German Federal Cartel Office Publishes Draft Guidelines on Jurisdiction for Merger Review SUMMARY On 5 December 2013, the German Federal Cartel Office (Bundeskartellamt) published new draft guidelines on its jurisdiction to review M&A transactions. Under German law, a transaction does not automatically require notification to, and prior approval by, the Federal Cartel Office if the parties turnover meets the German filing thresholds. Transactions are notifiable (and require approval) only if they have sufficient domestic effect on competition, i.e., sufficient nexus to Germany. This sets German merger control apart from the EU merger control rules which apply extra-territorially and can subject transactions to merger review that have no effect on competition in the EU, but where the parties turnover meets the applicable filing thresholds. The draft guidelines that the Federal Cartel Office has released for public consultation are intended to provide guidance on the concept of domestic effect. The Federal Cartel Office hopes that this will enable parties to a proposed merger to determine more easily and quickly whether their transaction requires notification and approval in Germany. This is particularly relevant for foreign-to-foreign transactions. The draft guidelines confirm that the formation of joint ventures will not require merger control approval in Germany if (i) the joint venture is not, and will not be, active in Germany (or a wider geographic market that includes Germany) and (ii) the parents, despite meeting the filing thresholds in Germany, do not compete on any market in Germany (or a wider geographic market that includes Germany). The Federal Cartel Office has invited comments on the draft guidelines by 30 January 2014. It intends to adopt the new guidelines thereafter, at which time they will replace the current guidelines on domestic effect that have been in force since 1999. New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Tokyo Hong Kong Beijing Melbourne Sydney www.sullcrom.com
SUBSTANCE OF THE DRAFT GUIDELINES In the draft guidelines, the Federal Cartel Office ( FCO ) confirms that M&A transactions (i.e., mergers, acquisitions and the formation of joint ventures) require prior notification and approval only if they have sufficient domestic effect on competition in Germany. Thus, transactions do not automatically require a merger filing in Germany if the parties turnover meets the relevant thresholds. 1 domestic effect, a merger filing will not be required. If there is insufficient The FCO identifies transactions that (i) clearly have domestic effect and (ii) clearly lack domestic effect. I. Transactions that clearly have domestic effect M&A transactions involving only two parties (i.e., an acquiring undertaking and a target undertaking) whose turnover meets the filing thresholds will always have sufficient domestic effect and will require a merger filing. This is a consequence of how the German filing thresholds work: In a two-party transaction, the thresholds will be met only if the target has turnover in Germany of at least EUR 5 million which translates into sufficient domestic effect. In transactions that involve more than two parties (for example, the acquisition of joint control by two undertakings of another undertaking or the acquisition of 25% or more of the voting rights or equity of a company by two other undertakings), sufficient domestic effect will exist if the target s turnover in Germany is more than EUR 5 million. In the case of the formation of green-field joint ventures, sufficient domestic effect will exist if the joint venture will be active in Germany and is expected to generate turnover of more than EUR 5 million annually in Germany in the course of the next three to five years. II. Transactions that clearly lack domestic effect Lack of domestic effect is relevant in particular as a basis to rule out a filing obligation for the formation of joint ventures where only the parents turnover meets the German filing thresholds. According to the draft guidelines, domestic effect clearly can be excluded if the following three conditions are met: (i) The joint venture is not, and will not be, active on any market in Germany (or any wider geographic market that includes Germany, such as the EU). (ii) There is no risk of spill-over coordination between the joint venture s parents in Germany on the product market(s) on which the joint venture is active, or on any market that is upstream or downstream of those markets. 2 This is the case if the parents are actual or potential competitors in 1 A merger filing is required in Germany if, in the last financial year, the parties combined worldwide turnover exceeded EUR 500 million and the turnover in Germany of one party exceeded EUR 25 million and that of another party exceeded EUR 5 million. 2 Spill-over coordination arises when the parties cooperation in a joint venture leads to the coordination or alignment of their activities outside the joint venture. -2-
