Transactions and practices: EU Joint ventures
Joint ventures encompass a broad range of commercial operations, ranging from fully-fledged merger-like operations to co-operation limited to particular functions, such as production, distribution or research and development. This Practice note considers the treatment of joint ventures under both the EU Merger Regulation and Article 101 of the Treaty on the Functioning of the European Union.
Changes in terminology: Following the entry into force of the Lisbon Treaty on 1 December 2009, Article 81 and Article 82 of the EC Treaty have been renamed Article 101 and Article 102 of the Treaty on the Functioning of the European Union (TFEU)). In addition, the Court of First Instance (CFI) has been renamed the General Court. This new terminology has been reflected throughout this note. For further information on the Lisbon Treaty see the Practice note, The European Union after the Treaty of Lisbon (www.practicallaw.com/2-381-1190).
The author is grateful for the assistance of Ninette Dodoo of Clifford Chance LLP in the preparation of this section.
Joint ventures encompass a broad range of commercial operations, ranging from fully-fledged merger-like operations to co-operation limited to particular functions such as production, distribution or research and development. For example:
Two or more parties combine their resources to bid for the award of a contract to construct an infrastructure project. This may be an endeavour limited in time to the construction period, with usually no co-operation between the parties beyond the project itself. The competition law consequences of such an arrangement may well be non-existent, or at least very limited, so long as the parties do not reach agreements or understandings which go beyond the scope of the specific project. Though the parties may describe it as a joint venture, it will not be regarded as a full-function joint venture under the EU merger control rules (see below) as it is not lasting. However, Article 101 of the Treaty on the Functioning of the European Union (TFEU) (formerly Article 81 of the EC Treaty) may apply to it insofar as it contains any elements which go beyond the project; for example, if it involves any long-term exclusive supply or take agreements (see Transactions and practices, Co-operation between competitors: Collusive tendering (www.practicallaw.com/A14477)).
Two or more parties combine to undertake joint research and agree how they will respectively exploit the results. Although this type of arrangement may not take the form of a full-function joint venture as described below (so that the EU merger control rules would not apply), Article 101 may apply to arrangements of this kind, and these are considered in Transactions and practices, Collaborative agreements (www.practicallaw.com/A14478).
Two or more parties combine to pool their activities in a particular field, often creating a new, jointly-owned corporate vehicle for the purpose, with its own management and access to sufficient resources (in the form of finance, staff, assets and so on) to enable it to conduct its activities on a lasting basis. This is known as a full-function joint venture, and it will be assessed under the EU merger control rules if it has an "EU dimension", which will be the case if certain turnover thresholds are exceeded (see Assessment under the Merger Regulation). Joint ventures which are not full-function, and full-function joint ventures which do not have an EU dimension but which have a co-operative element, will be assessed under the procedural and substantive rules of Article 101 of the TFEU and/or national competition (including merger control) rules (see Assessment under Article 101 in respect of joint ventures which are not full-function).
This Practice note considers the treatment of joint ventures under both the EU Merger Regulation and Article 101 of the TFEU.
Major changes to the application of Article 101 as well as to the Merger Regulation came into force on 1 May 2004. Regulation 1/2003 (OJ 2003 L1/1) replaced Regulation 17/62, which forms the framework for competition enforcement, and Regulation 139/2004 (OJ 2004 L24/1) replaced Regulation 4064/89 on merger control (Merger Regulation) (for more on these merger reforms see Mergers and acquisitions, box, Reform of EU merger control (www.practicallaw.com/A14482)). This note deals with the law as it has applied since 1 May 2004.
The following categories of joint venture, which are treated differently under the EU competition rules, may be distinguished:
Full-function joint venture without a co-operative element. Broadly, this is a joint venture of the type described in the third example set out in the introduction to this section, where there is a structural change in the market such as the establishment of a jointly-owned company (or the acquisition of shares in an existing company), without the joint venture potentially leading to any co-ordination of competitive behaviour between the parents. This would be the case where, for example, two participants put all their activities into the joint venture, retaining only their investments, and where they have no activities competing with the joint venture, or arrangements for the supply of materials to or purchase of materials from the joint venture. The meaning of "full-function" is considered in When is a joint venture full-function? A joint venture of this kind should be assessed entirely under the EU merger control regime insofar as the relevant thresholds are met (see Assessment under the Merger Regulation).
Full-function joint venture with a co-operative element. This is the same as a full-function joint venture described above, but with the additional element that the joint venture has the object or effect (whether wholly or partially) of co-ordinating the competitive behaviour outside the joint venture of the parties who have established it, i.e. because two or more of the parents retain significant activities either in the same market as the joint venture, or in upstream, downstream or neighbouring markets. Such co-ordination is often referred to as the "spill over effects" of a joint venture. If, for example, two oil companies put all their chemicals operations into a jointly-owned company, that joint company might well be a full-function joint venture. But if the oil companies both remain active in feedstock (an "upstream" activity), or plastics (a "downstream" activity), the creation of the joint venture in which they both have an interest may result in the companies co-ordinating their behaviour with respect to these upstream or downstream activities. Such a joint venture will fall to be examined under the EU merger control regime, assuming that the relevant turnover thresholds are met (see Assessment under the Merger Regulation), which in this case will also include an assessment of any co-ordination issues under Articles 1011(1) and 101(3) of the TFEU. The circumstances in which such co-ordination may arise are considered in Application of Article 101 under the Merger Regulation procedure.
Non-full-function joint venture. This is a joint venture of the type described in the second example given in the introduction to this section (though not necessarily established for the purpose of research), where the parties' co-operation does not involve any structural change. These types of joint ventures are assessed under the procedural and substantive rules of Article 101 and possibly under national competition laws (see Assessment under Article 101).
The three categories above are used for the purpose of the discussion which follows.
Position if Merger Regulation applies
Generally, it will be advantageous for the parties to bring their joint venture within the scope of the Merger Regulation. There are a number of reasons for this:
The Commission has sole competence to investigate joint ventures which amount to concentrations and which have an EU dimension (see below), to the exclusion of national competition authorities. Therefore, once a transaction is caught by the Merger Regulation, the national competition rules of countries within the European Economic Area (EEA) (see Glossary (www.practicallaw.com/A14505)) will not apply. The Commission's exclusive jurisdiction is, however, subject to limited exceptions under the Merger Regulation, including the right of a member state to carry out a parallel investigation if its "legitimate interests" are affected, or where the Commission, at the request of one or more member states, has referred a notified concentration back to the relevant authority of the member state or states concerned (see further, Transactions and practices, EU Mergers and acquisitions: One-stop shop principle (www.practicallaw.com/A14482)).
The Commission's obligation to reach a decision under the Merger Regulation, is in contrast to the position under Article 101. Prior to 1 May 2004, it was possible to notify an agreement to the Commission under Article 101 for a clearance or exemption decision. However there were often significant delays associated with this. Since 1 May 2004 it is no longer possible to notify agreements to the Commission for clearance or an exemption. The parties must assess for themselves whether Article 101(1) applies and if the conditions for the application of Article 101(3) are met. Accordingly, the Merger Regulation provides greater legal certainty.
Nonetheless, in certain circumstances the Commission may be prepared to issue some form of comfort or clearance for a non-full-function joint venture. It can do so in one of two ways:
Opening an investigation into the joint venture, and then closing the case. Such case closures are on the grounds of administrative priorities, and do not amount to a finding that there has been no infringement of Article 101, so they are not binding on national competition authorities and regulators, although they do considerably minimise the risk that a national authority or court would come to a different conclusion. In closing the investigation, the Commission will often indicate that its reasons for closing the case, including the fact that there was insufficient evidence of an infringement to proceed with the investigation (if applicable). If commitments are accepted it will issue a decision indicating that those commitments adequately addressed any competition concerns that it identified. This approach has been taken, for example, in relation to airline operators who wished to form an alliance to cooperate on revenue-sharing, joint management of schedules, pricing and route capacities, but could not enter into a full-function joint venture structure as to do so would require one or more of them to surrender their national flag carrier status (see for example, Legal update, Commission accepts binding commitments from British Airways, American Airlines and Iberia (www.practicallaw.com/9-502-7919)). In practice, the substantive issues arising from such joint ventures are analysed by the Commission in the same way as they would be for a full-function joint venture.
The second route for clearance is to request that the Commission issues a formal declaration that Article 101(1) does not apply (either because the agreement or practice in issue is not caught by Article 101(1) or because the conditions of Article 101(3) are met) or issues informal guidance to that effect, in accordance with its Notice on informal guidance relating to novel questions Articles 101 and 102 TFEU that arise in individual cases (OJ 2004 C101/78). The Commission has not, to date, issued such a declaration or guidance, and will only do so if it is satisfied that the public interest of the EU so requires and, in particular, that the joint venture in question gives rise to novel questions of law arise with cross-border implications or where it is necessary to clarify the law in order to ensure consistent application of the law throughout the EU. Commission decisions in such circumstances are of a declaratory nature only, but are binding on national competition authorities and courts. Informal guidance, however, is not (see Competition regime, Article 101: Exemption under Article 101(3) (www.practicallaw.com/A14484)). Under the post 1 May 2004 regime, the competition authorities and courts of member states have the power to apply Article 101 in full.
