Germany: Merger Control
In 2015, the German Federal Cartel Office (FCO) received approximately 1,100 merger control notifications, a figure roughly equal to the number of notifications in previous years. Eleven cases were subject to an in-depth investigation. The authority issued one prohibition decision which related to the proposed acquisition of food retailer Kaiser’s Tengelmann by EDEKA. One notification was withdrawn at an advanced stage and one matter was cleared subject to conditions.
German merger control rules are contained in section 35 et seq of the German Act against Restraints of Competition (ARC). This primary legislation includes a definition of the types of transactions covered by merger control rules, the thresholds that trigger a filing obligation, the main procedural rules, information requirements for the notification, and the substantive test.
A filing is required if the intended transaction:
- produces effects in Germany;
- constitutes a concentration as defined in the ARC; and
- meets the turnover thresholds set out in the German law but not those of the EU Merger Regulation (EUMR).
Even if all conditions are met, a filing will not be required if the de minimis transactions clause applies.
Effects in Germany
According to section 130(2) ARC, German rules on merger control apply only where the intended transaction produces effects on competition in Germany. As a rule, this will always be the case where:
- the target company has its place of incorporation in Germany;
- the target company has subsidiaries or any other affiliated companies in Germany; or
- the target company has in the recent past been active on the German market (even if only by way of imports into Germany).
In the past, the FCO considered sufficient effects to be likely even if the target was not active in Germany but the parties were potential competitors in this country. Given the recently introduced requirement that at least two parties generate revenues in Germany, this position is likely to be of relevance only where two parties with sufficient revenues in Germany acquire or set up an entity that would be a potential competitor of one of the parents in Germany.
In December 2013, the FCO published a draft guidance paper on the topic of domestic effects. In line with its previous practice, the authority suggests that any transaction in which the parties meet the financial thresholds will produce sufficient domestic effects to trigger the application of German merger control rules. Only in case of the establishment of a joint venture with no German activities will an analysis of the effects become necessary. However, the test suggested by the authority is extremely broad and complex and the FCO encourages parties to notify their transaction as a matter of precaution rather than indulge in a complex analysis of potential effects. This approach has been criticised as not being in line with the law. Nevertheless, in practice, many parties follow this suggestion, particularly as the notification of transactions that do not raise issues is a fairly straightforward process that involves only limited time and effort.
Definition of a concentration
German merger control rules consider the following transactions as potentially notifiable concentrations:
- The acquisition of all or a substantial part of the assets of another undertaking (section 37(1) No. 1 ARC).
- The establishment of the power to directly or indirectly exercise a controlling influence over another undertaking (section 37(1) No. 2 ARC).
Besides the acquisition of a majority of the shares, this mainly covers rights to use the assets of another undertaking or rights providing for control over the identity of the members of the board of directors or their decision-making process.
The acquisition of sole as well as joint control (either due to a shareholders’ agreement or due to a situation – such as in a fifty-fifty joint venture – where strategic business decisions need the consent of more than one shareholder) is caught. A change from joint control to sole control will constitute a concentration as will changes in the group of shareholders exercising joint control.
The acquisition of de facto control is also caught by section 37(1) No. 2 ARC. Instances of this are mainly acquisitions of less than 50 per cent of the shares in a publicly traded company. In these cases, even a minority shareholding may give the acquirer a majority of the vote in the shareholders’ meeting. The point of reference used to establish de facto control regularly is the average attendance at shareholders’ meetings in the recent past.
- The acquisition of shares or voting rights in another undertaking, if they alone or together with other shares or votes already held by the acquirer:
- amount to 25 per cent of the share capital or the voting rights; or
- amount to (or are increased to) 50 per cent of the share capital or the voting rights of another undertaking (section 37(1) No. 3 ARC).
Shares or voting rights held by other entities within the group to which the acquirer belongs must be included in the assessment.
Where several undertakings successively or simultaneously acquire shares in another undertaking to the extent mentioned above, this is deemed a merger of the acquirers (joint venture) but effectively limited to the markets in which the target company operates – this additional definition of a concentration may be relevant in the context of assessing whether a transaction meets the financial thresholds (eg, when shares are acquired in the course of the setting up of a new company). This analysis may also include shareholders that acquired their shares some time ago in a distinct transaction, the link of which to the present transaction may not be obvious to the parties to either the existing or the incoming shareholder.
