The German Competition Digitisation Act: Good news for M&A activity, challenges ahead for big tech companies and digital platforms
On 19 January 2021, a major amendment to the German Act Against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen, "GWB") – the so-called "GWB Digitisation Act – entered into force. The amendment pursues two major objectives: to create a regulatory framework for competition in the digital economy and to implement the ECN+ Directive into national law. The key changes concern various areas of competition law, i.e. merger control, abuse of dominance – in particular in the context of the digital economy, cartel prosecution and horizontal cooperation.
Overall, the amendment will result in fewer transactions being notifiable to the German Federal Cartel Office ("FCO"), implements far-reaching powers for the FCO against big tech companies and digital platforms by modernising the abuse of dominance provisions, introduces a formal procedure for companies to obtain a decision from the FCO on the legality of envisaged cooperation with competitors within six months (and thus more legal certainty) and extends the FCO's investigative powers in the area of cartel prosecution. However, whether and to what extent compliance efforts may now be considered as a mitigating factor, even though explicitly addressed in the amendment, remains unclear.
Merger Control – Decreased jurisdiction of the FCO through a significant increase in domestic turnover thresholds?
The amendment includes far-reaching changes to the German merger control regime. As a consequence of a significant increase in the domestic turnover thresholds, far fewer transactions will be subject to German merger control in the future. Although the original draft bill had proposed an increase in domestic turnover thresholds, the competent parliamentary committee made last-minute changes by further increasing those thresholds. The increased domestic turnover thresholds aim to reduce the workload of the FCO in mergers cases by up to a third in order to free up resources to address the market power of leading companies in the digital markets, or other critical cases.
As a result, transactions will only be subject to German merger control and require a merger control notification to the FCO if they meet the following three cumulative thresholds:
- the combined worldwide turnover of all participating companies exceeds EUR 500 million;
- at least one participating company has a German turnover exceeding EUR 50 million; and
- (a) at least one further participating company has a German turnover exceeding EUR 17.5 million; or
(b) the transaction value amounts to more than EUR 400 million and the target has significant activities in Germany, but achieves a German turnover below EUR 17.5 million and – as an unwritten requirement – the turnover of the target does not reflect adequately its market position and competitive potential (for further information on the transaction value test, see Ashurst's Newsletter of August 2018).
Having reviewed approximately 1,200-1,400 notifications per year in recent years, the majority of which raise little or no competition concern and/or have limited impact on competition in Germany, the FCO sees the new thresholds as a means to focus on the cases that are most relevant to competition.
We expect the amendment to reduce the number of German merger control filings by a third. Acquisitions of small German companies and acquisitions of foreign companies with limited exports to Germany will benefit most. In contrast, establishments of joint ventures and co-investments that are reportable today will typically continue to be notifiable. This is because a typical parent company or co-investor (together with its company group) is larger than a typical target company.
Apart from the increase in the domestic thresholds, the German merger control regime remains widely unchanged. Only the threshold for the so-called "de-minimis exemption", according to which the FCO may not prohibit mergers if they affect "de-minimis markets" that have existed for at least five years, is increased from a market size of EUR 15 million to EUR 20 million. However, the law clarifies that in order to benefit from the de-minimis exemption, the combined size of all relevant de-minimis markets concerned by the concentration must be below that threshold.
In addition, as a reaction to a merger in the German waste management sector involving a number of acquisitions of very small competitors that did not meet the turnover thresholds, the amendment introduces a new filing requirement. A filing may be ordered by the FCO, even if an acquisition meets neither the turnover thresholds nor the transaction value threshold, if there are indications that competition will be significantly impeded by future transactions in the industry sector concerned. However, the FCO may use this new merger control tool only: (i) after conducting a sector investigation; (ii) if it concerns an acquisition of companies that achieved a turnover of more than EUR 2 million in the last business year; (iii) of which more than two thirds was in Germany; and (iv) if the parties have a 15% share of domestic supply (or demand on the buyer side). It remains to be seen if the FCO will be in time to intervene when large companies start buying smaller rivals and market structures change, if it must first conduct a sector enquiry.
As regards special rules for specific sectors, certain hospital mergers will be exempted from merger control requirements until at least 2027 and the turnover multiplier applicable to the print media sector will be reduced from eight to four.
From a procedural point of view, the duration of the Phase II merger control review period is extended by one month to a total of five months (one month for Phase I, plus four months for Phase II).
Abuse of dominance - important changes for the protection of competition in the digital economy
Another central focus of the amendment concerns the modernisation of the abuse of dominance rules.
The "classical" abuse of dominance rules enforced by competition authorities are primarily aimed at stopping or sanctioning abusive behaviour by companies with market power after the abuse has already taken place. However, it is widely considered that the rate of development of the digital economy and the rapid growth of the large platforms make it necessary for the FCO to be able to intervene more quickly and more effectively. The amendment therefore enables the FCO to intervene pre-emptively to prohibit certain conduct by "big tech" and digital platforms at an earlier stage. In this regard, the German legislature is an international pioneer and hopes to curb the market power of the big tech companies and digital platforms with such tools. Similar instruments are also being discussed at European level.
