Within the last six months the German Federal Cartel Office imposed heavy fines on US nutrition and pet food producer Mars and a German press publishing house for allegedly breaching German merger control rules by closing transactions before merger control clearance (“gun jumping”). While traditionally European antitrust authorities have been perceived as less stringent than their US couterparts in controlling behaviour of merging parties prior to merger approval, these recent cases send a clear signal that the German authority is prepared to tackle these issues. Similarly, the European Commission has recently shown its willingness to intervene where it suspects parties to a transaction may be engaging in conduct which amounts to implementation of a transaction before merger approval.
- The recent FCO decisions
The Mars case concerns the acquisition of US pet food producer Nutro Products, Inc. by Mars Inc. The parties filed the transaction with the authorities in the US, Germany and Austria in May 2007. After clearance in the US, but before approval by the German Federal Cartel Office (FCO) and the Austrian regulator, Mars and Nutro closed the transaction and transferred the main assets such as production sites and certain IP rights to Mars. However, although the parties tried to avoid the effects of the closing in the US spilling over into Germany by carvingout the transfer of distribution rights for Germany and Austria, the FCO considered Mars’ conduct to be an intentional breach of German merger control law and fined the company in December 2008.
Regarding the fine against the German press publisher Druck- und Verlagshaus Frankfurt (DuV), the FCO only became aware of the breach of the standstill clause due to a new filing years after another transaction had been closed. Back in 2001, DuW acquired two advertisement journals, but only notified one of these transactions to the FCO. As DuW appointed a trustee to hold its shares in the other company, the FCO only noticed this merger seven years later when DuW sold its shares in 2008 and filed the divestment to the authorities. The FCO imposed a fine on DuV which is – as in the Mars case – subject to appeal.
- Broad scope of German merger control rules
The German gun-jumping rules have to be taken into account in all national and international transactions that fall under the German merger control regime – which is know as one of the broadest merger control systems worldwide. Provided they do not meet the revenues thresholds of the EC Merger Regulation (ECMR), transactions have to be filed with the German FCO prior to closing if
- both parties to the transaction have a combined worldwide turnover of more than € 500 million (US $ 650 million), and
- one party to the transaction generates revenues of more than € 25 million (US $ 32.5 million) in Germany, and
- Another party generates revenues of more than EUR 5 million (US $ 6.5 million) in Germany.
The second domestic threshold of € 5 million entered into force only in March 2009 and is intended to cut the number of filings where the merger only has insignificant effects on competition in Germany. Based on past experience ,the new threshold may reduce the number of such filings by up to 30%. However, thresholds still remain significantly lower than in other jurisdictions.
Futhermore, German merger control rules catch acquisitions of minority interests so that even an acquisition of 25% shareholding in a company (or sometimes less depending on the level of influence the shareholding confers), would be subject to a filing requirement in Germany if filing thresholds are met.
Thus, parties need to carefully consider a notification in Germany when contemplating a merger. As seen in many previous cases, this also applies to mergers between two non- German companies with no operations on the ground in Germany but which meet the filing thresholds through sales to German based customers.
- The FCO stands up for stricter law enforcement
The impact of German merger control law on international transactions is even more important considering the trend towards stricter law enforcement efforts of the FCO in the area of merger control proceedings. Companies engaged in global transactions where merger approvals may have been obtained in key jurisdictions in which the companies have their principal operations, will be under pressure to close the deal as soon as possible.
Carve-out options (carving out local business/assets or certain distribution chains from the deal in jurisdictions where merger approvals are still pending) need to be carefully evaluated since they may still infringe local laws. As seen in the Mars case, the German FCO considered the carve-out of distribution rights for Germany and Austria did not avoid infringement of the German rules prohibiting implementation of a notifiable transaction prior to merger approval. Companies also need to consider reputational damage and the extent of potential sanctions – under German law, the FCO can impose fines up to 10% of the annual turnover not only of the company which is a direct party to the transaction, but of the whole corporate group.
In the DuV case, the FCO also considered certain circumstances as aggravating in deciding on the level of the fine, e.g., DuV’s high market shares – and thus the high likelihood of denial of merger control approval –, what the FCO perceived as the intentional breach of the standstill clause, the trustee construction, and the financial power of the company. Moreover, a transaction not approved by the FCO is void and cannot be executed once the FCO decides not to clear the merger. Alleged gun jumping has also already lead to unannounced “dawn raids” investigations at companies’ offices by the FCO.
The most difficult issue in practise for participants in transactions to be notified in Germany is identifyingwhich pre-closing activities are permitted. The scope of standstill obligations is wide and covers not only the transfer of assets but also the takeover of certain management functions or even influencing the current board of the target. Furthermore, German antitrust rules prohibiting anti-competitive agreements between independent parties also apply to the conduct of the parties prior to closing. Parties must assess on a case-by-case basis which actions may be taken consistent with the applicable antitrust laws.
- A look at the EU law counterpart
The European Commission has also taken a more proactive approach recently in enforcement of the EC rules on the conduct of parties prior to merger approval and closing of a transaction. In December 2007 the Commission dawn raided the UK premises of two suspension PVC producers, Ineos and Norsk Hydro. The raids were reportedly launched to investigate whether the companies were implementing Ineos’ proposed acquisition of the polymer busines of Norsk Hydro prior to European Commission merger approval and whether the parties were exchanging any commercially sensitive information that might breach the Article 81 prohibition on anticompetitive agreements and practices.However, it appears that the Commission did not take any further action against the parties.
Nonetheless, the fact that the Commission launched the investigation sends a signal to companies contemplating mergers that they should exercise vigilance in relation to their conduct before merger approval and closing of the transaction.