In many countries turnover tests triggering merger control can be overly far-reaching and cover transactions that are “entirely foreign” and do not have any appreciable effect in the country concerned. Newly issued German Federal Cartel Office (FCO) Guidelines address this issue providing clarification and examples for exemption from German merger control notification requirements due to insufficient domestic effects. Specifically, German merger control filing obligations do not apply to international joint ventures where: (1) the joint venture company is not active, and is not a potential competitor, on the German market; and (2) parents of the joint venture company are not competing in Germany on the same or a related (upstream or downstream) product market as that of the joint venture company.
On September 30, 2014, the German authority in charge of merger control, the Federal Cartel Office (“FCO” – in German Bundeskartellamt), issued newly revised Domestic Effects Guidelines* clarifying when international mergers will escape the scope of German merger control even if they exceed the statutory turnover (revenue) thresholds normally triggering merger control in Germany. When German merger control applies, the parties to a merger or business combination have the obligation to notify the FCO prior to the completion of the transaction and obtain the FCO’s explicit or implied approval (for example, if the FCO does not act within one month after proper notification). German merger control applies when a transaction meets a two-fold test: first, a purely numerical turnover based test, and second, a separate domestic effects test. Under the current turnover test, German merger control generally applies if in the year preceding the transaction (1) the parties’ combined world-wide turnover exceeded EUR 500 million; (2) at least one party’s turnover in Germany exceeded EUR 25 million; and (3) a second party’s turnover in Germany exceeded EUR 5 million. The turnover test can easily capture many non-German transactions, particularly among companies with multinational operations. The domestic effects test is intended to filter out transactions that have insufficient effects on the German market to justify the FCO taking jurisdiction over the transaction. The new Guidelines provide a welcome clarification of the application of the domestic effects test and can provide the basis for avoiding having to file a merger control notification in Germany for some purely non-German transactions. The Guidelines emphasize that turnover (revenue) in Germany, market share and potential spillover effects in Germany are among the principal factors that the FCO will take into account for assessing whether or not the German effects of a combination or arrangement between parties outside Germany can be considered marginal or negligible and escape German merger control even if the turnover thresholds are exceeded.
One of the most useful features of the Guidelines is that they provide a safe harbor for non-German joint ventures that meet the following conditions: (1) the joint venture company is not active, and is not a potential competitor, on the German market; and (2) the parents of the joint venture company do not compete in Germany on the same or a related upstream or downstream product market as that of the joint venture company. The FCO assumes that a joint venture meeting these conditions does not have any adverse spill-over effects on the German market. The safe harbor from the notification filing obligation applies even where the turnover of two of the parent companies each exceed the turnover tests otherwise triggering German merger control because the domestic effects rule takes precedence.
The Guidelines provide the following example of how the domestic effects rule will be applied in the context of a joint venture: Two multinational companies A and B acquire joint control of company C; both A and B are big enough to have international activities that meet the German statutory turnover tests and thus would in principle fall under German merger control; C is only active in the Brazilian electronics retail market, Company A is based in Europe and active worldwide in wholesale and shopping outlets, and Brazil-based B is an investment company invested in various sectors in Brazil and outside Brazil only in mineral resource related sectors; as A and B are not competing in Germany on C’s market (electronics retail) or related upstream/downstream markets, spillover effects in Germany can be excluded, there are no sufficient domestic effects in Germany and a German merger control filing is not necessary.
While the additional domestic effects test theoretically applies to all decisions regarding whether or not to notify, the FCO’s Guidelines made it clear that purely two-party transactions such as a sole buyer’s acquisition of a target company from seller cannot benefit from the domestic effects analysis. In those cases the FCO deems the statutory turnover thresholds to be conclusive evidence of sufficient domestic effects to trigger a merger control filing, thereby giving the FCO the opportunity to consider the impact of the acquisition on the German market. Likewise, a German merger control filing cannot be avoided in a multi-party joint venture where the parent companies’ turnover exceeds the thresholds and the joint venture company’s turnover in Germany exceeds EUR 5 million or exceeds 5% market share.
In other cases, primarily where the parent companies’ turnover exceeds the turnover thresholds but the joint venture company has less than EUR 5 million turnover in Germany, the transaction might still escape the scope of German merger control if effects on the German market are only marginal, but the analysis will depend on the individual facts and circumstances of each case and no clear safe harbor can be relied on to avoid the merger control filing obligation.
For newly established joint venture companies, the FCO will assess the expected annual turnover and market share in Germany, usually based on a projection period of 3 to 5 years (the FCO has indicated it may take into account the parties’ business and finance plan where realistic).
Where appropriate the FCO has indicated its availability for informal pre-filing contacts to explore domestic effects issues.
While the Guidelines have not clarified all questions regarding the application of the German merger control filing rules to combinations taking place outside Germany, the Guidelines are a welcome exercise by the FCO in pragmatic self-restraint and should result in facilitating the implementation of many international transactions without the administrative burden of a German merger control filing.
* “Merkblatt Inlandsauswirkungen in der Fusionskontrolle” dated 30 September 2014, available on www.bundeskartellamt.de.