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. Following the ninth amendment to the German Act against Restraints of Competition (ARC), the scope of German merger control has become even wider due to the introduction of a transaction-value threshold by which transactions can be caught, even if the parties do not meet the relevant turnover thresholds.2 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 German 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 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 well working balance between an unusually wide scope of applicability on the one hand and a flexible and practical review on the other.

Regarding its industry focus, 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

2017 saw a relatively low degree of merger control enforcement in comparison to previous years. Only three decisions were issued in 2017 following an in-depth Phase II review. Two were cleared without conditions or undertakings. One was prohibited. Three others were withdrawn by the parties after the FCO has informed the parties about its competition concerns during the merger review. In addition, the FCO continues to be prepared to engage in detailed pre-filing consultations. Thorough pre-filing contacts allow the parties and the FCO to resolve may issues that would otherwise result in an in-depth Phase II review. Pre-filing consultation remain entirely confidential upon the parties' request. They are neither mandatory nor a general best practice requirement as with, for example, with the European Commission. Rather, it lies in the parties' discretion whether they consider that a case warrants pre-filing consultations, either to avoid a Phase II review or, at least, to obtain initial guidance from the FCO on which areas it intends to focus its review. The following overview highlights some recent key cases and developments in German merger control.

i Online platforms and big data

E-commerce and online content, including online platforms, continued to play an important role in the FCO's merger reviews. However, 2017 did not bring any significant cases or new developments with regard to actual cases. It was more for the FCO to apply the experience it has gained in previous years. All cases were cleared in Phase I.

Generally with a view to online and, in particular, platform cases, the FCO follows a more data-based approach when assessing mergers and market power, arguing that market shares based on turnover are not always a suitable means to evaluate the competitive significance of internet companies. As part of the ninth amendment of the ARC, a new transaction value threshold has been introduced ,which aims to catch transactions of internet companies that may dominate their data-focused markets without generating significant turnover. The new threshold is triggered if the transaction value exceeds €400 million and the target has 'significant' business activities in Germany. However, based on publicly available information no case has yet been caught under the new thresholds.

A digital platform case involved the acquisition of the concert and festival organiser FKP Scorpio Konzertproduktionen ('Hurricane', 'Southside') by CTS Eventim. CTS Eventim operates the ticket online shop 'Eventim.de' and organises rock and pop tours and festivals. The transaction was cleared unconditionally in January 2017 after an in-depth Phase II investigation. The FCO found CTS Eventim to have a strong position, in the markets for the sale of tickets via digital platforms and online shops. Although CTS already held a stake in FKP Scorpio, the transaction required merger clearance due to the increase of CTS's share in FKP Scorpio. However, the FCO concluded that its increased share in FKP Scorpio does not result in a relevant lessening of competition. However, parallel to the merger review, the FCO initiated proceeding against CTS Eventim on the suspicion that it has abused its market power by imposing exclusivity clauses on its business partners. In December 2017, the FCO issued a decision by which it held that certain exclusivities in CTS Eventim's agreements with tour organisers and ticket retailers were anticompetitive and invalid. Later in the year, the FCO prohibited CTS Eventim's other proposed acquisition of its competitor Four Artists.

ii Ongoing consolidation in the food retail sector

2017 was also another year of ongoing consolidation on the food retail sector, which is already highly concentrated. The four largest retailers Edeka, Rewe and Aldi and the Schwarz group (including Lidl) between them share over 85 per cent of the total market. 2017 did not see major mergers and acquisition in the traditional food retail sector. However, the FCO unconditionally cleared in Phase I a purchasing joint venture between EDEKA, Germany largest retailer, and Budnikowsky, a leading drug store chain. The FCO principally based its decision on the fact that the product portfolios of the joint venture partners, despite some overlaps, have a different focus. As a result, both parties are not close competitors. Each party faces significant competition from its direct competitors. In addition, the activities of the joint venture did not directly affect the downstream business.

iii Other cases and developments

In three cases, the parties withdrew their merger notifications after the FCO had set out its competition concerns in its written statements of objections (cases Landgard/Raiffeisen Gartenbau, Schwenk/Poterra Zement, Potters Industries/Sovitec Mondieal).

In May 2017, the FCO published guidelines on remedies in merger control.3

The guidelines describe the most important types of remedies and set out the procedure by which remedies are accepted and implemented by the FCO.

