Now the second domestic turnover threshold has been brought in, a number of mergers are no longer subject to German merger control

The long-awaited introduction of the second domestic turnover threshold for the application of German merger control came into force on 25 March, 2009. Accordingly, a number of mergers with only minor effects on the German market will no longer be subject to German merger control. Foreign acquisitions of German companies and mergers of foreign companies, which have only a small presence in Germany, will benefit most from this new threshold.

As part of the Third Act on the Elimination of Bureaucratic Obstacles for Medium-sized Companies (MEG III), the German legislature has amended section 35 para. 1 no. 2 of the Act Against Restraints of Competition (ARC) by adding a second domestic turnover threshold of €5m (£4.5m). From now on, a merger is only subject to German merger control if all three of the following conditions are met:

  • the combined worldwide turnover of all of the parties involved exceeds €500m (£445m);
  • the German turnover of at least one party exceeds €25m (£22m); and
  • the German turnover of at least one other party exceeds €5m (£4.5m).

Practical implications

From now on, many transactions that involve a target company with only minor sales in Germany, or an acquirer without considerable operations in Germany, will no longer require regulatory filings with the Federal Cartel Office (FCO).

The practical results can be seen in the following two situations involving foreign companies, where German merger control clearance will no longer be required:

  • A German company acquires a foreign company: both have a combined worldwide turnover of more than €500m (£445m) and the German company has a German turnover of more than €25m (£22m). The foreign target company is present in Germany, but its German turnover does not exceed €5m (£4.5m) per annum.
  • Two foreign companies merge: both companies have a combined worldwide turnover of more than €500m (£445m). One of the foreign companies has a German turnover of more than €25m (£22m); the other foreign company is active in Germany, but its annual German turnover does not exceed €5m (£4.5m).

The new turnover threshold will have an impact not only on foreign mergers, but also on transactions within Germany if the target's overall (worldwide) turnover does not exceed €5m (£4.5m). Accordingly, the previous de minimis turnover threshold of €10m (£8.9m), which applies only to independent target companies, has now been supplemented by a second absolute de minimis rule applying to any company (dependent or independent) with an annual turnover not exceeding €5m (£4.5m). Special thresholds, however, continue to apply in the areas of press, television and radio.

Greater legal clarity

The jurisdiction of the German merger control regime was previously established on the basis of a 'domestic effects' test, according to which a transaction had to have an appreciable effect within Germany. The FCO and the courts applied a very wide interpretation of the term 'appreciable effect' in this context. In foreign-to-foreign transactions where one party exceeded the domestic turnover threshold of €25m (£22m), even minimal German sales of the other party were sufficient to trigger German merger control.

The newly introduced second domestic threshold of €5m (£4.5m), for the first time, gives clear guidance on which transactions require notification to the FCO. The new rule will therefore result in greater legal clarity, in particular in foreign-to-foreign merger cases which have only minor effects on competition in Germany, as the general 'domestic effect' criterion can now be assessed on the basis of a clear turnover figure. This amendment is in line with international efforts of both the Organisation for Economic Co-operation and Development and the International Competition Network (ICN), which have been calling for a clear and sufficiently national nexus for national merger control requirements.

Reduced case-load and easier assessment of filing requirements

The newly-introduced threshold will definitively reduce the number of cases notified to the FCO. It is estimated that the authority's caseload will be decreased by up to one-third i.e. by up to 700 cases per year. In particular, those foreign-to-foreign mergers which have little impact in Germany, and which are therefore generally viewed as unproblematic under German competition law, no longer have to be filed with the FCO. This leaves more resources for the FCO to deal with the really interesting merger control cases and antitrust enforcement.

For companies and advisers the new rules will make it easier, in particular in international transactions, to determine whether or not a deal requires merger filing and approval in Germany. This will certainly reduce the risk of violating notification requirements, which could result in the invalidity or dissolution of the merger and the imposition of fines by the authorities. This is particularly important since the FCO has recently taken a stricter approach to the enforcement in 'gun jumping' cases, by imposing severe fines on parties completing transactions without prior merger control approval. From now on, there will be no more room to argue that a foreign-to-foreign transaction had no domestic effect in Germany if both domestic turnover thresholds are satisfied.

The legislative change is a sign of a modern and pragmatic regulatory approach towards increasingly international M&A activity. However, given the relatively low domestic turnover thresholds compared to the size of the economy, Germany will still remain high up on the list of countries requiring national merger control filings in international M&A transactions.

Georg Philipp Cotta is a partner at Beiten Burkhardt in Munich.