In the current evolving world, the transaction value of a merger or acquisition is no longer limited to the turnover value of the target company. Instead, as seen in Facebook’s acquisition of WhatsApp for 19 billion USD, high transactional value does not always correlate with turnover, instead, it can relate to a strong market and substantial innovation potential.
Through early acquirement of an emerging competitor, market-leading companies may fully integrate the emerging competitor into their business portfolio, thus dismantling competition. For antitrust or competition laws that mainly utilise a turnover threshold test to regulate market practice, early acquisition, especially in the technology industry, are often overlooked, since the turnover of the target company does not exceed the threshold test.
As a result, in 2017 Germany and Austria jointly adapted their competition law to address the threshold gap. The German Competition Act (Gesetz gegn Wettbewerbsbeschränkungen, GWB) and Austrian Cartel and Competition Law Amendment Act 2017 (Kartellgesetz, KartG) were amended with the supplement of a transactional value threshold test. Under the new law, M&As shall notify German and/or Austrian authorities should it exceed the turnover threshold and transactional value threshold.
Turnover threshold test
Mergers, acquisitions or establishments of joint ventures (hereto referred to as concentrations) under the following conditions are notifiable in Germany:
- The parties combined worldwide turnover exceeded EUR 500 million
- The domestic German turnover of one party exceeds EUR 25 million
- The domestic German turnover of another party exceeds EUR 5 million
Transaction value threshold test
Concentrations under the following conditions are notifiable in Germany:
- The considerations for concentration exceeds EUR 400 million; and
- The target company has substantial domestic operations in Germany
(The threshold test under the Austrian Cartel and Competition Law was amended under the same effect, though lower threshold amounts are provisioned)
On 14 May 2018, Germany and Austria jointly published Draft Guidelines for general consultation on the amendments to provide further interpretation and clarification on transactional value threshold. Specifically, the Draft Guidelines define the conditions relating to considerations for the concentration and substantial operations.
Value of consideration
Scope of consideration
All assets and other monetary benefits transferred from seller to buyer fall under the value of consideration. These include the following:
- Assets acquired such as cash, securities, company shares, tangible assets and intangible assets of licenses, trademarks, patents
- Non-competition payments
- Future components of which value and payment are contingent upon certain conditions, such as additional payments agreed upon the achievement of turnover, sales, profit or license targets.
- Liabilities
Calculation of consideration
The consideration value is calculated on the date once the transaction is completed. Any payments after the completion shall be calculated at the time of completion by utilising assumptions and discounting methods from the financial sector.
Determination and validation
The parties involved shall check the value of consideration and establish if it is subject to notification. Regardless of whether the consideration is notifiable, any valuation is required to be documented in a transparent manner and verifiable should the authorities require such valuation. If necessary, a valuation report should be undertaken to determine the valuation.
Substantial domestic operations
Domestic German operation is measured by the domestic activity (local nexus) and the target company’s market orientation and significance. The criterion is provisioned to focus on takeovers of companies whose core activities are domestic.
Primarily, local lexus is measured on the basis of indicators other than turnover. Different criteria measures shall be tailored to sectors and activities. For example, in the digital sector monthly active users or access frequency of website can constitute as an indicator.
Domestic operations are required to have market orientation. In other words, the target company in the existing market receives payment for providing services. Additionally, the payment is not limited to monetary; rather the following scope is established:
- A service is remunerated by means other than monetary payment
- A service is offered free of charge, but monetised in a different manner or expected to require payment later or monetised in a different way later
- The activity consists of research and development of (future) products or services
The Draft for Guidelines requires the parties of mergers to be responsible for the value assessment, including the potential filing requirements. In cases the companies are unclear if threshold notification applies; the authorities invite parties to submit a precautionary notification to avoid a later infringement of standstill obligation. Additionally, if the valuation assessment changes from the filling analysis to the completion of the transaction and exceeds the transaction value threshold, it is subject to notification. Although, if the transaction is not reportable ex-post, should it exceed the transactional value after the completion of the transaction. Thus, parties should take caution to last-minute value increases from filling analysis to closing.
Consequently, the amended merger law demonstrates an extended scope of the threshold test. There is an increased focus on the current and future market potential of the target company, as well as the greater analysis of the domestic company operation. With the Guidelines expected to be published later on this year, it shall be interesting to review the effect of international transactions and if other European countries follow suit.
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