Acqui-Hires, Art. 22 and Germany’s transaction value threshold

Microsoft’s recent takeover of employees of Inflection AI, a leading artificial intelligence startup, has sparked significant debate in competition law circles. The case reflects the perceived challenges regulators face in addressing the competitive impacts of “transactions” in rapidly developing industries such as AI. From the European Commission’s invocation of Article 22of the EU Merger Regulation (EUMR) to the German Federal Cartel Office’s (FCO) final cessation of the case, this case offers critical insights into the limitations and future trajectory of merger control frameworks in Europe and Germany.

What makes this case particularly relevant is that Microsoft did not simply “buy” Inflection as a company but “only” took over Inflection AI’s employees and concluded agreements on financing and the use of intellectual property. The case therefore did not constitute a classic “transaction” within the meaning of merger control which is why the question arose as to whether it could nevertheless be subject to merger control.

When announced, and irrespective of the question whether the case actually qualifies as “transaction” within the meaning of merger control law, the Microsoft/Inflection AI “deal” appeared to fall outside the Commission’s jurisdiction as Inflection AI’s turnover was below the relevant merger control thresholds. However, recognizing the strategic importance of the transaction in the AI sector, the Commission utilized its then current practice of so-called Article 22 EUMR, which – according to the reading of the Commission – allowed national competition regulators to refer a case even if they had no jurisdiction. Seven Member States followed the Commission’s invitation to the referral, signaling shared concerns about the “deal’s” implications for competition and innovation.

However, as we all know, the European Court of Justice’s Illumina/Grail ruling brought an end to such referrals (see also here). Following this precedent, the referring Member States withdrew their referral requests, which led to the Commission having no further jurisdiction for reviewing the case.

Acquiring employees – a concentration?

After the Commission announced not to take any decision, the FCO evaluated whether it had jurisdiction to review the case. Unlike acquisitions focused on revenue-generating assets, Microsoft, as mentioned above, was apparently largely interested in Inflection AI’s highly skilled AI researchers and engineers alongside its intellectual property. The overall value of these agreements was determined by the FCO to exceed the transaction value threshold in German merger control (of EUR 400 million).

But, as a first step, the FCO had to assess whether the takeover of employees, so called acqui-hires, can constitute a “concentration” in the sense of German merger control. This is a highly debated question also in other jurisdictions: Can the takeover of employees be subject to merger control and, if so, under which circumstances?

In Inflection’s case, the FCO found the answer to be “yes” and stated that the takeover of all employees together with the accompanying agreements on financing and the use of intellectual property rights is in principle subject to German merger control. This is, e.g., consistent with the position of the CMA in the UK, which ultimately cleared the case.

However, different from the CMA, the FCO ultimately found to have no jurisdiction to review the case on substance because Inflection AI had no, as the German transaction value threshold requires, “substantial operations in Germany” since its operations within Germany were minimal. Consequently, the deal was deemed non-notifiable in Germany. While the FCO recognized the qualitative significance of the transaction, the quantitative criteria embedded in the current legal framework prevented further scrutiny.

Current trends and future challenges

The regulatory scrutiny of the Microsoft/Inflection AI case illustrates the current trends and complexities of overseeing transactions in rapidly evolving industries.

Acqui-hires seem to be becoming an increasingly prevalent strategy, particularly in the tech / AI sector. Such approaches enable companies to secure top talent and cutting-edge intellectual property, bypassing the limitations of traditional recruitment. While acqui-hires often involve smaller entities that may not meet turnover thresholds, they can nevertheless have far-reaching competitive implications.

While neither the Commission nor the FCO could ultimately block review the “deal”, the case highlights why competition regulators think that their current frameworks must be adapted. Without such adaptations, they see a risk that strategically significant transactions in emerging sectors will escape regulatory oversight, potentially harming competition and innovation:

• After its experiences with Illumina/Grail and Microsoft/Inflection AI, it would not come as a surprise if the Commission were to suggest amending Article 22 EUMR to explicitly allow referrals even in cases where Member States themselves lack jurisdiction over a transaction. Such a revision would strengthen the Commission’s call-in powers and ability to scrutinize significant cross-border deals that might otherwise escape oversight. At the same time, we see that call-in powers at national level can lead to cases being called in and then referred to the Commission. A very recent example is Nvidia’s planned acquisition of Run:ai, which was originally called in by the Italian antitrust regulator and then referred to the Commission.
• Concurrently, the FCO might want to explore how to adopt its transaction value threshold to include cases where the target is expected to have substantial domestic operations “in the near future”. In fact, the FCO’s president seems to be lobbying for an amendment of the threshold to also take into account “possible or future” German activities of the target.

While these measures would reflect a proactive approach to capturing the competitive implications of transformative deals in emerging markets like AI and digital innovation, the downside would be an increasing deal uncertainty which could potentially have a negative impact on Europe and Germany as investor-friendly business hubs.

Photo by John Barkiple on Unsplash