"Less is more" – Germany eases merger control requirements

On 14 January, the German Parliament passed far-reaching amendments of German antitrust law, the Act against Restraints of Competition (ARC), which also affect merger control. The amendment, also known as the "German Competition Digitalization Act", focuses especially on the reform of regulatory requirements to curb the market power of (large) companies with digital business models. The reforms of German merger control provisions seemed to take a back seat in the public debate - wrongly so. The following article summarizes the essential changes.

Raising the merger control thresholds

The most significant change in practice is the drastic increase of the domestic turnover thresholds in merger control. Although it appears inconspicuous in comparison to the reform of provisions dealing with an abuse of dominance and other regulations aimed at the digital economy, it will bring considerable relief for the Federal Cartel Office (FCO) as well as companies doing business in Germany. In future, significantly fewer M&A transactions will be subject to notification in Germany

Specifically, 

  • the first domestic turnover threshold will be increased from EUR 25 million to EUR 50 million and
  • the second domestic turnover threshold will be increased from EUR 5 million to EUR 17.5 million.

The threshold of EUR 500 million worth of turnover combined worldwide remains unchanged.

A previous draft the government presented had already provided for increases in the domestic turnover thresholds to EUR 30 million and EUR 10 million, respectively. Why the odd threshold value of EUR 17.5 million was chosen, remains unknown (the government's reasoning supplementing the changes explains the increase inter alia by taking inflation into account , but for the first domestic turnover threshold this nevertheless led to an "even" number). From a company's point of view, the easing of the thresholds is nevertheless to be welcomed without reservation.

The previous thresholds were, as the legislator has now also recognized, very low in international comparison, which led to a filing obligation for a large number of cases which were completely unproblematic on substance – but still demanded a considerable amount of resources from the FCO. Even in the "Corona year" 2020, when M&A activity almost came to a standstill in spring, the FCO ultimately received over 1,200 notifications. The bureaucracy associated with this can now be reduced, as a large number of cases will no longer require notification and clearance in the future. Already based on the significantly lower threshold value increases proposed in the first government draft, a reduction in the number of cases by a good 22% per year was estimated. With the amendments now passed, we would assume a reduction of up to 40% (possibly even more). Linked to this is the goal of more strongly focusing the freed-up resources of the authorities on the examination of potentially problematic cases. The motto is: "less is more"

Important: The ARC amendment is expected to pass the Federal Council on Monday, 18 January 2021, and could therefore enter into force already this week. Accordingly, the increase of the thresholds may also become relevant for transactions that are currently already far advanced and for which a German filing obligation was assumed based on the current (soon to be outdated) thresholds. It is therefore worth revisiting the question of a German filing obligation – especially since the relevant point in time for assessing such obligation is the time of completion of the transaction (which may be much further in the future).

It should not be forgotten, however, that the transaction value threshold will remain in effect and can catch cases where the target company has a turnover of less than EUR 17.5 million. This may be the case if the acquirer has a turnover of more than EUR 50 million in Germany, the transaction value exceeds EUR 400 million and the target company (irrespective of its turnover) is active in Germany to a considerable extent, e.g. through R&D activities or free services aimed at German users (as can often be the case in the digital economy). We therefore expect that the significance of the transaction threshold will be strengthened by the now increased turnover thresholds.

Something new in the assortment: The notification order

With a completely new provision, Section 39a ARC, the FCO can oblige an undertaking by order to notify to the FCO its mergers with other companies in one or more precisely defined economic sectors. However, the requirements for this are narrow. A notification order can only be issued if

  • the acquiring company has achieved turnover of more than EUR 500 million worldwide in its last business year
  • there are objectively reasonable grounds to believe that future mergers could significantly impede effective competition in the domestic market in the economic sectors concerned,
  • the acquiring company has a share of at least 15% of the supply of or demand for goods or services in Germany in these economic sectors, and
  • the FCO has already conducted a sector enquiry for the economic sectors in question and is therefore already very familiar with the typical market conditions in the sector.

Even then, only mergers in which the target company fulfils two minimum conditions must be notified, i.e. the target needs to have

  • turnover of more than EUR 2 million in its last business year,
  • of which more than two thirds were achieved in Germany. 

If these requirements are met, the FCO may issue a notification order which applies for three years from the date of notification of the FCO’s decision to the company concerned.

Important: According to the legislator's intention, the above-mentioned 15% threshold is not intended to refer to a "market share" in the economic sense, but to the share of any goods or services characterizing the respective sector of the economy. Thus, no relevant market must be defined and the FCO has discretion in determining the goods or services relevant for the sector of the economy as well as in determining the criteria for the share determination. It is also worth flagging that there is no specific "best-before" date for the sector inquiries to be carried out by the FCO before issuing a notification order. The “sector inquiry criterion” can therefore, at least based on the wording of the provision, still justify a notification order even if the respective sectoral investigation was carried out a long time ago. However, the government's reasoning makes it clear that there must be a certain temporal link to the notification order: Sector inquiries carried out several years ago are considered to be "not a suitable starting point, as market conditions may have changed in the meantime". It is also stated in the reasoning that for reasons of legal certainty, only future sector inquiries are to be considered, i.e. those that are completed after the new regulation comes into force. Certain ambiguity remains, however, even with these restrictions.

