Merger control update: Düsseldorf Higher Regional Court restricts the Federal Cartel Office’s expansive interpretation of the transaction value threshold

Transaction value thresholds are a unique feature of German and Austrian merger control law. They allow for the review of mergers where the turnover of the target company does not sufficiently reflect its economic potential. Despite the joint Guidelines on Transaction Value Thresholds issued by the German Federal Cartel Office (Bundeskartellamt) and the Austrian Federal Competition Authority (Bundeswettbewerbsbehörde), the practical application of these thresholds frequently leads to legal uncertainty. Two recent decisions by Düsseldorf Higher Regional Court have now set limits on an expansive interpretation of these thresholds in Germany.

Background

Even though the transaction value threshold was introduced into the German Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen) in 2017, judicial decisions on its application remain rare. This is because companies often choose to file a precautionary notification with the Federal Cartel Office or at least submit an informal inquiry when there is legal uncertainty regarding the obligation to notify.

Recently, however, Düsseldorf Higher Regional Court ruled on the application of the transaction value threshold in the context of a fee dispute. The case involved two transactions where no notification was made to the Federal Cartel Office, although the transaction value exceeded EUR 1 billion by a significant margin. In 2018, the US software company Adobe acquired two globally active target companies that developed software for the e-commerce sector and B2B marketing automation, respectively; the two companies distributed the products internationally, including in Germany. Although the German turnover of the target companies did not meet the relevant turnover thresholds in Germany, the Federal Cartel Office considered the acquisitions notifiable and therefore reviewed the completed acquisitions as part of divestment proceedings (Entflechtungsverfahren). Since no significant restrictions of competition could be identified, the Federal Cartel Office terminated the proceedings but ordered Adobe to pay the costs anyway. Adobe contested these decisions. Consequently, Düsseldorf Higher Regional Court had to assess whether notification obligations existed (see the court’s press release).

Wording of the law

The application of the transaction value threshold requires the value of the consideration for the merger to exceed EUR 400 million. However, additional criteria must also be met: on the one hand, certain turnover threshods must be met, including a combined worldwide turnover of the parties exceeding EUR 500 million and a turnover exceeding EUR 50 million by one party in Germany. On the other hand, the transaction value threshold only applies if the target company’s turnover in Germany does not exceed EUR 17.5 million, but it nevertheless “has substantial operations in Germany”. As a result, the transaction value threshold serves as a supplementary criterion to the traditional turnover thresholds. However, the undefined legal concept of “substantial operations in Germany” requires interpretation and therefore, unlike clearly assessable turnover criteria, creates legal uncertainty for companies.

Although the Federal Cartel Office’s guidelines are helpful in assessing whether a notification obligation exists, they merely reflect the authority’s interpretation and do not legally bind the courts due to their non-statutory nature. Furthermore, these guidelines do not encompass all conceivable case scenarios or application issues.

Required level of substantial operations in Germany

A key factor in the decisions was the assessment that the turnover generated by the target companies in Germany adequately reflected their market position and competitive potential. The Federal Cartel Office expressly recognised in its guidelines that mergers in which the turnover adequately reflects the competitive potential fall outside the scope of the transaction value threshold.

Düsseldorf Higher Regional Court emphasised that in the case of “mature markets”, the primary focus must be on the turnover achieved. As the target companies had been distributing their software for approximately ten years, including in Germany, at the time of the acquisition, the court concluded that a “mature market” could be assumed. The court nevertheless examined whether there were any other particular indications of “substantial operations in Germany”. However, a company presence, employees, customers and turnover in Germany are not sufficient per se. Instead, a particular “degree” of activity must be reached, which is to be understood restrictively, particularly in the case of “mature markets”. A merely abstract growth potential that is inferred from the purchase price (proportionately attributable to Germany) is insufficient to meet this standard.

The Federal Cartel Office had therefore erroneously assumed notification obligations and should not have initiated divestment proceedings.

Conclusion

The decisions of the Düsseldorf Higher Regional Court restrict an expansive interpretation of the transaction value threshold and link its application to specific evidentiary requirements. They thus contribute to greater legal certainty in determining the existence of notification obligations in Germany under merger control law.

However, the decisions are case-specific. It is clear that highly dynamic and innovative markets must be treated differently than markets with an established turnover structure. This is illustrated, for example, by the recent acquisition of the biotechnology company Olink by Thermo Fisher, which the German Federal Cartel Office found to meet the transaction value threshold but ultimately cleared in in-depth, second phase proceedings (more on this at Noerr Insights). The decisions are therefore not a “free pass” for acquisitions of companies with strong research capabilities or if new growth markets are affected. The control of what are known as killer acquisitions is not restricted either, provided that the significant economic importance of the target company’s activities in Germany can be specifically demonstrated.

Companies, particularly those operating in innovative and dynamic markets, should always carefully consider which factors beyond pure turnover figures could be decisive for a notification obligation. Informal enquiries with the Federal Cartel Office often remain advisable to clarify potential uncertainties in advance.

More clarity through the reasons given for the decisions?

It will be interesting to see the reasons for the decisions, which are yet to be published. It would be very welcome if they contained further interpretative guidance on the transaction value threshold.

Please contact us at any time if you have any questions about the transaction value threshold.