I Introduction

While Germany is the largest economy in Europe, the turnover thresholds that trigger a merger filing requirement in Germany are some of the lowest across Europe. In addition, the types of transactions that are caught by the Germany merger control regime go significantly beyond the usual ‘acquisition of control’, which is the applicable test in the vast majority of other European jurisdictions (along with the European Merger Control Regulation (ECMR) itself). As a result, unless subject to the ECMR, almost every significant European transaction that involves businesses with sales in or into Germany results in a merger filing, with the German Federal Cartel Office (FCO) receiving more than 1,000 merger filings year-on-year.

Although the FCO is a very experienced authority that never shies away from taking a hard line if a transaction raises serious competition concerns, its approach is generally pragmatic and cooperative. The FCO’s divisions are each responsible for certain industries. Thus, parties can generally expect decision-makers with sector-specific knowledge and experience. Also, the formal requirements for submitting a complete notification in unproblematic cases are less burdensome than in many other jurisdictions.

In cases that raise serious competition concerns, the FCO’s approach tends to be more legalistic and focused on documentary and empirical evidence than in other major jurisdictions where economic theories increasingly appear to dominate the merger reviews. Even if this is only a subtle difference – the FCO certainly employs economic theories and involves its chief economist team – it can make cases less data-intense. On the other hand, it can also lead to parties fearing that the authority does not sufficiently understand commercial realities.

All in all, the German merger control regime, although differing in many respects from regimes in other countries, strikes a good working balance between an unusually wide scope of applicability on the one hand and a flexible and practical review on the other.

In substance, the FCO continues to show an active interest in the numerous aspects of e-commerce and online markets, big data, platform markets, network effects, online marketing and others. Companies involved in transactions that require merger clearance in Germany are well advised to consider the implications of German merger control at an early stage of their contemplated transactions.

II Year in review

According to the FCO’s statistics for 2015, around 1,100 merger projects were notified to the FCO, 11 of which went through an in-depth second phase review. One case was prohibited (see below) and another was withdrawn by the parties (presumably following close consultations with the FCO’s case team). One of the cases that was examined in an in-depth Phase II review was cleared subject to conditions, and six other cases were ultimately cleared without conditions and undertakings.2 The following overview highlights some recent key cases and developments in German merger control.

i Online platforms and big data

The importance of e-commerce and online content, including the treatment of platforms that capture strong market positions through network effects, played an important role in some of the FCO’s recent merger control decisions.

The president of the FCO (Andreas Mundt) announced a more data-based approach when assessing mergers and market power, arguing that turnover is not always a suitable means to evaluate the competitive significance of internet companies. The FCO even considers the possibility of introducing a new merger notification threshold based on transaction value in connection with internet platforms, in order to prevent certain transactions from falling under the radar. This was almost the case with the Facebook/WhatsApp merger in 2014, which nearly escaped merger control despite a transaction value of US$19 billion and a huge number of users because WhatsApp had just generated enough turnover to meet the merger notification thresholds of three EU Member States.

The FCO also launched an in-house project group, the Internet Platforms Think Tank, to develop concepts to deal with the digital economy and platform markets. The Think Tank’s findings have already been used in the assessment of the merger between two major online dating platforms (ElitePartner and Parship), which was cleared after an in-depth Phase II investigation in October 2015. Among other reasons, the FCO found and based its clearance on the consideration that users frequently use more than one platform (multihoming). Such multihoming user patterns, in combination with low barriers to entry, would ensure effective competition despite significant market shares after completion of the merger. In addition, the FCO acknowledged the importance of network effects, in particular in the context of two-sided platform markets. In line with its wider policy considerations regarding the internet business, the FCO explicitly held that an assessment of the parties’ market positions and the competitive effects of the transaction merely based on turnover would be insufficient to reflect the actual market dynamics. Rather, network effects and user numbers would be an important benchmark for the assessment of platform mergers.