III THE MERGER CONTROL REGIME

i Jurisdiction

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

    1. the transaction constitutes a concentration pursuant to Section 37 of the German Act against Restraints of Competition (ARC);
    2. the turnover and transaction value thresholds of Section 35(1) and (1a) ARC are met; and
    3. none of the exemptions provided for in Section 35 (2) ARC apply.

Concentration

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

    1. 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
    2. 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 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:

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

Transaction value threshold

Before the ninth amendment, the German merger control thresholds followed a purely turnover-based approach. The new threshold is structured similarly to the size-of-transaction test under US merger control law and will be triggered if the transaction value exceeds €400 million and the target has 'significant' business activities in Germany ('local nexus'). It is, however, combined with turnover thresholds, and will apply if:

    1. the combined aggregate worldwide turnover of all undertakings concerned exceeds €500 million;
    2. in Germany, in the last financial year preceding the transaction:
      • one of the undertakings concerned had a turnover of more than €25 million;
      • neither the target nor any other undertaking had turnover of more than €5 million respectively; and
      • the value of the consideration paid in return for the transaction is more than €400 million; and
          1. the target has significant activities in Germany.

The first two requirements are identical to those of the traditional, turnover-based threshold that will continue to be the cause of most merger filing requirements. The new threshold will apply if the third requirement of the traditional turnover test is not met. The first limb of the new test, the 'transaction value' according to (b), needs to be determined based on the consideration for the target company (paid in any form), including assumed liabilities. This approach is different from the US size-of-transaction test which is focused on the acquisition price or 'fair market value'.

The local nexus test according to (c) is fulfilled if the target carries out activities in Germany that might result in turnover in some time (i.e., a high number of German users in case of a service or substantial R&D in case of research companies and start-ups).

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 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 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), German merger control remains applicable.

Exemptions

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

    1. 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
    2. 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 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:

    1. 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.
    2. 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.
    3. 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 German merger control regime also provides for a 'stop-the-clock' possibility and an automatic extension of the deadlines upon submission of a remedy proposal as known from the EU merger control regime. Once notified, the vast majority of cases are cleared after a Phase I inquiry, lasting as a maximum 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. The four months period 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 complete notification that it initiates an in-depth investigation of the proposed transaction. In the absence of such communication prior to the end of Phase I, the proposed merger is deemed to be cleared by time lapse (which is never the case in practice). Phase I clearances are communicated by standard clearance letters merely informing the parties that the requirements for a prohibition are not met and not containing any substantive reasons or competitive assessment. A reasoned decision will only be issued following an in-depth Phase II investigation. Only reasoned Phase II decisions can be appealed before the Higher Regional Court of Düsseldorf.

In case of a prohibition decision, the parties also have the option to apply for an overruling approval by the Federal Minister for Economic Affairs and Energy if the negative effects of the merger on competition are outweighed by benefits to the economy as a whole or if the merger is justified by an overriding public interest. The ministerial decision may include conditions imposed on the parties. Following the EDEKA/Kaiser's Tengelmann ministerial authorisation and the dispute about the lack of transparency, the ninth amendment of the ARC now provides for a faster and more transparent procedure.

Third parties such as competitors, suppliers and customers of the merging parties 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 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, third party 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

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 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 a very limited role, with the authority reviewing the competitive effects brought about by the proposed merger in their overall context. In practice, the presumptions primarily 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 a significant impediment of effective competition 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). For the pro-competitive effects presented by the parties to be taken into account, they 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 (i.e., conditions that must be satisfied before the actual merger may be implemented, such as upfront buyer solutions) are generally preferred by the FCO.

While behavioural remedies are not generally impermissible, they are only accepted if they are equivalent to divestitures in their effects and provided that they do not require a constant monitoring by the FCO. 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 reportable transactions 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 to have 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 with and a leading role in both the European Competition Network and the International Competition Network, whose 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, utmost care is required when drafting internal documents in preparation for 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 & CONCLUSIONS

As part of the ninth amendment of the ARC, the German legislator decided to revise the merger control rules. With a specific view to the internet economy, the new rules are driven by the importance of data when assessing mergers and market power, arguing that turnover is not always a suitable means to evaluate the competitive significance of internet companies. It remains to be seen how the FCO and courts will deal with uncertainties, in particular the determination of the transaction value, which often remains unknown until the very end of the transaction proceedings.

On a more general note, the FCO can be expected to remain at the forefront of the enforcement of assessment in the internet, online and big data sectors. 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 head of the European Antitrust & Competition practice at Milbank, Tweed, Hadley & McCloy LLP.

2 The amendment came into force on 9 June 2017.

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.