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12 Oct 2017

New Transaction Value-Based Merger Reporting Threshold in Germany: Much Ado About Little?

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Germany this summer introduced a new transaction value-based set of reporting thresholds. Austria introduced a similar provision which will enter into force on November 1. On the European level, the Commission is contemplating to introduce a transaction value-based reporting threshold as well. The new German thresholds are subsidiary to the primary purely turnover based thresholds, i.e., they become relevant if the primary thresholds are not met. First experiences with the new thresholds unsurprisingly show that the criterion of the target being active in Germany “at a significant scale” raises questions in practical application since the text of the law does not give any guidance. Moreover, there is no consensus among commentators how to interpret the new criterion, and there is so far no guidance from the Federal Cartel Office available.

Introduction

As is probably well-known at this time, Germany this summer introduced a new transaction value-based set of reporting thresholds. Austria introduced a similar provision which will enter into force on November 1. On the European level, the Commission is contemplating to introduce a transaction value-based reporting threshold as well.

The new German thresholds are subsidiary to the primary purely turnover based thresholds, i.e., they become relevant if the primary thresholds are not met, in particular because the target company in a two-party scenario did not generate turnover in Germany of more than Euro 5 million in the last financial year. In such cases, the two-party acquirer-target transaction is still reportable in Germany under the subsidiary thresholds if, cumulatively, (i) the combined worldwide turnover of the acquirer and the target in the last financial year was more than Euro 500 million, (ii) the acquirer had turnover in Germany in the last financial year of more than Euro 25 million, (iii) the “value of the consideration for the concentration” (as defined in some detail in the law) exceeds Euro 400 million, and (iv) the target is active in Germany “on a significant scale.”

Local Nexus Threshold

First experiences with the new thresholds unsurprisingly show that the criterion of the target being active in Germany “on a significant scale” raises questions in practical application since the text of the law does not give any guidance. Moreover, there is no consensus among commentators how to interpret the new criterion, and there is so far no guidance from the Federal Cartel Office available.

In legal literature, it has for example been proposed to consider the activities of the target in Germany in relation to the activities of the entire sector of the target in Germany, and that there is no notification requirement only if these activities are, based on an overall consideration of all parameters, in a marginal area (for example below 1%). Other commentators take the view that a branch in Germany and the significance of the German activities of the target for the global business of the target could be among the factors for the assessment of the scale of activities of the target in Germany, or that a significant scale of activities of the target in Germany may, depending on the circumstances of the individual case, be lacking because the large turnover justifying the high purchase price is primarily generated outside Germany. Further, it has been stated that the new thresholds may apply to any sector, including traditional industries and mature markets.

However, such approaches do not appear to be in line with the guidance provided by the explanations in the legislative materials with respect to the new set of thresholds in general as well as specifically with respect to the criterion of the target being active in Germany “on a significant scale.”

Acquisitions of Innovative Targets With yet Little or No Turnover by Established Companies

According to the materials, the new set of thresholds aims to capture certain kinds of concentrations where companies are purchased for a high price but only generate turnover of less than Euro 5 million in Germany. “The high purchase price is in such takeover cases often an indication of the existence of innovative business ideas with a large competitive market potential.” “Missing or small turnover can in particular, albeit not exclusively, in the digital business sector no longer always be equated with little economic relevance of the undertaking.” The new thresholds aim to capture cases where missing or little turnover of the target fails to adequately reflect its already existing market potential. The materials conclude on the general rationale of the new thresholds that they are required “in order to reflect more reliably the competitive potential of a target with yet little turnover.”

The materials cite as examples companies whose successful market entry primarily requires generating a large number of users and consequently network effects, which is supported by an inexpensive or free of charge offer. “Further examples where yet missing turnover may reflect the already inherent market potential to be small, and consequently incorrectly, can be found in the area of private research and development, for example in the pharma and technology sector. For example, the turnover potential of companies will realize only after their sale if their business model is specifically aimed at developing technologies or products (such as active pharmaceutical ingredients prior to the drug approval).”

“These developments are reflected in the investment conduct of larger, established undertakings. In particular companies that have a successful internet and data based business model themselves try to purchase potential competitors with high innovation potential. This can serve to extend the own offer portfolio. The aim of such takeovers can however also be to not use the innovation potential but to take competing business models or products off the market. Investors are prepared to pay relatively high purchase prices even for undertakings which to date generated only very small or no turnover but have success with their offers and business ideas. A particularly striking example was the acquisition of the messenger service WhatsApp Inc. which was acquired in 2014 for a purchase price of approximately US$ 19 billion by Facebook Inc.