The above “softeners” notwithstanding, the requirements of the provision are quite rigid overall. Accordingly, the government does not expect more than one to three "notification order procedures" per year. However, even this may result in major efforts for the FCO as well as the companies involved, since such a procedure is supposed to correspond to that of a full-blown phase II examination in merger control. Subsequent merger control proceedings would come on top of this. The government’s reasoning supplementing the amendment assumes that each notification order procedure will result in an average of four additional merger control proceedings – one of which will then enter Phase II, i.e. keep both the FCO and the parties busy for months on end. Not least for this reason, companies should keep this provision on their radar in the future. This certainly applies to all (large) tech players but also applies to companies of the "old economy", since the degree of a company’s digitalization is not a criterion for Section 39a ARC. Rather, the government's reasoning makes it quite clear that the provision is supposed to capture all attempts by companies to "build up an extensive market concentration through successive transactions without merger control".

 Special arrangements for hospital mergers

The ARC amendment also provides for special rules for hospital merger control. Here, certain transactions will be completely free of merger control, regardless of turnover or transaction value thresholds. This is the case for all mergers in the hospital sector insofar as 

  • they involve a cross-site concentration of several hospitals or individual specialized departments of several hospitals
  • they are not precluded by any other provisions of competition law and this has been confirmed by the competent German Land when the application was submitted in accordance with Article 14(2)(3)(a) of the Hospital Structural Fund Ordinance,
  • the existence of the further requirements for funding pursuant to Section 12a (1) sentence 4 of the Hospital Financing Act in conjunction with Section 11 (1) number 2 of the Hospital Structural Fund Ordinance has been established in a disbursement notice pursuant to Section 15 of the Hospital Structural Fund Ordinance and
  • they are completed by 31 December 2027.

This exemption was not yet included in the initial draft bill that became public around one and a half years ago. However, the government saw a need for action, as specialization and the formation of medical centers in the hospital sector is politically desired. In recent years, however, the FCO had undertaken some critical reviews of hospital mergers, resulting in considerable burden on the merging parties and, in some cases, the failure of the project (either due to a formal prohibition by the FCO or because merger plans were abandoned due to concerns of the authority that seemed insurmountable). Some hospital mergers were not even notified after the FCO had already signaled concerns in informal preliminary talks. The exemption now passed by Parliament will facilitate consolidation in the hospital sector.

No changes to the ministerial approval

For future prohibition decisions, companies will keep their "last straw" after all. While the previous government draft included certain amendments to the ministerial approval provisions, these have been removed without replacement from the text of the law now passed by Parliament. The government draft had provided for a tightening of the substantive requirements for a ministerial approval and also stipulated the priority of a judicial review of the FCO’s decision over the ministerial approval. These changes would have made the ministerial approval obsolete in practice (which has already been criticized in the literature). But now, for once, everything remains as it is. Companies can therefore continue to try to convince the Federal Minister of Economics of the advantages of their merger project after a prohibition decision by the FCO – and still get it over the finish line despite the FCO’s veto.

Resolution on Killer Acquisitions 

Finally, it is worth pointing out the resolution adopted by Parliament in the wake of passing the amendment. This resolution calls on the Federal Government to "work at the European level to create possibilities to prohibit companies with outstanding cross-market importance from hindering innovation and competition by strategically buying up competitors (so-called "killer acquisitions")". The German parliament is thus in line with EU Competition Commissioner Vestager, who recently also spoke out on ways to prevent killer acquisitions. 

In doing so, the Commission announced its intention to chance its procedural practice when assessing merger control referral requests by Member States to the Commission under Art. 22 EUMR. While such a referral is theoretically also possible if the national notification thresholds are not met in the referring Member State, the Commission had so far urged Member States to refrain from referrals under these circumstances. It now wants to change this practice from summer 2021. This would allow each Member State, irrespective of its own jurisdiction, to ask the Commission to review a transaction if it has competition concerns about a transaction. The Commission is currently drafting guidelines to explain how this practice will be handled.

The resolution is remarkable because the above-mentioned transaction value threshold already now allows the FCO to examine a "killer acquisition", even if the target company does not yet generate any turnover and is (or could be) merely a significant driver of innovation. The extent to which Germany will therefore make use of the expanded referral possibilities in the future remains to be seen, especially since the FCO will, due to removal of small and micro transactions from its purview, have more "manpower" for examining more complex mergers itself. One can therefore expect the discussion about the right merger control response to digital and other economic challenges to continue.

Assessment and outlook

The amendments to German antitrust law bring about a number of changes. In addition to the main points discussed here, these concern a number of detailed provisions which will influence the merger control practice of the FCO. This applies in particular to the raising of the de minimis market threshold from EUR 15 million to EUR 20 million, the lowering of the threshold multipliers for press and publishing merger control, the facilitated aggregation of several transactions between the same parties within two years and the extension of phase II reviews by one month. These and the other provisions discussed here will make German merger control more focused and more strongly oriented towards transactions that are potentially problematic in terms of market structure.

As a result, the future will see both "less" and "more" merger control: While numerous transactions that were previously routinely subject to notification will disappear from the FCO’s radar, the remaining cases will in all likelihood be scrutinized even more closely. Companies should now quickly adapt to this new world.     
 

 

Authored by Falk Schoening, Johanna Brock-Wenzek, and Florian von Schreitter

 

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