German merger control will see some major changes in 2021. Today, the German parliament adopted the draft 10th Amendment to the German Act Against Restraints of Competition (ARC). The new amendment to the ARC will come into force within the next few weeks and bring some significant changes:
- Less control for small-scale M&A: The domestic filing thresholds will rise. As a result, fewer M&A deals will require an approval by the Federal Cartel Office (FCO) than it is the case today.
- More control for critical deals: The examination period for in-depth merger reviews will expand from four to five months, and additional merger control scrutiny will apply to acquisitions of certain companies even where the target does not meet the regular revenue thresholds.
This alert provides an overview of the upcoming changes. These revisions will be relevant to investors as well as to the management and directors of any acquirers and target companies with meaningful business in Germany.
REDUCED SCOPE OF GERMAN MERGER CONTROL
Higher Domestic Revenue Thresholds
The new ARC increases the two domestic revenue thresholds that the parties to a merger must meet to trigger an FCO filing requirement (Sec. 35 para. 1). Going forward, if at least one company has domestic revenues of more than EUR 50 million and another company has more than EUR 17.5 million, these thresholds are met. Previously, EUR 25 and EUR 5 million were sufficient. In addition, and this threshold is not subject to change, all the involved companies must account for at least EUR 500 million combined worldwide revenue.
|All merging parties combined||One party to the merger||Another party to the merger|
|Current ARC thresholds||EUR 500 million (worldwide)||EUR 25 million (domestic)||EUR 5 million (domestic)|
|New ARC thresholds||EUR 500 million (worldwide)||EUR 50 million (domestic)||EUR 17.5 million (domestic)|
These changes will relieve small and medium-sized companies from the burden of merger control. The government expects at least 20 percent fewer notifications than under the current thresholds. This will allow the FCO to dedicate more resources to in-depth reviews of critical mergers and other enforcement measures.
Wider Scope to Assume De Minimis Markets
The new ARC further reduces the scope of merger control by extending the de minimis clause (Bagatellmarktklausel, Sec. 36 para. 1). Currently, the clause exempts transactions from merger control which concern a market with total domestic sales of less than EUR 15 million in the last calendar year. This threshold will go up to EUR 20 million. This will foster the opportunities for small and medium-sized enterprises to consolidate in times of digitization and globalization. Again, the FCO will focus on mergers, which are of greater importance to the entire economy.
Moreover, the amended clause will allow the FCO to consider multiple markets when calculating the revenue. In its current wording, the clause requires each relevant market to be considered separately. However, case law already allows the FCO to apply a bundled view under the de minimis clause, i.e., to consider multiple markets as one if the markets are somehow connected, e.g., if they adjoin each other locally. The wording of the revised clause now expressly allows such a bundled view and thereby aligns with case law.
Calculating Revenue – IFRS Accounting Standards and Treatment of Publishing Revenues
The new law expands upon methods of calculating revenue beyond the German Code of Commerce (Sec. 277). If companies only prepare their annual financial statements according to International Financial Reporting Standards (IFRS), Sec. 38 para. 1 of the revised ARC will now also accept that method.
Certain special rules for calculating revenues in the publishing sector will also change (Sec. 38 para. 3). Currently, mergers that affect the publishing, production and distribution of newspapers, magazines, or their components, are subject to merger control if the companies' revenue multiplied by eight reaches the relevant thresholds. The new ARC cuts this multiplier in half. Consequently, mergers in the press sector will not trigger merger control if the merging parties have combined worldwide revenues of EUR 62.5 million (500 million divided by eight), but of at least EUR 125 million.
Procedural Changes – Longer In-Depth Reviews and No Obligation to Notify the FCO About the Closing of a Deal
The new ARC extends the examination period for in-depth "phase II" reviews from four to five months. It also abolishes the merging parties' obligation to inform the FCO about the closing of the transaction. However, if the parties failed to notify the FCO about a reportable merger, they must inform the FCO about that failure.
Moreover, there will be additional wording to prevent any circumvention of a notification obligation. Under the current framework, companies could split a merger into a large unproblematic portion, and notify the FCO about that portion, and a smaller portion that raises competition concerns but is not subject to merger control. The new ARC closes this gap by capturing multiple portions of one acquisition as a whole, as long as they involve the same companies and take place within a period of two years.
ENHANCED MERGER CONTROL OVER SUCCESSIVE TRANSACTIONS
In an effort to broaden the scope of German merger control to potentially critical deals, the new ARC introduces an additional enforcement tool for the FCO (Sec. 39a). The authority will be better placed to tackle successive acquisitions of companies active in the same economic sector. For the tool to apply, the FCO must first send a formal notice to the acquiring company. The notice will declare certain markets or sectors at risk of market concentration, and require the company to generally notify the FCO about any transaction in that field. However, certain limitations apply: First, the FCO can only put a company on a watch list if the company has worldwide revenues of more than EUR 500 million. Second, the FCO needs to provide objective evidence that future acquisitions by the concerned company may significantly impede effective competition in Germany in the specified sectors. Third, the company must account for at least a 15 percent market share in Germany in the affected sector as a buyer or supplier. And fourth, the FCO must already have conducted a formal sector inquiry of the relevant industry.
Once a company receives a formal FCO notice, it will have to notify the FCO about any acquisition of a business that is active in the specified sector with revenue that exceeds EUR 2 million in the last business year; provided that at least two-thirds of the revenue was generated in Germany. The notice shall remain valid for three years.
The new tool shall address a blind spot that emerged in specific cases under the previous merger control regime. In particular, the German waste disposal company Remondis had managed to gradually acquire various smaller regional competitors without any need for FCO approval, which allegedly resulted in Remondis monopolizing the waste disposal market. The new tool can now capture this type of transaction.
The FCO might also use its enhanced powers to control acquisitions of highly innovative companies with (still) small revenues, e.g., in the pharmaceutical or technology sector. This has triggered some speculation whether the FCO could also use the new tool against so called "killer acquisitions", where an established industry player buys up smaller start-up businesses with a view to preventing them from attacking its own market position. Nevertheless, the way the new tool is now laid out does not allow much room for the FCO to use it in that particular respect.
Following today's adoption, the new ARC will likely come into force by the end of January 2021. The revised merger rules, including the higher notification thresholds, will apply to every transaction that closes as of that date. Investors and acquirers might thus want to consider delaying certain envisioned transactions if they would fulfill the current threshold and a filing would not be required per the new elevated thresholds.
Regarding the merger control tool over successive transactions, it is notable that the FCO has not only conducted a sector inquiry into the waste disposal industry, but recently also completed sector inquiries into Smart TVs, user reviews in the Internet, and comparison portals, for example. Ongoing sector inquiries concern online advertisements, messenger services, and charging infrastructures for electric vehicles. A complete list of the FCO's sector inquiries can be found on its website. Successive transactions in these sectors now encounter a slightly higher risk of facing merger control scrutiny.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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