Antitrust Alert: New Notification Threshold in Germany Reduces Risks to Offshore Transactions
Germany has introduced a new threshold for premerger notifications to its merger control system, effective tomorrow, 25 March 2009. This amendment to the German Act Against Restraints Of Competition (ARC) is expected to reduce the number of merger control filings in Germany dramatically. In particular, the amendment will provide (limited) relief for the parties to offshore transactions, although enforcement risks remain for transactions to which the ARC still applies.
Filing criteria currently in force
German merger control is mandatory. If a transaction meets the ARC filing criteria, the parties must delay closing their transaction until the FCO has cleared it. In the past, a merger control filing was required already if (i) one party generated revenues of more than 25 million euros in Germany and (ii) both parties generated combined revenues of more than 500 million euros worldwide. These thresholds apply to the consolidated total revenues of the groups of companies to which the direct parties to the transaction belong, in their last fiscal year.
These filing thresholds have frequently resulted in filing requirements for transactions that have no or only an insignificant connection to competition in Germany. This was because the 25 million euro threshold for sales in Germany could be satisfied by one party alone, either the buyer or the target. There was no separate revenue test for the German turnover of the other party to the transaction. In theory, the ARC requires – in addition to the revenue thresholds being satisfied – that the transaction affect competition in Germany. In practice, this "effects tests" is meaningless. The criteria of the Federal Cartel Office (FCO) are so broad as to attach competitive effects to virtually any offshore transaction. In addition, the FCO's guidelines are ambivalent and have left business in many cases with no choice but to file.
Compliance risks involved
The broad extra-territorial application of German merger control raises significant compliance risks:
- The FCO recently imposed substantial fines on parties to M&A transactions that – in the FCO's view – failed to comply with the ARC's procedural requirements. The FCO determines the amount of a fine on the basis of the revenues of the parties to the transaction, multiplied by the number of years in which the parties were in non-compliance (for example, the number of years that the buyer has owned shares in the other business without required FCO clearance).
- The acquisition of shares or assets for which FCO clearance was required, but was not obtained, is not legally enforceable in Germany. The FCO no longer accepts corrective filings, that is, post-closing submissions where the acquirer has only realized after closing that a filing was required. Therefore, currently there is no way to "cure" a legally defective acquisition and to obtain retroactive effect.
- The extraterritorial application of German merger control does not only relate to acquisitions of control. Any acquisition of a “competitively significant influence” over another business may trigger the ARC's applicability. The FCO recently applied this ARC provision to the acquisition of a 14% minority share ownership and to the right to appoint one member of the supervisory board of another business.
The new revenues test
As of tomorrow, in addition to the 500 million and the 25 million euro tests, one of the parties must have generated revenues of more than 5 million euros in Germany (while the other party's German revenues satisfy the 25 million euro test). As a result, transactions will only be subject to reporting in Germany if both parties have substantial business interests in Germany.
The Ministry in charge of the amendment anticipates that the amendment will reduce the FCO's revenue stream through filing fees by at least 1.4 million euros per year. The more significant effect on the FCO's daily business will be that the FCO will be able to shift further resources from merger control to its ongoing fight against cartels. Following a recent re-organization of the FCO, it currently has three units exclusively assigned to cartels, dawn raids, and related sanctions.
Given the size of the German economy, however, revenues of 5 million euros are not much of a hurdle. Most other EC Member Sates have significantly higher thresholds for either party's local sales (such as 50 million euros in France). Nonetheless, the Government estimates that the new 5 million euro test will reduce the number of merger control filings by about one third (in 2007, the FCO reviewed 2,240 merger submissions).
More importantly, for the majority of transactions, businesses can now determine if they have to file a transaction for the FCO's review solely on the basis of their revenues in Germany. The new threshold, therefore, will significantly reduce compliance risks. Issues remain in relation to multi-party transactions, such as when JVs are formed, where the assessment of a filing and clearance requirement in Germany will continue to be necessary on the basis of the FCO's overly extensive and ambivalent criteria.
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Carsten T. Gromotke