The importance of network effects was also relevant in the merger review regarding the online real estate portals Immonet and Immowelt. Although the transaction combined the second and third largest real estate portals in Germany, the FCO concluded that the merger created an opportunity to increase competition with regard to the market leader (Immobilien Scout). Again, network effects in platform markets played a key role. In portal markets, both sides of the market (i.e., real estate providers and end customers) tend to choose the perceived market leader with the aim of benefiting from the larger network effects, namely the largest market coverage and biggest data pool. Consequently, market players need a certain presence on both sides of the market to compete effectively. Through the merger of Immonet and Immowelt, the merged entity was able to catch up with the market leader and become a closer and more effective competitor to the market leader. In other words, platform markets with their important network effects allow for a high degree of concentration while still being highly competitive.

ii Overruling by the Federal Minister for Economic Affairs and Energy

The acquisition of supermarket chain Tengelmann by EDEKA marks a recent example – and one of only very few – where the FCO’s decision to prohibit a merger was overruled by the Federal Minister for Economic Affairs and Energy. Upon application by the parties, the Minister has the power to overrule the decision of the FCO. However, the Minister is bound to the FCO’s competitive assessment. An approval by the Minister requires that the negative effects of the merger on competition are outweighed by benefits to the economy as a whole or an overriding public interest. Since the introduction of German merger control in 1973, a ministerial approval has only been granted in eight cases, of which five were granted in connection with various behavioural conditions.

In April 2015, the FCO prohibited the acquisition of 451 Kaiser’s Tengelmann outlets by EDEKA, based on the conclusion that the transaction would have considerably worsened competition conditions on a large number of already highly concentrated regional grocery retail markets and would have further increased the bargaining power of the leading group of retailers, with respect to the procurement of branded products.

However, in March 2016 the Minister overruled the decision and cleared the transaction subject to several behavioural conditions.

The decision raised many concerns and objections, and even resulted in the resignation of the chairman of the German Monopolies Commission, an independent governmental committee of experts that has to issue a public opinion on the public interest implications if the parties to a prohibited transaction apply for ministerial approval.

REWE, another major German retail chain and direct competitor of the parties, has appealed the ministerial approval before the Higher Regional Court of Düsseldorf, while EDEKA and Tengelmann appealed the blocking decision of the FCO. Final decisions are not expected before 2017.

iii Media and advertising

In June 2015, the FCO cleared the Media Impact marketing cooperation between Funke-Mediengruppe Axel Springer. Despite Springer’s strong position in nationwide newspaper advertising (through the Bild newspaper), having been held in the past to be dominant, the FCO did not consider Springer’s position to be dominant anymore since advertising customers can achieve almost nationwide coverage for advertising by booking advertising space in a combination of regional newspapers. In addition, and even more notably, the FCO also considered the degree of competition from other media in neighbouring markets, particularly nationwide TV advertising and online advertising. This may constitute an important starting point for the FCO to acknowledge the existing and increasing convergence of advertising markets, particularly with a view to online marketing and TV advertising.

iv Healthcare

In May 2016, after increasing consolidation in the healthcare sector and expected additional future mergers of hospital operators, the FCO launched a sector inquiry into the hospital service to examine the competitive conditions in the sector. A specific task of this sector inquiry is to further develop examination criteria for the authority’s merger control proceedings.3

v Demerger of organic dairies Andechser and Söbbeke

In 2015, as a result of a demerger control proceeding combined with an extensive investigation conducted by the FCO, Savencia, a French dairy group, was forced to divest its shareholding in Andechser Molkerei in order to ensure that the two largest organic dairies in Germany – Andechser Molkerei Scheitz GmbH and Molkerei Söbbeke GmbH – compete independently from each other.

In 1999, Savencia acquired a minority shareholding in Andechser Molkerei Scheitz. From 2011 to 2013, Savencia acquired control over competitor Molkerei Söbbeke. Savencia obtained merger clearance from the FCO for the acquisition of Söbbeke, but this was pursuant to the findings of the FCO based on incorrect information provided to the authority during the merger review in 2011. Once the misstatements were noticed, the FCO initiated the demerger proceeding.

In this context it should also be noted that any person or undertaking, who intentionally or negligently fails to notify a concentration correctly and completely commits an administrative offence under the ARC, which is punishable with a fine.

