In many legal systems, such as Germany and other EU member states, transactions are subject to merger control if at least two criteria are met:
In this Legal Update, we would like to address a question that is rarely discussed in detail: Which companies or shareholdings (on the side of the undertakings concerned) are exactly relevant when it comes to the determination of the respective relevant turnover thresholds (keyword: group concept)? If, for example, the acquirer controls a wholly-owned subsidiary that generates substantial turnover, it goes without saying that this company needs to be included in the assessment of whether the acquirer meets the relevant turnover thresholds. However, the assessment can be rather complex in case of minority shareholdings or in other special situation, like fund structures. This is precisely what we intend to address.
A holds two participations, T1 (with 100 % of the shares) and T2 (with an unknown share amount). While A and T1 each generated only approx. € 1 million in net sales, T2 generated sales of approx. € 600 million net worldwide in its last fiscal year, of which € 230 million were generated in Germany.
T1 intends to buy all the shares and thus sole control of Z, which generated net sales of approx. €14 million in Germany.
If the operation is assessed under German merger control law, the following rules apply: Participants (within the sense of Art. 35 (1) ARC) are therefore T 1 (including its affiliated companies, Art. 36 (2) ARC, 17, 18 AktG) and Z. To meet the German thresholds (and to trigger German merger control laws at all), it is decisive whether T2’s sales are to be taken into account.
Each legal system autonomously defines the criteria that it deems relevant for the merger notification obligations, even if the concepts may be quite similar in wording. The same applies for the question of group membership, which is the central topic of this legal update.
Below, we discuss the criteria for group membership both under European merger control law (Section 1.), German merger control law (Section 2.), Austrian merger control law (Section 3) and elaborate on some special situations (Section 4.).
Within the scope of the Merger Regulation ((EC) No 130/2004 of 20 January 2004, EUMR) or the Consolidated Notice on juris-dictional issues (2009/C 43/09) (KM), only those transactions are considered relevant which result in a „permanent change of control“, Art. 3 (1) EUMR. All circumstances must be taken into account that allow to „exert a decisive influence on a company‘s activities“, Art. 3 (2) EUMR. According to the KM, it is sufficient that the buyer may have a right of veto over a strategic decisions, so-called „negative control“ (KM, para. 18, 54). Once several shareholders are able to block such actions, they exercise joint control (KM, para. 62). Strategic decisions are, for example, those relating to the budget or the appointment of company management (KM, para. 67).
Thus, the concept of control is very broad; control can be acquired on both a legal and a purely factual basis.
A currently holds all the shares in T1. In their last business year, the companies generated net sales of approx. € 6 billion worldwide, of which approx. € 220 million was generated within the EU.
A intends to slightly expand a currently existing minority stake in T2. After the planned changes to the articles of association, A would be given the right to block decisions on the budget and the appointment of senior management. T2 generated a turnover of approx. € 260 million in the EU.
Assessment: This transaction would qualify as an acquisition of negative control by A over T2 under the EUMR. However, there is (probably) no need to notify the transaction (under Art. 1 (2) EUMR), since the turnover thresholds are not met (elaborated below in more detail).
The EU Commission is responsible for the assessment of mergers that are of community-wide dimension. This is the case, inter alia, if (i) the combined aggregate turnover of all the undertakings concerned exceeds €5 billion and (ii) the aggregate community-wide turnover of at least two of the undertakings concerned is more than €250 million, Art. 1 (2) EUMR.
In order to reach the thresholds mentioned above, not only the turnover generated by the undertaking that directly participates itself (so-called “undertakings concerned), but also the turnover of undertakings with which the participating undertaking are “connected” or “affiliated” by means of the rights described in Art. 5 (4) EUMR, are relevant.
More specifically, the turnover of an undertaking must be taken into account if this undertaking
Based on the underlying articles of association, the existence of the criteria (i) and (ii) is easily established. However, this is more difficult when it comes to the rather vague criterion of the „right to manage the undertakings’ affairs“ (iii). According to the KM, such a management right arises, in particular, based on organizational contracts, like domination contracts, operating leases or based on the specific organizational structure at hand, such as the general partner in a GmbH or voting rights.