Clearance under the Merger Regulation is not limited in time, and is not affected by future changes in market conditions (although a clearance decision under the Merger Regulation may be revoked where the decision is based on incorrect information or the parties breach an obligation attached to the decision) (see further, Transactions and practices, EU Mergers and acquisitions: Commission's review procedure (www.practicallaw.com/A14482)).
If a full-function joint venture with co-operative elements has an EU dimension, the Commission's jurisdiction under the Merger Regulation enables it to apply the Article 101 test to the co-operative elements (see Application of Article 101 under the Merger Regulation procedure).
Position if the Merger Regulation does not apply
Article 101 and national rules may apply to joint ventures which are not full-function, or which, though full-function, are not of an EU dimension because the relevant turnover thresholds are not met, but have a co-operative element.
The application of Article 101 to joint ventures which are not full-function is considered in Assessment under Article 101.
In the case of full-function joint ventures which are not of an EU dimension, the Commission has stated that it will leave the assessment of any co-operative elements to national competition authorities as far as possible (Statements for the Council Minutes, 20 June 1997).
Relationship between EU and national controls
The circumstances in which joint ventures may be subject to EU and/or national competition rules are summarised in the box, Joint ventures: control under EU and national laws.
Assessment under the Merger Regulation
A joint venture will be assessed under the Merger Regulation if:
It amounts to a concentration (see below); and
It has an EU dimension, that is, where the relevant turnover thresholds are exceeded (see EU dimension).
A "concentration" as defined in the Merger Regulation will arise where a change of control on a lasting basis results from the merger of two or more previously independent undertakings, or where:
One or more persons already controlling at least one undertaking, or
One or more undertakings acquire, whether by purchase of securities or assets, by contract or by any other means, direct or indirect control of the whole or part of one or more other undertakings (Article 3(1)(b), Merger Regulation).
This includes both acquisitions of sole control (where one person or undertaking acquires control) and acquisitions of joint control (where two or more persons or undertakings acquire control). Mergers and acquisitions of sole control are discussed in Transactions and practices, EU Mergers and acquisitions (www.practicallaw.com/A14482). The current Merger Regulation amended the definition of a concentration under Article 3 from that in Regulation 4064/89 to expressly require that there must be a change of control on a lasting basis. This change reflects the Commission's previous practice in assessing concentrations.
In order to qualify as a concentration for the purpose of Article 3(1)(b), a joint venture must perform "on a lasting basis all the functions of an autonomous economic entity" (Article 3(4)).
Therefore, if the Merger Regulation is to apply to a joint venture, three conditions must be satisfied:
There must be an acquisition of joint control by two or more independent undertakings;
The joint venture must perform all the functions of an autonomous economic entity on a lasting basis; in other words, it must be a full-function joint venture; and
The joint venture must have an EU dimension (that is, the relevant turnover thresholds must be met).
These conditions are considered in detail below (see also box, Joint ventures and mergers: application of the Merger Regulation).
The Commission had indicated that it intended to extend the scope of the Merger Regulation to include partial-function production joint ventures. This proposal was abandoned, however, and was not included in the current Merger Regulation.
Joint ventures and mergers: application of the Merger Regulation
For a joint venture to constitute a concentration under the Merger Regulation, it must be jointly controlled. An acquisition of sole control will mean that there is a concentration in the form of a merger, rather than a joint venture. If neither sole nor joint control are acquired, the transaction is unlikely to constitute a concentration, and the Merger Regulation will not apply. Consequently, it will be necessary, where it is clear that sole control does not arise, or where sole control does arise but that concentration does not have an EU dimension, to establish the existence of joint control if parties wish to bring their transaction within the scope of the Merger Regulation (see Position if Merger Regulation applies).
Some examples of typical situations in which a concentration in the form of a joint venture may arise are set out in the box, Situations in which a concentration may arise.
Under the Merger Regulation, "control" is constituted by "rights, contracts or any other means which, either separately or in combination and having regard to considerations of fact or law involved, confer the possibility of exercising decisive influence" on the undertaking concerned (Article 3(3)). The Merger Regulation applies to the acquisition of both de facto and de jure joint control. An example of the assessment of an acquisition of de jure control is Hutchinson/RCPM/ECT (Case COMP/JV.55, 3 July 2001). An example of de facto control is TPS (Case COMP/JV.57, 30 April 2002)
The Commission has expanded upon this definition as it applies to joint control in its Consolidated Jurisdictional Notice (OJ 2008 C95/1) (the Notice). The Notice states that "joint control" exists when two or more undertakings have the possibility of exercising decisive influence over another undertaking: the joint venture. Decisive influence normally means the power to block actions which determine the strategic commercial behaviour of an undertaking. The essential feature of joint control is the possibility of a deadlock arising from the power of two or more parent companies to veto proposed strategic decisions, which effectively requires them to reach a common understanding in determining the commercial policy of the joint venture.
If this situation does not exist, and instead one parent company can effectively take all the major decisions by itself, there is no joint control. It would therefore not normally be consistent with the notion of joint control for only one of the parent companies to have a casting vote in situations of deadlock.
The most straightforward example of joint control is where there are two participants with equal voting rights in the joint venture. In this situation, each participant exercises decisive influence over the joint venture, as the consent of both is required for any decisions to be taken (for example, Granaria/Ultje/Intersnack/May Holding (Case COMP/JV.32, 28 February 2000) and CVC/Permira/AA (Case COMP/M.3517, 27 August 2004)).
Joint control may also arise where the joint venture partners enjoy equal shareholdings, but decision-making is by majority voting. In Alba/Beko/Grundig, for example, all decisions had to be taken by majority voting pursuant to the shareholders agreement of the joint venture's partners. In practice, however, no decision could be taken without agreement between the board representatives of the joint venture's partners. In these circumstances, the Commission found that both parents had the possibility to exercise decisive influence over the joint venture, and so had joint control (Case COMP/M.3381, 29 April 2004).
Joint control may also exist where the participants do not have equal rights in relation to the joint venture, either in terms of voting power or their representation on the decision-making bodies, or where there are more than two parent companies. A number of factors which are relevant in this situation are considered below.
Joint control will also exist if at least two shareholders have the right to veto key strategic commercial decisions relating to the business of the joint venture, such as decisions relating to the budget, the business plan, major investments and the appointment of senior management (see, for example, JCI/Bosch/VB Autobatteries JV (Case COMP/M.2939, 18 October 2002) where the minority shareholder was deemed to exercise joint control with the majority shareholder despite the former's 20% shareholding, since important business decisions relating to the joint venture could only be approved with the combined votes of both the majority and the minority shareholders).
A right of veto which extends only to matters such as changes in the company's statutes, increases or reductions in its share capital or liquidation, typically aimed at protecting the financial interests of minority shareholders as investors in the joint venture, will not be sufficient for this purpose (for example, Blackstone/CDPQ/Kabel Nordrhein-Westfalen (Case COMP/JV.46, 19 June 2000)).
The right of veto need not necessarily extend to all key strategic decisions: the Commission will assess the package of veto rights as a whole. However, a veto right that does not relate either to strategic commercial policy, to the appointment of senior management or to the budget of business plan cannot be regarded as giving joint control (paragraph 73, Consolidated Jurisdictional Notice).
It regards the ability to veto decisions relating to the budget and the appointment of management as very important veto rights, because these give the minority shareholder a decisive influence on the overall commercial policy of the joint venture (paragraph 69, Consolidated Jurisdictional Notice).
A right of veto over the business plan alone may be sufficient to confer joint control if the business plan is comprehensive, in that it contains details of the aims of the joint venture and the measures to be taken to achieve them. However, where the business plan merely contains general declarations concerning the business aims of the joint venture, the existence of a veto right will be only one of the factors taken into account. Similarly, in China National Agrochemical Corporation/ Koor Industries/Makhteshim Agan industries (Case COMP/M.6141, 3 October 2011), the Commission considered that a right to veto hiring and firing of senior management was sufficient to confer control, notwithstanding that the parent company in question would have no rights to veto any other strategic decisions of the joint venture.
The significance of a veto over the investments that the joint venture is able to make will depend on the size of investments which require the participants' approval. If it is very high this may be regarded merely as the normal protection of a minority shareholder's interests and count against the existence of joint control. However, there is no universal threshold above which investments will be deemed to be sufficiently high, such that a veto over them will be viewed as a minority shareholder protection. Consequently, the relevant threshold must be assessed by reference to the value of investments typically undertaken by businesses operating in the market in question. The extent to which investments are an essential feature of the market in which the joint venture is to participate is also relevant. If investments do not play a significant part in the joint venture's business, the importance of the veto will be reduced (for example, Blackstone/CDPQ/Kabel Nordrhein-Westfalen (Case COMP/JV.46, 19 June 2000)).
A veto right which is of particular importance in the market in which the joint venture operates may be important in establishing joint control. For example, a veto over the technology to be used by a joint venture may be an important right where technology is key to the joint venture's activities.
British Steel/Europipe provides an illustration of joint control arising out of veto rights held by the participants (Case IV/M.1014, 26 February 1998). Here there were three participants in the joint venture, with each party holding 33.3% of the share capital. The joint venture was to have a two-tier management structure, consisting of an executive management committee comprising four managing directors who were to be responsible for day-to-day management, and a partners' committee made up of nine members, three of whom were appointed by each parent company. Any modifications to the business plan required the unanimous approval of the parent companies. In addition, the shareholders' agreement provided that certain key decisions (relating, for example, to acquisitions and disposals, and major financial matters), required the unanimous approval of the partners' committee. As the affirmative vote of each participant was therefore required for all major decisions, the Commission held that the joint venture was jointly controlled by the three parent companies.
