The transposition of the EU Damages Directive encouraged a number of countries across Europe to update their competition laws more broadly, amid concerns that the existing rules do not fit the challenges of the digital age.
This issue became particularly apparent with Facebook’s plans to acquire WhatsApp. Despite a transaction value of USD 19 billion, WhatsApp did not reach the necessary domestic turnover thresholds of most EU member states’ merger control regimes, let alone the thresholds of the European Commission. The European Commission obtained jurisdiction over this transaction only through the backdoor.
This is a phenomenon that many transactions involving digital business models share. Their market value and competitive impact may be expressed in the transaction value but not reflected in the turnover of the business. Many of these businesses only generate a very modest turnover, if any at all.
This led legislators in Germany and Austria to add another requirement to their test in order to capture deals that – despite the low turnover figures of the target company – may have a significant impact on competition in the future.
Until now, the parties to a transaction needed to exceed certain merger control thresholds in order for a transaction to be notifiable in Germany. The ninth amendment to the Act against Restraints of Competition (which is expected to come into force in June 2017) will add a transaction value threshold based on deal value. According to the new test, a transaction will be subject to review by the Federal Cartel Office if in the business year immediately preceding the transaction:
- the combined aggregate worldwide turnover of all participating undertakings was more than EUR 500 million; an
- the domestic turnover of at least one participating undertaking was more than EUR 25 million; and
- the domestic turnover of another undertaking concerned was more than EUR 5 million.
- (i) neither the target nor any other party had an individual turnover in Germany exceeding EUR 5 million; and
- (ii) the value of the consideration paid in return for the transaction exceeds EUR 400 million; and
- (iii) the target is active in Germany to a significant extent.
The transaction value includes the purchase price and any other monetary benefits paid by the buyer as well as the value of any liabilities the buyer assumes. The target will be considered to have a local nexus if it carries out activities in Germany that it might monetize in the foreseeable future, e.g. a significant user base in Germany or substantial R&D activities.
Austria has included a similar update of is merger control thresholds in its planned legislative amendment package.
Currently, a transaction is notifiable to the Austrian Cartel Office if the combined worldwide turnover of undertakings exceeds EUR 300 million; the combined Austrian turnover of the undertakings exceeds EUR 30 million; and each of at least two undertakings’ worldwide turnover is over EUR 5 million. No notification is required if only one undertaking concerned has a domestic turnover exceeding EUR 5 million while the other undertakings’ combined worldwide turnover is less than EUR 30 million.
The new amended regime, which will be effective from 1st November 2017, introduces an additional transaction value test. Even if the turnover criteria are not met, a transaction must be notified to the Austrian Cartel Office where in the last business year preceding the transaction:
- the combined worldwide turnover of the undertakings exceeds EUR 300 million; and
- the combined Austrian turnover of the undertakings exceeds EUR 15 million; and
- the value of the consideration paid in return for the transaction exceeds EUR 200 million; and
- the target is active in Austria to a significant extent.
The purpose of these amendments is to capture transactions where the turnover of the target may be low but where the transaction may have a significant impact on competition. The future will show whether the amendments achieve their aims. It is currently unclear how many transactions per year will be captured by the new threshold, and whether these will actually merit a closer look by the competition authorities.
The more urgent question for companies is whether the German and Austrian competition authorities will give guidance on the interpretation of the rather vague new thresholds. The transaction value-criterion, for instance, may be difficult to determine in cases of complex earn-out pricing models, alternative payment models or other non-cash benefits, where the value of consideration may even remain unclear until well past signing or even closing. This could create a significant uncertainty with respect to the notifiability of the transaction and would pose significant problems for the parties’ project planning and future M&A activities. Both authorities have acknowledged the need for resolving these uncertainties and are currently in the process of preparing and aligning guidelines on these new thresholds. Both authorities are cooperating to agree on a consistent approach.
It is likely that other European, and indeed global, competition authorities, will be monitoring this new transaction-value approach to merger review in Germany and Austria and considering whether the time is right to adopt similar thresholds too.