As a general rule, the Commission bases its assessment of which companies should be viewed as one “group”, on criteria similar to those used for assessing control (see above). However, it emphasises, that the two terms are not identical. The EUMR (deliberately) applies different criteria: While the creation of economic dependence may, in fact, result in the acquisition of control (under Art. 3 (2) EUMR), this does not automatically mean that a „controlled“ entity will (later on) also be relevant for the assessment of the turnover thresholds (under Art. 5 (4) EUMR).
The latter is only the case if the (additional) criteria mentioned above are met. In particular, negative control (i.e. the right to merely block strategic decisions) is only subject to Art. 5 (4) EUMR if the conditions under Art. 5 (4) lit. b i to iii are fulfilled (additionally), for example, if a company is entitled to appoint more than half of the senior management.
See Example 1a). Upon completion of this transaction, A intends to acquire 100% of the shares of Z, which generated approx. € 500 sales in the EU
Assessment: While the transaction qualifies as an acquisition of control by A over Z under the EUMR, it is still not subject to the EUMR, since the thresholds (according to Art. 1 (2) are not reached. T2’s turnover cannot be attributed to A (including T1) since there is neither a majority shareholding nor the ability to manage the company’s affairs (see above), (hence lack of group membership).
However, the result may differ in individual cases where several companies jointly exercise negative control and if further criteria apply (see KM, para. 181).
See example 1a, but A holds exactly 50% of T2. The remaining 50% of the shares in T2 are held by X. A and X have the same voting and participation rights.
Assessment: According to the Commission’s interpretation, the thresholds under Art. 1 (2) EUMR are met in this case: For the „managing of business“ within the scope of Art. 1 (4) EUMR, it would be sufficient for A (and X) to „jointly“ manage the affairs of T2, which would also be the case in the event of (mere) negative control.
Unlike under the EUMR, the concept of control is less central under German law when it comes to the definition of a „relevant transaction“. German law not only treats various types of changes in control as relevant transactions, but also the acquisition of less significant influence, such as the (initial) acquisition of 25 % or 50 % of the shares or voting rights in another company as well as the acquisition of a competitively significant influence, Art. 37 (1) ARC. The latter can also become relevant in transactions involving the acquisition of less than 25 % of the shares.
In Germany, too, only those transactions are subject to merger control that meet specific thresholds. These thresholds are reached, if the undertakings involved have had (i) a total worldwide turnover exceeding € 500 million and (ii) at least one of the undertakings concerned had a domestic turnover of more than € 25 million and (iii) another of the undertakings has had a turnover of more than € 5 million within the financial year preceding the concentration.
According to the ARC, not only the turnover of the undertaking concerned needs to be taken into account when assessing the turnover thresholds, but also the turnover of those companies with which the undertaking concerned are „connected“ or “affiliated”, Art. 36 (2) ARC (“verbundene Unternehmen”). To that end, the ARC does not set up own criteria, but refers to the law on stock corporations, Art. 17 and 18 AktG (German Stock Corporate Law).
The „connection“ or “affiliation” requirement (to be established under German law) must result from rights granted under corporate law and is limited to the group relationships specifically referred to in Art. 36 (2) ARC.
According to Art. 17 AktG, “affiliated” companies are legally independent companies over which another (controlling) company can exercise direct or indirect control. This is the case when the dependent company cannot escape the influence that another company may exert on its business policies. In case of a majority participation – as under the EUMR – such control relationship is presumed.
In case of minority shareholdings, it is decisive whether there are additional rights to exert influence on the company’s business. Such may for instance exist when the company has voting power (going beyond its minority shareholding) or if there are control agreements in place. The possibility to exert such additional influence must be conveyed under corporate law. “Affiliation” or “dependence” that is solely of an economic nature, e.g. resulting from loan or supply contracts, is insufficient (it would probably also be insufficient under Art. 5 (4) EUMR though). Mere veto rights under corporate law, i.e. a purely negative control (see above), are also insufficient under German law.
