to the European Commission’s Consolidated Jurisdictional Notice2, and considered all direct supplies to customers’ locations in Germany as German sales.
By way of background, the Jurisdictional Notice explains that, in general, turnover generated through the sale of goods is allocated to the place where the customer is located. Sometimes the relevant customer location may not be obvious, e.g. if the place of delivery differs from the billing address or the place where the customer was located when the purchase agreement was concluded. In such cases, the relevant location for the purpose of turnover allocation is the place where competition with alternative suppliers takes place. This is usually the place where the characteristic action under the respective contract is performed. For contracts on the sale of goods, this is usually the delivery of the product. The same principles apply if a multinational corporation has a central purchasing unit that sources goods for the entire company from a central location. If all products are delivered to a central location and subsequently re-distributed internally to different places in other Member States, the respective turnover is allocated only to the Member State where the central purchasing organisation is located. If the central purchasing unit merely concludes a framework agreement, but there are in fact direct links between the seller and the different subsidiaries in the sense that the subsidiaries place concrete orders and directly receive the product from the seller, the turnover is allocated to the Member State in which the subsidiary is located, irrespective of who receives the invoice or effects the payment. The same applies if the central purchasing organisation places the order, but the product is directly delivered to the subsidiary3.
The Düsseldorf Court confirmed the FCO’s position. For the purpose of the cursory review, that is required for the assessment of jurisdiction, the Court did not find fault in the FCO’s approach that the place of delivery is the relevant location where competition takes places. In the Court’s view, this position was backed up by the parties’ argument that the products were not delivered to Switzerland and then into Germany but directly to Germany in order to save transport costs. The Court stated that transport costs would constitute typical factors for the structure of a market that could play a significant role for a customer’s buying decision. Thus it was not flawed to consider the location of product delivery as the location where the actual competition takes place.
The decision touches upon several issues that have been under discussion in recent years.
The de-minimis clause as a jurisdictional threshold has caused many practical problems in Germany in the past because the assessment of the total market value regularly requires a precise definition of the product market. Such definition became more complicated when the FCO – backed by the courts – began to bundle various minor markets with the result that the exemption was hardly available4. Hence, for the assessment as to whether or not a pre-merger notification has to be made to the FCO, the de-minimis exemption provides too little certainty – as this case shows again. Fortunately, the proposed changes to German merger control rules will clarify the situation. According to draft amendments to the Act Against Restraints of Competition,5 the de-minimis clause will no longer apply as a jurisdictional threshold, but only be part of the substantial assessment. Parties will therefore have to notify any transaction that meets the turnover thresholds, but if the transaction only affects markets in Germany, in which a turnover of less than EUR 15 million was generated, the transaction cannot be prohibited because of the creation or strengthening of a dominant position on such minor market.
Geographic turnover allocation is also sometimes controversial. The decision at hand clarifies, at least in the context of a cursory review, that the FCO may consider the place of delivery as the relevant location where competition takes place and hence where the turnover generated with the sale of goods should be attributed to. It seems likely that the Higher Regional Court of Düsseldorf would not object if the FCO used the same approach in a thorough merger investigation.
Finally, the Court reiterates that the risk of not filing has to be borne by the parties. There is no such thing as a “negative attestation” in the sense that parties can initiate legal proceedings to get confirmation that a filing is not required. If parties are unsure whether a filing is required or not, and want to avoid the risk of violating the standstill obligation, the appropriate way to get legal certainty would be to notify the transaction and go through the administrative merger control procedure. The chance seems fairly small that parties are able to successfully claim irreparable losses to initiate court proceedings in order to solve a dispute between the FCO and parties on the obligation to file.
Following this decision, the transaction was notified for the second time in May 2012. It is currently being reviewed in a second phase investigation by the FCO. The claimant’s goal to achieve legal certainty for the transaction at hand, could so far not be achieved.