Another example is Blackstone/CDPQ/Kabel Nordrhein - Westfalen (above). Despite there being several different players and equity interests involved, the Commission considered that only two entities, Blackstone and CDPQ, had joint control of one of the joint ventures under review (CAI Lux), and that, through CAI Lux, the two companies exercised joint control over the other joint venture (KNW). CAI Lux is a joint venture company with a number of investors, including Blackstone, CPDQ, and CAI. The Commission took the view that as Blackstone and CDPQ were the two largest shareholders they were the two parties that were in a position to veto important decisions taken by CAI Lux's governing board. In relation to KNW, a joint venture company between CAI Lux (55%) and KDG (45%), a wholly-owned subsidiary created by DT for the purpose of this transaction, the Commission also concluded that Blackstone and CPDQ, through CAI Lux, jointly controlled KNW.
The Commission considered a number of factors. First, under the terms of an agreement between Blackstone and CPDQ, any board directors of KNW appointed by CAI Lux were required to vote together and to follow the instructions of CAI Luxs board of directors or those of its shareholders. Second, although KDG (and indirectly DT) enjoyed certain veto rights, these rights did not cover the business plan, the appointment of management or budgetary control over KNW. The Commission thus concluded that DT did not, through KDG, have joint control over the strategic affairs of KNW.
The figure in the box below, Blackstone/CDPQ/Kabel Nordrhein Westfalen illustrates the shareholding structure in this case.
Minority shareholders acting together
The fact that a minority shareholder does not have specific veto rights does not necessarily exclude the possibility of joint control. It is possible for two or more minority shareholders to have joint control by acting together in exercising their voting rights.
Such joint control may have a legal basis - the minority shareholders may, for example, have transferred their rights to a holding company or they may have entered into a legally binding agreement to act in concert. Alternatively, there may be de facto joint control if there are strong common interests between the minority shareholders so that one would not act against the interests of the other.
Whether there are strong common interests will depend on the particular circumstances. As a general rule, where a joint venture agreement establishes a new joint venture entity, there is a higher probability that the Commission will find joint control. This is because it is more likely that the participants will be carrying out a deliberate common policy, and so have strong common interests, than in the case of a purchase of shares in an existing undertaking. In the case of acquisitions of shareholdings, there is a higher probability of commonality of interests if the shareholdings are acquired by means of concerted action. However, a common interest as financial investors will not generally be sufficient (see the Consolidated Jurisdictional Notice, paragraphs 74 to 80).
The chances of establishing strong common interests are further increased when each participant supplies or contributes something to the joint venture which is essential for its functioning (see, for example, Toray/Murata/Teijin (Case COMP/M.2763, 6 December 2002)). However, the greater the number of participants, the less likely it is that there will be a co-ordinated approach indicating strong common interests, unless the parties can point to a specific feature of the partnership, which shows that the participants' interest are aligned.
The latter point was highlighted in a case concerning the creation of a new joint venture company to operate a terrestrial television channel in the UK (Case IV/M.673, Channel Five, 22 December 1995). In this case there were four shareholders, none of whom held veto rights. The parties argued that there was nonetheless de facto joint control because of their strong common interests stemming from the prior links between the parties and the fact that each shareholder would be contributing expertise to the joint venture. However, the Commission found that a prior link existed between only two of the shareholders, and that, in reality, one of the parties was making only a financial contribution and the others would only be contributing minimally. There were no long-term supply agreements and the parties admitted that only a modest proportion of the joint venture's television programmes would be purchased from its parents. The Commission therefore found that the parties did not have sufficiently strong common interests to establish de facto joint control.
In contrast, in Toray/Murata/Teijin (above) the Commission found that the parents did have joint control of the joint venture even though none of the parents had veto power at the level of the board of directors, where decisions on the joint venture's annual business plan, budget and major investments were taken. It sufficed that unanimity was required for the adoption of decisions of a strategic nature at the level of the shareholders meeting. The broad powers afforded to shareholders meetings, in particular to meetings of representatives of shareholders, effectively limited the scope of the board's powers. The Commission further noted that where a new joint venture is established with a limited number of parents, each making a vital contribution to the joint venture, there is a strong likelihood that the joint venture will be operated with the parents' agreement on the most important strategic decisions, even if there is no express provision for veto rights.
Similarly, in Petrochina/ Ineos/ JV (Case COMP/M.6151, 13 May 2011), the transaction under consideration entailed the creation of three separate joint venture companies, of which Ineos would be the majority shareholder of two, and Petrochina would be the majority shareholder of the third. The Commission considered that the transaction gave rise to de facto joint control over the three joint ventures, primarily because the joint ventures were interlinked and interdependent on one another. Therefore, the parties would have to agree on all matters of strategic importance in order for the joint ventures to function effectively. In particular, business plans and strategies of the three joint venture companies would have to be aligned with one another as it would not be possible to take a decision in respect of one company without considering the impact on the others. As a consequence, PetroChina and INEOS would have strong common interests (the profitability of the business as a whole), such that they would not act against each other in exercising their rights in relation to the three joint ventures,
In relation to acquisitions of minority shareholdings in companies which are already in existence, prior links between the shareholders or concerted action in acquiring the shares may be factors indicating a common interest. For example, in Skanska/Scancem (Case IV/M.1157, 11 November 1998) the Commission considered, inter alia, that certain acquisitions had taken place by means of concerted action between two of the parent companies, and that the evidence showed that these companies had in principle agreed on a comprehensive shareholder's agreement, which included agreement on the business of the joint venture. Therefore, it made more sense for them to act together on a long-term basis, as opposed to trying to form shifting alliances with minor shareholders on a case-by-case basis.
Similarly, in Fletcher Challenge/Methanex (Case IV/M.331, OJ 1993 C98/9), it was envisaged that an existing company would become jointly controlled by two parent companies. The two parents were together to hold 54% of the shares in the joint venture company, with the public holding the remaining 46%. Neither of the two parent companies would possess veto rights. However, the two parents were still found jointly to control the joint venture because there were legally enforceable obligations between them as to how they were to exercise their voting rights (to a large extent jointly). In addition, they had strong common interests in making the joint venture a major player in the relevant market (the methanol market), due to their complementary expertise in this field.
In Nokia Corporation/SP Tyres (Case IV/M.548, OJ 1995 C163/6), Nokia held 80% and SP Tyres held 20% of the shares in an existing joint venture company. Following an offer of shares to the public, Nokia would hold 25% to 40% of the shares, SP Tyres would continue to hold 20% and other shareholders would own between 40% and 55%. At the same time, a shareholders' agreement between Nokia and SP Tyres provided that the nominee directors of each were to use their best endeavours to achieve a mutual understanding with regard to all strategic policy issues relating to the joint venture. Not surprisingly, this obligation was found to fall short of an absolute veto. However, the parties also contended that there was de facto joint control as they had strong common interests in not voting against each other, based upon their prior links, including a number of agreements previously entered into by the parties and the fact that two of the six directors of the joint venture company were appointees of SP Tyres.
Further, the parties argued that the combination of their individual strengths created a degree of inter-dependence. The Commission rejected these arguments. The common interests were not sufficiently strong, and SP Tyres' ability to appoint directors to the joint venture company amounted to no more than the protection of a minority shareholder's rights. Further, there was only minimal inter-dependence as one of the parents was withdrawing from the market and, as such, would have a primarily financial interest in the joint venture.
In the case of existing companies, the Commission will also look at voting behaviour in the company's decision-making bodies over a period of time to identify common voting behaviour between existing shareholders.
Joint control for a limited period
If the joint venture is subject to joint control for a start-up period only, and subsequently solely controlled by only one of the participants, the venture will not be considered to be jointly controlled. In BS/BT (Case IV/M.425, 28 March 1994), the two parent companies each held 50% of the shares, but the joint venture agreement provided that they were to have unequal voting rights. The parent with the lower voting strength was given limited protection in the form of veto rights for the first three years, but after this the rights expired. This led the Commission to conclude that the joint venture was not jointly controlled.
In contrast, in F2i/ Axa Funds/ G6 Rete Gas (Case COMP/M.6302, 24 August 2011), one of the parent companies was granted veto rights over certain strategic decisions for an initial period of five years, but would have a veto right over budgets and business plans adopted after this period only if certain financial criteria were not met. The Commission considered that these governance arrangements conferred joint control for a period long enough to bring about a lasting change in the structure of the undertakings concerned.
The possible relevance of put options (under which one shareholder can require another to buy its shares in a company) to the issue of joint control was also considered in the BS/BT case, and in Albacom (Case IV/M.604, 15 September 1995). In both cases, the participant with the lower voting strength had a put option under which it could, in certain circumstances, require the other participant to buy its shares in the joint venture. The question was whether the existence of the put options would have the effect of constraining the behaviour of the participant with the greater voting strength to such an extent that there would be de facto joint control.
The Commission found that this might be the case where the exercise of the put option would be sufficiently detrimental to the controlling participant (for example, because of the financial burden of having to purchase the shares) that in practice it would feel obliged to take into account the requirements of the non-controlling participant in the management of the joint venture. In the cases under consideration, however, the put options were not found to confer joint control.
