New transaction value threshold in German merger control
On 9 June 2017, the 9th amendment to the German Act Against Restraints of Competition (ARC) came into force. One of the key legislative changes affecting corporate transactions is the introduction of an additional threshold for German merger control which is not based solely on the turnover of the companies involved but primarily on the value of the transaction. The new threshold was designed to make corporate transactions subject to merger review which involve market-relevant companies of the New Economy that do not yet generate particularly high-turnover and thus would have previously escaped scrutiny by the German Federal Cartel Office (FCO). The legislative amendment will lead to an increase in costs for reviewing whether a corporate transaction is reportable since it is not entirely clear yet how the new threshold has to be interpreted. Alongside other changes, this amendment of the ARC is therefore very relevant to corporate transactions (see also this article).
Legal situation to date
Until the legislative change, a corporate transaction (concentration) was only subject to German merger control if the conditions for European merger control were not met and in the last completed financial year
• all undertakings participating in the concentration had an aggregate worldwide turnover of over EUR 500 million,
• one participating undertaking had turnover of over EUR 25 million in Germany, and
• another participating undertaking generated turnover of over EUR 5 million in Germany.
Even if these conditions were met, a transaction was exceptionally exempted from German merger control if one of the undertakings involved – including all affiliates – generated worldwide turnover of less than EUR 10 million (so-called “de minimis” clause).
New threshold based on transaction value
The 9th amendment package to the ARC introduces an additional threshold. According to this, a concentration will also be subject to German merger control if the conditions for European merger control are not met and in the last completed financial year
• all undertakings participating in the concentration had an aggregate worldwide turnover of over EUR 500 million,
• one participating undertaking had turnover of over EUR 25 million in Germany,
• no other participating undertaking generated turnover of over EUR 5 million in Germany,
• but the value of the consideration for the merger is more than EUR 400 million and
• the target company is active to a considerable extent in Germany.
The de minimis clause mentioned above does not apply in the context of this new threshold based on the transaction value.
Key term of the new threshold: The value of the consideration
The “value of the consideration” forms the key term of the new threshold based on transaction value. This term comprises all assets and other benefits in kind (purchase price) plus the value of any liabilities assumed by the acquirer (section 38 para 4a ARC). According to the legislator’s explanatory memorandum, the concept of assets is broad and also includes those kinds of consideration that are linked to the occurrence of particular conditions. This includes, according to the memorandum, consideration based on earn-out clauses, additional payments for achieving turnover or profit targets and payments related to non-compete agreements.
The burden of calculating the value of the consideration and, if necessary, choosing a method for determining the goodwill, falls upon the undertakings participating in the concentration. According to the explanatory memorandum, however, “normally” no additional certification by an auditor will be necessary. Nevertheless, the new threshold ushers in considerable legal uncertainty.
Difficulties with calculating the transaction value...
When agreeing on a fixed purchase price, on a certain number of shares to be transferred (or an indefinite number of shares with a certain stock market value on a certain reference date), one might think it would be easy to identify the value of consideration. However, in this case the value of any liabilities to be taken on by the buyer would be disregarded. Yet, they also have to be taken into account. This will not always be an easy task. First, there is the question of whether the statutory term “liabilities” is to be taken literally and thus only those items must be taken into account that are shown as liabilities in the target company’s balance sheet (section 266 para 3 lit. C. German Commercial Code). Thus, provisions in the meaning of section 266 para 3 lit. B. German Commercial Code would remain outside the scope although this term encompasses also uncertain liabilities. Since the seller is also released from these liabilities as a result of the transaction, it could make sense to take them into account too. On the other hand, uncertain liabilities do not necessarily reduce the company’s value (at a later stage). Thus the amendment to the ARC leaves uncertainty how to handle in practice for instance provisions for (supposedly or actually) unlawful conduct by the target company which were created to cover (more or less probable) future compensation claims and fines.
Possibly an even greater practical problem in determining the value of the consideration arises from contractual clauses which provide only for a payment of a basic purchase price on the signing date and an adjustment (calculated for instance based on market developments) at a later date, e.g. on the closing date. Such constellation could lead to tricky results from the viewpoint of merger control. For instance, at the time of signing the value of the consideration – i.e. the basic purchase price plus assumed liabilities – amounts to EUR 395 million and thus the transaction would not trigger German merger control. However, at closing it might turn out that the purchaser has to make a top-up payment of EUR 10 million. In this case, a merger filing requirement in Germany would only become apparent on the closing date (assuming that the other relevant thresholds are also met). Thus, from a legal point of view only a closing action would reveal that merger clearance needs to be obtained prior to closing and therefore closing would have to be stopped and postponed until the FCO granted clearance to the transaction.
