Merger control of Venture Capital investments

A risk not to be underestimated or the danger of killer acquisitions, gun jumping and unscrambled eggs


Due to the 10th amendment of the German Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen, following “ARC”), which entered into force at the beginning of this year (see our blogpost), the thresholds under merger control law (relating to the turnover of the companies involved) were raised significantly. In particular, the domestic turnover thresholds of Section 35 (1) no. 2 ARC (i.e. the yearly turnover that the merging parties normally need to have achieved in Germany in order to trigger German merger control) were increased from EUR 25 million to EUR 50 million and from EUR 5 million to EUR 17.5 million respectively.

In a large number of cases (also venture capital investments) German merger control is therefore not triggered any more. However, merger control and general competition law requirements must be carefully assessed in each and every case by the parties involved since the set-up and circumstances of a transaction may still require filing with the German Federal Cartel Office (Bundeskartellamt, following “FCO”). Infringements of the relevant provisions can trigger severe sanctions and civil law consequences if assessed incorrectly:

For instance, focusing on the turnover thresholds of the investor and the target company alone does not suffice to assess possible merger control filing requirements. This is a typical risk
parti­cularly in financing rounds in the early phase of a start-up company which does not yet generate significant turnover. Thus, some investors might be inclined to look only at their own turnover and the one of the start-up, disregarding possible filing requirements arising from the participation of other investors or financial institutions. Yet, the merger (concentration within the meaning of the GWB) can also take place at the level of the investors. In this scenario, the co-investors are (also) considered undertakings to the concentration, with the consequence that their turnover is relevant for the question whether the merger control thresholds are reached. That is to say, co-investments can lead to the creation of a joint venture, in which the investors participate as parent companies, or to a merger directly at the level of the investors themselves (so-called fiction of a partial merger of the parents), depending on the size of the shareholding and the rights of control.

Another general (incorrect) perception in this context is that merger control is triggered only when a firm acquires control, such as over a start-up. However, also the acquisition of minority shares and competitively significant influence can constitute a merger under certain circumstances as discussed below.

Furthermore, the 9th amendment of the ARC in 2017 introduced a transaction value threshold, so that notification obligations can exist even if not all of the mentioned turnover thresholds are reached. Thus, if in a transaction in which large corporates or VC funds participate and/or a high purchase price is paid for a target company based on its value or market potential, a deal might unexpectedly trigger merger control with the FCO and/or other competition authorities.


1. Concentration

In financing rounds the investment usually takes place in form of a capital increase and the issuance of new shares (possibly combined with an acquisition of shares in the form of a secondary). If the capital increase leads to an increase in the shares of at least one investor or to the acquisition of shares of 25% or more, this falls within the statutory definition of a concentration for the acquisition of shares under Section 37 (1) no. 3 lit. b) ARC. It is irrelevant whether the parties all actively participated in the merger. In contrast, even a merger between two investors can occur (with both of their turnover being relevant for merger control purposes) if an investor already holds a 25% stake and a new investor also acquires a stake of 25% or more by subscribing for shares.

Moreover, such “investor JV” can also be created if the threshold of 25% is not reached, but joint control is acquired or even only the possibility of exercising competitively significant influence on another party (Section 37 (1) no. 2 and no. 4 ARC). For instance, this can be the case through appointment rights regarding the management boards and/or the granting of veto rights in essential strategic decisions on the business and/or the budget of the target company (so-called negative control).

a) Turnover-based threshold

If a concentration exists and the turnover thresholds of Section 35 (1) ARC are exceeded by the parties involved, i.e. domestic thresholds (see above) and worldwide aggregated (group) turnover of all parties involved of more than EUR 500 million, in general the investment is subject to notification with the FCO.

b) Transaction value-based threshold

As already mentioned above, the ARC also provides for an alternative threshold, depending on the transaction value ("value of the consideration for the merger"). Thus, a notification requirement under the German merger control regime can arise, even if the parties (including their controlled affiliates) do not meet the turnover thresholds of Section 35 (1) no. 2 ARC. According to Section 35 (1a) ARC merger control can be triggered even if the second domestic turnover threshold (EUR 17.5 million) is not reached, as long as the value of the consideration for the merger exceeds EUR 400 million and the company to be acquired is active in Germany "to a significant extent". The purpose of this provision was primarily to make the acquisition of companies with low turnover but high competitive potential and high market potential subject to merger control and thus to prevent a "killer acquisition" by large rivals (in particular – but not limited to – big tech and pharmaceutical companies). However, an obligation to notify does not mean that the investment raises concerns from the perspective of competition. In contrast, as a general rule most investments are permissible (especially in the case of exits in the start-up scene) and so far the provision has not yet played a major role in practice since its entering into force. Nevertheless, in view of the considerable legal consequences for infringing a filing obligation, it is important to analyze possible notification requirements with due care.