III The Merger Control Regime

i Jurisdiction

The German merger control regime provides for a mandatory pre-merger filing requirement if:

  • a the transaction constitutes a concentration pursuant to Section 37 of the German Act against Restraints of Competition (ARC);
  • b the turnover thresholds of Section 35 ARC are met; and
  • c none of the exemptions provided for in Section 35 ARC apply.
Concentration

Unlike in many other jurisdictions, German merger control does not only cover the acquisition of control4 (solely or jointly), but also:

  • a the mere acquisition of at least 25 per cent of either the capital or voting rights in another company, irrespective of whether or not the shareholding will confer control or a significant influence over the target (all existing shareholdings of all entities of the purchaser’s group have to be taken into account); and
  • b the acquisition of shares or voting rights even below the threshold of 25 per cent if the transaction results in an acquisition of a ‘competitively significant influence’. Competitively significant influence is less than control but generally requires the acquisition of significant influence through additional rights (‘plus factors’) such as (1) information rights in respect of the operative business of the target; (2) the right to nominate members of the management board, the board of directors or the supervisory board; or (3) de facto blocking minority on annual shareholder meetings. Such influence is ‘competitively significant’ if the purchaser is or controls a competitor of the target, or if the purchaser or any of it its group companies is party to a significant vertical supply relationship with the target.
Turnover thresholds5

The turnover thresholds (referring to the last completed business year) are as follows:

  • a the combined worldwide turnover of all participating enterprises exceeded €500 million;
  • b one participating undertaking had a turnover exceeding €25 million within Germany; and
  • c at least one further undertaking had a turnover in Germany exceeding €5 million.

If the same parties enter into two or more transactions concerning the acquisition of parts of a company within a two-year period, these transactions will be treated as a single concentration. The turnover thresholds will apply to the transactions as a whole, to ensure that parties cannot avoid a notification obligation by slicing a deal into staged transactions each falling below the relevant turnover threshold.

If the transaction also exceeds the turnover thresholds of the ECMR (see the EU chapter), a notification has only to be made to the European Commission without the need to go through an additional procedure in Germany (the ‘one stop shop’ principle). However, if a transaction meets the ECMR turnover thresholds but does not qualify for a concentration under the ECMR (e.g., in case of a non-controlling interest or a non-full-function joint venture; see EU chapter), German merger control remains applicable.

Exemptions

The ARC provides for two exemptions. A filing will not be required if:

  • a one of the participating companies is independent (i.e., not under the control of another company) and has achieved a worldwide turnover of less than €10 million in the last business year; or
  • b the concentration has no ‘domestic effects’, in other words it impacts on the German market. Given that the German merger control regime requires at least two undertakings concerned generating turnover in Germany, this exemption only plays a role in joint venture cases where both joint venture partners but not the joint venture itself generates turnover in Germany.

Even though it is not an exemption from the formal filing requirement anymore, there is still an exemption when assessing mergers affecting de minimis markets, in other words, markets with total revenues of less than €15 million in Germany in the last calendar year and in existence for more than five years (Section 36(1) No. 2 ARC). Since the Eighth Amendment of the ARC, a prohibition decision cannot be based on competition concerns on de minimis markets. Thus, such mergers still need to be notified if they meet the relevant turnover thresholds, but they cannot be blocked to the extent that de minimis markets are affected.

ii Consequences for completion without merger clearance

Concentrations that are subject to merger clearance in Germany must not be completed prior to having obtained clearance.6 The consequences for infringing the filing obligation are threefold:

  • a A transaction that is completed before having obtained clearance is deemed to be invalid as far as Germany is affected. In particular, the acquisition of shares in German companies and the acquisition of assets located in German are invalid until having obtained clearance. In addition, IP rights of the target are unenforceable in Germany. In order to remedy a legally defective acquisition and to obtain retroactive effect, the parties are required to submit a post-completion notice containing all the details that are normally required in a pre-merger notification. The FCO will then assess the competitive issues triggered by the proposed transaction directly as part of a ‘merger dissolution procedure’ without any statutory deadlines running.
  • b Secondly, the parties are subject to fines, which can theoretically range to up to 10 per cent of the parties’ worldwide group turnover in the last business year. In practice, the fines have been well below this threshold but can still be significant depending on the circumstances.
  • c Finally, infringing the filing obligation can – if detected – seriously affect the parties’ relationship with the authority, which will make future filings much more difficult.
iii Procedure

There is no filing deadline. The filing can be made as soon as the parties to the concentration can show a good faith intention to complete the transaction.

There is also no official filing form that needs to be completed. Instead, German notifications are submitted in the form of a letter that has to include certain information required by law. The parties also have to submit a mandatory post-completion notice to the FCO, which needs to be filed without undue delay following completion of the transaction. This is, however, a mere formality.