At the same time, however, such a postponement of closing would mean that the calculations for purchase price adjustment would have to be carried out again for the date of the (second) closing. The worst-case scenario would then be that the new calculation shows that the purchaser actually does not need to make a top-up payment (e.g. due to a rapid worsening in the economic situation of the target), but instead the seller has to repay part of the basic purchase price.
Things get even more muddled if the purchase price adjustment is not to be carried out or completed at closing, but only at a later date. In accordance with the example above, it could happen that the target company has already been transferred to the purchaser when it turns out that the transaction is subject to merger review by the FCO due to the now higher purchase price. The parties would then have to make a post-closing filing and trust that the FCO will not argue that, from a formal point of view, the transaction has been completed without the required clearance having been obtained beforehand.
The seemingly clear threshold for the value of the consideration is thus not at all simple to deal with and can therefore be a source of uncertainty in a transaction. It remains to be seen whether the interpretation difficulties in calculating the transaction value can be sufficiently addressed by FCO guidelines as the legislator suggests in its explanatory memorandum. The comparison with other FCO guidelines, e.g. on the issue of analysing domestic effects, highlights the limits of these kinds of “soft laws”. The guidelines cannot cover all conceivable cases and, especially for the most difficult ones, do not contain any clear statements or only advise to make a precautionary filing. Thus, such guidelines might not provide clarity to the extent sought after by companies.
... and determining the considerable domestic activity of the target company
Another not quite precise criterion of the new threshold is that the target company must be active to a “considerable extent” in Germany. This aims to ensure that only transactions with sufficient connection to the German market are subject to merger control in Germany.
In practice, the uncertainty of the phrase “considerable domestic activity” will probably lead to interpretation difficulties as well. The legislator’s explanatory memorandum only lists as an example of domestic activity that the company’s services are used in Germany and the existence of domestic R&D activities. With regard to cases from the digital economy, the number of active monthly users or the number of unique visits to a website may be taken into account.
In parallel with the 9th amendment package to the ARC in Germany, the Austrian legislator also introduced a new threshold in the Austrian Cartel Act which is based on the transaction value and considerable domestic activity. The Austrian explanatory memorandum lists the same examples for transactions in the digital economy as the German legislator does. In contrast to Germany, however, having business premises in Austria is already considered sufficient for assuming a considerable domestic activity.
These examples already show the future challenges in applying the criterion of “considerable domestic activity”: What number of active monthly users or unique visitors of an app/website is sufficient to qualify as a “considerable activity”? The German legislator points out that these figures must be viewed in relation to the size of the potential user group. This is correct but makes it necessary to determine a comparison standard in every individual case and thus increases the review effort and risk of errors. It seems very doubtful that the mere existence of business premises can lead to the conclusion that there is considerable domestic activity. The existence of a holding company which merely holds stakes in foreign companies, for example, has no effective impact on domestic competition. Submitting the acquisition of such a holding company to merger control would not contribute to the protection of effective competition, but would simply be a superfluous burden on companies and the resources of the FCO.
Conclusion and outlook
The main aim of introducing a merger control threshold based on transaction value was to enable the FCO reviewing such transactions in the digital economy in which a company with high innovation and market potential but (still) low turnover is acquired for a high purchase price (which indicates the target’s relevance for the market). According to the explanatory memorandum the legislator was having in mind transactions such as the takeover of WhatsApp by Facebook in 2014. In principle, this is understandable since the deal was not reportable in Germany and was only reviewed by the European Commission after a referral request by the parties. However, the new threshold covers transactions in all industries and thus also mergers in the “old economy”. Thus, there is a risk that transactions which the legislator previously considered competitively insignificant and which were not in the “crosshairs” of the 9th amendment package to the ARC will also, or primarily, be caught.
Admittedly, a threshold based on transaction value is not a novelty in international terms, since at least in the US there has been a similar rule for decades. The German threshold is also quite high, which should limit the number of cases it will apply to. Individual issues with calculating the transaction value and assessing the domestic activity of the target company will have to be resolved by legal practitioners. This will require more time and effort to review and thus will lead to higher transaction costs. In comparison to that the results are fairly meagre: the legislator itself only expects three additional filings per year. It seems more than doubtful that, given this small number, the additional review effort which will be involved in far more transactions is justified and proportionate.
Any Questions? Please Contact: Dr Sebastian Janka or Peter Stauber
Practice Group: Antitrust & Competition