German merger control: Edeka/Tengelmann – New impulse for the ministerial authorisation procedure?

Under German merger control law (Act Against Restraints of Competition, ARC), notifiable concentrations are subject to review by the competition authority (Federal Cartel Office, FCO) which is limited to an assessment of their effects on competition. If a concentration is likely to have negative effects on competition, it must be prohibited by the competition authority (§ 36 (1) ARC), irrespective of any public interest benefits which it might entail (e.g. the securing of jobs).

Although public interest benefits are therefore not taken into account in the review by the FCO, they are not entirely irrelevant for the approvability of concentrations under the ARC. Notifying parties to a concentration, which has been prohibited by the FCO, can invoke such benefits in an application for authorisation of the concentration by the Federal Minister of Economics (FME) pursuant to § 42 ARC (Ministerial Authorisation, MA). Authorisation shall be granted, if the negative effects of the concentration on competition are outweighed by advantages to the economy as a whole or if it is justified by an overriding public interest (§ 42 (1) ARC).¹

The MA procedure was conceived as an extraordinary remedy for exceptional cases, meant to serve as a valve for political pressure which safeguards the independence of the FCO, and it has been largely applied in that way. From its introduction in 1973 (together with the German merger control regime) until the end of 2014, the FCO prohibited 187 concentrations. Only 21 prohibitions were followed by an application for MA, which was granted in only 8 cases, in 5 of them only in part and/or subject to conditions.²

After an extended period of dormancy (the last cases, concerning concentrations between regional hospitals, date back to 2008), the MA procedure recently re-emerged in the spotlight in the Edeka/Tengelmann case.

The case concerns the planned acquisition by Edeka (E), one of the 3 major German full-range food retailers (besides Rewe and Kaufland), of around 450 outlets of (the chronically loss-making) competitor Tengelmann (T). The FCO concluded that the project was likely to considerably worsen competition conditions on a large number of already highly concentrated regional and municipal food retail markets and, considering the commitments offered by the parties to be insufficient to address these concerns, prohibited the concentration by decision of 31 March 2015.³ During the proceedings, several third parties had expressed an interest in acquiring a significant number of T outlets.

On 28 April 2015, the parties applied for MA pursuant to § 42 (1) ARC, arguing in particular that the substantial public benefits of the concentration outweighed any negative effects on competition. Most importantly, the acquisition of the entirety of T, as intended by E, would secure the jobs of T’s ca. 16,000 employees and the status quo of their individual and collective rights. In the counterfactual scenario of T exiting the market and/or being sold in parts, at least half of the employees would be laidoff (with substantial follow-on costs for the State budget⁴), in particular in unprofitable T outlets which would have to be closed, and others be re-employed on significantly less favourable terms.

On 3 August 2015, the so-called Monopoly Commission (MC) issued its (non-binding) opinion pursuant to § 42 (4) ARC. The MC did not concur with the parties’ submissions and recommended that the application for MA be rejected. While the securing of jobs and employee rights clearly qualified as public interest benefits, the concentration was not sufficiently likely to secure the 16,000 jobs at T, as claimed by the parties. E could be expected to have an incentive to generate synergies (including by removing duplicate functions and outlets) and to restructure T, including by reducing workforce (in order to render T profitable), and it would be legally allowed to do so. It was also not sufficiently certain that the concentration would secure a greater number of jobs than the counterfactual scenario, since several third parties had expressed an interest in acquiring and carrying-on a significant number of T outlets and since remaining (and mostly unprofitable) outlets would likely require restructuring or closure also when acquired by E.

The FME (Sigmar Gabriel) has not taken a decision yet. Given that he should have normally done so within 4 months (§ 42 (4) ARC), this may be taken as a sign that the application for MA in the present case has got realistic chances of success. And indeed, what has transpired from the procedure so far, in particular from the public hearing on 16 November 2015, seems to indicate that the FME suspects a splitting-up and sale of parts of T to lead to a greater loss of jobs than T’s acquisition by E. A lot will probably depend on whether the parties find a way to effectively commit to securing a sufficient number of jobs and employee rights for a sufficient amount of time, whilst at the same time respecting the rule that commitments, in order to be eligible, must be structural and not require a continuous control of E/T’s conduct (§ 42 (2) ARC).

Should the FME grant authorisation, the Edeka/Tengelmann case may very well give the MA procedure an impulse to re-gain relevance in the merger approval process under the ARC.

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