Whether a transaction constitutes a concentration does not depend on the legal structure of the target undertaking: where voting rights in entities that do not have share capital (eg, a partnership) are acquired, this may constitute a notifiable concentration as well.
Whether the setting up of a joint venture qualifies as a notifiable transaction only depends on the structure of the transaction (ie, whether the owners acquire a sufficient number of shares or voting rights). German law differs from European merger control rules in that it does not require full functionality of a joint venture to trigger German merger control rules. Thus, even the setting up of entities that merely support the business activities of the parties (eg, pure production joint ventures) constitutes a concentration if the parents acquire a relevant amount of shares. As usual, merger control in such cases will consider the effects of such transactions on the structure of competition. Behavioural rules (article 101 TFEU or section 1 ARC) continue to apply in parallel. The FCO will consider both sets of rules when reviewing the transaction. This may create procedural tensions. The FCO has on occasion refused to provide merger control clearance before being satisfied that the proposed transaction did not conflict with the behavioural rules. In particular, the complexity of the analysis under article 101(3) TFEU or section 2 ARC may, if required, delay merger control clearance even in situations where the proposed transaction does not raise any issues under merger control rules. Planning such transactions will need to take this potential for delay into account.
- The acquisition of less than a 25 per cent shareholding may still constitute a concentration if it gives the acquirer a competitively significant influence over the target (section 37(1) No. 4 ARC).
Such influence will be due to ‘plus factors’: rights granted to the shareholder that go beyond the influence which the shareholding in itself confers upon the entity. Such rights will as a rule relate to the strategic positioning of the target while falling short of conferring outright control. Examples of such plus factors include the right to nominate senior executives, veto rights concerning the strategic planning, R&D support agreements, joint marketing and distribution agreements, or even options to acquire further shares. Influence granted in such a way must be ‘competitively significant’ to fulfil section 37(1) No. 4 ARC. This will as a rule only be the case where the acquirer competes with the target.
Successive transactions may each constitute distinct concentrations within the meaning of the law. For example, this would apply where a company has already bought 25 per cent of the shares in another undertaking and now intends to acquire further shares which would raise its shareholding to 50 per cent. However, a concentration shall not arise in such case where the latter transaction does not result in a substantial strengthening of the existing relationship between the two companies.
Concentrations are subject to pre-merger control where:
- the combined revenues of all parties to the transaction in the last completed business year exceeded €500 million;
- at least one party achieved domestic (ie, within Germany) revenues of more than €25 million in the last completed business year; and
- at least one other party achieved domestic revenues of more than €5 million in the last completed business year.
The parties to the transaction for the purpose of turnover calculation are the acquirer (including its parent companies and its subsidiaries) and the target (either the legal entity and its subsidiaries or the business associated with the assets to be acquired). German merger control rules, for the purpose of turnover calculation as well as the definition of a concentration and the competitive assessment, consider all undertakings that are under common control as a single entity (section 36(2) ARC). Where two or more undertakings exercise joint control, each of the controlling shareholders is considered to be in control for this purpose.
The turnover of the seller is generally not taken into account. Something else applies only where the seller (or any other shareholder in the target) retains 25 per cent or more of the shares in the target. In such case, the seller (or third party) is party to the concentration (the setting up of a joint venture) so that its turnover is included in the calculation. This means that the setting up of a joint venture with no previous activities (ie, no business being contributed by the parents) may constitute a notifiable transaction if the shareholders meet the thresholds.
Turnover for the purposes of German merger control rules is calculated as ‘net turnover’. Thus, VAT and other taxes directly related to the revenues, as well as any reductions that directly affect the amount of turnover (eg, discounts, rebates, etc) need to be deducted. Trade turnover is valued at 75 per cent of actual revenues. Turnover generated through the production or distribution of newspapers or journals needs to be multiplied by a factor of eight; revenues generated in the area of broadcasting (including the sale of advertising space) need to be multiplied by a factor of 20.
The relevant turnover is calculated on the basis of the revenues generated during the last completed business year (section 35(1) ARC). Subsequent acquisitions and divestitures are taken into account and will increase or decrease the turnover shown in the company’s profit and loss account. Also, the method of calculation may need to be adapted where the business year has been less than a full year. Generally, only external turnover (revenues generated by sales to entities that are not part of the same corporate group) is taken into account.
