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Website user numbers and patent activity to influence German merger controls

Whether or not businesses have to obtain clearance for mergers they plan in Germany could depend on how many German website users target companies have, or how many patents they have filed in the country, according to guidance issued by the Federal Cartel Office (FCO).05 Sep 2018

Under German merger control laws businesses are generally obliged to pre-notify the FCO of planned mergers if all undertakings that are a party to the transaction have combined worldwide turnover in excess of EUR 500 million; one undertaking has turnover in excess of EUR 25 million in Germany, and either one other undertaking has turnover in excess of €5 million in Germany or the value of the consideration for the merger is more than €400m and the target company operates to a considerable extent in Germany.

This latter transaction value threshold was introduced very recently in the context of the 9th Reform of the German Act on Competition Restraints that entered into force on 9 June 2017. The introduction of the new threshold is essentially a reaction to the fact that major transactions such as the acquisition of WhatsApp by Facebook escaped German merger control.

The FCO has published guidance, developed in partnership with Austria's competition authority, to help businesses understand how the pre-notification rules apply in practice. The guidance was recently translated into English.

According to the guidance, a number of factors could help acquiring companies determine whether or not the target company has 'significant domestic activity' in Germany.

For businesses active in the digital sector, the number of monthly or daily active users of, or unique visitors to, websites with a German audience are "examples of possible indicators" of domestic activity, according to the guidance.

Evidence of research and development in Germany can also constitute 'domestic activity', the FCO said. It said the 'significance' of that activity could be measured, for example, with reference to the volume of patents the target business has registered or filed for in Germany.

The FCO said: "The assessment of the degree of significance associated with the planned acquisition of research and development activities can be based on various conceivable criteria. These can include the number of staff engaged in research and development or the research and development budget, for example. The number of patents or patent citations can also be an indication. If a transaction primarily involves the acquisition of a domestic research site with sufficient domestic market orientation, it is safe to assume significant domestic activity. "

According to the FCO's guidance, the domestic activities of target companies will generally be said not to have 'market orientation' if the turnover they generate is "below €5m in Germany and if this turnover adequately reflects its market position and competitive potential".

However, it said that domestic turnover may not necessarily be "an adequate indicator" of the market orientation of a target company's activities. It said this situation could arise "because the company is active on a market that is not characterised by turnover or because its product has only recently come onto the market so that the low turnover generated so far does not reflect the competitive potential".

The FCO also said that domestic activities do not necessarily need to be linked directly with revenue-raising to be relevant in evidencing their market orientation.

"Despite the absence of monetisation, an activity could conceivably still have market orientation, especially in the following potentially overlapping scenarios: a service is remunerated by means other than monetary payment; a service is offered free of charge but is monetised in a different way or can be expected to require payment in future or be monetised in a different way in future; the activity consists of research and development of (future) products or services," it said.

Examples include where target companies obtain data from customers, or because digital services are offered for free initially before being "monetised" at a later date when they become popular.