Clifford Chance

On 29 November 2024, the German Federal Cartel Office ("German FCO") announced that hiring a team of employees of another business (so-called acqui-hires) may, under certain circumstances, be subject to German merger control.

Earlier this year, Microsoft Corporation ("Microsoft") announced the acquisition of certain assets of Inflection AI, Inc. ("Inflection"). Inflection is a US based technology company which was founded in 2022 and (until the transaction) developed and a machine learning and generative AI foundation model and launched an AI chatbot called Pi.

The transaction mainly comprised the hiring of the two co-founders of Inflection, who were subsequently assigned with the task of advancing Microsoft's AI-tool Copilot and other consumer artificial intelligence products and research at Microsoft. In addition to the hiring of these two co-founders, Microsoft made employment offers to most of Inflection's staff and agreed, among other things, on a non-exclusive license for Inflection's intellectual property and, according to reports, on a waiver of any legal rights by Inflection for hiring the latter's staff.

Prior to the assessment by the German FCO, the EU Commission dealt with the transaction following a referral request by seven EU Member States under Art. 22 of the EU Merger Regulation ("EUMR").

Upon review of the details of the transaction and its implementation, the EU Commission considered that the transaction involved all assets necessary to transfer Inflection's position in the markets for generative AI foundation models and for AI chatbots to Microsoft. Further, in view of an announcement of Inflection that the ‘new Inflection' would shift its focus to a different activity, namely its AI studio business, the EU Commission regarded the agreements entered into between Microsoft and Inflection as a structural change in the market that amounts to a concentration under the EUMR. Following the Illumina/GRAIL judgment by the Court of Justice of the European Union of 3 September 2024, holding that Member States cannot refer a transaction to the EU Commission under Article 22 of the EUMR when not competent to review the transaction under their national merger control rules, all seven Member States that submitted an initial referral withdrew their requests. Therefore, the EU Commission decided on 18 September 2024 not to take a decision.

Subsequently, the German FCO had to assess whether to review the transaction under national merger control provisions.

Based on its investigations, the German FCO concluded that the takeover of the employees of Inflection and the terms governing the use of Inflection’s key intellectual property rights by Microsoft amounted to a de facto takeover of Inflection by Microsoft and as such they were subject to German merger control.

However, the national thresholds for reviewing the takeover were not met. Generally, in case of an acquisition of assets the turnover attributable to the asset is determined by treating the business unit or production plant that it represents as the point of reference for the determination of turnover. In the case at hand, the German FCO presumably looked at the overall turnover of Inflection AI, Inc., given that it concluded that the employees and agreements subject to the transaction comprised its entire competitive potential.

Given that the domestic turnover thresholds were not met, the German FCO also assessed whether the transaction could have been subject to merger control scrutiny in Germany under the so-called transaction value threshold test, as the value of the consideration for the takeover exceeded EUR 400 million. However, according to the German FCO, Inflection did not have substantial operations in Germany at the time of the proposed acquisition. More specifically, the German FCO deemed the number of Inflection's Pi chatbot users in Germany was too low at that time. As a consequence, the German FCO discontinued its proceedings.

The German FCO explicitly noted that it has deemed the acquisitions of all employees of Inflection together with the accompanying agreements on financing and the use of intellectual property rights to constitute a merger which is generally subject to merger control in Germany. Further, it mentioned that it has seen increasing numbers of acqui-hires, which are ultimately about transferring the competitive potential of a target company to the buyer by hiring their highly skilled employees with specialised knowledge. These acqui-hires mainly concerned young, innovative companies in the digital sector, such as those involved in developing artificial intelligence.

The case at hand is also another example of the appetite of the German FCO and other competition authorities to scrutinize digital companies, not only under antitrust law but also under the applicable merger control provisions. The transaction was also reviewed as a merger, and ultimately cleared unconditionally, by the UK's Competition and Markets Authority.

Further, less traditional types of acquisitions which are not based on the typical structures of acquisition of shares or assets such as production facilities and similar assets, such as acqui-hires, may also have relevance under merger control law. In such cases, it is increasingly important to check at an early stage whether the relevant merger control thresholds are met. In relation to such transactions, it is of particular importance to assess whether the so-called transaction value threshold is met. This test, which also exists in other jurisdictions, such as Austria, is a new criterion introduced a few years ago to determine whether a transaction is subject to merger control even if the turnover of the target is below the domestic turnover thresholds but the value of consideration particularly high is met.