2. Legal consequences for infringing a filing obligation (gun jumping)

If an investment falls under German merger control but is implemented without the prior approval of the FCO, this constitutes a violation of Section 41 (1) sentence 1 ARC (so-called gun jumping). Legal transactions which violate this prohibition to implement a transaction prior to clearance by the FCO are void (Section 41 (1) sentence 2 ARC). However, the invalidity is only “pending”. This means that the invalidity ends retroactively (ex tunc) if a non-notified concentration obtains later after closing an approval (typically the transaction is notified by the parties having detected the gun jumping or upon request by the FCO. The FCO then initiates so-called “divestment proceedings” which can  be terminated at some stage (no statutory timeframe for the FCO) if the transaction does not raises competitive concerns (Section 41 (1) sentence 3 no. 3 ARC)).

Quite interesting is the question how the above-mentioned invalidity of the transaction affects the capital increase that has been carried out and possibly already registered:

Following the most convincing opinion, the validity of the capital increase as such is not pending. Instead, only the validity of the related acquisition of shares (specifically: the subscription of the shares by the new investor) is pending, since the ineffectiveness of a legal transaction in the context of gun jumping can only refer to the statutory concentration itself. However, if there has been an infringement of the gun jumping prohibition, this does not lead to the permanent nullity of the acquisition of shares, but only to a pending ineffectiveness, which can be cured (cf. in this regard the German Federal Supreme Court (Bundesgerichtshof (BGH), judgement of 17 October 2017, KZR 24/15 – ConsulTrust, marginal no. 36 et seqq.)

Nevertheless, it is unclear what effect this has on the increase of the share capital. Under the assumption that the capital increase has already been registered, the share capital has been effectively increased. However, if the takeover of the shares is not valid, the registered capital and the "subscribed" capital fall apart. This discrepancy can only be resolved by notifying the implementation of the transaction to the FCO which needs to start and terminate divestment proceedings. If these proceedings are terminated (clearing the transaction), the infringement of the gun jumping prohibition is deemed to have been remedied retroactively, as discussed above. If, on the other hand, a divestment of the merged entity is ordered, the capital increase must be rewound. If so, the acquisition of the shares is void so that the acquirer has at no time effectively assumed the position of a shareholder. However, since the alleged new shareholder is registered in the list of shareholders recorded in the commercial register, he is considered a shareholder vis-à-vis the company pursuant to section 16 (1) of the German Limited Liability Company Act (GmbHG). Thus, at least resolutions of the shareholder in which the shareholder concerned has participated should remain effective.

In such cases, it is particularly difficult for investors that the divestment proceedings are not subject to any time limit as mentioned already above. This means that the parties to the merger have fewer possibilities to control the transaction and that the transaction as a whole could thus be jeopardized. Moreover, in practice such divestment is very difficult, especially if implementation measures have already been taken (in practice, this is also referred to as "unscrambling the egg").

In addition to the risk of divestment, an infringement of the gun jumping prohibition also can involve high fines by the FCO (cf. Section 81 (2) No. 1, Section 81c (1), (2) ARC) and other competition authorities. Recent years have shown that in the authorities' practice this is more than a theoretical risk, as evidenced by numerous proceedings (such as in Germany, France, Italy or by the European Commission). However, it always depends on the circumstances of the individual case whether and to what amount a fine is actually imposed.


Already in the course of the term sheet negotiations it should be examined whether the shareholding structure and/or the investor rights could establish a concentration between investors. If necessary, the obligation to file a merger control notification can be avoided by specifically structuring the participation or shareholder agreement. If this is not the case, the clearance by the FCO (and possibly other competition authorities) must be included as a closing condition in the contract and taken into account in the timeline and liquidity planning for the start-up. If liquidity becomes low by the time of approval, bridge financing needs to be considered.

In case of a transaction being subject to prior approval but nevertheless the merger being closed without notification (or before clearance), a notice to the FCO is required in order to resolve the infringement of the gun jumping prohibition. Otherwise, problems are likely to arise at the latest during the due diligence of a subsequent transaction if the issue comes up unexpectedly. This also applies to cases in which the transaction value threshold was overlooked.

The potential consequences under civil and sanction law show that merger control experts should be consulted at an early stage, also and particularly in cases of venture capital investments. At the same time, besides the merger control topics "general" competition and antitrust law must also be taken into account. If there are competitive (esp. horizontal) overlaps between the parties involved (or even only their affiliated companies) or if, for example, non-competition clauses are to be agreed for sellers, the boundaries set by antitrust law must be known and observed with due care. Legal limits (and a possible leeway) have also an impact to the design of the investment process and the necessary exchange of (competitively sensitive) information between VC investors. Considering above ensures that the parties’ enthusiasm about the investment opportunity does not need to give way to arising unpleasant topics, such as killer acquisitions, gun jumping and unscrambled eggs.

Philipp Dietz, LL.M. (Edinburgh)

Philipp Dietz, LL.M. (Edinburgh)
+49 221 9937 14224

Dr Sebastian Felix Janka, LL.M. (Stellenbosch)

Dr Sebastian Felix Janka, LL.M. (Stellenbosch)
+49 89 23714 10915