Merger Control in Germany: An Overview

Martina Maier and Philipp Werner

Howrey LLP

Germany has a long-standing tradition of merger control enforcement. A considerable number of cases are brought before the German Federal Cartel Office (FCO) for merger control purposes every year. According to the last available statistics the FCO received 3,516 notifications in 2005/2006. The high number of cases can at least partly be attributed to two peculiarities of the German merger control system: not only the acquisition of control but also the acquisition of 25 per cent of the shares or voting rights is subject to merger control review and even the acquisition of a minority shareholding of less than 25 per cent can be subject to control; and the turnover thresholds of German merger control are relatively low and can be met in cases where the target is not located in Germany and has no German turnover.
This article summarises the main substantive and procedural German merger control provisions as of 1 August 2008. In particular, it sets out the categories of transaction that fall within the scope of German merger control, as well as the applicable turnover thresholds. It also explains the merger control procedure and the substantive criteria for the appraisal of a merger.
Effective merger control was introduced in Germany in 1973. The relevant legal provisions are set out in articles 35 et seq of the Act against Restraints of Competition (ARC). Germany has a mandatory notification system and transactions falling within the scope of the merger control rules must not be closed without prior clearance by the competent authority.
The German Federal Cartel Office (FCO) is the competent merger control authority. The FCO is an independent higher federal authority with its seat in Bonn. Decisions of the FCO are made by independent decision divisions responsible for different business sectors and products. Further information can be found at the FCO website (www.bundeskartellamt.de), which also contains an English translation of the ARC.

Substantive provisions

In general terms, a merger falls within the scope of the ARC and has to be notified to the FCO if the following four conditions are met:
• the merger does not fall within the scope of the EC Merger Regulation;
• the type of transaction is covered by the ARC;
• the companies involved exceed certain turnover thresholds; and
• the merger has an effect within the territory of the Federal Republic of Germany.

The merger will be cleared if it is not expected to create or strengthen a dominant position in one or more markets. Otherwise, it will be prohibited unless the benefits of the merger outweigh the competitive disadvantages.

EC Merger Regulation

The provisions of the ARC are not applicable if the merger falls within the scope of the EC Merger Regulation No. 139/2004. In this case, the matter will be handled by the European Commission under the EC Merger Regulation.

Types of transactions

The following types of transaction qualify as concentrations under the ARC:
• the acquisition of all or an essential part of the assets of another company;
• the acquisition of direct or indirect control by one or more companies by way of rights, contracts or other means;
• the acquisition of shares in another company provided that the interest alone or together with another interest already held by the acquiring company reaches 25 per cent or 50 per cent of the capital or the voting rights in the other company; and
• the establishment of any other relationship between companies as a result of which one or more companies may directly or indirectly exercise a competitively significant influence over another company.

Contrary to many other merger control regimes, the ARC does not require the acquisition of direct or indirect control. With respect to a share deal, even the acquisition of 25 per cent of the shares or voting rights constitutes a concentration. In exceptional circumstances, even a share transfer below 25 per cent can be sufficient to trigger the obligation to notify, if it results in a competitively significant influence. For example, the acquisition of 24.8 per cent of the shares had been deemed to confer a competitively significant influence in a case where the acquirer had the contractual right to designate a specified number of members to the target’s supervisory board and certain prerogatives with regard to capital increases in the target.
With respect to an asset deal, not only is the acquisition of all assets of another company caught by the German merger control rules, but also the acquisition of an essential part of the assets; depending on the individual case, the assignment of a single brand might be deemed sufficient.

Thresholds

The German merger control provisions apply only if the parties to the concentration exceed certain turnover thresholds, namely:
• the combined aggregate worldwide turnover of all the companies involved is more than €500 million; or
• the German turnover of at least one company involved is more than €25 million (contrary to many other jurisdictions, it is not necessary that the turnover of at least two companies exceeds a certain domestic turnover threshold).

The relevant turnover has to be calculated on the basis of the involved companies’ turnovers for the preceding year, while also taking into account the revenue of affiliated upstream or downstream companies. Revenues from the supply of goods and services between affiliated undertakings (intra-group revenues) as well as excise taxes are not taken into consideration. Special turnover calculation rules are set up for companies trading in goods, companies in the print media sector, some financial institutions and building companies.
The type of transaction qualifying as a merger is decisive in answering the question of which companies’ turnovers are relevant for the purposes of the ARC. With respect to a share deal, the turnover figures of the acquiring and the target undertakings have to be taken into account. With respect to an asset deal, besides the buyers’ turnover, the calculation of the turnover of the seller shall take into account only the assets sold. If one or more companies acquire sole or joint control over the target undertaking then, apart from the target’s turnover figures, all the turnover figures of the companies which gain control have to be included in the calculation.
However, the merger will not be subject to the ARC, even if the above-mentioned turnover figures are met, if one of the two following situations occurs:
• a company which had a worldwide turnover of less than €10 million in the last business year and which is not controlled by a third company (or where the whole group had a worldwide turnover of less than €10 million in the last business year) merges with another undertaking; or
• the merger concerns a market in which goods or commercial services have been offered for at least five years, and which had a sales volume of less than €15 million in the last calendar year. The German supreme court has decided that only turnover achieved in Germany must be taken into account for the assessment of this ‘minor market’ exception, overruling an earlier decision practice of the FCO.