In BS/BT, the put options did not in themselves pose a sufficiently strong financial disincentive given the relative economic strength of the participant with the greater voting strength, which was BT. In Albacom, the put options could only be exercised in narrowly defined circumstances and, as such, were held not to constitute a deterrent.
A further issue raised by put options is whether the existence of such rights affects the lasting nature of the joint venture namely whether the joint venture can be said to be operating on a lasting basis. The issue ultimately turns on the specific circumstances of each case. In K+S/Solvay, for example, the Commission concluded that the put (and call) options in issue did not constitute legally binding agreements whereby the joint control exercised by the parent companies would be converted to sole control by one of them. Since it was also uncertain that these rights would be exercised after the interim period prescribed in the parties' joint venture agreement the existence of these rights were insufficient in themselves to put into question the lasting nature of the joint venture (Case COMP/M.2176, 10 January 2002).
Changes in the structure of control
A concentration may also arise when there is a change in the structure of joint control, for example a change from joint control to sole control, an increase in the number of shareholders exercising joint control or the replacement of an existing shareholder in an already jointly controlled undertaking. An example of a change from joint control to sole control is Hutchinson/ECT (Case COMP/JV 56, 29 November 2001).
In addition, an operation may be considered to be an acquisition of sole control where it leads to joint control for a starting-up period of up to three years, but according to legally binding agreements the joint control will be converted into sole control by one of the shareholders (see Case COMP/M.2389, Shell/DEA, 20 December 2001).
The Commission's assessment of joint-to-sole-control cases varies, depending on the likely substantive questions in issue. The Commission has stated that a change from joint to sole control may exceptionally require close investigation. In its Notice on a simplified procedure for treatment of certain concentrations under the Merger Regulation (OJ 2005 C56/32), the Commission notes that competition issues may arise in circumstances where the former joint venture is integrated into the group or network of the remaining shareholder. This is because the natural discipline that results from the existence of potentially diverging interests of different controlling shareholders is removed. This in turn (the removal of that disciplining constraint) could strengthen the strategic market position of the party acquiring sole control (see, for example, Case IV/M.1328 KLM/Martinair, 29th Report on Competition Policy, 1999 (points 165-166), where the Commission challenged the change from joint control to sole control by KLM forcing the parties to abandon the transaction. Compare with Deutsche Post/DHL (II) (Case COMP/M.2908 21 October 2002), where on the facts the change from joint to sole control did not raise significant competition concerns).
Shifting alliances between shareholders
Joint control will not normally exist where there is a possibility of shifting alliances between minority shareholders. This will be the case where no individual shareholder has the ability to veto strategic decisions relating to the joint venture (see above). In Eureko (Case IV/M.207, 27 April 1992), each shareholder was to hold between 20% and 30% of the joint venture. It was anticipated that additional participants would subsequently acquire equal stakes in the joint venture so that, as the number of participants in the joint venture grew, the existing shareholders' stakes would be diluted. The Commission found that there might not be sufficient grounds to consider that Eureko was jointly controlled by the parties, although the Merger Regulation was ultimately held not to apply on other grounds. The possibility of shifting alliances and the likelihood of further parties joining the venture meant that control was liable to change constantly.
Sole control by one minority shareholder
If a single minority shareholder has the power to veto important strategic decisions (for example, because it has a casting vote), that shareholder will normally be presumed to have sole control. The acquisition of such (negative) control will constitute a concentration within the meaning of the Merger Regulation, but it will be classified as a merger rather than a joint venture because there is no joint control.
In Ford/Mazda (Case IV/M.741, 24 May 1996), for example, the Commission found that Ford's power to veto important decisions in relation to the business conduct of the joint venture, Mazda, and its right to nominate the president, meant that it acquired sole control over the whole of Mazda by increasing its shareholding from 24.5% to 33.4%.
When is a joint venture full-function?
As mentioned above, in order to qualify as a concentration a joint venture must perform "on a lasting basis all the functions of an autonomous economic entity" (Article 3(4), Merger Regulation). A joint venture which satisfies these requirements is referred to as a "full-function" joint venture. This is the case regardless of whether the joint venture is a wholly new operation or whether it is formed from assets that the parents previously owned separately.
According to the Commission's Consolidated Jurisdictional Notice (the Notice), a joint venture will be full-function if it performs the functions normally carried out by an undertaking operating on the same market in which the joint venture operates. To achieve this, a joint venture must:
Have management dedicated to its day-to-day operations and access to sufficient assets, personnel and financial resources in order to operate its business activity independently;
Have the ability to conduct its own commercial policy;
Have activities that go beyond one specific function for the parents.
Have no significant purchase or supply agreements between it and its parents which would undermine its independent character; and
Be of a sufficiently long duration as to bring about a lasting change in the structure of the undertakings concerned.
A full-function joint venture must have sufficient assets, personnel and financial resources in order to perform its business independently of its parents. It must, in essence, be a self-sufficient entity from the operational point of view.
An example of a case in which this requirement was found to be satisfied is Hitachi/NECDRAM/JV (Case Comp JV/44, 3 May 2000). In this case, the Commission considered that a joint venture, the functioning of which would be implemented in three stages over a period of at least two years, was full-function. This was because at the end of this period the joint venture would have established an independent sales channel, would have exclusive use of its own brand and access to the necessary intellectual property rights. In addition, the joint venture would have all the necessary resources to operate as an autonomous economic entity, including assets, staff and finances.
On the other hand, in RSB/TENEX/Fuel Logistic (Case IV/M.904, 2 April 1997), a joint venture for the forwarding of nuclear products was found not to be full-function. Although the parents indicated that the joint venture would at some time have its own equipment and staff, there were no concrete plans or a timetable for such a development. In addition, the joint venture would mainly supply one of its parents (see further Commercial relationship with parent companies). Therefore, as the joint venture was largely dependent upon its parents for its continued existence, it was not a self-sufficient entity. Moreover, the joint venture lacked the necessary transportation equipment, specialised staff and appropriate premises to operate independently: it had no packaging equipment for the forwarding of nuclear goods, and no assets apart from some office equipment it did not have any of its own staff and it was to operate from the offices of one of its parents.
In certain circumstances, however, a joint venture may be considered full-function even if it does not own the resources that it needs in order to operate on the market, provided it has sufficiently firm access to such resources. For example, in Celanese/Degussa (Case COMP/M.3056, 11 June 2003), ownership of certain production facilities that were to be used by the joint venture was retained by one of the parents, for technical reasons. Despite this, the Commission confirmed that the joint venture was full-function, as it would have exclusive access to the production capacity of the plant in question.
Activities beyond one specific function for the parents
A joint venture will not be full-function if it only takes over a specific aspect of a parent company's business, such as R&D or production, or if the joint venture's function is limited to the distribution of a parent company's products (Case IV/M.58 Baxter/Nestle/Salvia, 6 February 1991).
In Toray/Murata/Teijin (above), however, the full-functionality of the joint venture was not in issue even though the parent companies did not transfer all aspects of their operations related to the relevant business to the joint venture at the time of its creation. The marketing, sales and R&D activities of the parents were transferred at once, together with the relevant resources to carry on these activities. The parents further agreed to transfer their manufacturing activities to the joint venture company within one year of its incorporation. Dismissing the parent companies' arguments that the joint venture would attain full-functionality only at a future date when the manufacturing operations were transferred, the Commission found that it sufficed that the joint venture's parents had already agreed upon the principle of transferring the remaining assets required for a full-function joint venture.
Particular issues may arise where the joint venture is involved in holding real estate property and has principally been established for tax reasons. Such a joint venture will not usually be considered to be full-function as long as its purpose is limited to the acquisition or holding of real estate for its parents, using finances provided by the parents: it will lack an autonomous, long term business activity and will also lack the necessary resources to operate independently (paragraph 96, Consolidated Jurisdictional Notice).
A full-function joint venture must be free to determine its own commercial policy in its own interests. The commercial policy of the joint venture must not simply represent the commercial aspirations and needs of the parent companies. However, the Commission recognises that it is not necessary that the joint venture enjoys full autonomy as regards the adoption of its strategic decisions. If this were the case then no jointly controlled undertaking could ever be considered to be full-function. It is sufficient that the joint venture is autonomous operationally (see paragraph 93, Consolidated Jurisdictional Notice).
When Carlsberg and Allied Lyons UK amalgamated their brewing and beer wholesale activities through the creation of a 50/50 joint venture known as Carlsberg-Tetley, the Commission found that this did not constitute a full-function joint venture, since Carlsberg and Allied Lyons were to retain ultimate ownership of their beer brands and would have a final say in the joint venture's commercial policy. Carlsberg-Tetley would therefore not be an autonomous economic entity (Carlsberg/Allied Lyons, 22nd Report on Competition Policy (1992)).
However, the existence of a commercial relationship between a joint venture and its parent does not necessarily mean that it cannot be full-function. In Cargill/Vandemoortele (Case IV/M.1227, 20 July 1998), for example, the fact that the joint venture was to use the sales force of one of its parents to distribute its products did not prevent it from being full-function, because the parent was to act solely as an agent, with the joint venture itself being responsible for the organisation, marketing and pricing of the sales.
