"Acqui-hires" in the digital sector – a new playground for the German Federal Cartel Office?

For some time now, the Federal Cartel Office (FCO) had been examining whether the takeover of almost all employees of Inflection AI by Microsoft in March of this year was subject to the German merger control rules. While the FCO concluded on 29 November 2024 that the takeover was not notifiable in Germany, the authority's decision is interesting and could have substantial impact on the takeover of employees in the digital sector going forward. In particular, the FCO held that the hiring of key staff in itself could, in principle, constitute a notifiable concentration. Potential legislative changes in 2025 might strengthen the FCO's reach further.

Background: Less traditional types of transactions in the AI sector

Competition authorities around the world are grappling with "less traditional" types of transactions in the digital sector, in particular in the evolving field of AI. Recent examples include the scrutiny of partnerships between AI startups and tech giants in the UK. The CMA concluded it did not have jurisdiction over Alphabet's investment in Anthropic, Microsoft's investment in Mistral AI and Amazon's investment in Anthropic. It decided that it did have jurisdiction over Microsoft's hiring of Inflection employees, but ultimately found that the transaction did not give rise to a realistic prospect of a substantial lessening of competition. A decision on whether to investigate Microsoft's investment in Open AI is still pending (see our detailed briefing on AI partnerships and merger control rules here).

The FCO also investigated Microsoft's investment into Open AI, but ultimately concluded that it did not have jurisdiction, as, at the time of the relevant initial investment, Open AI's activities in Germany were not substantial enough to be caught by the German size of transaction test (see here).

In general, the German authority is very alert to transactional and investment activity by big tech in the AI sector. It has identified artificial intelligence as a key technology and is very mindful of the risk of "large internet companies further consolidating their positions of power" (see here).

In that regard, it is important to note that the German Act against Restraints of Competition (ARC) puts the FCO in a good position to capture a variety of "less traditional" transactions that are not subject to review in other jurisdictions, in particular not under the EU Merger Control Rules:

• The notion of a notifiable concentration is much broader and covers transactions below the threshold of control (acquisition of 25% of shares, acquisition of competitively significant influence).
• The "size of transaction" test allows the FCO to look into acquisition of targets with little turnover in Germany, as long as the (i) target has "substantial operations" in Germany and (ii) the consideration for the acquisition exceeds EUR 400 million.

Indeed, the takeover of almost all employees of Inflection AI by Microsoft was investigated by the FCO under the "size of transaction" test.

The Microsoft/Inflection AI case

On 19 March 2024, Microsoft announced the hiring of the two co-founders of Inflection AI, assigned with the task of advancing "Copilot" and other consumer artificial intelligence products and research at Microsoft. In addition to the hiring of these two co-founders, Microsoft made employment offers to most of Inflection's staff and agreed, amongst others, on a non-exclusive license for Inflection's intellectual property and, according to reports, on a waiver of any legal rights by Inflection for hiring the latter's staff.

After the EU Commission, in the aftermath of the CJEU's ruling in Illumina/Grail, (see our summary here) announced not to review the transaction (see here), the FCO started to investigate whether the "acqui-hire" was notifiable in Germany.

Based on the press release (see here), the starting point of the FCO's analysis was that the deal ultimately transferred the competitive potential of Inflection AI to Microsoft and thereby qualified as a concentration under the ARC. This conclusion was apparently based on the takeover of the workforce and the terms governing the use of Inflection’s key intellectual property rights by Microsoft. In that regard, it remains to be seen whether a "naked acqui-hire", i.e. transfer of key personnel only, would be sufficient to qualify as a concentration or whether the transfer of IP rights is critical as well. The FCO also leaves open whether it is necessary that personnel switches directly to the new employer to constitute a concentration or whether this could also apply to circumstances in which key employees leave their current position become unemployed but start with the "acquirer" a few months later.

Even though the FCO concluded that the "acqui-hire" constituted a concentration, it ultimately decided that it did not have jurisdiction, as the turnover thresholds for reviewing the transaction were not met by Inflection AI. Therefore, the transaction could only have been subject to merger control in Germany under the size of transaction test. The test did not apply in this case, as Inflection AI did not have substantial operations in Germany, and the FCO deemed the number of Pi chatbot users in Germany to be too low.

Future developments: Legislative reform

The next reform of the ARC is scheduled for 2025 although the new election looming in February 2025 might put this into question. Nevertheless, the FCO's president Andreas Mundt has already indicated that his agency believes that changes to the size of transaction test are necessary, including a potential lowering of the relevant transaction value from EUR 400 to 300 million. Mundt has also flagged that it is difficult to determine whether a target has "substantial" operations in Germany and that focussing on the current status of the activity rather than taking into account future developments might be outdated. 

It also remains to be seen how strictly the courts will interpret the criterion of "substantial operation" in Germany under the size of transaction test. In Meta/Kustomer, the Higher Regional Court of Düsseldorf has been quite restrictive, thereby to some extent limiting the FCO's ability to look at transactions with a remote connection to Germany (see our summary here).