On 21 July 2011, the German Federal Cartel Office (FCO) published a consultation paper on substantive merger control called “Draft Guidance on Substantive Merger Control” (Draft Guidance).  This is the first time the FCO has consulted on a guidance paper.  Comments on the draft guidance can be submitted until 21 September 2011.

Against the fact that the German merger control regime catches a large number of mergers (around 1000 mergers a year) and that the FCO has a strong enforcement record (15 Phase II- proceedings in 2010), the Draft Guidance provides detailed insight in the approach taken by the FCO in assessing mergers.

German merger control is applicable if the following three cumulative turnover thresholds are met: the aggregate worldwider turnover of all undertakings concerned exceeds € 500m, the turnover in Germany of one undertaking concerned exceeds € 25m and the turnover in Germany of another undertaking concerned exceeds € 5m.  In addition, German merger control catches the acquisition of control as well as the acquisition of a minority shareholding of 25 percent or – in cases of “competitively significant influence” even shareholdings below 25 percent.  The Draft Guidance does not deal with the question under which conditions German merger control is applicable, it only concerns the substantive analysis of mergers which fall under German merger control.

The Draft Guidance reflects the existing approach of the FCO rather than proposing an new way of thinking. While it also encorporates economic considerations, it largely provides a agency friendly interpretation of the FCO’s decision practice and relevant case-law.  Still, it shows a move towards more economic analysis and a deviation from the FCO’s traditional, more market structure oriented approach.  But it seems unlikely that the strict enforcement policy of the FCO will change as a result of the new guidance paper.

The Draft Guidance focuses on the question whether a merger will lead to the creation or strengthening of dominance.  Unlike in other jurisdictions, such as the US and EU, the creation or strengthening of a dominant position is the criterion for the prohibition of a merger in German merger control.  While discussions are under way about the introduction of the  SIEC test (“significant impediment to competition”) in an effort to harmonize German with EU merger control rules, the FCO makes it clear that it anticipates that the Draft Guidance will remain relevant even if the underlying test changes.

In terms of substance, the Draft Guidance distinguishes between horizontal, vertical and conglomerate mergers and between single firm dominance and collective dominance.  The definition of dominance and the substantive assessment relies on standard theories of harm and recognised economic theories that are also used by other competition authorities such as the European Commission.

Some elements of the Draft Guidance reflect a traditional German understanding of merger control which may differ from the approach in other jurisdictions.  Thus, the Draft Guidance suggests that the purpose of merger control is to protect competition as an effective process, which will also protect the interests of consumers, not necessarily in the short term but rather in the longer term. It further suggests that protecting competition may sometimes coincide with protecting competitors.  Concerning the threshold for the FCO’s intervention in a merger case, it is sufficient if competition is weakened due to changes in the market structure and market power increases correspondingly.  An appreciable effect of the merger on the market is not required.  Equally, the FCO is not required to proof an impairment of total welfare or consumer welfare but it is sufficient to prove that the merger threatens the functioning of competition.

The Draft Guidance states that market shares are an appropriate starting point for the assessment, but the value of market shares as an indication for market position depends largely on the conditions prevailing on the individual market in question.  The Draft Guidance does not contain any presumptions based on particular market shares or market concentration levels (HHI).  It only notes that the statutory presumption of dominance may apply if neither the existence or the absence of market power can be proved.  This presumption kicks in at a market share of 33 percent for single firm dominance (50 percent for collective dominance of three or less undertakings, 66 percent for collective dominance of five or less undertakings).

The Draft Guidance recognises that vertical mergers have a less pronounced and more indirect effect on competition because they do not lead to a reduction of the number of actual competitors in the market.  However, they may have anti-competitive effects in terms of input foreclosure, customer foreclosure or exchange of commercially sensitive information.  With respect to conglomerate mergers, the Draft Guidance notes the standard theories of harm.  Unlike the EU Commission’s guidance, there are no safe harbour market shares in the Draft Guidance.

The Draft Guidance also discusses the failing firm defence as well as the possibility of balancing the anti-competitive effects with pro-competitive effects on different markets. The Draft Guidance is rather restrictive here.  Pro-competitive effects are only taken into account if they are structural.  Potential advantages to the economy as a whole, other policy objectives and public interest considerations will not be taken into account, nor are mere commercial benefits for the merging partiers, such as improved capacity utilisation or cost savings.  Efficiencies resulting from the merger will not be taken into account, unless these efficiencies also have a structural impact.

The German and English versions of the Draft Guidance are available on the FCO’s website at www.bundeskartellamt.de.