Further, the Commission recognises that joint ventures are often fledgling undertakings which may require some assistance from their parents in the initial years if they are to be commercially successful. For example, in UPM-Kymmene/APRIL (Case IV/M.1006, 11 June 1998), a joint venture was found to be full-function, despite the fact that it would initially conduct its sales through staff employed by one of its parents, because the staff were to be transferred to the joint venture as and when required and the parent was to act only as the agent of the joint venture without taking on any economic risk. Similarly, in Nordic Capital/Molnlycke Clinical/Kolmi (Case IV/M.1075, 20 January 1998), provision for one of the parents to supply administrative services to the joint venture during a two-year transitional period did not undermine the full-function status of the joint venture. However, the joint venture must deal with its parents at arm's length, on the basis of normal commercial conditions, and be free to recruit its own employees or obtain staff via third parties (paragraph 94, Consolidated Jurisdictional Notice).
In a case where the parent companies had retained legal ownership of the facilities to be used by a joint venture during a transitional period, the Commission concluded that this did not affect the joint venture's full-function character, in view of the difficulty of separating integrated equipment on an industrial site (Case IV/M.994 Hitachi/Dupont, 24 October 1997). In Smith Nephew/Beierdorf/JV (Case COMP/JV.54, 30 January 2001), the Commission similarly found that the parents of the joint venture would act as mere agents, where the joint venture manufactured most of the products in its own facility and where 40-60% of its sales would be through its own sales and marketing force, the remainder being marketed through its parents sales channels. The full-function status of the joint venture was not therefore in issue.
Commercial relationship with parent companies
In deciding whether a joint venture is full-function, the Commission takes into account the existence of any commercial relationship between a joint venture and its parents, who may be important trading partners of the joint venture, either as suppliers or as customers.
The Commission adopts a pragmatic approach to sales by the joint venture to its parents during the initial years. In its Consolidated Jurisdictional Notice (above), the Commission accepts that the joint venture may initially have to sell almost exclusively to its parents, or rely on purchases from them, in order to establish itself on the market, and indicates that this will not normally undermine the full-function status of the joint venture as long as the trading period does not exceed three years. This three-year time limit is not, however, set in stone and will depend on the specific conditions of the market in question.
For example, in Siemens/Italtel (Case IV/M.468, OJ 1995 L161/27), the Commission accepted that all the joint venture's sales would be to a subsidiary of one of its parents for the "foreseeable future": the joint venture was still found to be full-function because the subsidiary was the joint venture's only potential customer, as it had a monopoly on the market for telecommunications infrastructure in Italy.
After this start-up period, the joint venture may continue to sell products to its parents. Whether this affects the full-function status of the joint venture will depend upon the extent to which the joint venture is in a position to play an active role on the market as a whole and can be considered economically autonomous from an operational view point.
The Commission will take into account the proportion of sales that the joint venture makes to its parents compared with the total production of the joint venture, and whether the parties trade on normal commercial conditions. There is no specific turnover ratio which distinguishes full-function joint ventures from others. In one case, for example, the Commission found that a joint venture was full-function despite only 15% of its sales being to third parties in the first year, on the basis that, by the third year, this figure was expected to have grown to 65% (Case IV/M.1005 Maersk Data/Den Danske Bank, 15 January 1998). In another case, the Commission considered that the joint venture retained its full-function nature even though 50% of its production would be sold to one of its parents (Case COMP/M.2868, Linde/Sonatrach/JV, 19 December 2002).
The Consolidated Jurisdictional Notice indicates that a joint venture will generally be regarded as full-function where it achieves more than 50% of its turnover with third parties. Below this threshold a case-by-case analysis will be required. If the joint venture treats its parent companies in the same commercial way as third parties then full- functionality could be established on the basis of sales of only 20% to third parties (paragraph 98, Consolidated Jurisdictional Notice).
If the parent companies operate upstream and are consequently suppliers of the joint venture, the Commission will take various factors into account in deciding whether the joint venture is full-function.
The amount of raw materials which the joint venture purchases from its parents compared to the amount obtained from third party suppliers is also taken into account. Generally, the higher the proportion acquired from the parents, the more likely that the joint venture is not full-function. In AgrEvo/Marubeni (Case IV/M.788, 3 September 1996), the joint venture was to receive a "substantial proportion" of its supplies from third party producers, and in Matra BAe Dynamics/Dasa/LFK (Case IV/M.945, 27 January 1998) the joint venture was to receive about 80% of its supplies from third parties. Both these joint ventures were found to be full-function.
If significant value is added by the joint venture to the products supplied by its parents, this is evidence that the joint venture is full-function (see, for example, Matra BAe Dynamics/Dasa/LFK, ). Indeed, in certain circumstances, a joint venture may remain full-function even though it purchases all of its raw material inputs from a parent, provided it adds significant value to those inputs. For example, in BP/ Chevron/ ENI/ Sonangol/ Total/ JV (Case COMP/M.6477, 16 May 2012), a joint venture for the production and marketing of liquefied natural gas was to receive natural gas solely from one of its parents, but was nevertheless considered full-function as, by liquefying the gas, the joint venture would add considerable value to it, enabling it to be transported and marketed worldwide.
On the other hand, if little value is added, the joint venture may in reality be little more than a joint sales agency for the parent companies. It should, however, be noted that if there is a specific market for the distribution of a certain product (a trade market), and the joint venture competes on this market with other full-function entities, the fact that the joint venture does not add significant value to the product would not in itself undermine the full-function status of the joint venture.
In AgrEvo/Marubeni, for instance, the Commission found that there was a separate market for the distribution of products in the agrochemical and horticultural sectors. Distributors of these products were not vertically integrated into the production of such products, but were entirely dedicated to the business of distribution. The Commission would, however, normally expect a joint venture active in a trade market to have the necessary facilities (such as warehouses, depots, transport fleets).
If the commercial transactions between the parent companies and the joint venture are at arm's length, this will provide further evidence of the joint venture being full-function (for example, Hydro/SQM/Rotem/JV (Case COMP/M.2524, 5 December 2001)). The granting of preferential supplier status to the parents would not appear to undermine this. In one case where two parent companies were to supply goods and services to two joint venture companies on an arm's length basis, but with the joint ventures being granted "preferential customer status" and the parents being granted "preferential supplier status", the joint ventures were nevertheless found to be full-function (UPM-Kymmene/APRIL, above).
Issues relating to full-functionality can arise in relation to outsourcing agreements, whereby an undertaking enters into a joint venture with a service provider to provide services to it which were previously conducted in house. Such a joint venture will not normally be considered to be full-function where it provides services exclusively to its parent and is dependent for its services on the service provider. However, an outsourcing joint venture may be full-function if significant third party sales are anticipated and the relationship between the joint venture and its parent is truly commercial in nature (paragraph 100, Consolidated Jurisdictional Notice).
A joint venture must be intended to operate on "a lasting basis" in order to be full-function. Many joint ventures are established for an indefinite period and, as such, will satisfy this requirement. Provision may be made in the joint venture agreement for termination upon the occurrence of certain events, such as failure of the joint venture or fundamental disagreement between the parent companies, without affecting the full-function status of the joint venture.
A joint venture established for a fixed period can still be on a lasting basis where the period is sufficiently long in order to bring about a lasting change in the structure of the undertakings concerned or where there are provisions for the continuation of the joint venture after the expiry of such period. For example, in Eastman Kodak/Sun Chemical (Case IV/M.1042, 15 January 1998), the joint venture was initially established for a period of only ten years, but this was still found to be on a lasting basis as there were automatic options to renew the agreement for further periods of five years. A period of seven years was considered sufficient in Go-Ahead/Via/Thameslink (Case IV/M.901, 24 April 1997). Similarly, in Smith & Nephew/Beierdorf/JV (above), the Commission found that a joint venture that was established for an initial term of more than seven years and automatically renewable for successive terms of more than two years was established on a lasting basis. In Lazard/Intesa BCI/JV (Case COMP/M.2982, 4 February 2003), the Commission concluded that a joint venture established for an initial term of five years, subject to renewal of successive five-year terms, until termination by written notice of one of the joint venture's parents was sufficiently long to result in a lasting change in the structure of the undertakings concerned.
On the other hand, a joint venture is not set up on a lasting basis where it is established for a short finite period. A joint venture which was established as a temporary vehicle for the holding of shares, and which the joint venture partners intended to wind up after three years, was found not to have been established on a lasting basis (Case IV/M.722 Teneo/Merrill Lynch/Bankers Trust, 15 April 1996).
In addition, a joint venture will not be considered to have been set up on a lasting basis where there are outstanding decisions to be taken by third parties in relation to an essential part of its business activity. Such decisions might relate to the award of a contract or the grant of access rights. In the absence of such decisions there will remain doubt as to whether the joint venture will ever become operational. However, once the necessary decisions are taken in favour of the joint venture a concentration will arise (paragraph 105, Consolidated Jurisdictional Notice).
Changes in the activities of the joint venture
A new concentration might arise where the parents decide to extend the scope of the joint venture's activities and this involves the acquisition of the whole or part of another undertaking by the joint venture. Similarly, a new concentration might arise if significant additional assets (including contracts, know-how or other rights) which constitute the basis of the extension of the joint venture's activities are transferred to it.