In case of a staggered transaction, the FCO may, under certain conditions, consider the different parts of the transaction as a single overall concentration. This applies if the transfer of shares or assets of different entities forms part of an overall plan. This may have important consequences for the calculation of the relevant turnover as the turnover of the different target entities needs to be combined. It will also impact the ability of the parties to close parts of the transaction – the hold-separate rules will apply to each individual transfer until the transaction as a whole has been cleared.
In addition, recent changes to the ARC introduced the rule that two or more transactions between the same parties within the space of two years will be treated as a single transaction for purposes of calculating the relevant turnover, if this leads to the thresholds being met for the first time (section 38(5) sentence 3 ARC). The approach differs from a similar rule at EU level contained in article 5(2) sentence 2 EUMR. The EU rule is broader in that it more generally combines all transactions within the time period even if the initial transaction already had a ‘Community dimension’ on its own. The German rule only applies to the situation where a subsequent transaction leads to the turnover thresholds being met for the first time. Thus, if the initial transaction already was subject to German merger control, no addition of revenues takes place. Section 38(5) sentence 3 ARC aims to capture cases of attempted circumvention, where the parties break down an overall transaction into a series of deals that individually do not meet the turnover thresholds. However, it also applies to transactions where the thresholds are met not because the revenues of the targets are added, but because of a change that has occurred within the acquirer. This could, for example, be the case where the acquirer between two transactions with the same seller has acquired other businesses from third parties that push its turnover beyond the relevant thresholds.
For credit institutions and other financial institutions, turnover is substituted by certain income items such as:
- interest income;
- income from securities;
- income from shares and other variable yield securities;
- income from participating interests;
- income from shares in affiliated undertakings;
- commissions receivable;
- net profit on financial operations; and
- other operating income.
Insofar as insurance undertakings are concerned, turnover is substituted by the value of gross premiums, including outgoing insurance premiums, but without taxes and parafiscal contributions or levies charged by reference to the amounts of individual premiums or the total volume of contributions.
Non-application of EU merger control rules
Even if a transaction qualifies as a concentration within the meaning of German merger control rules and meets the turnover thresholds, German merger control does not apply if the transaction is subject to the EUMR (section 35(3) ARC). This is the case where the transaction constitutes a concentration with a community dimension or if the transaction is referred up from member state level to the European Commission under article 4(5) EUMR.
The de minimis exemption
Section 35(2) ARC contains the de minimis exemption. According to section 35(3) ARC, a concentration does not have to be notified in Germany (even though the turnover thresholds are met) where one of the undertakings concerned by the transaction (not necessarily the target) is an undertaking that is not dependent and that in the last preceding business year achieved an annual turnover of less than €10 million. The FCO also applies this exemption to cases in which the target is controlled by another undertaking but where the group to which the target belongs as a whole does not exceed the €10 million threshold. Where more than two undertakings are involved in the transaction (eg, where two or more parties acquire joint control over the target), the exemption does not apply even if the target meets the exemption criteria.
Concentrations that are subject to German merger control have to be notified to the FCO on a pre-merger basis. There is no deadline for notification – the German legislator has assumed that the hold-separate requirement contained in section 41(1) ARC provides sufficient incentive for the parties to come forward and notify their transaction speedily.
Section 39(2) ARC places the obligation to notify on the undertakings participating in the concentration – this generally includes the acquirer and the target but not the seller. In the case of joint ventures (ie, a situation where, after consummation of the transaction, two or more shareholders hold at least 25 per cent of the shares in the target) or the acquisition of or changes in joint control, the other shareholders are also considered as undertakings participating in the concentration, even if they are not involved in the underlying deal. The seller is obliged to notify a concentration only if the transaction constitutes an asset deal or an acquisition of 25 per cent or 50 per cent of the share capital or the voting rights in the target.
In practice, the notification is usually put together and submitted by the buyer (in agreement with the seller). Where the seller wishes to become formally involved in the proceedings, it may join the notification – which is usually affected by means of a simple letter to the authority to this effect.