The fact that a filing has been received (including the names of the parties and a brief description of the affected markets) will be published on the website of the FCO shortly after the submission of the filing.

The Eighth Amendment to the ARC introduced certain changes to the statutory time limits, including the EU’s ‘stop-the-clock’ possibility and an automatic extension of the deadlines upon submission of a remedy proposal. Once notified, the vast majority of cases are cleared after a Phase I inquiry (lasting one month). In straightforward cases, the FCO is generally prepared to clear the transaction even well before expiry of the one-month waiting period of Phase I. Though this is entirely within the discretion of the FCO and also depends on the workload of the case handler, it is not uncommon to receive early clearance after two or three weeks, or even earlier.

The maximum time frame for an in-depth review, encompassing Phase I and Phase II, is four months from the time of the complete notification and is extended by one month to five months if remedies are offered.

In cases that give rise to competition concerns, the FCO must inform the notifying parties within one month of receipt of the notification that it has initiated an in-depth investigation of the proposed transaction. In the absence of any such communication by the end of Phase I, the proposed merger is deemed to be cleared by time lapse (which is never the case in practice). A reasoned decision will only be issued following an in-depth Phase II investigation. Only such reasoned Phase II decisions can be appealed before the Higher Regional Court of Düsseldorf.

Third parties such as competitors, suppliers and customers of the merging parties will generally have the opportunity to comment on a proposed merger in the context of information requests issued by the FCO in the course of its investigation, or to submit unsolicited comments. Third parties may thus raise concerns without having to request formal admission to participate in the proceeding.

Third parties whose economic interests will be substantially affected by a decision of the FCO may, however, formally intervene in the proceedings upon application and admission by the authority. Once admitted, these interveners have the right to be heard, to submit comments on the proceeding and to have access to the non-confidential part of the authority’s file. They also have the right to appeal the FCO’s decision.

The FCO is among the most active authorities in the EU’s referral system: Articles 4(4) and 4(5) of the EU Merger Regulation provide for the possibility of pre-notification referrals at the initiative of the notifying parties, while Articles 9 and 22 provide for the (often problematic) possibility of post-notification referrals triggered by the Member States – an option used by the FCO on a regular basis.

iv Substantive assessment

Since the Eighth Amendment to the ARC, the FCO principally applies the same substantive test as the European Commission, that is, whether the proposed transaction would lead to a significant impediment to effective competition (SIEC), in particular by means of the ‘creation or strengthening of a dominant position’.

According to its Guidance on Substantive Merger Control of March 2012, the FCO first distinguishes between three broad categories of mergers: horizontal, vertical and conglomerate mergers. For each of these three categories, in line with the European Commission’s Horizontal and Non-Horizontal Guidelines, the German competition authority then distinguishes again between single and collective dominance.

For a finding of single and collective dominance, the German merger control regime provides for the following – rebuttable – presumptions: a single undertaking has a share of at least 40 per cent of the market; three or fewer undertakings possess an aggregated share of at least 50 per cent of the market; or five or fewer companies hold a combined market share of at least two-thirds.

However, in the FCO’s decision practice, these presumptions play only a very limited role, with the authority reviewing the competitive effects brought about by the proposed merger in their overall context. In fact, the presumptions merely provide an indication as to whether a deal requires closer scrutiny.

The cooperative aspects of joint ventures will, in addition, be examined under the rules relating to anticompetitive agreements (Section 1 of the Act against Restraints of Competition).

A merger that leads to an SIEC will not be prohibited if the requirements of the balancing clause are met (i.e., if the companies show pro-competitive effects on a different market that outweigh the negative effects on the affected market). To be taken into account, the pro-competitive effects presented by the parties must be of a structural nature.

When the FCO reaches the preliminary conclusion that a concentration raises competition concerns, the parties can offer commitments in Phase II to secure conditional approval. Conditions precedent (in which case the merger may not be implemented until the condition is satisfied), such as upfront buyer solutions, are generally preferred by the FCO.

The Eighth Amendment introduced the possibility of behavioural remedies that are equivalent to divestitures in their effects (provided that ‘effective control’ is possible). However, the type of remedy that is most likely to be accepted by the FCO is a structural remedy, namely, a divestiture that removes the competition concerns. In cases where such structural remedy is not possible, the parties continue to face a difficult time to convince the authority to accept any other remedy solution. Not surprisingly, it continues to be difficult to convince the authority not to insist on structural remedies in the form of condition precedent.