A non-full-function joint venture could become a full-function joint venture (so giving rise to a concentration) in the event of a change in organisational structure or where the joint venture begins to trade actively on the open market. The concentration will arise once the decision by the joint venture's shareholders or managers to alter its activities is taken. For example, in American Express/ Fortis/ Alpha Card (Case COMP/M.5241, 3 October 2008), the joint venture had previously been required to seek the express consent of American Express before obtaining card processing services from anyone other than American Express, a condition which the Commission viewed as precluding the joint venture's full-function status. Removal of this consent requirement from the joint venture's contractual and governance arrangements was all that was required in order to render the joint venture full-function.
Circumstances in which full-function nature need not be established
The Consolidated Jurisdictional Notice (paragraph 91) provides that where there is a joint acquisition of control over another undertaking or parts of another undertaking from third parties, this will be a notifiable concentration even if the acquired undertaking would no longer be considered full-function after the transaction, for example, because it will sell exclusively to the parent undertakings in future (see, for example, ENI/Acegasaps/JV (Case COMP/M.6068, 11 April 2011)).
In contrast, where there is an acquisition of joint control over an undertaking that was previously under the sole or joint control of one or more of the parties that will jointly control the venture, post-transaction, the Notice implies (but does not state expressly) that the full-function nature of the joint venture must be established, as the acquisition is not "from third parties". However, the Commission's practice is not entirely consistent on this point as, in many of its decisions on such cases, there is no assessment of whether the full-function criteria were met.
If it is established that the joint venture is a concentration, it is then necessary to consider whether it has an "EU dimension". A joint venture, in the same way as any other "concentration", will have an EU dimension if the respective turnover figures for the undertakings concerned in the transaction meet the thresholds set out in the Merger Regulation.
A concentration has an EU dimension where either:
The combined aggregate worldwide turnover of all the companies concerned is more than EUR5 billion (this threshold is intended to exclude mergers between small and medium-sized companies) and
The aggregate EU-wide turnover of each of at least two of the companies concerned is more than EUR250 million (this threshold is intended to exclude relatively minor acquisitions by large companies or acquisitions with only a minor European dimension), unless each of the companies concerned achieves more than two-thirds of its aggregate EU-wide turnover within one and the same member state (this threshold - the so-called two-thirds rule - is intended to exclude cases where the effects of the merger are felt primarily in a single member state, when it is more appropriate for the national competition authorities to deal with it) (Article 1(2), Merger Regulation)
The combined aggregate worldwide turnover of all undertakings concerned is more than EUR2.5 billion (instead of EUR5 billion) and
The aggregate EU-wide turnover of each of at least two of the undertakings concerned is more than EUR100 million (instead of EUR250 million); and
The combined aggregate turnover of all undertakings concerned is more than EUR100 million in each of at least three member states; and
In each of at least three of these member states, the aggregate turnover of each of at least two of the undertakings concerned is more than EUR25 million, unless each of the companies concerned achieves more than two-thirds of its aggregate EU-wide turnover within one and the same member state (Article 1(3) Merger Regulation; (see also box, Merger Regulation turnover thresholds, below).
This second limb of the turnover test covers concentrations of a smaller size where the parties carry on, jointly and individually, a minimum level of activities in three or more member states.
These thresholds serve as a means of determining the categories of transactions that are best dealt with by the Commission. However, by virtue of the complementary referral system under the Merger Regulation cases can be reattributed by the Commission to member states and vice versa, upon request and subject to certain conditions (see Transactions and practices, EU Mergers and acquisitions: Referral back to member states (www.practicallaw.com/4-107-3705) and Referral by member states (www.practicallaw.com/4-107-3705). The Merger Regulation allows the referral mechanism to be triggered before the notifying parties make a formal filing.
Calculation of turnover
The calculation of the relevant turnover figures is considered in Transactions and practices: EU Mergers & acquisitions: Calculation of turnover (www.practicallaw.com/4-107-3705), but it is important to note the following special rules which apply in the case of joint ventures:
The undertakings whose turnover must be included for this purpose are those parties who will be exercising joint control over the joint venture company (see Joint control) - the turnover of shareholders who do not exercise joint control is therefore excluded. In addition, where joint control is established over a pre-existing (as opposed to a newly created) company, this company also will count as one of the undertakings concerned.
If one of the undertakings concerned in turn exercises joint control with one or more third parties over another joint venture (itself not otherwise affected by the transaction at issue), that joint venture's turnover must be divided equally between each of the jointly controlling parties, and the resulting share added to the turnover of the undertaking(s) concerned for the purpose of the present joint venture. For example, if party A is setting up a new joint venture company X, but at the same time already controls a joint venture company Y jointly with four other shareholders, 20% of company Y's turnover should be added to the turnover of A for the purpose of calculating turnover with respect to the proposed joint venture X.
In a situation where an acquisition is carried out by a full-function joint venture which is already operating on a market, the Commission will normally consider the joint venture itself and the target company to be the undertakings concerned, rather than the joint venture's parent companies, with turnover of the joint venture's controlling parents consolidated with that of the joint venture.
Conversely, if the acquisition is carried out by a jointly controlled company that is a mere vehicle for an acquisition by the parent companies, the each of the controlling parent companies will be deemed a separate undertaking concerned, along with the target. This will be the case, in particular, where the joint venture is set up especially for the purpose of acquiring the target company or has not yet started to operate, where an existing joint venture has no full-function character, where the joint venture is an association of undertakings, or where there are other elements which demonstrate that the parent companies are in fact the real players behind the operation (for example, significant involvement by the parent companies in the initiation, organisation and financing of the operation).
Under the Merger Regulation a full-function joint venture which has an EU dimension must be notified to the Commission and must not be implemented prior to receipt of clearance from the Commission (the so called "standstill obligation"). Implementation prior to clearance can incur "gun jumping" fines of up to 10% of the worldwide turnover of the parties that notified (or ought to have notified) the joint venture. Under Article 7(3) of the Merger Regulation, parties can apply for a derogation from the standstill obligation if justified by the adverse effects that the effects of complying with it would have on the parties to the concentration and/or third parties, and taking into account the threat to competition posed by the transaction.
As regards what amounts to "implementation", commencement of a joint venture's market facing activities will almost certainly constitute an act of implementation. For instance, the Commission required Bertelsmann and Kirch to stop marketing Kirch's digital television decoder boxes and Premiere Digital television service through Premier, a joint venture between Bertelsmann and Kirch that was notifiable under the Merger Regulation, but which had not received clearance. The parties committed to cease all forms of direct marketing by Premiere, not to accept new requests for subscriptions and to suspend various advertising operations concerning Premiere Digital (seeCommission press release IP/97/1119 "Bertelsmann and Kirch Agree On Immediate Suspension Of Sales Of D-Box Decoder By Premiere").
For activities relating to the setting up of a greenfield joint venture that fall short of market-facing conduct (such as the creation or transfer of production assets, carrying out of R&D, hiring of employees and creation of the joint venture legal entity) the position is more ambiguous, but it seems that certain preparatory steps taken for the creation of a joint venture that will inevitably be full-function in nature will also be viewed as acts of implementation. In Shell Espana/ Cepsa/ SIS JV (Case COMP/ M.3275, 14 September 2004) the Commission granted a derogation from the standstill obligation in order to allow the parties to carry out certain steps that were required by the Spanish airports authority, following the award to their newly-created joint venture of concessions for the supply of certain services at a number of Spanish airports. The Commission appears to have accepted that the following steps would have amounted to implementation of the joint venture:
Signing of the administrative contracts with the Spanish airports authority.
Procurement by the joint venture of insurance cover.
Obtaining any necessary Civil Aviation Authority authorisations.
Paying a deposit related to the provision of the relevant services to be provided under the concession.
Payment of a tender publication fee.
Signing leases over certain parts of the airports within which the concessions were to be operated.
In this case, the Commission granted the derogation, as Spanish administrative law did not permit the above steps to be made conditional on Merger Regulation clearance, and the transaction did not appear to pose a threat to competition.
In the above case, the joint venture's market facing activities under the concession meant that it would inevitably be full-function in nature. In other cases, however, the parent companies may have made no final or binding decision on matters that would determine whether or not a joint venture will be full-function. In such cases, it should, in principle, be possible to carry out a far greater range of preparatory steps while avoiding gun jumping liabilities, or the need for a derogation. For example, in BP/ Chevron/ ENI/ Sonangol/ Total/ JV (Case COMP/M.6477, 16 May 2012), the joint venture had already, by the time of notification, constructed infrastructure for the production of liquefied natural gas (LNG),in Angola, but the Commission did not question whether this amounted to a prohibited act of implementation, presumably because the parents had originally intended for the joint venture to be non-full-function, selling its LNG solely to affiliates of the parents.
Joint venture partners are able to notify a joint venture with an EU dimension in the absence of a definitive agreement. However, the joint venture partners need to demonstrate a good faith intention to conclude a binding agreement.
Notifications must be made on Form CO, as published by the Commission. The form is annexed to the Commission's implementing regulation (Regulation 802/2004 OJ 2004 L133/1, as amended by Regulation 1269/2013 OJ 2013 L336/1).
The same considerations apply to the procedure for making a notification, and the procedural aspects of the Commission's investigation, as in the case of mergers or acquisitions of sole control in general: see Mergers and acquisitions: Notification of a concentration (www.practicallaw.com/A14482), Suspension (www.practicallaw.com/A14482), Commission's review procedure (www.practicallaw.com/A14482), Remedies (www.practicallaw.com/A14482) and Third party interventions (www.practicallaw.com/A14482).