Effects doctrine

Mergers are subject to the provisions of the ARC if they have ‘an effect’ within Germany. This means that mergers involving foreign companies may also fall within its ambit. In general, two basic categories can be distinguished: mergers where the target is located in Germany and mergers where the target is located abroad. Mergers of the first category (eg, acquisitions of assets or shares of a domestic undertaking, or the establishment of a joint venture in Germany) always have a domestic effect regardless of where the parent companies are located. As regards the second category, the FCO may take into consideration different criteria, such as sales in Germany, market shares of subsidiaries that are active in Germany, German imports, or other German assets.
The FCO applies the concept of a domestic effect very broadly. In its 1999 guidelines on domestic effects, it pointed out that it assumes a domestic effect even in cases where, although only one party has so far operated in Germany, it is likely that goods will be supplied in Germany as a result of the merger, the merger will enhance the know-how of a company involved in the merger that operates in Germany, industrial property rights will accrue to the latter, or the financial strength of the involved company that operates in Germany will be strengthened. Moreover, in some cases, the FCO might deem it sufficient that the domestic market structure is changed as a result of the merger, even if the merger is completed between companies abroad which have no domestic subsidiaries or branches.
The FCO has shown a strong and increasing willingness to enforce German merger control. Past experience has shown that even a turnover of €100,000 is considered to be sufficiently appreciable for jurisdictional purposes. Indeed, the acquisition of a foreign-based undertaking with a domestic market share of 0.14 per cent and 0.23 per cent by an acquirer who held a domestic market share of 4.4 per cent was considered to produce sufficient effects to trigger the application of the German merger control rules. The FCO has also a strong enforcement record with respect to foreign-to-foreign mergers, including some recent prohibition decisions.

Market dominance

The German merger control provisions rely on the market dominance test to ascertain whether a merger may be cleared. When appraising a merger, the FCO takes into account inter alia the market shares of the involved companies after the concentration, the financial power of the participants, their access to supplies or markets, their links with other undertakings, legal or factual barriers to market entry for other companies, their ability to shift their supply or demand to other goods or services, as well as the ability of the purchaser and seller to resort to other companies.
In 2004, the German Supreme Court overruled its jurisprudence on the relevant geographic market, stating that the latter was not necessarily restricted to Germany. Following this decision, the FCO has shown a great willingness to scrutinise mergers with effects on markets which are wider than Germany. For example, in a 2006 case when prohibiting a US–US merger the FCO relied on a worldwide market definition, rather than focusing on the competitive conditions in Germany.
The ARC lays down two legal presumptions for market dominance: a company is presumed to have single dominance if it has a market share of at least one-third; and joint dominance may be presumed if two or three companies acting on the relevant markets reach a combined market share of 50 per cent, or five or fewer companies acting on the relevant markets reach a combined market share of two-thirds.
In general, a concentration that is expected to create or strengthen a dominant position shall be prohibited by the FCO unless the merger leads to improvements in the market conditions that outweigh the disadvantages caused by the dominance.

Procedure

As seen above, the requirements to notify a merger under German merger control law (transaction type, thresholds and domestic effect) are relatively low. This means that a high number of mergers, even those presenting little or no risk to the market, will be brought before the German FCO every year.

Notification

Contrary to other jurisdictions, in Germany there is no compulsory notification form that has to be completed. However, the FCO has published a notification form and asks the notifying parties to use this form. According to the ARC, a notification to the FCO must describe the transaction and contain certain information with respect to every company involved in the merger:
• name;
• place of business or registered office;
• type of business;
• turnover in Germany, in the European Union and worldwide;
• its market shares, including the basis for their calculation or estimate, if the combined market shares of all the companies involved amount to at least 20 per cent in Germany;
• in the case of an acquisition of shares in another company, the size of the interests acquired and of the total interest held; and
• if a company involved is located abroad, a person authorised to receive any document issued by the FCO with regard to the notification.

