Key Takeaways
Background
Transaction
Kustomer is a U.S.-based provider of a cloud-based customer relationship management (CRM) platform for business customers enabling them to communicate with their (end) customers. The CRM platform enables business customers to upload data necessary for managing and communicating with their end customers. Kustomer’s revenue was exclusively generated through license fees paid by its business customers.
Although Kustomer’s domestic revenues were below the primary revenue threshold, the Federal Cartel Office (FCO) concluded that a 2022 acquisition of Kustomer (Acquisition) met the subsidiary transaction value threshold (TVT) because (1) the parties’ combined global revenues exceeded €500 million, (2) one party’s German revenues exceeded €500 million, (3) no other party’s German revenues exceeded €17.5 million, (4) the value of the transaction exceeded €400 million, and (5) Kustomer had “substantial domestic operations.”
First-Instance Appeal
The FCO approved the Acquisition in Phase 1. The acquirer appealed against the fee order issued in connection with the approval (i.e., contesting the notifiability of the Acquisition under the TVT).
This first-instance appeal was upheld by the Higher Regional Court Düsseldorf (HRC). While it found that the other elements of the TVT were met, the HRC found that Kustomer’s only domestic operations entailed the processing of data relating to German end customers on behalf of its business customers. Since only those business customers could decide whether to use Kustomer's services, the competitive significance of Kustomer’s operations depended on the business customers, not the location of their end customers. The HRC concluded that Kustomer's domestic operations at the time were, therefore, not “substantial,” such that the Acquisition was not notifiable.
Judgment
Following an appeal by the FCO, the German Federal Court of Justice (BGH) overturned the HRC judgment, clarifying the scope of the TVT and confirming that the Acquisition was notifiable.
Scope of the TVT
- The activities of the target are generally attributed to customer location, since that is where competition with alternative providers ordinarily takes place. However, the activity need not be attributed to the location of the target’s direct customer(s). It can be attributed to Germany if it is capable of having domestic competitive effects given its characteristics, regardless of the location of the target’s direct customers.
- The scope of the TVT was drawn “very broadly,” with only marginal domestic activities being excluded. Especially in the digital sector (which the TVT addresses), a service can have potential competitive significance in Germany if it is used by customers in Germany. The TVT is, therefore, broad enough to encompass data processing, even if it is conducted abroad on behalf of business customers based in Germany, if it concerns data of German end customers.
Assessment of Kustomer’s Activities
- The processing of end-customer data is core to Kustomer's offering to its business customers (i.e., an integral and essential part of its CRM platform service, and not merely an ancillary service).
- Kustomer’s processing of German end-customer data is a domestic operation, despite being based on contracts with its German business customers rather than direct legal relationships between Kustomer and end customers. The number of end customers is indicative of the extent of Kustomer's domestic operations, since its competitive potential is connected to the ability to access this data.
- The ratio between Kustomer's domestic and global revenues does not indicate whether its domestic operations are substantial, since the TVT assumes that domestic revenue of the target may not reliably reflect its competitive potential. For this reason, revenue-based criteria, including (revenue-based) market share, are generally not relevant in determining both whether the target has domestic operations and whether those operations are substantial.
Implications
The BGH judgment notes that transacting parties “can recognise the competitive potential of the target company because they will in any case take into account the possible effects of the acquisition on their own competitive position in German markets, considering the economic activities of the company in Germany” (at 39). However, in practice, transacting parties will have to grapple with applying the theoretical test set out by the BGH to a range of different targets with differing activities in Germany, as well as how it differs from tests based on target activities applied in other jurisdictions. For example, the BGH judgment consciously leaves open whether processing of German end-customer data on behalf of business customers outside of Germany could also amount to substantial domestic operations.
Identifying Indirect Connections
The BGH judgment means that, in deciding whether a digital transaction is notifiable to the German FCO, indirect activities (e.g., resulting from end-customer interactions with transacting parties’ customers) need to be assessed to determine whether they might amount to substantial domestic operations in Germany. Despite the different jurisdictional rules in Germany and the United Kingdom, from a practical perspective, the scope of the TVT requires parties to consider their indirect nexus to Germany (in addition to their direct operations and revenues), not dissimilarly to the analysis required by the UK share-of-supply test. For example, in Sabre/Farelogix, the CMA concluded that the share-of-supply test was met because both firms supplied IT solutions to UK airlines that allow travel agents to book flights. It found that Farelogix supplied in the United Kingdom because Farelogix supplied services to American Airlines that British Airways (BA) was able to access in connection with interline bookings with American Airlines and dismissed the parties’ claims that the BA agreement involved only a minor technical link, that Farelogix never intended to serve BA, and that BA expected to obtain the relevant services from American Airlines rather than Farelogix.
Differences Between TVTs Adopted in Different Countries
The BGH’s dismissal of revenue as a relevant criterion for determining whether domestic operations are substantial is significant. While this is consistent with prior German guidance, it differs from the approach being taken in applying the TVT in neighboring Austria, where “the Bundeswettbewerbsbehörde (BWB) will routinely find that there is no domestic activity if the turnover of domestic target companies is below €1m provided that this turnover adequately reflects the market position and the competitive potential of the target company” (see the FCO and BWB’s Guidance Paper (2021) at 83). In a similar vein, the Indian TVT focuses on the ratio between the target’s domestic and global revenues to determine domestic effects since, depending on the sector, a target must generally have 10% of its global gross merchandise value, revenue, or business users in India.
[View source.]
