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06-09-2017Article

Update Antitrust June 2017

Overview of the main reforms under the 9th ARC Amendment - part 2

VI. Extension of the scope of merger control

The 9th ARC Amendment also extends the scope of merger control. This is intended to ensure that the merger control can fulfil its function comprehensively even in an increasingly dynamic economic world, and can keep pace with the ever faster economic cycles, including against the background of the advancing digitisation and interlinking of business and society.

1. Legal prerequisites for the new conditions for actions

Under the newly added subsidiary conditions for actions, the regulations on merger control will in future also be applicable if (1) the undertakings involved have collectively achieved global sales revenues of more than 500 million euros, (2) at least one of the undertakings involved has achieved sales revenues of more than 25 million euros in Germany in the last financial year prior to the merger, but none of the other undertakings involved has achieved sales revenues of more than 5 million euros in Germany, (3) the value of the counter-performance for the merger is more than 400 million euros and (4) the undertaking to be acquired operates in a significant scope in Germany.

a. Value of the counter-performance


A basic prerequisite for the notification requirement under the new conditions for actions is that the merger has a specific dimension. This is measured according to the value of the counter-performance. The role model for this approach is the "size of transaction test" that has been established in the USA since the introduction of its merger control in 1976, and that has proven itself in practice.

b. Significant activity in Germany


The notification requirement concerning the proposed merger under the new conditions for actions is also dependent on significant activities in Germany of the target undertaking to be acquired.  Accordingly, there is a need for a certain noticeability of influencing of a specific market as a result of the merger. However, no high standards are to be placed on the noticeability. By contrast, marginal activities should not result in a notification requirement. With regard to the assessment of the activity in Germany and of the authoritative criteria and factors for this, the lawmaker did not consider statutory fixing or determination of absolute quantitative threshold values to be appropriate; these vary depending on the industry or market maturity.

c. Aim of the new regulation

The reform in the context of the merger control is intended to achieve a situation in which the market potential and the economic importance of the target undertaking are also covered in future. On the basis of this regulation, the Federal Cartel Office can also check mergers in which large, established undertakings wish to create or strengthen their domination through the takeover of young, innovative undertakings (e.g. start-ups) with a high economic value. As recently shown by the acquisition of the instant messenger WhatsApp Inc. by Facebook Inc., the possibility cannot be excluded of foreclosure effects arising in the context of such transactions, market entry barriers being created and innovation potential hindered. This can occur for example if undertakings that are already market leaders integrate up-and-coming competitors completely into their own business at an early stage of their development, change the original activity of the undertaking acquired or even discontinue it completely. The introduction of the new supplementary threshold for actions is intended to enable the Federal Cartel Office to check such effects in advance and to prevent them if necessary.

2. Calculation of the value of the counter-performance


Parallel to this, the 9th ARC Amendment also adds a regulation on calculation of the value of the counter-performance for the purpose of the new conditions for actions.  Under this regulation, the counter-performance comprises "all assets and other services in money's worth, received by the seller from the acquiring party in connection with the merger […] (selling price), plus the value of any liabilities assumed by the acquiring party”.

a. Term "assets"

The intention of the lawmaker is a broad interpretation of the term "assets". It includes all monetary payments, the transfer of voting rights, securities, property, plant and equipment as well as intangible assets. It is also intended to cover counter-performances that are linked to the occurrence of specific conditions, as contained in so-called "earn out" clauses, as well as agreed additional payments to the seller in the event of specific sales or profit targets being achieved at a future date. Payments for any agreed renunciation of competition by the seller should also be added.

b. Consideration of liabilities

Additionally, the lawmaker has expressly stated that the counter-performance also includes the value of the liabilities assumed by the acquiring party.  The release from debt has a positive value particularly for the seller, and must therefore logically be taken into account when assessing the value of the counter-performance. The idea is thus to cover in particular those cases in which the seller effectively receives a reduced selling price.

c. Valuation method

The valuation method applied by the undertaking notifying the merger is fundamentally left to that undertaking. The only requirement is that the method must be recognised for valuation for continuation of the undertaking acquired. Nevertheless, valuation on the basis of liquidation values is not permitted. According to the intention of the lawmaker, the level of the selling price, calculated on the basis of a corresponding valuation and contractually agreed by the merger parties, including any liabilities assumed, should normally trigger a presumption of correctness for the valuation. As a rule, there is no need for additional attestations, for example by an auditor.

d. Aim of the new regulation

The aim of the new regulation is to calculate the overall amount that the acquiring party is prepared to pay for the takeover of the undertaking to be acquired. This reflects the economic importance that it attaches to the influence over the undertaking, the possibility to dispose of its assets, resources, business ideas or models as well as patents.

3. Reforms concerning formal requirements on notification

In the event of a merger under the new conditions for actions and within the framework of notification of the intention, the Federal Cartel Office must, in addition to the information previously required, now also be informed of the value of the counter-performance for the merger, including the bases for its calculation, together with additional information on the nature and scope of the activities in Germany.

4. Evaluation of the new regulation

In practice, the very high requirements will mean that the new conditions for actions will have effects in a very manageable scope only. However, whether this covers those particular cases that the lawmaker had in mind when making this amendment, will become clear after three years in the context of the evaluation envisaged by law.

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