In such scenarios, the disproportionality between missing or small turnover, which at first sight gives rise to the assumption of missing or small market relevance, and the nevertheless strikingly high purchase price militates for the concentration well having an economic and competitive relevance from the perspective of the acquirer.”

The legislative materials note that the new set of thresholds, which requires, inter alia, that the combined worldwide turnover of the undertakings concerned was more than Euro 500 million in the last financial year, and that the purchaser generated turnover of more than Euro 25 million in Germany in the last financial year, extends the scope of German merger control “only moderately and captures in particular the acquisition of new competitors with yet little turnover by relatively large undertakings with significant turnover.”

“Significant Scale” of Activities in Germany: Targets in “Old Economy” Versus Other Targets

Specifically on the “on a significant scale” local nexus criterion, the materials describe the following scenario as an example of a case where there is no activity of the target in Germany “on a significant scale” in the meaning of the new set of thresholds:

“A Canadian conglomerate sells its business with special motors to a German competitor for a purchase price of more than Euro 400 million. The worldwide turnover of the target and the purchaser in the last year were more than Euro 300 million, respectively. The German purchaser generated turnover in Germany of significantly more than Euro 25 million. However, the turnover of the target in Germany was only approximately Euro 1 million. In the affected industry—characterized for many years by exchange of goods against payment and high turnover volumes—the competitive potential of a company and its market position are reliably reflected by the turnover generated so far. In case of turnover of less than Euro 5 million the target therefore does not meet the threshold of significant activity in Germany.”

Consequently, it is to be assumed on that basis that the “on a significant scale” local nexus criterion is not met if a target which did not generate turnover of more than Euro 5 million in Germany in the last financial year is active in a mature market in the “old economy.” For such cases, i.e., for transactions where the target is active in a conventional business, the new cumulative set of thresholds is therefore not relevant. The same conclusion is drawn by other commentators, concluding that the new thresholds shall only be applied “if turnover does not have sufficient significance to capture the market potential of the target business,” and that consequently the new set of thresholds “is not applied to sectors where turnover reliably reflects the market potential.” It is rightly noted in this context that for acquisitions of targets in “traditional industries” or in “an established business sector (for example the manufacturing sector)” the requirement under the primary turnover based thresholds of the target having had turnover in Germany of more than Euro 5 million in the last financial year shall remain unchanged by the new thresholds.

By contrast, targets which did not generate turnover of more than Euro 5 million in Germany in the last financial year and which are active in markets which have not been characterized for many years by exchange of goods or services against payment and by high turnover volumes, and whose competitive potential is consequently not adequately reflected by turnover, may be active in Germany “on a significant scale” despite little or no German turnover. According to the legislative materials, it needs to be assessed based on the current activity of the target (i.e., not as in case of turnover the activity in the last financial year) whether this is the case. Which non-turnover based criteria are appropriate for the assessment depends on the individual case. The materials point to criteria commonly accepted and used in the relevant industry of the target, for example, the number of users (“Monthly Active User”) in Germany of an app in case of a provider of a communication app for smartphones, the number of visitors (“unique visitors”) in Germany of a website in case of offers in the internet, or the conduct of R&D activities in Germany. According to the materials, if an app is generally directed at all consumers as user group, the German market is sufficiently affected if the app is used in Germany by one million users. “In case of smaller user groups the number may be lower” than one million.

Conclusion

In sum, while the new transaction value-based set of thresholds in Germany attracts attention, part of it likely to be attributed to the fact that Germany is the first jurisdiction within the EU to have introduced this type of threshold, its relevance in practice will likely be fairly limited if the set of thresholds is applied in line with the guidance provided by the legislative materials. The new thresholds aim at acquisitions of innovative start-ups with yet little or no turnover by established companies with already significant turnover, notably acquisitions of little tech companies by big tech groups (like in the Facebook/WhatsApp case) or acquisitions of biotech companies by large pharma groups. Other transactions, i.e., the majority of transactions, will continue to be either caught by the primary exclusively turnover based thresholds or otherwise not be reportable in Germany.

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