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08 February 2007
The acquisition of a real estate portfolio, a single real property or a joint development project can give rise to notification obligations under national merger control rules if the relevant turnover thresholds are met. In April 2006 the Federal Cartel Office (FCO) clarified the conditions under which marginal real estate acquisitions may be exempt from the general pre-merger notification obligation, thereby significantly relieving burdens on the merger control review process.
Real estate transactions are covered by German merger control if they constitute a 'concentration' within the meaning of Section 37(1) of the Act Against Restraints of Competition. Both the acquisition of shares or control and the "acquisition of all or a substantial part of the assets of another undertaking" can constitute a concentration triggering the notification requirement.
Previously, it was controversial whether the acquisition of real properties through a fund or capital investment company constituted the acquisition of "a significant part of the assets". In accordance with the case law of the Federal Court of Justice, the FCO examines whether:
By a letter of March 18 2005 the First Decision Division of the FCO, which is in charge of the real estate sector, confirmed its previous administrative practice by acknowledging that even marginal acquisitions of real estate - irrespective of whether they are developed or undeveloped - generally satisfy the undefined term 'acquisition of a significant part of the assets', and thus constitute a concentration to which merger control rules are applicable if the respective turnover thresholds are met.
In order to calculate turnover, all controlled and controlling undertakings or affiliates are treated as a single undertaking. In its March 2005 letter the FCO further clarified the controversial question of whether this principle also applies to capital investment companies that hold and manage property funds and are connected with a depositary bank. According to the FCO, capital investment companies are undertakings controlled by their depositary banks, and therefore are regarded as a single undertaking. Consequently, the turnover of the controlling depositary bank, the capital investment company and all property funds managed by it should be aggregated for the calculation of the merger control thresholds. However, as on the seller's side the object of purchase is treated as an individual undertaking, only the turnover (ie, the annual net lease revenue) attributable to the relevant real estate is taken into account.
The FCO previously announced that it would grant on application formal exemptions from the pre-merger notification obligation to various types of transaction, such as:
More recently, by a letter of April 6 2006 the First Decision Division specified the criteria pertaining to the 'significant part of the assets' test, thereby defining a material exemption from the pre-merger notification obligation.
According to the FCO, in the case of real estate transactions the preconditions for the acquisition of a significant part of the assets are fulfilled only if the turnover attributable to the properties or real property portfolio to be acquired amounted to more than €5 million during the last financial year. Otherwise, the acquisition will not appreciably strengthen the purchaser's position on the relevant market and thus be exempt from the pre-merger notification obligation. This threshold does not refer to the purchase price achieved for the real property during the relevant transaction; rather it relates to the turnover achieved with the real property (ie, net lease revenues).
However, even if the respective turnover falls below the €5 million threshold, the exemption applies only if the following prerequisites are also fulfilled:
The recent clarifications of the undefined term 'significant part of the assets' by the FCO have already eased the merger control review process for real estate transactions. It is hoped that the First Decision Division will provide further guidance on the remaining questions, such as whether only the revenues of the existing portfolio of the purchaser or also the annual net lease revenues of the target must be taken into account when calculating the €30 million threshold for the material exemption.
Furthermore, the FCO's administrative practice will show how real estate transactions will be assessed. In particular, it remains to be seen to what extent the €5 million threshold will also apply to transactions which are structured as a successive accumulation of minor acquisitions.
If a transaction concerns the acquisition of a portfolio of properties, the €5 million threshold generally applies to each single property. However, using a rigid interpretation of this principle, even the acquisition of a huge portfolio would be exempt from the notification requirement provided that each single property falls below the €5 million threshold. It remains unclear to what extent net lease revenues of properties located in the same region must be taken into account.
For further information on this topic please contact Stefan Lehr or Michael Holzhäuser at CMS Hasche Sigle by telephone (+49 711 976 40) or by fax (+49 711 976 49 00) or by email (firstname.lastname@example.org or email@example.com).
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