It is not entirely clear as to which extent the categories of the German and European group concept (“affiliation”) deviate from one another in concrete cases. Legal practice – at least in Germany – indicates though, that purely factual circumstances (e.g. a majority in shareholder meetings) can also justify group membership, whereas this seems more remote under EU law.
There are voices whereby the (rather strict) notion of “affiliation” or “connectedness” under German corporate law may not sufficiently match the requirements of merger control law. The German Federal Supreme Court (BGH), too, seems to favor a broader approach by arguing that that the protection of external shareholders and creditors is paramount to the AktG, while Art. 36 ARC serves to protect competition and hence calls for a broader interpretation.
Since the turnover thresholds ultimately decide on the Federal Cartel Office’s (FCO) jurisdiction and since there is a strong need for legal certainty in formal merger control law, we do not support such tacit extension of the relevant clause. As far as apparent, the FCO itself has not answered the question yet as to whether it favors a broader notion of “affiliation. In practice, of course, this question can often be left open. Moreover, practitioners generally tend to refer to the concept of “control” under the EUMR, even though this definition even exceeds the boundaries of European law regarding the group concept (see above).
German and European merger control apply different criteria for determining relevant transactions on the one hand and the question of group membership on the other. This approach is by no means mandatory.
The Austrian statute (KartG), for example, has opted for a more “synchronized” approach. Art. 22 of the KartG states: "In the application of this Federal Act, sales revenues shall be calculated in accordance with the following principles: Undertakings that are affiliated with each other in the form described in § 7 shall be regarded as a single undertaking". Art. 7 KartG in turn defines various transactions, including the initial acquisition of 25% of the shares in another company.
The US investor A acquires a non-controlled minority shareholding of 25% in T1. It is A’s first investment in Europe. T1 generates a turnover of approx. € 100 million worldwide, of which approx. 60 million is generated in Austria. Later, A acquires a 100% stake in Z, a company located in Southern German. Is there an obligation to notify? A beabsichtigt, das Unternehmen Z zu erwerben.
Assessment: Based on all of the jurisdictions we looked at, the acquisition of a 100% stake in another company qualifies as a relevant transaction. As regards the respective turnover thresholds, note the following: (i) According to Austrian law, the turnover of T1 would have to be allocated by 100% to company A. Depending on the geographic turnover allocation of Z's turnover, this may already trigger an obligation to notify in Austria. (ii) Under German law, on the other hand, the turnover of T1 would not have to be allocated to A, since the conditions for “affiliation” are not met (see above). (iii) According to European law, the turnover would also not have to be awarded, since the requirements of Art. 5 para. 4 ECMR are likely also not met.
Under the criteria discussed above, minority and parity shareholdings may be included in the turnover analysis both under the EUMR and German law. However, there may be differences in the amount of turnover that needs to be included. For example, the EUMR stipulates that, in the case of joint ventures, the turnover is to be apportioned equally among the undertakings concerned, Art. 5 (5) lit. b) EUMR. There is no comparable rule under German law.
A holds a 50% shareholding in T1 and has the right to manage the business of T1. The other half of the shares in T1 are held by B, which may appoint more than half of the members of the Supervisory Board. T1 generated a turnover of approx. € 80 million.
A intends to acquire the company Z.
Assessment: (i) According to the EUMR, only 50% of T1’s sales would be attributable to company A (i.e. approx. € 40 million). (ii) Under German merger control law, however, T1’s turnover would have to be fully allocated to company A (i.e. approx. € 80 million).
Acquisitions by investment companies can pose particular challenges: Sometimes it can be difficult to determine the portfolio companies which (based on the above criteria) are attributable to the acquirer. This is so because in many cases, the shares in the relevant portfolio companies are not held directly, as is the case in more „typical“ group structures.
The company setting up the fund or the persons acting on its behalf often exert only indirect influence on the portfolio companies that generate the „actually“ relevant turnover. If, for example, they determine the general partner (in the case of a structure based on limited partnerships) or occupy the general partner themselves, the Commission will in any case assume sufficient influence (pursuant to Art. 5 (4) EUMR; KM, para. 189 f.).
 We dispense with going into the details of Art. 35 (1a) ARC.