Sighting of a rare animal: Clearance for a transaction that raises concerns

In (EU/German) merger control, M&A deals that significantly impede effective competition are to be prohibited. That rule is set in stone. Right? Not entirely: The German Bundeskartellamt has cleared a transaction that it would generally have had to prohibit, making use of a rarely used provision in German merger control.

The case (Westenergie/Rheinenergie) was about a “strategic alliance” between two energy providers, in which the parties inter alia brought parts of their respective businesses under joint control. The alliance mainly concerned heating electricity and e-charging stations. So it involved much-discussed topics, not only given the current energy crisis, but also with regard to political considerations on energy transition and the automotive industry.

An impediment to competition…

The Bundeskartellamt has only published a German press release on the case and a short background paper on heating electricity. What one can glean from these is that the transaction was only cleared:

  • subject to remedies, which did not fully address the regulator’s concerns; and
  • because the remaining concerns were outweighed by the transaction improving market conditions.

To take this approach, the Bundeskartellamt relied on a rarely used provision in German merger control law: Section 36 (1) No. 1.

…outweighed by improvements of market conditions

For Section 36 (1) No. 1 to apply, it is on the parties to show that the transaction will lead to improvements of market conditions that will outweigh an impediment to competition. I.e., the burden of proof is on the parties, and the regulator is to perform a kind of “balancing test”, weighing an impediment to competition against market condition improvements.

In the particular case of Westenergie/Rheinenergie, the Bundeskartellamt seems to have found that the remedies – which required the sale of significant parts of one of the parties’ heating electricity business – would lead to the creation of a new strong competitive force. In the expectation of the regulator, the creation of this new force will improve market conditions and outweigh the loss of one of the party’s competitive position that the transaction will bring about (and with that also outweigh the Bundeskartellamt’s remaining concerns).

A rare animal…

There is no direct equivalent to Section 36 (1) No. 1 in EU merger control law, nor – as far as I know – in many national merger control laws. And even in Germany, the clause is not widely known and seldomly applied.

Maybe most interestingly, the clause even allows for clearances of transactions in which competitive concerns on a given market are outweighed by improvements of the market conditions on an entirely different market. This means that, e.g., the strengthening of a dominant position on one market can be outweighed by the creation or strengthening of a new/smaller competitor on a different market.

… and a political one

Applying such a balancing test is not an easy task. While the clause is not new in German merger control, in some ways it is a modern instrument that fits into the times we live in. It is also discussed in the context of taking sustainability aspects into consideration in merger control. The instrument allows the Bundeskartellamt to take a broader perspective and to bring – to a certain extent, and for better or worse – political and policy considerations into the assessment: If conditions are expected to improve on a (German) market that is deemed larger and/or more important, the regulator is able to overlook accept negative consequences on a smaller and/or less important market.

Against that background, and while it might be a modern instrument, it should not be surprising that the clause has so far not been applied all too often.

[Photo by Zdeněk Macháček on Unsplash]