Notification of joint ventures with limited nexus to the EU
As each controlling parent of a joint venture is deemed to be an undertaking concerned, it is possible for the creation of a joint venture to satisfy the turnover thresholds outlined above even if the joint venture itself will have no activities, assets or sales whatsoever in the EU, or will have them only to a minimal degree.
In Gencor v Commission (Case T-102/96, judgment of 25 March 1999), the General Court stated that application of the Merger Regulation "is justified under public international law when it is foreseeable that a proposed concentration will have an immediate and substantial effect in the Community". However, the position of the Commission appears to be that satisfaction of the thresholds for an EU dimension is synonymous with a transaction having an immediate and substantial effect in the EU, even if the joint venture cannot itself be said to have such an effect. This is presumably because the joint venture creates a link (and therefore potential for coordination) between two parents that do have substantial activities in the EU.
Accordingly, it is usually the Commission's practice to require notification of any joint venture with an EU dimension, regardless of the likelihood that it will have activities or sales in the EU. In the event of inadvertent failure to file a joint venture with no nexus to the EU, a remedial notification to the Commission should mitigate liability for gun jumping fines. The Commission has never imposed a fine for failure to notify such a joint venture and, given the dicta of the General Court in the Gencor case, where such a joint venture also gives rise to no potential concerns regarding the co-ordination of the parent's EU activities there should, in principle, be good grounds for the Commission to show leniency (see below, Application of Article 101 under the Merger Regulation procedure).
Where parties do notify a joint venture with only minimal activities within the EEA it is possible to do so using a short form notification. Such a notification may be made where joint control is acquired by two or more undertakings, and:
The turnover of the joint venture and/or of the activities of businesses contributed to the joint venture by the parents within the EEA is less than EUR100 million; and
The total value of the assets transferred to the joint venture within the EEA is less than EUR100 million.
Changes from joint to sole control can also be notified in short form, provided that the notified transaction does not raise substantive concerns (see, for example, Deutsche Post/DHL (II) (above at Changes in the structure of control)).
The Commission has noted that competition issues may arise in the situation where companies A and B jointly control a joint venture C, which is a direct competitor of A, and A subsequently acquires sole control over C. This is because the change from joint to sole control in these circumstances removes the competitive constraint exercised by C prior to A's acquisition of sole control and affords the combined entity a significant market position (see, for example, KLM/Martinair, 29th report on Competition Policy 1999, points 165-166 (above)). In such cases, the Commission will review the notified transaction under the full notification procedure. Equally cases that raise potential co-ordination issues under Article 2(4) of the Merger Regulation may not be appropriate for treatment under the short-form notification procedure.
For further information on the short form (simplified) merger procedure see Practice note, EU Mergers & acquisitions: Simplified procedure for certain concentrations (www.practicallaw.com/4-107-3705).
Commission's assessment under the Merger Regulation
Compatibility with the internal market
In assessing a concentration the Commission must determine whether it is compatible with the internal market (Article 2(1), Merger Regulation). For this purpose the Commission must take into account:
The need to maintain and develop effective competition within the internal market in view of, among other things, the structure of all the markets concerned and the actual or potential competition from undertakings located either within or outside the EU;
The market position of the undertakings concerned and their economic and financial power;
The alternatives available to suppliers and users;
Any legal or other barriers to entry;
Supply and demand trends for the relevant goods and services;
The interests of the intermediate and ultimate customers; and
The development of technical and economic progress, provided that it is to customers' advantage and does not form an obstacle to competition.
(Article 2(1)(a) and (b), Merger Regulation.)
Since 1 May 2004, a concentration which would significantly impede effective competition in the internal market or in a substantial part of it, in particular as a result of the creation or strengthening of a dominant position must be declared incompatible with the internal market (i.e. prohibited) (Article 2(3), Merger Regulation). Conversely, a concentration which would not significantly impede effective competition in the internal market or in a substantial part of it must be declared compatible with the internal market (i.e. cleared) (Article 2(2), Merger Regulation).
The above test replaced the original substantive test in Regulation 4064/89 whereby a merger that created or strengthened a dominant position as a result of which effective competition would be significantly impeded in the internal market or a substantial part of it had to be declared incompatible with the internal market (the dominance test). While the current test is wider in scope, the previous decisions of the Commission and the case law of the European Courts continue to serve as precedent for the application of the current substantive test and, in particular, the assessment of dominance.
In assessing the criteria laid down in Article 2(1) of the Merger Regulation, the Commission will consider, inter alia, the parties' ability to maintain prices above competitive levels or to maintain output, product quality or innovation below competitive levels.
Siemens/Drägerwerk/JV (Case COMP/M.2861, 30 April 2003) provides an example of the Commission's likely approach to the assessment of joint ventures under the current substantive test. The Commission's analysis focused on, inter alia, the pricing effects of the transaction and other economic criteria.
The General Court judgment in the Sony/BMG case shows that the Commission has to apply the same analytical rigour in clearing a transaction as in finding a significant impediment of competition (Case T-464/04 Impala v Commission, judgment of 13 July 2006). Following an appeal by a trade association, the General Court annulled the Commission's decision approving the creation of a joint venture between Sony and Bertlesmann Music Group (BMG) under Article 8(2) of the old Merger Regulation. The General Court concluded that the Commission's reasoning and examination of the absence of a collective dominant position were not adequate (see EU Mergers & acquisitions: Sony/BMG (www.practicallaw.com/4-107-3705)).
The Commission's substantive assessment under the Merger Regulation is considered in EU Mergers and acquisitions: Substantive assessment (www.practicallaw.com/A14482). The principles which apply in the case of mergers or acquisitions of sole control in general also apply to joint ventures where there is no co-ordination of competitive behaviour: the Commission will assess the market position that will result from the combination of the businesses being contributed by the parents as well as the competitive effects of the transaction in the relevant market (in the case of a newly-established joint venture), or the impact of a change in control (in the case of a pre-existing joint venture).
The Commission's Notice on the appraisal of horizontal mergers provides guidance as to the Commission's likely approach (see Mergers and acquisitions, box, Horizontal Guidelines (www.practicallaw.com/A14482)).
However, separate issues (considered below) are raised in the case of a joint venture where two or more of the parents remain active in the joint venture's market or in related markets, since this entails a risk of co-ordination of competitive behaviour between the parents (see Application of Article 101 under the Merger Regulation procedure).
Certain ancillary agreements or restrictions may be entered into by the joint venture and its parents as part of the overall transaction, such as restrictive or non-compete covenants, purchase and supply arrangements or intellectual property licences.
To the extent that such restrictions are directly related and necessary to the implementation of the joint venture (see below), they will be classified as ancillary restrictions and will not be challenged for the term of the relevant restrictions. Restrictions which are not ancillary will be assessed separately under Article 101.
Guidance as to the meaning of restrictions which are directly related and necessary to the implementation of a joint venture is contained in the Commission's Notice regarding restrictions ancillary to concentrations(OJ 2005 C56/24). To be treated as ancillary, restrictions must:
Have a direct link to the establishment of the joint venture.
Be subordinate in importance to the main object of the joint venture.
Not constitute substantial restrictions wholly different in nature from those which result from the transaction itself.
Be necessary for the implementation of the joint venture. This means that, in their absence, the venture could not be implemented or could only be implemented under more uncertain conditions, at substantially higher cost, over an appreciably longer period or with considerably less probability of success.
Be proportionate. This means that their duration, subject matter and geographical field of application should not exceed what the implementation of the joint venture reasonably requires. In practice the Commission will also take into account industry practice in determining whether a particular ancillary agreement is reasonable in the circumstances of the case.
An assessment of whether restrictions are ancillary must distinguish between those which affect the joint venture and those which affect the parents. In Blackstone/CDPQ/Kabel Nordrhein-Westfalen (Case COMP/JV.46, 19 June 2000) the Commission states that restrictions to the detriment of third parties will be considered as ancillary only where they are the inevitable consequence of the concentration itself and are not separable from it. Restrictions on the joint venture will usually be regarded as ancillary where they:
Define the object of the joint venture, such as provisions which specify the product range or the location of production; or
Require the joint venture to purchase from or supply its parents (at least during the joint venture's start-up period), where the parents assign to the joint venture certain stages of the production or manufacture of certain products.
Restrictions on the parents will usually be regarded as ancillary where they:
Prohibit the parents from competing with the joint venture, or from actively competing with it in its area of activity for the lifetime of the joint venture; or
Impose a restriction on one or more of the parents, where the joint venture is granted an exclusive exploitation licence in respect of fields of technical application and product markets in which the parent company granting the licence is not active or is ceasing to be active.
Restrictions on non-controlling shareholders will not usually be considered to be ancillary.
Any additional restrictions relating to quantities, prices or customers, and any export bans, will generally be regarded as going beyond what is required for the setting-up and operation of the joint venture, and therefore as not ancillary.
Any extension of the non-compete covenant to areas in which the joint venture may in the future decide to become active is not ancillary to the concentration (Case IV/JV.22 Fujitsu/Siemens, 30 September 1999).
It is for the parties to self-assess compliance of their ancillary restraints with the Commission's Notice regarding restrictions directly related and necessary to concentrations. Since 2004, the Commission does not (except in exceptional circumstances) decide on the compliance or otherwise of ancillary restraints in its individual Merger Regulation clearance decisions (see Recital 21, Article 6(1)(b) and Article 8(1) and (2), Merger Regulation). Instead, a Commission decision clearing a concentration automatically covers any ancillary restrictions, without the Commission having to assess such restrictions in individual cases.
