Higher Regional court rejects Cartel Office's interpretation of size-of-transaction test (again)

In a recent decision (VI Kart 2/24 [V] and VI Kart 3/24 [V], only German press release available), 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 (FCO). The decision concerned Adobe's $1.68 billion acquisition of commerce platform Magento and its $4.75 billion takeover of Marketo back in 2018.  

The decision 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 turnover thresholds are, in accordance with Sec. 35 (1a) of the Act against Restraints on Competition (ARC), nevertheless subject to merger control by the FCO if:

• the overall value of the purchase price exceeds 400 million euros AND
• the target's operations in Germany are substantial.

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.

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

In 2018, Adobe acquired the commerce platform Magento for $1.68 billion and Marketo for $4.75 billion. Both transactions were reviewed in the US and no competition concerns were found. After the FCO had become aware of the acquisitions in the summer of 2023, it initiated a so-called divestiture proceedings (Entflechtungsverfahren), which it discontinued a little later after a review of the transactions showed that they did not raise competition concerns. At the same time, the FCO adopted a formal decision ordering Adobe to bear the administrative costs of the divestiture proceedings. Adobe challenged the cost decision arguing that the FCO lacked jurisdiction to review the transactions.

Given the targets' low turnover in Germany the essential question was whether the conditions of the transaction value threshold were met, in particular whether the targets were substantially active in Germany. As far as can be seen from the press release, the court denies that for two reasons.

Firstly, the court points to the turnover of the targets in Germany, which was below the relevant turnover threshold (17,5 million euros). The court takes the view that given the maturity of the markets in question the turnover can actually be a valid indicator as to whether substantial activities in Germany exist. In other words: If the target is active in a mature market where turnover is a good indicator for the market position and turnover remains below the relevant standard turnover thresholds there is no room for an application of the transaction value test. In these cases, there is per definition no substantial activity in Germany. Only where turnover is not a reliable indicator for the actual competitive relevance of a target, e.g. in transactions involving pharmaceuticals still in clinical tests or digital companies in the start-up phase, the transaction value test can be used to establish jurisdiction even though turnover is low or non-existent. In these cases, substantial activity in Germany can be demonstrated by relying on other factors than turnover.

As regards the maturity of the market the court holds that the targets were selling software for remuneration for more than ten years prior to the transaction, which in the court's eyes sufficed to assume a mature market.

Secondly, the court takes the view that the FCO could – irrespective of the turnover point – not establish that the target companies had significant domestic activities. Taking into account, among other things, their presence in Germany, the number of their respective employees and customers in Germany, the court took the view that target companies' activities in Germany had not reached the level necessary to assume significant domestic activities.

Outlook

This is the second time after its decision in Meta/Kustomer in 2022 (see here) that the Higher Regional Court of Düsseldorf rejects the FCO's extensive interpretation and application of the transaction value test. The appeal by the FCO in that case is still pending in the Supreme Court. In the case at hand the court didn’t allow the FCO to file a further appeal to the Supreme Court. That means that the court thinks that the legal standard to be applied here is so clear that the Supreme Court does not have to review the case. The FCO will however likely complain to the Supreme Court against the Regional Court's rejection to allow for an appeal and it remains to be seen whether the Supreme Court agrees that the legal standard to be applied is clear.

On substance the main argument invoked by the court – in mature markets turnover below the relevant turnover thresholds excludes (i) substantial domestic activity and hence (ii) an application of the transaction value test – is shared by the FCO in its guidelines. The point of difference seems to be at what stage a market can be viewed as sufficiently mature. It will be interesting to see what criteria the court has applied in this regard once the full decision is published. 

Undertakings with their natural focus on deal security will welcome the court's judgement that opposes an extensive interpretation of the transaction value test by the FCO. Nevertheless M&A parties – in particular in the digital sector – should carefully assess whether they can rely on turnover alone to exclude a filing in Germany or whether they need to take into account the transaction value test.