Reform of German merger control rules: Important changes for real estate transactions

Significant increase of turnover thresholds

Real estate transactions have to be notified to the FCO if the turnover of the undertakings involved and the acquired real estate exceeds the turnover thresholds of Section 35 (1) ARC. The reform of the ARC significantly increases the relevant thresholds. In the future, significantly fewer transactions are expected to meet the thresholds.

Under the existing rules, a transaction has to be filed if in the last business year preceding the closing (i) the combined aggregate worldwide turnover of all the undertakings involved was more than EUR 500 million, (ii) the German turnover of at least one undertaking involved was more than EUR 25 million ("first domestic threshold") and (iii) the German turnover of another undertaking involved was more than EUR 5 million ("second domestic threshold").

The amendment significantly raises the two domestic thresholds. The first domestic threshold doubles from EUR 25 million to EUR 50 million. The second domestic threshold increases from EUR 5 million to EUR 17.5 million. In real estate transactions, the second domestic threshold often determines whether there is a filing requirement or not. By more than tripling this threshold, it is likely that many real estate transactions will no longer be subject to a filing requirement.

Nevertheless, transactions that deviate from the archetype of an asset deal or a 100 percent share deal will continue to require close scrutiny. If, for example, a 50:50 joint venture is established for the acquisition of a property, it is necessary to examine whether the second domestic threshold is met by the joint venture partner. In such cases, even the acquisition of real estate which generated significantly less than EUR 17.5 million or even no turnover at all may still be subject to a filing requirement (in fact, the turnover generated with the real estate may not be relevant at all).

Example 1: A and B establish a 50:50 joint venture to acquire a property in Hamburg. A generates a turnover of EUR 700 million worldwide and EUR 100 million in Germany. B generates a turnover of EUR 20 million in Germany, while the property generates a turnover of EUR 10 million. There is a filing requirement as the turnover of both A and B has to be considered. The same applies if the property does not yet generate any turnover because it has not yet been rented out or is still in the development phase.

It should also be noted that a purchase price of more than EUR 400 million (more precisely: value of the consideration, i.e. purchase price plus any liabilities acquired) may trigger a filing requirement, even if the turnover generated by the property located in Germany is less than EUR 17.5 million.

Stricter rules for successive transactions

The reform of the ARC introduces stricter rules for the assessment of successive transactions between the same parties. Under the existing rules, transactions that take place between the same parties in the same direction within two years must be assessed together for the purpose of the examination of the turnover thresholds (Section 38 (5) sentence 3 ARC). However, this is only required under the current wording of the rules if the turnover thresholds of Section 35 (1) ARC are met "for the first time". With the reform of the ARC the words "for the first time" are removed from the provision.

In future therefore transactions which in themselves meet the thresholds of Section 35 (1) ARC must also be included in the overall assessment. The practical consequences are illustrated by the following two examples: 

Example 2: A sells to B three properties in three independent transactions in January, June and December 2021, each of which generates annual rental income of EUR 8 million.

Example 3: A initially sells a real estate portfolio to B in January 2021 which generates annual rental income of EUR 20 million. In an additional transaction in August 2021, another property is sold to B which generates annual rental income of EUR 4 million.

Under the current wording Section 38 (5) sentence 3 ARC would only be applicable in Example 2. Here, the second domestic threshold of now EUR 17.5 million would be reached for the first time with the third transaction. The third transaction would trigger a filing requirement. By contrast, the provision would not apply in Example 3 according to the prevailing view in legal literature. The first transaction in January 2021 in any case triggers a filing requirement on its own. Section 38 (5) sentence 3 ARC is of no relevance here. The successive acquisition of further property in August does not result in an additional filing requirement as the turnover thresholds are not exceeded "for the first time" as a result of the additional transaction.

The deletion of the words "for the first time" as part of the ARC reform changes this result. Transactions that were notifiable on their own will also be included in the overall assessment. Each additional transaction may be subject to notification. For this reason, the transaction in August results in a second filing requirement.

This surprisingly strict result is confirmed by the German government's explanatory notes  (p. 109, German only). It states:

The deletion of the words "for the first time" rules out the possibility of circumventing the merger control rules. Under the existing rules, a merger could be split into a larger unproblematic part, which is notified and cleared by the Federal Cartel Office, and a competitively problematic part, which is not subject to merger control. In the case of the latter, no examination by the Federal Cartel Office would be possible, contrary to the intention of the law.

The government's reasoning is not convincing, as the alleged possibility of circumventing notification requirements does not exist under the current law. If a single transaction was artificially split up it would in any case have to be regarded as a single merger according to case law of the German Federal Court of Justice without requiring the application of Section 38 (5) sentence 3 ARC (see BGH, 6 December 2011, KVR 95/10, para. 19 et seq. - Total/OMV). However, irrespective of this questionable argument the explanatory notes clearly show that the legislator assumes that in the future transactions which have already been notified to the FCO need to be included in the overall calculation of the relevant turnover pursuant to Section 38 (5) sentence 3 ARC. The FCO’s statement on the draft bill (p. 24) confirms this understanding. The result is an alignment with the parallel provision of EU merger control in Article 5 (2) subpara. 2 EU Merger Control Regulation. Section 38 (5) sentence 3 ARC, which already was very important for real estate transactions and easy to overlook, thus gains further relevance.

Requirement of closing notice removed from ARC

A small but bothersome formality of the German merger rules is that the FCO has to be notified of the completion of each notified transaction after the closing. This requirement will no longer apply once the reform is in force. The relevant Section 39 (6) ARC has been reworded. In the future, a closing notice will only be required in cases where the parties fail to comply with the notification obligation under Section 39 (1) ARC and the suspension obligation of Section 41 (1) ARC and have unlawfully closed a transaction. In case of transactions that have been correctly notified, a closing notice is no longer required. This is a welcome improvement which reduces the administrative burden - not least for the FCO.

Entry into force and impact on ongoing transactions

The law was already passed by the Federal Council on January 18, 2021 and entered into force on January 19, 2021. It is advisable to consider the implications of the reform for ongoing transactions. The new thresholds apply to all transactions which have not yet been closed.

Conclusion

The reform of the ARC brings about welcome simplifications for real estate transactions. It can be assumed that in the future significantly fewer transactions will have to be notified to the FCO. Considering that real estate transactions often only have a very low competitive relevance due to the large volume of the markets concerned and the resulting small market shares, this simplification of the transaction process is very welcome.

For a summary of further changes to the German merger control rules please refer to our article "Less is more" – Germany eases merger control requirements.

Authored by Dirk Debald, Sebastian Faust, and Jan-Christoph Rudowicz