Germany on the product market on which the joint venture is active outside Germany or on a market in Germany that is upstream or downstream of the joint venture s market outside Germany. 3 (iii) There is no risk of spill-over coordination on any other markets in Germany. This is the case if the parents do not compete (actually or potentially) on any other relevant product market in Germany or on a wider relevant geographic market that includes Germany. In summary, the formation of brown-field joint ventures (joint acquisition of existing companies) and green-field joint ventures (formation by two or more parties of a new company) will not require a merger filing in Germany if (i) the joint venture is not, and will not be, active in Germany (or on a wider geographic market that includes Germany) and (ii) the joint venture s parents do not compete on any market in Germany (or on a wider geographic market that includes Germany). III. Criteria for assessment of domestic effect on a case-by-case basis For cases that do not fall in the above categories, the FCO proposes the following guidance: 1. Joint ventures with some activities in Germany (but turnover of less than EUR 5 million) If a joint venture has some activities in Germany but turnover in Germany of less than EUR 5 million, sufficient domestic effect will exist only if the joint venture s activities in Germany are not marginal. According to the draft guidelines, a joint venture s activities do not automatically qualify as marginal if its turnover is below EUR 5 million or its market share is less than 5%. Sufficient domestic effect can arise from the transfer of important resources to the joint venture, e.g., intellectual property rights and knowhow. 2. Risk of spill-over coordination between the parents in Germany Even if the joint venture is not, and will not be, active in Germany, its formation can give rise to domestic effect if there is a risk of spill-over coordination between its parents in Germany. If the joint venture s parents compete with each other in Germany (or on a wider geographic market that includes Germany) on a product market on which the joint venture is, or will be, active (or on a product market upstream or downstream of the joint venture s market), the following guidance applies: The formation of the joint venture will not have sufficient domestic effect if the parents combined market share in Germany (or on the wider geographic market that includes Germany) is less than 10%. In such cases, a merger filing will not be required, even if the parents turnover meets the filing thresholds. If the parents compete in Germany (or on a wider geographic market that includes Germany) on a market that is not related to the joint venture s market, the formation of the joint venture will be considered to give rise to a risk of spill-over coordination only if the joint venture is of significant importance to the activities of its parents. If the joint venture is of marginal significance to the parents, there is no risk of spill-over 3 Note that the geographic market on which the parents compete can be wider than national. In that case, the parents may not be actual or potential competitors on the wider geographic market that includes Germany, such as the EU. -3-
coordination, and the formation of the joint venture will not have sufficient domestic effect for a merger filing to be required. To assess the significance of the joint venture to its parents overall activities, the FCO advises looking at the turnover that the joint venture generates (or is expected to generate) relative to the turnover of its parents, and at whether the joint venture will own resources that are of strategic importance to its parents. COMMENT The draft guidelines are helpful in that they confirm clearly that the formation of joint ventures with no conceivable nexus to Germany will not require FCO approval. This is a welcome clarification because the German filing thresholds could, if applied formalistically, subject joint ventures to merger review, even if they have no discernable effect on competition in Germany. The FCO realises that the assessment of spill-over coordination by the parents can be cumbersome indeed more cumbersome than the actual merger review would be in substance. This can be the case, in particular, in joint acquisitions of companies by two or more private equity firms or in the joint formation of acquisition vehicles by would-be acquirers. The overlap analysis required for the assessment of the risks of spill-over coordination must include all controlled portfolio companies of the participating firms, even if their acquisition of the target raises no substantive competition concerns. In such cases, the FCO advises the parties to submit a filing and leave open the question of whether sufficient domestic effect exists. The FCO would then endeavour to grant timely clearance. While drafting merger filings in Germany is not as cumbersome as in other jurisdictions and the FCO often grants clearance in non-contentious cases ahead of the one-month waiting period, a filing will nevertheless cause some cost and delay to the transaction timetable. Perhaps the FCO will simplify the guidance on spill-over coordination further in the guidelines that it adopts in 2014. The gain in legal certainty may outweigh the loss of oversight by the FCO of possible spill-over coordination, the risks of which are purely theoretical in many transactions. * * * Copyright Sullivan & Cromwell LLP 2013-4-
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