Merger control reform: capturing transactions in the digital markets

On 1 July 2016, the German Ministry of Economic Affairs published a draft bill to amend the German Act against Restraints of Competition (ARC).  It proposes, among other things, to extend the scope of the existing merger control regime by introducing a second jurisdictional threshold based on the value of the transaction.  Absent major changes to the bill by Parliament (which appear unlikely) the new value-based test will enter into force by the end of 2016.  The effect of the new test will be to catch any merger with a transaction value of more than €350 million, irrespective of the turnover generated by the target company in Germany.

Background, purpose and aims of the new value threshold

Turnover-based thresholds are a common feature of merger control regimes worldwide offering a simple tool enabling parties and authorities to identify proposed transactions which merit assessment as to their possible effects on competition. While the level of turnover required to trigger a need to notify may vary considerably between jurisdictions, turnover tests are otherwise largely similar, requiring a measurement of the turnover of one or both of the parties in a particular jurisdiction or region.

In recent years, a number of high profile cases in digital markets have escaped review because the parties have not met the relevant turnover thresholds.  This is largely because the parties provide their services free of charge.  While a free-of-charge service obviously results in respectively low revenues, it does not necessarily indicate an equally low economic value or suggest that the transaction will have a negligible impact on competition.  Small “digital start-ups” will often fail to generate high turnover in the early stages but their corporate value may nonetheless be significant as a result of the degree of innovation, know-how, or their market presence in terms of users and/or members. This conflict between high purchase prices and low turnover is considered particularly important in terms of the overlap between Data Protection and Antitrust Law. Big Data has already become a “core economic asset”, so not only is the digital sector subject to Data Protection Laws but also transactions between parties which own such assets ought to be subject to scrutiny by competition authorities.

This “gap” in competition authorities’ powers to scrutinise the impact of so-called “digital” deals has caused frustration leading to increased demand to find a means to better assess commercial activity within the digital sector.  One such deal was the Facebook/Whatsapp transaction, which was ultimately reviewed by the European Commission (COMP/M. 7217 of 03.10.2014) because of the “one stop shop” rule which allows parties to go straight to the Commission if their transaction qualifies for review under the national competition laws of three Member States (certain of which have market share or share of supply tests in addition to turnover-based thresholds) - but did not qualify for review in other major EU jurisdictions which exclusively utilise turnover-based thresholds.

The new German merger control regime

The new value based threshold proposed by the German Ministry of Economic Affairs has been modelled on the merger control regime in the USA. Under the proposal, section 35 ARC will be supplemented by a new paragraph 1a which provides (as an alternative to the second domestic turnover threshold) a new notification threshold of €350 million, based on the “value” of the transaction. The value is effectively the price that the seller receives from the purchaser as a result of the transaction.  However it is worth noting that, pursuant to a new section 38(4)(a) ARC, this concept will be interpreted broadly to include multiple types of assets (for example contingent considerations or assumed liabilities).  The proposal includes provision, under section 43(a) ARC, for the value threshold to be reviewed and, if necessary, adjusted after three years.

In addition, under section 35(2) ARC, it is proposed to dis-apply the de minimis exemption for transactions that meet the value threshold. The de minimis exemption was introduced to allow for small family owned businesses to be acquired without being subject to compulsory assessment. It applies in case of an acquisition of a target company which is not affiliated to any group of undertakings and whose turnover was less than €10 million in the preceding business year.

In summary, the new provisions require that transactions must be notified to the German Federal Cartel Office (FCO) if:

1. the combined consolidated worldwide turnover of all undertakings involved exceeded EUR 500 million in the preceding business year; AND
2. the German turnover of at least one undertaking involved exceeded EUR 25 million in the preceding business year; AND
3. the German turnover of at least one other undertaking involved exceeded EUR 5 million in the preceding business year;

OR

4. the value of the consideration, received as a result of the transaction, exceeds EUR 350 million; AND
5. at least one other undertaking (besides the undertaking generating EUR 25 million in Germany in its preceding business year) either operates, or is likely to operate in the German market.

Although the new regime is expected to come into effect by the end of the year, its passage has not been entirely smooth. On 25 July 2016, the German Federal Cartel Office published its comments on the draft amendments to the ARC and criticised the draft proposal in so far as it concerned the domestic effect of transactions (point 4 above). The FCO encouraged the legislator to include an explicit provision to capture domestic activities carried out by the target undertaking. Absent this, the FCO suggested that the merger control regime might inadvertently capture cases which were not intended to be subject to the new regime, such as international joint ventures (where the joint venture is not currently active within Germany). The FCO’s comments appear driven by concerns to ensure that the regime does not become burdened by forcing the review of multiple additional transactions where the main focus of the transaction lies outside of Germany.  In addition, the FCO considered that the broad approach to defining “value” may be too uncertain, leading to disruption to the notification process as a result of parties needing to request clarification on whether their transactions are caught.

A blueprint for Europe?

A transaction-value based threshold appears to be on the horizon in the EU as well. The European Commission has confirmed that it plans to reconsider the EU turnover based thresholds in light of the Facebook/Whatsapp transaction by issuing a public consultation.  This followed comments on 3 August 2016, in which the Commission published an “Evaluation Roadmap”  in which it stated that a “purely turnover-based jurisdictional threshold” is perceived to give rise to a “legal gap [that] may not only concern the digital industry, but also other industry sectors, such as pharmaceutical”. Competition Commissioner Vestager has indicated her support for a regime change noting “the value of a merger could be a good guide to its importance”.  However, she also emphasised the need for there to be a well-defined EEA link and for the value threshold to be set at an appropriate level. The consultation asks for views on whether there is a possible enforcement gap under EU merger control noting “A debate has recently emerged on the effectiveness of these purely turnover-based jurisdictional thresholds, specifically on whether they allow to capture all transactions which can potentially have an impact in the internal market.” The German transaction based threshold may well serve as a blueprint for future transaction-value based thresholds in the EU.