Even if the traditional turnover-based thresholds are not met, in certain circumstances a transaction may be notifiable if (a) the consideration exceeds €400 million in Germany or €200 million in Austria and (b) the target has significant current activities in Germany or Austria respectively. The guidelines aim, inter alia, to clarify the scope of the new transaction value thresholds. This article mainly focuses on the transaction value test in Germany.
| What you need to know - key takeaways |
- Since 2017, certain mergers have qualified for competition review in Germany and Austria based on the value of the transaction, in circumstances in which the traditional turnover thresholds are not met.
- In Germany, the primary purpose of introducing a transaction value test was to provide the FCO with the ability to investigate mergers concerning target companies with modest turnover, but which may nevertheless have a significant impact on competition. In particular, the focus was on certain digital and innovative sectors, such as the pharmaceutical sector.
- The guidance clarifies that the transaction value test is only applicable in Germany in cases where (a) the target's German turnover is below €5 million and (b) the target has substantial current activities in Germany.
- The target will not be considered to have substantial current activities in Germany in circumstances in which its turnover in Germany to date reflects its market position and competitive potential in Germany.
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In view of the interconnectedness of Austria's and Germany's economies and similarities in their merger notification tests, the FCO and AFCA have decided to publish joint guidance on the new transaction value tests applied in their respective jurisdictions since 2017.
In each of Germany and Austria, there are two limbs to the transaction value test. First, the transaction value must exceed a prescribed threshold: €400 million in Germany and €200 million in Austria. Second, the target company must have substantial domestic activities. However, following the introduction of this new test in each of Germany and Austria, there has been a lack of clarity in respect of the application of that test. This article focuses on the application of the test in Germany.
Determination of the transaction value
For the purposes of the tests, relevant consideration comprises all assets and other monetary benefits that the seller will receive from the buyer in connection with the transaction, including all cash payments, voting rights, securities and tangible and intangible assets. It also covers any future payments, such as earn-out-clauses or payments which are conditional upon reaching certain turnover or profit targets (including outside Germany), payments for non-competition obligations by the seller, as well as assumed liabilities of the target or the seller (limited to interest bearing parts thereof).
Current substantial domestic activities
In Germany, not all transactions that exceed the transaction value threshold must be notified. In particular, the notification obligation will only arise where (a) the transaction value threshold is exceeded, (b) the target did not achieve a turnover of more than €5 million in Germany, and (c) the target has substantial current activities in Germany.
The meaning of the concept of "substantial domestic activities" has been a significant source of debate. However, the guidance clarifies that the new transaction value threshold should not be interpreted extensively such that the notification obligation would arise in all cases where the relevant consideration threshold is exceeded and the target's turnover in Germany is below €5 million. The crucial question is whether the turnover generated by the target to date in Germany reflects its economic and competitive potential in Germany.
As a rule of thumb, in the following situations - by way of example - it is likely that the FCO will consider that the turnover does adequately reflect the market position in Germany:
- if the target has generated insignificant domestic turnover (i.e. under €5 million) for a sustained period;
- if the target generates significant turnover abroad but not in Germany, for instance, because the target has not (yet) established a (proper) sales structure in Germany.
The situation is, however, different when the target's turnover is not an adequate indicator, for instance, because the company is active on a market that is not characterised by turnover or because its product has only recently come onto the market such that the low turnover that it has generated to date does not reflect its real economic and competitive potential. In such cases, other indicators of the extent of the target's current domestic activities may be relevant, with the particular indicators depending on the sector in which the target is active (e.g. number of "monthly active users" or the number of "unique visitors" to a website).
The guidelines have been created in light of the FCO's and the AFCA's initial experience of dealing with notifications made pursuant to the new thresholds and have been developed following discussions with practitioners and a public consultation process. The FCO and the AFCA have emphasised that, in the absence of sufficient case practice, it cannot yet model every possible scenario where the obligation to notify a transaction pursuant to the transaction value threshold would arise and that thus the guidelines should be regarded as preliminary.
There are sound reasons for the new transaction value threshold not being interpreted too extensively by the FCO. In particular, we note that the German Act against Restraints of Competition already provides that the transaction value test is not applicable in cases where the target achieved a turnover of more than €5 million in Germany in the last business year.
