The sale of start-ups – do competition authorities have a say?

In many cases, the sale of a start-up to an investor will not require prior notification to the Bundeskartellamt (German Federal Cartel Office) or other competition authorities. In most countries, whether the acquisition of an undertaking requires a notification depends on the turnover of the acquirer and the target. The requirement for notification to the Bundeskartellamt is unlikely to be triggered when the total turnover of the target company is below EUR 5 million. However, even if the target’s turnover does not exceed this threshold a notification will be necessary when the transaction volume – i.e. primarily the agreed purchase price – exceeds EUR 400 million. A transaction volume trigger also applies for merger control in Austria (here the threshold is EUR 200 million). The fulfilment of other conditions may also trigger a notification requirement under the merger control laws of other countries, regardless of the turnover of the companies involved: in Spain and Portugal, for example, it will be triggered when the market shares of the undertakings involved exceed certain levels.

If the acquisition needs to be notified, it may not be implemented before the competition authority (or authorities) has issued its clearance decision. In its review, the competition authority examines the acquisition to see whether it is expected to significantly impede effective competition. This will be the case in particular when the concentration is likely to create or strengthen a dominant position on the market for the acquirer or the target. Such cases are rare; however, where this is found to be the case, the merger will be prohibited and may not be implemented.

When assessing the sale of a start-up, competition authorities will look at whether the acquirer and the start-up are already in competition with one another, whether the start-up is a potential competitor of the acquirer (and possibly just needs time to become competitive) or whether both companies are not competitors (and are unlikely to become competitors in the future). The more intensive the level of competition between the acquirer and the start-up and the more likely it is that the start-up is a growing competitor, the more intense the scrutiny by the competition authorities will be. If the acquirer already has a very strong market position and if the start-up is already or would foreseeably be in the position within the next three years to compete against the acquirer, the concentration may be prohibited. “Buying up” the competition can lead to the strengthening of a dominant market position for the purchaser or – if the start-up is already a competitor – the creation of such a position when the target gives the purchaser the decisive additional market power.

The EU Commission has repeatedly stated that start-ups have a particular competitive value as an innovating factor. Innovation can strengthen a competitor’s market position. If a merger would eliminate the start-up as an independent source of competition and innovation on the market, this can curb any incentive for the purchaser and other competitors to innovate. This in turn will reduce the level of competition on the market to the detriment of consumers.

Summary: In many cases, the sale of a start-up will not require notification to a competition authority. However, if the start-up has already established itself on the market with a significant turnover or the transaction value is particularly high, the notification requirement might be triggered in Germany and/or in other countries. If notification is necessary, the competitive features of start-ups, in particular their strength in innovation, can lead to greater scrutiny of the acquisition by the competition authorities.

Jan Christian Eggers
(Lawyer, LL.M.)