Taking over employees may be subject to merger control in Germany – Bundeskartellamt not competent to review Microsoft/Inflection transaction as Inflection has no substantial operations in Germany

Over the past few weeks, the Bundeskartellamt has been examining whether the takeover of almost all employees of Inflection AI, Inc. (in the following: Inflection) by Microsoft Corporation (in the following: Microsoft) in March 2024 is subject to German merger control. It concluded that this was not the case as the operations of target company Inflection in Germany were only minor at the time of the takeover.

However, in its assessment the Bundeskartellamt deemed the takeover of all employees 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.

Andreas Mundt, President of the Bundeskartellamt: “This case shows that German competition law can also cover less traditional takeover plans in the digital sector. We have recently seen more and more of these so-called 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 concern young, innovative companies in the digital sector, such as those involved in developing artificial intelligence. The transaction value threshold, a new criterion introduced a few years ago to determine whether a transaction is subject to merger control, allows us to also review these cases and prohibit them, if necessary. In this way, we are helping to preserve diversity in new digital markets.”

Inflection is a technology company which was founded in 2022 and has developed and launched the chatbot called Pi.

After the European Commission had announced on 18 September 2024 that it would not take a decision in this case (see the Commission’s press release of 18 September 2024), the Bundeskartellamt had to decide whether to review the transaction.

Based on its investigations the Bundeskartellamt concluded that the takeover of the workforce 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. The Bundeskartellamt had examined the different contracts between Microsoft and Inflection and between Microsoft and Inflection’s shareholders.

However, the national thresholds for reviewing the takeover were not reached in this case. The transaction could have been subject to merger control in Germany under the so-called transaction value threshold as the value of the consideration for the takeover exceeded 400 million euros. In order for the transaction to be reviewed, the target company must have substantial operations in Germany at the time it is acquired. The investigations have shown that this was not the case for Inflection. The Bundeskartellamt deemed the number of Pi chatbot users in Germany to be too low. As a consequence, the Bundeskartellamt discontinued its proceedings.