The submission of an incomplete or incorrect notification constitutes an administrative offence incurring a fine of up to €100,000.
If the merger does not raise substantial competition concerns, the notification may be drafted at short notice, assuming all the necessary information is available. However, the more the transaction may raise substantive issues, the more emphasis has to be placed on the product and geographic market description, as well as on the competitive analysis. In cases that appear problematic from a merger control point of view, it seems advisable also to contact the FCO before the notification is submitted to discuss potential competitive concerns in advance.
In Germany, there are no specific time limits for the submission of a merger notification. However, the merger has to be cleared prior to its completion. The notification can take place at a relatively early stage of the transaction; depending on the individual case, the clear intent of one of the involved parties might be deemed sufficient to notify the transaction to the FCO before the signing of the respective agreement.
In general, the notification has to be made by all the parties involved, ie, in the case of a share deal, the acquirer and the target company. If the transaction is structured as an asset deal, the seller also has to notify it. In practice, it may be deemed sufficient if the notification is submitted by one of the parties to the transaction, usually by the acquiring company.
The names of the parties involved, the relevant markets, and the date of the notification are usually published by the FCO on its website some days after the notification has been made. The decision to enter into a phase II investigation of a specific case must be published by the FCO.

Investigation

After a notification has been made, the FCO investigates within a period of one month (phase I) starting from the date of submission of a complete notification, whether the notified merger can be cleared or whether a further investigation (phase II) appears to be necessary. In general, the entire investigation period must not exceed four months.
As the ARC merger control rules have been in force for more than 30 years, the FCO has gained a lot of experience over the decades. This means that the FCO is generally willing to decide relatively quickly on cases that do not cause substantial competitive concerns without requesting further detailed information. A clearance decision might therefore be obtained some time before the expiry of the phase I investigation period. However, in complex cases which raise substantial competitive concerns, the FCO regularly goes into detail requesting further information. In practice, most decisions are adopted after a phase I investigation. In all cases, a notification which contains comprehensive market information might provide the catalyst for the investigation procedure.
Third parties whose interests will be substantially affected by the merger control decision (eg, competitors, suppliers, and customers) may participate, upon application, in the proceedings.
In 2005 and 2006 the FCO has entered into a phase II investigation in 64 cases and in 11 cases the merger was prohibited. In ten cases, the merger was only cleared with conditions and in ten cases the notification was withdrawn.

Clearance

If the FCO decides to clear a merger after a phase I investigation, the parties involved receive a clearance letter stating that the FCO does not oppose the notified merger. If the FCO decides after the initial phase I investigation to investigate the matter further, it informs the parties involved that it will enter into a phase II investigation, leading either to a clearance or to a prohibition. A prohibition decision can be issued only after a phase II investigation. In principle, a phase II decision, unlike a phase I decision, can be appealed before a court by the parties involved or by third parties. If the FCO fails to issue a decision within the time limits of phases I or II, the merger is deemed to be cleared.
Decisions by the FCO after a phase II investigation must contain a statement of reasons. They have to be published by the FCO and are available on the FCO website (www.bundeskartellamt.de). Upon the request of a party, business secrets will not be made public unless the information concerned cannot be deemed as confidential.
Undertakings (eg, divestiture of a subsidiary, transfer of know-how, assignment of a brand) can be offered to avoid a prohibition decision. It should be noted that, as with EC competition law, the FCO is very reluctant to accept mere behavioural undertakings as a means to dispel its competition concerns.
In its decision making, the FCO is bound by the pure competition yardstick, which means that it must not take into account non-competition arguments, such as, the dismissal of employees in the context of a merger. In exceptional cases, a prohibiting decision can be overruled by the federal minister of economics for policy reasons, if the restraint of competition is outweighed by advantages to the economy as a whole following the merger, or if the merger is justified by an overriding public interest. This instrument has been used, for example, in the EON/Ruhrgas merger after a prohibiting decision by the FCO, although, in general, this kind of permission is requested and granted very rarely.

Completion

After the issuance of a clearance decision, the German merger control provisions no longer constitute an obstacle to the completion of the merger. The completion has to be reported to the FCO. Substantial administrative fines will be imposed on the parties involved if they complete a merger before a clearance decision is given: the fine may now be up to e1 million. Moreover, the legal transaction which completes the merger shall be deemed to have no effect until a clearance decision has been issued. An infraction of this so-called standstill obligation may be remedied under certain circumstances, even without an ensuing clearance decision. This possibility applies to certain corporate transactions once they have been filed with the appropriate register, and to property transactions once they have been entered into the land register. The FCO has the power to dissolve a merger which has been completed in defiance of a prohibiting decision. It should be noted that the FCO is of the opinion that in case of the notification of an implemented merger, it is not bound to any deadlines for deciding on the notification.
Depending on the particular case, it might be possible to complete a transnational merger outside Germany and to delay the completion as regards the German shares or assets until clearance has been given by the FCO. However, in any case, it is advisable to approach the FCO in advance to discuss such a strategy.

Costs

The FCO charges an administrative fee for merger control proceedings which is dependent on the economic significance and on the subject matter of the notified merger. The amount may vary from €1,500 in cases that are easy to handle, to up to €50,000. In exceptional circumstances, a fee of up to €100,000 may be imposed.

An extract from The European Antitrust Review 2009