Section 39(3) ARC sets out the required content of a notification. This includes:
- a description and indication of the type of concentration;
- the names and place of business of the undertakings concerned;
- a description of the nature of their business;
- turnover achieved by the undertakings concerned in Germany, the EU and worldwide;
- market shares including the basis for their calculation or estimation if they reach 20 per cent in Germany or a significant part thereof;
- if the concentration is carried out via a share deal, the amount of shares to be acquired and the resulting total shareholding in the target; and
- a person duly authorised to receive service of documents in Germany if the undertaking concerned does not have a place of business in Germany.
This list already shows that notification requirements in Germany are much less stringent than at EU level. The FCO has issued a notification form on its website. However, parties are free to provide the relevant information in whichever way they think best serves the purpose (provided it meets the minimum requirements set out above, and is truthful and not misleading). Most notifications take the form of a simple letter to the authority, in particular where the concentration does not raise any competition issues. Notifications can be quite elaborate, though, if the transaction gives rise to potential competition concerns.
The FCO is willing to offer guidance on questions concerning the notification. While, the FCO will engage in pre-merger discussions with the parties to a certain extent, informal guidance of the kind considered ‘best practice’ at EU level is uncommon. ‘Completeness’ of the notification is usually not an issue and is left to the parties to evaluate by means of self-assessment. Thus, pre-notification discussions are generally only pursued where a transaction is likely to give rise to serious substantive issues.
Time periods for the review process
Section 40(1) and (2) ARC set out the timetable for the review process. According to section 40(1) ARC, the FCO has a one-month time period from the date of (complete) notification for the initial assessment of the transaction (Phase I investigation). This time period may be extended to a total of four months from the date of notification by informing the notifying party or parties at any point in time within the initial one-month period that the FCO has entered into a formal examination of the proposed concentration (Phase II investigation).
The time period is automatically extended by one month if one of the notifying parties first offers commitments to alleviate potential competition concerns (section 40(2) sentence 7 ARC). The FCO can also ‘stop the clock’ by issuing a formal request for information pursuant to section 59 ARC after a party to the transaction has failed to provide such information in response to a first request. The suspension of the time period ends when the undertaking provides the requested information to the authority (section 40(2) sentence 6 ARC). Finally, the time period for review can be extended in agreement with all notifying undertakings (section 40(2) sentence 4 No. 1 ARC).
A transaction that is subject to pre-merger control (with the exception pursuant to section 41(1a) ARC of certain public takeover bids) must not be consummated before clearance is obtained.
A violation of this prohibition of consummation prior to clearance is deemed to constitute an administrative offence, and fines of up to 10 per cent of worldwide turnover may be imposed. Moreover, any legal transactions contravening the ban on consummation do not produce any legal effects if they are governed by German law.
Involvement of third parties in the process
The FCO has the power to involve third parties in the investigation, be they customers, suppliers or competitors. The FCO is under a duty to protect business secrets made available to it in the course of the investigation. However, the fact that a transaction has been notified in itself does not constitute a business secret. In fact, the FCO publishes a short reference to the notification (but not the text of the notification) on its website, inviting third parties to comment on the transaction.
Unless they already have sufficient market intelligence available, reporting officers at the FCO will regularly contact other market players, particularly competitors, to obtain a better understanding of the actual market conditions and confirmation of the information provided by the parties. In the early stages of the investigation, such measures often aim to establish competitive relationships and the importance customers allocate to specific suppliers. These investigative acts usually take the form of phone calls. If the investigation progresses, matters become more formal; third parties may formally join the proceedings and investigative measures become more structured – extensive questionnaires may be sent out and copious data are gathered.
The final decision
If the FCO forms an opinion about the transaction within the first one-month period, it can decide to close the investigation by means of an internal decision. While this is a properly reasoned decision, it is not provided to the notifying parties. Instead, they are simply made aware of the termination of the investigation by means of an administrative letter. This letter merely informs them that the investigation has been closed and the transaction may be consummated. No reasons are given to the parties. Neither are third parties made aware of the reasons for the closure of the investigation. However, the FCO may decide to publish a summary of its thinking in the form of case notes for particular cases.
If the FCO enters into a formal Phase II investigation, the authority must adopt a formal, reasoned decision. Non-confidential versions of these decisions are made available to third parties and published on the FCO’s website. The undertakings concerned as well as third parties which had formally joined the proceedings have the right to appeal a formal decision of the FCO.
