By Daniel von Brevern, LL.M
In July 2014, Germany’s competition authority, the Federal Cartel Office (FCO), imposed fines totalling around 1338 million on 21 sausage manufacturers and 33 senior managers. Over the following months, several of the companies fined made use of a loophole in German competition law by engaging in international restructuring measures. The companies were dissolved and their assets transferred to sister companies or other group companies. The FCO ultimately grudgingly acknowledged that it had had to forfeit around 1238 million, and the loophole became widely known as the “sausage gap”.
The “sausage gap” has now been closed. On June 9, 2017, a number of amendments to the German law on restraints of competition (Amendment) entered into force. The Amendment aligns the German rules of liability to the European rules, in particular by introducing the concept of parental liability, which prevents companies avoiding fines by means of internal restructuring measures. Other notable aspects of the Amendment are the implementation of a European Union directive aimed at facilitating bringing damage claims for competition law infringements, and the introduction of a new size-of-transaction threshold under German merger control.
Closing the ‘sausage gap’: Parental liability
Prior to the Amendment entering into force, the FCO could impose fines only on the legal entity which, through its employees, was directly involved in the competition law infringement. As a consequence, companies were able to avoid liability if they succeeded in making the infringing legal entity disappear. Dissolving a company, and at the same time moving its assets to one or several other companies, raises complex legal issues (e.g., tax and insolvency law implications). Yet some of the sausage manufacturers fined by the FCO in 2014 managed to overcome these issues and were in fact able to escape the fines imposed on them.
The Amendment closes the “sausage gap” by aligning German law to European Union law. The liability for competition law infringements is no longer limited to the legal entity directly involved in the infringement but extends to all companies constituting a single economic entity. A parent company will be jointly and severally liable for subsidiaries involved in competition law infringements if, at the time of the infringement, the parent company exercised controlling influence over its subsidiary. This very much corresponds to the rules developed under European competition law by the European courts and the European Commission. It is therefore fair to assume that the “sausage gap” will cease to exist. The new rules on liability are highly complex, however, and likely to lead to numerous questions and possibly new loopholes.
Private competition law enforcement
In today’s European and German competition law environment, a typical two-step pattern can be observed. In a first step, the European Commission or the German FCO imposes a fine for competition law infringement (e.g., in July 2016, the European Commission imposed a fine totaling 12.93 billion on various truck manufacturers). In a second step, customers or other potentially disadvantaged companies threaten to bring or do bring damage claims against the companies involved in the competition law infringement (e.g., the companies that bought trucks bringing claims against the truck manufacturers).
In spite of this, governments and regulators throughout Europe still feel that bringing damage claims is often too burdensome and risky for the claimants, preventing efficient private enforcement of competition law. Therefore in 2014, the European Union adopted the Cartel Damage Claims Directive (Directive) that had to be implemented by the Member States by December 27, 2016. The Directive is aimed at removing practical obstacles to compensation for all victims of competition law infringements. It provides, inter alia, for easier access to evidence, claimant-friendly evidence rules, clear limitation period rules and rebuttable presumptions in relation to harm and damages caused by competition law infringements, as well as joint and several liability of all participants in a competition law infringement.
The Amendment implements the Directive in Germany and facilitates damage claims for competition law infringements under German law. In particular, the Amendment introduces
- a limitation period extended from three to five years;
- a rebuttable presumption that competition law infringements cause damages (while there is no presumption as to the exact amount of
- rules on the effects of settlements between the claimant and individual defendants (aimed at improving the willingness to settle);
- extensive disclosure rights with respect to information held by the defendant and/or third parties (and also, for reasons of equality of arms, with respect to information held by the claimant) and
- certain privileges for immunity applicants (e.g., liability limited to damages caused to the immunity applicant’s direct customers).
Merger control: New size-of-transaction threshold
More than 140 countries throughout the world have now adopted some form of merger control rules. Put very briefly, merger control rules require that transactions meeting certain conditions must be notified to the relevant merger control authority. In most jurisdictions, transactions meeting the thresholds may only be implemented once the relevant authority has cleared them.
In Germany, the acquisition of sole or joint control, or the acquisition of 25% or more of the shares in a company, requires notification to the FCO if certain turnover thresholds are met. The thresholds are met if the acquirer and the target company jointly have a worldwide turnover of more than 1500 million, if at least one of the companies (e.g., the acquirer) has revenues in Germany exceeding 125 million, and if the other company (e.g., the target) has revenues in Germany exceeding 15 million.
While the existing German merger control turnover thresholds remain unchanged and will continue to apply, the Amendment introduces an alternative size-of-transaction threshold. The new threshold is the result of a perceived lack of control over transactions involving companies with significant market potential, but – for the time being – limited actual revenues in Germany (e.g., tech start-ups with predictable growth potential). Under the new threshold, transactions will have to be notified in Germany if (i) the parties’ combined worldwide turnover exceeds 1500 million, and (ii) one party has a turnover of more than 125 million in Germany, and (iii) the value of the compensation exceeds 1400 million, and (iv) the target company has significant business activities in Germany.
The Amendment specifies that the compensation includes the purchase price and all other assets and noncash benefits, as well as liabilities assumed by the purchaser. In practice, the calculation of the compensation will in all likelihood raise numerous questions (e.g., relevant point in time for determining all elements of the compensation; scope of liabilities to be taken into account). Similarly, the meaning of significant business activities remains largely unclear. Due to these uncertainties, the applicability of German merger control is likely to become more difficult to assess, and less predictable.