Germany: Germany Strives For A "More Focused" Merger Control Regime, Shifting Attention To Problematic Deals

KEY TAKEAWAYS

Major changes in the German merger control regime can be expected for 2021. Today, the German government adopted the draft 10^th Amendment to the German Act Against Restraints of Competition (the "Draft"). The Draft will now enter the parliamentary process and may hence still be subject to change. But as currently drafted, the new law would significantly amend Germany's merger control regime:

• Less control for small-scale M&A: On the one hand, the domestic revenue thresholds will increase. 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: On the other hand, the examination period for in-depth merger reviews shall be expanded from four to five months, and there shall be additional merger control scrutiny for acquisitions of certain companies even where the target does not meet the regular revenue thresholds.

This alert provides an overview of the proposed changes. These revisions will be relevant to investors, as well as to the management and directors of any acquirers and target companies with relevant business in Germany.

REDUCED SCOPE OF GERMAN MERGER CONTROL

Higher Domestic Revenue Thresholds

The Draft increases the two domestic revenue thresholds that the parties to a merger must meet to trigger an FCO filing requirement. Going forward, if at least one company has a domestic revenue of more than €30 million and another company has more than 10 million, these thresholds are met. Previously, €25 and €5 million were sufficient. In addition, and this threshold is not subject to change, all the involved companies must account for at least €500 million combined worldwide revenue.

These changes shall relieve the burden of control on small- and medium-sized companies. The government expects 20% fewer notifications than under the current thresholds. The FCO shall rather use its resources to conduct more comprehensive in-depth reviews.

Wider Scope to Assume De-Minimis Markets

The Draft further reduces the scope of merger control by extending the de minimis clause (Bagatellmarktklausel). Currently, the clause exempts transactions from merger control, which concern a market with total domestic sales of less than €15 million in the last calendar year. This threshold will be raised to €20 million. With that, the government intends to foster the opportunities for small- and medium-sized enterprises to consolidate in times of digitization and globalization. Again, the FCO shall focus more on mergers, which are of greater importance for 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 to consider each relevant market separately from other affected markets. However, case law today already allows the FCO to apply a bundled view under the de minimus 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 will now expressly allow such bundled view and thereby align with case law.

Calculating Revenue – IFRS Accounting Standards and Treatment of Publishing Revenues

The Draft expands upon methods of calculating revenue beyond the German Code of Commerce (Sec. 277). The International Financial Reporting Standards (IFRS) shall also be accepted if companies only prepare their annual financial statements per IFRS rules.

The Draft further proposes to change the special rules for calculating revenues in the publishing sector. Currently, mergers concerning 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 Draft cuts this multiplier in half. As a consequence, mergers in the press sector will not trigger merger control if the merging parties have combined worldwide revenues of €62.5 million (500 million divided by eight) but only at €125 million.

Procedural Changes – Longer In-Depth Reviews and No Obligation to Notify the Closing of a Deal

The Draft extends the examination period for in-depth "phase II" merger reviews from four to five months.

The Draft abolishes the merging parties' obligation to inform the FCO about the closing of the transaction. However, if the parties failed to notify a reportable merger, they must still inform the FCO about their failure to do so.

Moreover, the Draft proposes additional wording to prevent any circumvention of a notification obligation. Under the current framework, companies could split a merger into a larger unproblematic portion, which is then notified, and a smaller portion, which raises competition concerns but is not subject to merger control. The Draft 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 rather than to limit it, the Draft introduces an additional enforcement tool for the FCO. The authority shall 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. Such notice would declare certain markets or sectors at risk of market concentration and require the company to generally notify any transaction in that field to the FCO. However, certain limitations apply: First, the FCO can only put a company on such watch list if the company has worldwide revenues of more than €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 15 percent market share in Germany in the affected sector as a buyer or supplier. And fourth, the relevant industry must already have been subject to a formal sector inquiry by the FCO.

Once a company is addressed by such a notice, it will have to notify any acquisition of businesses active in the specified sector whose revenue exceeds €2 million in the last business year, provided that at least two thirds of such revenue were generated in Germany. The notice shall remain valid for three years.

The new tool shall address a blind spot, which had emerged in specific cases under the current 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. This could now be captured with the new tool. However, 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 startup 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 for much room for the FCO to use it in that particular respect.

OUTLOOK

Following its adoption by Cabinet, the Draft will now be discussed in Parliament. While this may still result in some changes to the proposed new merger control rules, those will likely not be in the center of the upcoming debate. Rather, the Draft features a number of other proposals that have been far more controversial already, namely the enhanced scrutiny against an abusive behavior of large digital businesses. We currently expect the parliamentary debate to last at least until the end of the year. With that, the new merger control rules might then come into effect in Q1 or Q2, 2021.