Updates to merger regulation involving medium-sized privately owned businesses

published on 8 June 2020 | reading time approx. 3 minutes

The aim of the draft “Tenth Law amending the Law against restrictions in competition to achieve a focused, proactive and digital Competition Act 4.0 (GWB Digitalisation Act)”, is to modernise competition regulation in order to keep up with the increasing digitalisation of the economy. At the same time, it also implements EU Directive (EU) 2019/1. The implementation of European competition law is intended to align standards in the member states and facilitate Europe-wide collaboration between authorities. The law was initially intended to take effect in 2020; however, the impact of the Covid-19 crisis could mean delays.

Goal of updating the legislation

The goal of updating the legislation is to “create an organisational framework that meets the requirements for digitalising and globalising business.”

Substantial amendments include the modernisation of the control of abusive practices, acceleration of procedures, an increase in the second domestic turnover threshold, and the further development of the legal framework for compensation for cartel damages.

In addition, the draft law revised formal merger control regulations “in order to structure these more effectively and to enable the Federal Cartel Office to focus on the mergers most relevant to maintaining competition”. The draft emphasises that the German merger regulatory system is generally a well-functioning instrument of preventive competition policy, but in practice, there is still a need to improve some individual aspects.

Significant changes in the area of merger regulation

One significant change in the area of merger control regulations is the increase in the second domestic turnover threshold from EUR 5 million to EUR 10 million. Mergers of minor economic significance will therefore no longer be subject to any vetting. This is intended to reduce the number of merger notifications by about 20 percent. The increase in the threshold should also help to reduce the burden on companies, in particular medium-sized private ones. The legal justification claims that the existing domestic turnover threshold, particularly in the case of medium-sized private companies, tends to impose notification for mergers of low economic value, leading to a delay in these transactions.

Logically, one consequence is the elimination of what is referred to as the connection clause in Section 35 (2) sentence 1 GWB, which previously exempted mergers with small companies from merger controls if, despite breaking the turnover threshold, the combined turnover of the target company and vendor jointly earned otherwise was below EUR 10 million globally in the last full financial year.

In addition, the so-called insignificant market clause in Section 36 (1) no. 2 GWB (Compe-tition Law) is to be amended. Under the present legal situation, this ensures that mergers are not prohibited even if the conditions for a prohibition are indeed present but the total turnover in the relevant market was less than EUR 15 million in the previous calendar year. The threshold is likely to be increased to EUR 20 million. In addition, a group of related (insignificant) markets should be able to be considered. Medium-sized private companies are more likely to be active as dominant players in insignificant markets. The legislator would therefore like to prevent mergers being prohibited for competition considerations in an overall economically insignificant market.

In its stated objectives, the amendment to the law clearly emphasises that “special grounds for intervention with regard to the systematic purchase of fast-growing companies by “digital companies with a strong market position” are not considered necessary, but are providing a new tool for intervention. Among other things, under the new Section 39a (1) GWB, the Federal Cartel Office is expected to be allowed to intervene even when the intervention thresholds valid at the time have not been reached. A corresponding provision is expected to set a period of three years during which companies in a list of economic sectors yet to be named, can also be requested to report any mergers where the target companies have sales below the applicable domestic turnover threshold and where there are indications that domestic competition could be restricted by future mergers in the economic sectors specified.

The background is to avoid the risk of major companies and/or groups becoming dominant at the expense of medium-sized companies. Through acquisition strategies, competitively problematic concentrations can be created, particularly in regional markets if mergers are exempted from merger controls. The reason for this is that the turnover of the target company lies beneath the second domestic turnover threshold (in the future EUR 10 million). Companies that are already market leaders could buy up small competitors and also potentially dangerous newcomers without being subject to a merger control review by the Federal Cartel Office.

The Federal Cartel Office can only require companies that have achieved a global turnover of at least EUR 250 million in the last financial year to notify such mergers. This refers solely to the turnover of the purchaser.

In this context, a critical note is that such provisions to register future mergers, with the associated de facto lowering of intervention thresholds are not per se exactly helpful to the medium sized private companies concerned. Rather, in their practical application, it will be necessary to ensure that no additional burden is created on medium-sized private companies, e.g. if these provisions apply primarily in the markets of medium-sized private companies. Here, we must hope that the provisions are applied with a light touch and a scope that is appropriate for medium-sized private companies.

The requirement to notify the publication of completion is to be deleted in the new version of Section 39(6) GWB. Under the existing Section 39 (6) GWB, the completion of a registered merger has to be reported to the Federal Cartel Office. To reduce the burden on both the Federal Cartel Office and the company, there will be no duty to notify completion.

Finally, the existing set of deadlines for Section 40 (2) GWB for carrying out a full audit procedure is to be extended from four to five months. In return, in order to ensure a rapid merger control procedure, the option to extend the deadline with the agreement of the companies making the notification has been restricted.

Conclusion

The update to the legislation further strengthens the powers of the Federal Cartel Office. It is intended to enable rapid and effective intervention, especially in markets in the digital economy. By doubling the current second domestic turnover threshold, low by international standards, the Federal Cartel Office should be able to focus better on mergers that are relevant for competition. The number of transactions that medium-sized private companies have to notify should fall. Overall, we need to wait and see to what extent the reduction in the burden on medium-sized private companies intended by the changes in the law actually materialises. In particular, the new instrument of provisions for the notification of future mergers should be critically monitored.