The German Federal Ministry for Economic Affairs and Energy has drafted an amendment to the German Act against Restraints on Competition (ARC) that will, inter alia, significantly extend the deadlines for Phase I and II proceedings under the German merger control regime in reaction to the ongoing COVID-19 pandemic. This will have some important practical implications for those involved in M&A in Germany, and we highlight below some key tactical considerations.
Although the timeline for the passing of the bill is not fully clear at the time of writing, it appears likely that the new regime will enter into force shortly.
Extension of merger control timelines
Like many other merger control regimes, the German regime is a suspensory one – in other words, notifiable transactions may not be completed prior to obtaining merger control clearance. The review process following notification is divided into two phases: an initial Phase I review, followed by a more in-depth Phase II investigation where the Federal Cartel Office (FCO) concludes at the end of Phase I that further investigation is needed.
The FCO is currently required to complete its Phase I review within one month of receiving a complete notification from the merging parties. If an in-depth Phase II investigation is not opened within that one month period, the transaction may be implemented. For a Phase II investigation, the FCO is required to issue a clearance or prohibition decision within four months from the date of receipt of a complete notification. If it does not do so, the transaction is deemed to be cleared.
Under the proposed amendments to the ARC, these deadlines will be significantly extended for all transactions that have been notified or will be notified to the FCO between 1 March 2020 and 31 May 2020:
- Phase I will be extended by one month, i.e. overall duration of two months from notification; and
- Phase II will be extended by two months, i.e. overall duration of six months from notification.
An exception will apply for transactions notified between 1 March 2020 and 31 May 2020 for which, as of the date the revised ARC enters into force:
- Phase I has already ended and the FCO has not adopted a decision to initiate a Phase II investigation;
- Phase II has already ended and the FCO has not adopted a clearance or prohibition decision; or
- the FCO has already adopted a clearance decision.
The proposed new law also provides that these extended deadlines will apply to the review of transactions which have been referred from the European Commission to the FCO between 1 March 2020 and 31 May 2020.
Key practical implications and tactical considerations
Will transactions which have already been notified be affected by these changes?
The draft amendments to the ARC provide that the new extended deadlines will apply retroactively to all transactions notified to the FCO between 1 March 2020 and the date the revised ARC enters into force (as well as to notifications submitted between the date of entry into force and 31 May 2020), subject to the exceptions mentioned above.
In practice, this means that all notified transactions which are part-way through the Phase I review process as at the date of entry into force of the revised ARC will automatically fall under the new extended deadline regime.
For transactions which are subject to a Phase II investigation as at the date of entry into force of the revised ARC, the assessment is more nuanced: for concentrations notified prior to 1 March 2020, the previous Phase II deadline applies, i.e. the FCO has four months from notification to decide the case. For all other cases that were notified on or after 1 March 2020, and subsequently moved into Phase II review, the new six-month deadline applies.
Will there be any way to expedite proceedings?
The new extended deadlines could prove particularly problematic for straightforward cases where the merging parties have, based on the current legal framework, agreed tight closing deadlines for their transaction in anticipation of a Phase I clearance within one month from notification.
However, the FCO has been widely acclaimed for its pragmatic approach to merger review under the current framework, often not using the full one-month period available to it in Phase I before concluding that a Phase II investigation is not necessary (as seen for example in previous cases such as the sales of parts of the insolvent Thomas Cook group, cleared by the FCO in November 2019). It is anticipated that it will seek to continue to follow this approach, as far as it is possible to do so, under the proposed new regime.
The legislator’s main goal in revising the review deadlines is to give the FCO sufficient time to investigate the impact of a transaction on the relevant market(s) under the difficult conditions resulting from the COVID-19 pandemic (in particular the difficulties in obtaining critical information from third parties). In straightforward cases which do not require detailed market investigations, it is at least conceivable that the FCO will be able to reach a decision in substantially less time than that available to it under the new extended deadlines. The FCO may also be more inclined to issue a Phase I clearance decision more swiftly than the new two-month deadline would suggest where time is of the essence, for example where the target is experiencing serious liquidity issues due to the impact of the COVID-19 pandemic.
Against this backdrop, it will remain the case that one of the most important ways in which merging parties can expedite the review process is by providing all potentially necessary information to the FCO upfront as part of the notification.
Should a planned notification be delayed?
From a strategic point of view, merging parties may wish consider whether to delay notification of a planned transaction until early June 2020, to avoid the application of the extended deadlines. The German merger control regime does not specify any deadline for notification of a transaction, provided that the transaction is not implemented (even partially) prior to obtaining clearance. This means that merging parties enjoy a degree of flexibility when deciding exactly when to notify the FCO of a transaction which meets the relevant thresholds.
However, merging parties should carefully consider whether such strategy is in fact beneficial in their individual case – in practice, the position is unlikely to be as simple as it may at first appear.
Firstly, it cannot be excluded that the application of the extended deadlines could be prolonged by last minute changes to the current proposal, or by way of further amendment to the ARC in due course, potentially at short notice, depending on how COVID-19 pandemic develops. Indeed, the legislator’s explanatory statements accompanying the draft amendments to the ARC appear to envisage the possibility of prolonging the current extension if the overall situation has not substantially improved by mid-May 2020. In such circumstances, artificially delaying a planned notification until early June 2020 could ultimately simply cost additional time overall.
Secondly, the benefits of delaying notification may vary depending on the complexity of the transaction in question and the estimated likelihood of a Phase II investigation. As noted above, it is anticipated that the FCO will still seek to reach a Phase I decision as quickly as possible in “straightforward” cases, and may not need to exploit the full two month period available to it under the new extended deadlines. In such cases, delaying notification until early June may therefore simply result in a delay in receiving a clearance decision. However, the position is likely to be different for more complex transactions, where it is anticipated that the FCO is likely to conclude that an in-depth Phase II investigation is required. In such cases, it may indeed make sense to use the remaining time until end of May for pre-notification discussions with the FCO (which are not mandatory in Germany), and then formally notify at the beginning of June. Even if the extended deadlines ultimately continue to apply to notifications made in June, the benefit of more in-depth pre-notifications discussions will not be lost; indeed, in cases where the need for a Phase II investigation is finely balanced, such an approach may increase the potential for a Phase I clearance decision being reached within an extended two-month deadline.
What precautions should be taken in ongoing M&A negotiations?
Parties to transactions that are currently still under negotiation need to take the government’s plans for extended merger review deadlines into account when agreeing terms and deal documentation. Particular care should be taken in relation to the agreement of:
- long stop dates: the deadline for implementation of the deal should, as a fall-back, be based on the newly extended timeframes for merger control review (including where it is anticipated that a formal notification will be submitted after 31 May 2020, given that it cannot be excluded that the application of the extended deadlines may be prolonged); and
- deadlines to notify the merger: it may be advisable to include a degree of flexibility to allow for formal notification to be delayed for a short period for strategic reasons, as discussed above.