Merger control notifications are subject to administrative fees (section 80(1) sentence 2 No. 1 ARC). Fees range from €5 to €50,000, an amount that may be doubled in exceptionally complex cases. The FCO enjoys significant discretion when setting the fee, taking into account the significance of the transaction, the economic impact and the resources required to investigate the deal. Ultimately, fees tend to be modest, ranging from €5,000 to €20,000 in straightforward Phase I cases and only reaching the limits of the statutory range in particularly complex investigations.
In 2013, Germany introduced the concept of a significant impediment to effective competition as the yardstick for the assessment of notified transactions in an effort to further align its competition law with that of the European Union. However, the old dominance test is still maintained as the primary example of when the conditions for prohibition are met. Thus, the FCO claims that old decisions that assessed whether a transaction created or strengthened a dominant position still provide valid guidance for parties to future transactions.
Presumptions for dominance
German merger control rules contain a statutory rebuttable presumption of dominance. According to section 18(4) ARC, a single undertaking is considered dominant on a specific market if it holds a market share of 40 per cent or more. According to section 18(6) ARC, a number of undertakings are considered jointly dominant if the leading three undertakings taken together account for market shares of 50 per cent or more or if the leading five undertakings together account for market shares of 66.6 per cent. This approach deviates from the situation at EU level in two important respects. First, it introduces a presumption for joint market dominance (which is otherwise more difficult to prove than single firm dominance) that is lacking at EU level. Second, it establishes a presumption of dominance at a 40 per cent market share, whereas EU practice merely uses the 40 per cent-threshold to identify potential causes for concern. Thus, section 18(4) and (6) ARC reflect a more interventionist approach than what is known at EU level.
A potential cause of concern is mitigated by the fact that these presumptions are rarely relied on in a formal sense. In fact, the FCO is legally obliged to investigate the relevant markets to assess the competitive position of the undertakings concerned. Only where the investigation remains inconclusive with regard to the existence of dominance may the authority rely on the presumption. Nevertheless, the existence of these presumptions has in the past caused concern as they provide an important indicator which the FCO uses in its analysis. It will be interesting to see whether the change in the substantive test will lessen the focus on dominance (so far it has not) and thus diminish the relevance of the presumptions of market dominance.
Minor markets exemption
Until the most recent changes to the ARC in 2013, the minor markets exemption provided a true exemption from the notification requirement (provided only minor markets were affected by the transaction). This exemption has since been shifted to the section of the ARC that deals with the substantive assessment of a notified transaction. Pursuant to section 36(1) No. 2 ARC, the FCO is merely prevented from prohibiting a transaction on the basis that it will lead to a significant impediment to effective competition on a market on which business has been done for at least five years and which, in the last completed calendar year, had a total market volume of less than €15 million. Even if only minor markets are affected by a transaction, a notification is still required and closing of the transaction prior to obtaining clearance remains illegal.
The FCO may include conditions and obligations in its final decision. These serve the purpose of ensuring the implementation of commitments given by the parties in the course of the investigation in order to remove competition concerns that the authority might otherwise have entertained. Conditions need to be fulfilled before the clearance becomes effective, while obligations define requirements that need to be fulfilled post-merger.
In contrast to the situation at EU level, commitments under German law must not aim to monitor the behaviour of companies on a continuing basis (section 40(3) ARC). Thus, there is a strong preference for structural remedies such as the sale of assets. If the parties believe that behavioural remedies are best suited to solve potential competition concerns, they must be carefully designed to emphasise their effect on the structure of competition.
If the FCO prohibits a transaction, the parties can apply to the German Minister for Economics to obtain a ministerial approval of their deal. This may be granted if the transaction is likely to produce benefits for the economy as a whole that outweigh the anticompetitive effects of the transaction or if the transaction is justified by public interest that outweighs the competitive concerns. The minister does not enjoy the power to prohibit a transaction that does not raise competitive concerns for reasons of public interest. The lack of a general public interest clause and the very small number of ministerial approvals (only nine approvals have been granted since the introduction of the provision in 1973, the most recent decision in 2016 generated considerable controversy and is currently subject to an appeal as it appears questionable whether the benefits for the economy, which the decision by the current Minister for Economics claims the transaction will produce, are likely to materialise) reflect the focus of German merger control on maintaining competitive market structures rather than pursuing non-competition related policy goals.