It should also be noted that certain transactions may not only require clearance by the FCO but also other regulatory approvals based on special rules for – among others –foreign investments, telecommunications or media. These rules apply in addition to the general merger control regime and are administered by special agencies and authorities.

IV Other strategic considerations

The wide concept of control under the German merger control regime, which also covers non-controlling minority interests below 50 per cent and in certain cases even below 25 per cent, regularly results in companies being required to notify transactions in Germany even though no other competition authorities are competent to review the transaction. Despite the far-reaching German merger control regime, there is still room for transaction structures that do not trigger a German merger filing requirement. For example, it may be a suitable strategy to first merge new businesses before they are acquired by an investor if it would only be the investor who triggers the relevant merger control thresholds.

While pre-filing contacts are neither mandatory nor generally expected by the FCO, they can be very helpful in order to address and overcome potential competition issues early on or to secure a Phase I clearance where otherwise the FCO would have to open Phase II simply for having enough time to assess the transaction. Such pre-filing contacts will be handled by the FCO on a strictly confidential basis.

The FCO has a close involvement and a leading role in both the European Competition Network and the International Competition Network whose current chair is Andreas Mundt, the president of the FCO. The close communications between the authorities require consistent approaches in merger filings of transactions that require merger filings in multiple jurisdictions.

Empirical and documentary evidence plays an important role in German merger control. In cases that have the potential to give rise to competition concerns, a thorough preparation with operational business people and management is strongly recommended.

While the German merger control rules do not provide for a mandatory submission of internal documents prepared in connection with a transaction, such documents can be requested by way of an information request and reviewed by the FCO during the course of the merger review. Thus, outmost care is required when drafting internal documents in preparation of the transaction and presenting it to either boards or investors, in particular when it comes to the expected effects of the transaction.

The FCO acts independently and free from political influence. Attempts to lobby or even to exercise political influence almost always prove to be counterproductive.

Third-party interveners have a strong role with full rights of appeal and access to the file (including non-confidential copies of the merger filing and any additional correspondence of the parties with the FCO). Thus, it can be an attractive proposition to become an intervener in order to challenge (certain parts of) the transaction, resulting in remedies that may form attractive acquisition opportunities.

V Outlook and Conclusions

The FCO can be expected to remain at the forefront of the assessment of internet, online and big data. Transactions involving online businesses should, thus, be prepared thoroughly with a particular view to the assessment of relevance customer data, network effects and innovations. Confidential pre-filing contacts may be recommendable in order to avoid surprises during the actual review process.

Also, the FCO will remain active in requesting referrals back from the European Commission to national level if the main effects of the transaction are to be expected in Germany.

As regards the substantive review, while the role of economists will continue to grow, it is also likely that it will remain less relevant than in other jurisdictions, with documentary and empirical evidence remaining important factors in the investigation.

Footnotes

1 Alexander Rinne is a partner and Andreas Boos is a special counsel at Milbank, Tweed, Hadley & McCloy LLP.

2 www.bundeskartellamt.de/SharedDocs/Meldung/DE/Meldungen%20News%20Karussell/2015/21_12_2015_Jahresr%C3%BCckblick.html.

3 www.bundeskartellamt.de/SharedDocs/Meldung/EN/Pressemitteilungen/2016/31_05_2016_Sektoruntersuchung_Krankenhaeuser.html?nn=3599398.

4 The definition of control follows closely the definition contained in the European Merger Regulation (ECMR) and Consolidated Jurisdictional Notice under Council Regulation (EC) No. 139/2004 on the control of concentrations between undertakings.

5 Special rules apply for the calculation of the turnover of financial services providers, insurance companies, companies active in the media sector (television broadcasting, radio, newspapers and periodicals) and certain trading activities. Companies operating in the field of publication, production and distribution of newspapers and magazines are subject to a turnover multiplier.

6 In line with the EU’s merger control rules, the Eighth Amendment introduced an exception to the suspension obligation according to which public takeover bids or a series of transactions in securities may be implemented prior to clearance, provided that the transaction is notified to the FCO without delay and the acquirer does not exercise the voting rights attached to the securities in question or does so only on the basis of an exemption granted by the FCO.