In 2017, Germany introduced a “transaction value” threshold for mandatory pre-merger notification. The aim of the new threshold was to capture deals where, despite low turnover, the acquirer had placed a high value on the target business. It was anticipated that this would most frequently apply to tech and pharmaceutical start-ups and would allow the German Competition Authority to look at acquisitions of market “mavericks” that might otherwise fall under their radar.
This followed the Austrian Cartel and Competition Law Amendment Act 2017, which introduced a transaction value threshold that took effect from 1 November 2017.
The two authorities have now published joint draft guidelines on the interpretation and application of the new thresholds for consultation. The English translation can be found here.
The guidance follows a tricky period since implementation, with parties grappling with questions such as how to address variable aspects of consideration and changes in valuation between signing and completion. The guidance provides some clarity, but we examine the areas of uncertainty that still remain.
What is the transaction value threshold?
Until the amendments came into force, transactions were only subject to merger control in Germany and Austria if certain turnover thresholds were met.
Under the new test, a transaction will be subject to review by the German Federal Cartel Office if, in the business year immediately preceding the transaction:
1. the combined aggregate worldwide turnover of all participating undertakings exceeded €500 million; and
2. the domestic turnover of at least one participating undertaking exceeded €25 million in Germany; and
3. a) at least one further participating undertaking had a domestic turnover in Germany that exceeded €5 million;
(i) the value of the consideration paid in return for the transaction exceeded €400 million, and
(ii) neither the target nor any other party had an individual turnover in Germany exceeding €5 million, and
(iii) the target was active in Germany to a significant extent.
Even if the established turnover criteria are not met, a transaction must now also be notified to the Austrian Cartel Office if, in the business year preceding the transaction:
- the combined worldwide turnover of the undertakings exceeded €300 million;
- the combined Austrian turnover of the undertakings exceeded €15 million;
- the value of the consideration paid in return for the transaction exceeded €200 million; and
- the target has been active in Austria to a significant extent.
For further details on the new transaction value thresholds please see our report here.
Why were new transaction thresholds introduced in Germany and Austria?
The new requirements are intended in particular to control the acquisition of digital companies or start-ups with high market value but low turnover. A recent example of this is the acquisition of WhatsApp by Facebook in 2014, which did not fall under German scrutiny. The value thresholds are also intended to prevent established companies from buying up newly developing competitors with high innovation potential.
The pharmaceutical sector is another area that is likely to fall under the scope of the new transaction value thresholds.
Why did the Federal Cartel Office and the Austrian Competition Authority publish the joint draft guidelines?
The key element in determining the obligation to notify is the “value of the consideration paid in return for the transaction”. It is the responsibility of the parties to the transaction to calculate this value in order to decide whether the transaction has to be notified in Germany and/or Austria, even though the turnover thresholds are not met.
This new provision has led to interpretation problems in practice. Many questions remained unanswered, for example:
- What is the relevant point in time for calculating the transaction value?
- How are changes in value between signing and closing to be dealt with?
- How should variable elements of a transaction’s value which are only calculated after signing (earn-out payments, for example) be dealt with?
Following their own practical experiences over the last 12 months and subsequent extensive discussions with both filing parties and interested parties, the Federal Cartel Office and the Austrian Competition Authority have published this draft joint guideline in order to clarify these questions.
Which transactions are caught by the value threshold?
The new transaction value threshold is applicable to all transaction types, i.e. merger, acquisition of control, shares, assets or competitive influence.
How is the transaction value calculated and what exactly must be taken into account?
Which point in time is relevant?
The value of the transaction should be defined broadly. It should cover, for example, all payments (including future and variable purchase-price components due to earn-out clauses), transfers of voting rights, securities, fixed and intangible assets, license fees, payments for non-compete obligations, assumed liabilities etc.
The relevant point in time for determining the value of the transaction is the date of completion. However, in some circumstances it is not possible to determine the value of the transaction in advance because of value fluctuations between notifying the transaction and completion (e.g. due to currency or stock-market fluctuations). In these cases, parties may have regard to the transaction value at the time of notification. However, if the transaction value falls below the €400 million threshold for Germany, or the €200 million threshold for Austria after notification, the companies can withdraw from their notification. Conversely, if the transaction value increases between signing and completion, an obligation to notify the transaction will arise.
- Future payments must be calculated on the basis of discounting methods commonly used in the financial sector.
- The precise transaction value can be determined with a plausible (external) valuation report.
- Where the parties to the transaction are not sure whether the transaction value thresholds will be reached or not, the parties may submit a precautionary merger control notification.
How is “significant extent” defined in the context of domestic activity?
In addition to the value of the transaction, the target must be active in Germany and Austria to a “significant extent”. The Federal Cartel Office and the Austrian Competition Authority’s guidance includes the interpretation of substantial domestic operations. In particular, in the digital sector, parties to a transaction should consider its number of active monthly users or the number of times it is accessed by users. In addition, the Austrian Competition Authority regards a target to be sufficiently active domestically if it has a site or facility in Austria.
The draft joint guideline is a first step in clarifying the new transaction value thresholds. However, uncertainties remain. This is particularly true for transactions where value thresholds are not met at the time the transaction is signed, but where the transaction value increases until completion and meets the new thresholds at completion. It is unsatisfactory for undertakings to be left with a high degree of uncertainty regarding whether a filing is ultimately required or not.
Furthermore, the draft joint guidelines do not indicate a final deadline until which the authorities may investigate potential “gun–jumping” behaviour due to a non-observance of the value thresholds. Therefore, in a case where the parties to the transaction conclude that the value thresholds are not met and, thus, do not submit a merger control filing in Germany and/or Austria, they would need to keep their respective documentation on the calculation of the value of the transaction for an indefinite time. It would have been desirable if the authorities had committed to a fixed point in time for the valuation of the transaction as well as a final deadline for the safekeeping of documentation on the calculation of the value thresholds.
Please contact our experts in Germany if you have any questions on the new threshold or the draft guideline of the German and Austrian authorities.