In a recently published judgment, the Higher General Court of Düsseldorf has objected to the interpretation of the transaction value threshold under the German merger control regime by the Federal Cartel Office (Judgment of 23 November 2022 – Kart 11/21 (V)).
The judgment provides helpful guidance on the notification requirement under German merger control in scenarios where the purchase price is high but the target’s link to Germany is weak.
Background
Since 2017, mergers involving the acquisition of a target with turnover in Germany below the standard thresholds are, in accordance with Sec. 35 (1a) of the Act against Restraints on Competition (ARC), nevertheless subject to merger control(1) by the Federal Cartel Office (FCO) if:
- the overall value of the purchase price exceeds 400 million euros AND
- the target’s operations in Germany are substantial
The main aim of the transaction value threshold is to capture so called “killer acquisitions”, i.e. those cases in which incumbents acquire young, innovative companies with a high economic value, in particular in the digital and pharmaceutical sector.
The FCO has issued a guidance paper (available only in German) on the application of the transaction value threshold. Still, parties are often confronted with uncertainties, in particular when determining whether or not the target’s operations in Germany are “substantial” within the meaning of the law. With its recent decision, the Higher Regional Court of Düsseldorf clarifies some aspects of the transaction value test.
Facts of the case
After Meta had announced its intention to acquire Kustomer, the FCO adopted a formal decision determining that the transaction was notifiable in Germany and required Meta to submit a filing. Kustomer is active in the software market for customer service and support customer relationship management (CRM). Such software applications are used by businesses for engaging with their customers by answering questions, solving problems and giving advice in the context of the business-customer relationship. Kustomer essentially operates a licensing model under which it licenses its software to businesses who then integrate the CRM software into their communication channels with their end-customers. Additionally, Kustomer handles the data processing operations for its clients.
In parallel the concentration was also examined by the EU Commission after the case had been referred to it by the Austrian competition authority. The EU Commission cleared the deal in Phase 2 subject to commitments (see here). The FCO decided not to join the referral and assessed the transaction under the German merger control regime. Ultimately, the FCO cleared the transaction in Phase 1 taking into account the remedies that had been required by the EU Commission (see here).
The FCO’s position on jurisdiction
The FCO required notification of the transaction on the basis that Kustomer had “substantial” operations in Germany:
- the FCO recognised that the number of Kustomer’s direct customers in Germany (i.e. licensees) was very low and was in itself not sufficient to assume substantial operations in Germany;
- however, the FCO took the view that the domestic relevance of the services Kustomer provides is not only evident from the number of direct customers based in Germany, but also from the number of data sets of German end-consumers processed by Kustomer on behalf of its direct customers. Following a survey the FCO found that Kustomer managed data sets of a substantial amount of German end-consumers, which in its view was sufficient to assume that Kustomer had substantial operations in Germany.
The Appeal: The Higher Regional Court’s judgment
For procedural reasons, the Higher Regional Court only had to decide whether the FCO had rightly charged the administrative fee for its decision requiring Meta to notify the transaction for merger clearance in Germany. However, it used this opportunity to fundamentally reject the FCO’s approach to the transaction value test and annulled Meta’s fee.
The Court held that the FCO’s approach focussing on the location of end-consumers whose data sets were administered through Kustomer’s software was flawed:
- the Court took the view that an activity is performed at the place where an undertaking participates in the market. In the case of a service provider, this is the place where the customers or users are located. The Court held that this position is in line with the general principles of German and EU merger control rules and is also explicitly acknowledged in the FCO’s guidelines. Accordingly, it was only relevant how many of Kustomer’s direct customers (i.e. licensees) were located in Germany, while the number of German end-consumers whose data sets were processed through Kustomer’s software was irrelevant. Given that Kustomer only had a very limited number of licensees in Germany its domestic operations were not substantial;
- the Court views the FCO’s approach as incompatible with the wording of Sec. 35 (1a) ARC, which requires that the target has to have substantial operations in Germany. It is therefore not sufficient for the transaction to have some sort of effect in Germany, instead the relevant activities of the target itself have to be domestic;
- the Court acknowledges that the processing of end-user data is also part of Kustomer’s market-related activities: the use of the target’s services presupposes that the data of the end-consumers are processed by the target. However, only the licensees are Kustomers’ direct customers and make the decision as to whether they use the data processing services, which in turn is decisive for Kustomer’s success in competition with other providers and is therefore the only factor of significance.
In addition, the Court calls into question whether it was appropriate to apply the value of transaction test in this case, given that the CRM market was already developed and mature. The Court also wonders whether in such a scenario it would not be more appropriate to simply apply the usual turnover threshold of 17,5 million euros to determine a notification obligation. However, the judgment ultimately leaves this question open.
Outlook
The Court is obviously – and rightly so – driven by a concern that the FCO’s approach may lead to an unduly wide application of the value of transaction test.
If it is sufficient for German consumers to be indirectly impacted, even the acquisition of targets with only a very remote link with competition in Germany could be caught. It will often be unclear to the acquirer whether the target’s activities might indirectly impact German consumers somewhere down the value chain. This is particularly the case for targets with activities in globally connected markets like the digital sector. The Court counters this with the view that – in light of the significant consequences – an obligation to notify must be clear and obvious to the undertakings concerned.
Practical experience shows that the FCO’s “offer” to give its view on a notification requirement in informal guidance discussions with the parties is not a realistic solution. The dynamics and speed of the transaction process often do not allow parties to engage in informal discussions. Such informal discussions do not trigger any deadlines and put at risk transaction certainty. The Court therefore convincingly rejects this argument.
The FCO has appealed the Higher Regional Court’s decision. It remains to be seen whether the Supreme Court will agree with the Düsseldorf Court’s emphasis on a practicable and predictable interpretation of the transaction value test.
For further information, please contact:
Marcel Nuys, Partner, Herbert Smith Freehills
marcel.nuys@hsf.com
- Additionally, the acquirer has to achieve a turnover of more than 50 million euros and the combined worldwide turnover of acquirer and target has to exceed 500 million euros.
