Joint Guidance Paper on Transaction Value Thresholds – Final Version published by Austrian and German Competition Authorities
On 20 August 2018, the competition authorities of Austria (Bundeswettbewerbsbehörde – Federal Competition Authority or “FCA”) and of Germany (Bundeskartellamt – Federal Cartel Office or “FCO”) published the English version of their joint guidance paper on the new transaction value thresholds (“Guidance Paper”).
Purpose of the Guidance Paper
The Guidance Paper deals with the new “transaction value” thresholds that have been introduced into the Austrian Cartel Act (“ACA”) and, respectively, the German Act against Restraints of Competition (“ARC”) in 2017.
The purpose of the new thresholds is to make also those transactions reviewable that involve target companies with low turnover, but where a high purchase price indicates either an innovative business concept in the digital economy with great competitive market potential or a significant market potential for a product under development, e.g. in the pharmaceutical industry (see already this article).
Thus, the new threshold makes a transaction subject to German merger control if, albeit the “traditional” turnover thresholds of German law are not fulfilled, the value of the consideration for the transaction amounts to more than EUR 400 million, and the target company is active to a considerable extent in Germany. The thresholds in Austrian law are similar, but smaller, in particular the value of consideration for the transaction needs to exceed only EUR 200 million.
Already before – and continuously after – the enactment of these thresholds, voices called for clarification. In particular, it remained unclear from the wording of the law how the “value of the consideration” should be calculated. Further critique was directed at the criterion of the “considerable extent” of the target’s domestic activity (see again this article).
Against this background it is to be welcomed, first, that a guidance paper is published at all to give companies more legal certainty. Second, the fact that the authorities of Austria and Germany jointly picked up this issue and coordinated their approach exemplifies increased global cooperation between competition authorities (see on this topic this article). The expected cross-border consistency is surely appreciated by companies being active in both countries.
In fact, the Guidance Paper gives useful guidance, although a case-by-case analysis will often remain necessary. In detail:
Guidance on the value of consideration
In its first substantive part, the Guidance Paper illustrates how the value of consideration should be determined.
The value of the consideration encompasses all assets and other monetary benefits that the seller receives from the buyer in connection with the respective transaction. This includes all cash payments, the transfer of voting rights, securities, tangible and intangible assets. Thus, the term needs to be understood in a broad sense and basically reflects not only the company value, but also includes surcharges or premiums that exceed the determined value of the company. Also, considerations that are contingent on certain conditions, such as those specified in earn-out clauses, or other additional payments to the seller have to be taken into account as well as additional payments for non-compete obligations undertaken by the seller if not already reflected by the purchase price. Furthermore, even (interest-bearing components of) liabilities being assumed by the purchaser need to be taken into account.
The Guidance Paper also clarifies that in general the relevant date for determining whether a transaction has to be notified is its (planned) completion date (“Closing”). As regards future and variable purchase price components, their current value on the date of Closing shall be determined discounting methods that are customarily used for company valuations. However, the Guidance Paper acknowledges that in some cases the value of the consideration cannot be specified at the time of notification or that it might change over time. If a notification requirement might arise since the value of consideration may exceed the relevant threshold at or before Closing, the Guidance Paper recommends submitting a precautionary notification.
Guidance on considerable domestic activity
The second substantive part of the Guidance Paper concerns the criterion of the “considerable extent” of the target’s domestic activities. This criterion was introduced in order to ensure that the transaction has a sufficient nexus to domestic markets.
The Guidance Paper gives various examples for different scenarios. It outlines a (non-exhaustive) list of criteria for measuring and geographically allocating domestic activity, for determining its market orientation and significance. Nevertheless, the Guidance Paper emphasizes that different business sectors may require different criteria, e.g. the number of active users of a service is deemed appropriate in the digital economy, but not helpful in other sectors. The Guidance Paper also reiterates that research and development activities may also constitute a relevant activity for establishing a local nexus. Regarding the latter, the target’s location will however not be sufficient on its own for determining local nexus, but rather the use of assets for domestic business activities.
A welcome clarification is that domestic activity must be currently on-going, while merely anticipated activities (as envisaged in a legislative draft of the ARC) is not sufficient. Further, the local nexus test shall also test whether the activity of a company is attributable to the place of intended use, i.e. usually the place where the customer is located, because this is where competition with alternative providers takes place.
Regarding the question whether domestic activity can be deemed “considerable”, the Guidance Paper confirms for Germany that this test will not be met if the target generated domestic turnover below EUR 5 million (which mirrors the “traditional” second domestic turnover threshold) if this turnover adequately reflects the target’s market position and competitive potential.
Guidance on concentrations
Finally, the Guidance Paper qualifies which types of “concentration” (i.e. transactions) shall be caught by the new threshold. In this respect it is argued that transactions should become subject to merger control even if the acquired asset enables the buyer to assume only a future market position of the seller.
In any case, the Guidance Paper clarifies that individual acquisitions which are closely connected in substance and timing should be regarded as parts of a single concentration. Thus, the consideration of each individual transaction should be included in the calculation of the value of consideration. This is an important finding since in some cases already the implementation of the first transaction step may trigger merger control and might require prior approval, even if the value of the consideration for this step alone does not reach the relevant threshold.
Consequence in practice
Even if the Guidance Paper sheds light on certain aspects of the relatively new transaction value-based threshold, various questions remain and will need to be analyzed in each transaction that does not fulfill the traditional turnover-related thresholds. The authorities emphasize that it remains the responsibility of the transaction parties to check possible filing requirements.
Yet, the Guidance Paper also states that a valuation report might be needed in certain cases, so some uncertainty remains. In this context, it is not surprising, yet also unsatisfactory that the Guidance Paper comes to the suggestion that transaction parties should file a precautionary notification in case that the value of the consideration may potentially change over time. Here, the Guidance Paper only provides orientation insofar as that there will be no “gun-jumping case” if the value of the consideration meets the relevant threshold after the merger is put into effect.
For the time being, mergers with potential cross-border impact will need to be analyzed for filing requirements and differences in merger control systems will need to be dealt with. In this regard, the Guidance Paper by the FCO and the FCA is a step into the right direction and insofar an uplifting commitment from the authorities as the paper closes with the explicit offer to enter into discussions on an informal basis if companies seek guidance for issues arising from a specific transaction project which are not dealt with in the paper.
Any Questions? Please Contact: Peter Stauber or Dr Sebastian Janka
Practice Group: Antitrust & Competition