The most significant change to the rules on abuse of dominance is perhaps the newly introduced section 19a of the GWB. For the first time, it enables the FCO to intervene at an early stage when competition is threatened by certain large digital groups. The FCO can pre-emptively prohibit certain conduct by companies which, due to their strategic position and resources, are of overwhelming importance for competition across markets (so-called "super-dominant companies"). Examples of the types of conduct in which the FCO can intervene include, inter alia:
- granting preference to a company's own offerings over its competitors ("self-preferencing");
- hindering third parties in their business activities on procurement or sales markets if the company's activities are important for access to these markets;
- using competitively sensitive data collected by the company to create or appreciably raise barriers to market entry;
- impeding the interoperability of products or services or the portability of data
The effectiveness of these new tools is underpinned by a newly introduced, and hotly debated, shortened judicial review procedure. Disputes and appeals arising out of the FCO's use of its new tools will be directly decided by the German Federal Court of Justice, which is thus the first and last instance court in those matters. The purpose of this shortened judicial review, thereby skipping the previous first instance of the Higher Regional Court of Düsseldorf, is to avoid lengthy court proceedings and to save time, given that the markets concerned are quickly developing and changing. It remains to be seen whether this new judicial review procedure will be challenged, as some observers argue that it may infringe constitutional law.
The amendment also expands some of the "classical" abuse of dominance provisions to include internet-specific criteria. When measuring market power, the law provides that access to competition-relevant data and the question of whether a platform has so-called intermediation power are to be taken into account. A strong position in the intermediation of services can establish a relationship of dependency that is relevant under competition law.
In addition, protections against companies with relative or superior market power have been broadened. The amendment provides that any company (and not just small and medium-sized enterprises, as previously) is protected against a market participant on which it depends. Another important innovation is that the FCO can, under certain conditions, order that data access be granted for an appropriate fee in favour of dependent companies. Finally, the amendment introduces a right of intervention for the FCO against the so-called "tipping" of markets (i.e. the transformation of a market with several suppliers into a monopolistic or highly concentrated market). This new intervention right applies to companies with superior market power, i.e. it is not necessary to establish that the company concerned holds a dominant position in that market.
Cooperation between competitors – guidance for companies
Cooperation between competitors is becoming increasingly important in many sectors, in part, due to the digital transformation. The FCO is generally open for discussion and has already handled a number of requests for immediate guidance on the legality of cooperation between companies in the context of the COVID-19 crisis. However, going forward, the amendment enables companies to formally ask the FCO for a decision within six months on the legality of envisaged cooperation with a competitor, if the companies have a substantial legal and economic interest in such a decision. This should provide greater legal certainty to companies planning to cooperate with competitors, compared with having to rely on self-assessment only.
Cartel prosecution, implementation of the ECN+ Directive and recognition of compliance efforts in the assessment of cartel fines?
The amendment also implements the ECN+ Directive into German law and hereby strengthen the effectiveness of cartel prosecution. Through the implementation of the ECN+ Directive, the investigative powers of the competition authorities are extended.
In particular, in alignment with the system that exists at EU level, companies and their employees will in future be obliged to cooperate with competition law investigations, in particular, by providing information or evidence (in response to requests for information). As under European law, searches of premises are now subject to a duty to cooperate, with fines in case of non-compliance. In certain cases, natural persons may be obliged to provide incriminating information, but that information may not be used against them in criminal or administrative offence proceedings.
In determining the amount of the fine, the amendment specifies – as has been partly established by existing case law – that, in addition to the gravity of the infringement and its duration, the following circumstances must be taken into account: (i) the nature and extent of the infringement, in particular the proportion of turnover directly or indirectly related to the infringement; (ii) the importance of the products and services affected by the infringement; (iii) the manner in which the infringement was carried out; (iv) previous infringements by the undertaking, as well as adequate and effective precautions taken prior to the infringement to prevent and detect infringements; and (v) the company's efforts to detect the infringement and to compensate the damage, as well as precautions taken after the infringement to prevent and detect infringements.
The two latter aspects under (iv) and (v) constitute, at least at a first glance, a change in the assessment of companies' compliance efforts. While previously the FCO has strictly refused to recognise compliance efforts as a mitigating factor for the calculation of a cartel fine, Section 81d (1) sentence 2 no. 4 GWB, explicitly states that “reasonable and effective precautions taken in advance to avoid and detect infringements” can be considered as mitigating circumstances in the future assessment of fines. While this clarification is a welcome recognition of companies' compliance efforts and an overdue alignment with the legal approach to corporate crimes in Germany, it remains to be seen the extent to which the FCO's enforcement practice will change. As the FCO has previously declined to give credit for compliance measures based on the argument that the cartel infringement proves their lack of effectiveness, it is now likely to consider measures to be effective only if they lead to the detection and reporting of the infringement. However in circumstances where the infringement has been detected and reported to the FCO by a company, this new mitigating factor is unlikely to be relevant because the reporting company would already benefit from a reduction of the fine to zero as the first applicant for leniency under Section 81k GWB. It remains to be seen whether and the extent to which there may be room for companies to "fight" for the recognition of their compliance efforts.
Finally, the leniency programme has now been enshrined and codified in law.
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