The Merger Regulation does, however, envisage a residual role for the Commission with respect to ancillary restrictions. At the request of the parties, the Commission will assess whether a particular restriction is ancillary in nature if the case raises novel or unresolved issues giving rise to genuine uncertainty (i.e., involves legal questions that have not been addressed before in a Commission notice or decision) (Recital 21, Merger Regulation).
Restrictions that are not ancillary may possibly fit into any of the existing block exemption regulations, failing which the parties will have to form a view as to whether the criteria for application of Article 101(3) are met (see Assessment under Article 101).
The Commission has stated that if a joint venture is not in itself restrictive of competition, then restrictions that are necessary for the functioning of the parties' agreement are deemed to be ancillary to the main transaction and are, therefore, not caught by Article 101(1) (see Guidelines on the application of [Article 101(3) of the Treaty]; OJ 2004 C101/97). For example, in TPS the Commission concluded that a restriction obliging the parties not to be involved in companies active in the distribution and marketing of television programmes by satellite was ancillary to the creation of the parties' joint venture during the initial phase (OJ 1999 L90/6) . The Commission considered, inter alia, that the significant investments and risks associated with entering the pay-TV market and warranted the restriction. The restriction therefore fell outside Article 101(1) for a period of three years.
Application of Article 101 under the Merger Regulation procedure
To the extent that a full-function joint venture has as its object or effect the co-ordination of the competitive behaviour of its parents outside the joint venture (sometimes referred to as "spill over" effects), such co-ordination will also be examined in accordance with the criteria of Article 101 of the TFEU in order to establish whether the operation is compatible with the internal market (Article 2(4), Merger Regulation; see Assessment under Article 101). Joint ventures falling into this category are therefore subject to a double test: first, whether the establishment of the joint venture itself would significantly impede effective competition, and, second, whether the co-ordination between its parents is contrary to Article 101(1) (see box, An assessment under the Merger Regulation and Article 101).
The possibility of co-ordination of the parties' competitive behaviour arises if two or more of the parents participate, actively or potentially, in the same, similar or related product markets, and on the same or potentially the same geographic markets, as the joint venture. Article 101 comes into play where such co-ordination is the object or likely effect of the joint venture.
In applying the Article 101(1) test, the Commission must in particular ascertain:
Whether two or more parent companies retain significant activities in the same market as the joint venture, or in a market which is downstream or upstream from that of the joint venture, or in a neighbouring market closely related to this market, so that it is likely that they will co-ordinate their behaviour on the market(s) concerned; and
Whether the co-ordination which is the direct consequence of the creation of the joint venture (there must therefore be a direct causal link between the creation of the joint venture and any co-ordination of the parties' behaviour) affords the parties the possibility of eliminating competition in respect of a substantial part of the products or services in question (Article 2(4), Merger Regulation). For example, the Commission decided in BSkyB/Kirch Pay TV (Case COMP/JV.37, 21 March, 2000) that although there was some incentive for the parties to co-ordinate their behaviour (in an effort to reduce costs in the acquisition of sports rights), there was no causal link as such co-ordination could take place already and indeed was not facilitated by the establishment of the joint venture. There was no need to consider the restriction under Article 2(4) of the Merger Regulation.
Where it appears that the arrangement falls within Article 101(1), in determining whether the joint venture is compatible with the internal market, the Commission must also assess whether the criteria for exemption under Article 101(3) are satisfied. Article 101(3) will be satisfied where the advantages of the joint venture outweigh the negative impact of such co-ordination, and provided the parties are not in a position to eliminate competition in respect of a substantial part of the products or services in question (see Guidelines on the applicability of Article 101 of the TFEU to horizontal co-operation agreements OJ 2011 C11/1; see also Guidelines on the application of [Article 101(3) of the TFEU]; OJ 2004 C101/97).
Examples of factors which may be relevant to the Commission's assessment of whether a joint venture has as its object or effect the co-ordination of the parents' competitive behaviour are set out in the box, Co-ordination of parents competitive behaviour.
In practice, the Commission has tended to find that the co-operative elements of full-function joint ventures do not fall foul of Article 101(1). In most cases clearance is granted in Phase I, although this sometimes made subject to conditions. In two notable cases (BT/AT&T Case COMP/JV.15, 30 March 1999 and Hutchinson/RCPM/ECT Case COMP/JV.55, 3 July 2001), the Commission proceeded to a Phase II investigation before granting clearance subject to conditions. In Sony/BMG (above), the Commission initially cleared the transaction without conditions following an in-depth Phase II investigation.
Prohibited joint ventures
Between September 1990 and 31 December 2013, only 24 concentrations notified under the Merger Regulation have been prohibited as incompatible with the internal market, out of a total of over 5, 000 final decisions. Of the prohibited concentrations, eight concerned joint ventures (see box, A prohibited joint venture).
Assessment under Article 101
A joint venture that does not constitute a concentration within the meaning of the Merger Regulation will be subject to competitive assessment under Article 101 of the TFEU.
Article 101(1) prohibits, as incompatible with the internal market, agreements or concerted practices between undertakings which may affect trade between member states and which have the object or effect of restricting competition within the internal market. Article 101(1) may therefore apply to a joint venture, which is usually based on an agreement between the shareholders, or at least de facto co-ordination of the parents' policy towards the joint venture and their manner of controlling it.
Agreements that infringe Article 101(1) are void and unenforceable in respect of the provisions that restrict competition. The parties may be subject to fines, unless the agreement meets the conditions laid down in Article 10(3). Article 101(3) can be applied either to individual agreements or to categories of agreements by way of a block exemption regulation. The Commission has adopted a number of block exemption regulations, which lay down the conditions for application of Article 101(3) to certain categories of agreements. These block exemption regulations apply equally to joint ventures (see below).
When a joint venture is covered by a block exemption regulation the parties are relieved of the burden of assessing whether their individual agreement pertaining to the joint venture satisfies each of the conditions of Article 101(3). The application of Article 101(3) to categories of agreements by way of block exemption regulation is based on the presumption that restrictive agreements that fall within their scope fulfil each of the four conditions set out in Article 101(3) (see Guidelines on the application of [Article 101(3) of the TFFEU] OJ 2004 C101/97).
Alongside the block exemptions, the Commission has adopted guidelines, which provide insight into the Commission's approach to certain types of collaborative effort (see Guidelines on the applicability of Article 101 of the TFEU to horizontal co-operation agreements (OJ 2011 C11/1). Like block exemption regulations, the Guidelines apply to joint ventures as well. The scope and application of Article 101 are considered in detail in Competition regime, Article 101 (www.practicallaw.com/A14484).
For an example of a joint venture that was cleared under Article 101(3) see the Commission decision of 5 July 2002, concerning the "integrated air traffic system" of Lufthansa and Air Austria (OJ 2002 L242/25). This joint venture was cleared subject to conditions although it involved price co-ordination and market-sharing by the parent companies.
As discussed above, the Commission may also apply Article 101 to a joint venture which falls within the scope of the Merger Regulation if it has as its object or effect the co-ordination of the competitive behaviour of its parents.
Appreciable effect on trade between member states
A joint venture will fall outside the scope of Article 101(1) if it does not affect trade between member states, because its effects are limited to a single member state or to territories outside the EU (see further Competition regime, Article 101: Effect on trade between member states (www.practicallaw.com/A14484)). However, in the former case, the agreement will fall to be considered under the national competition laws of the EU member states in which it has actual or potential effects. As most such laws mirror the provisions of Article 101, an agreement that would be prohibited under Article 101 but for its lack of effect on trade between member states is likely to be prohibited under equivalent national competition laws.
Appreciable effect on competition
Joint ventures between competitors will not infringe Article 101(1) where their effect on competition in the EU is not appreciable. Under the Commission's Notice on agreements of minor importance, joint ventures between parents whose combined share of the relevant market does not exceed 10% are generally regarded as having no appreciable effect where they are competitors (OJ 2001 C368/07). Where the parents are not competitors a combined market share of under 15% raises a presumption that the joint venture will have no appreciable effect (see further Competition regime, Article 101: Appreciable effect (www.practicallaw.com/A14484)).
Restrictions of competition
The circumstances in which the Commission considers that joint ventures may restrict competition for the purposes of Article 101 are set out in the Commission's Guidelines on the applicability of Article 101 of the TFEU to horizontal co-operation agreements ) (OJ 2011 C11/1). These Guidelines are intended to provide an analytic framework within which to assess horizontal agreements that potentially bring about efficiency gains, that is, agreements on R&D, production, purchasing, commercialisation, standardisation and information agreements.
The Guidelines focus primarily on economic criteria, such as the market power of the parties, the market structure and the competitive effects of the agreement, for assessment of compatibility of horizontal agreements with Article 101. The Guidelines provide that where a horizontal agreement does not have as its object the restriction of competition, the potential effects on competition must be analysed and shown to be likely to negatively affect prices, output, innovation or the variety or quality of goods and services in the market.
Basic principles for the assessment under Article 101(1)
According to the Guidelines, the following do not fall under Article 101(1) unless the parties involved have a significant market share and the agreement is likely to cause foreclosure of third parties to the relevant market:
Joint ventures between parties who do not compete.
Joint ventures between competitors who could not independently undertake the joint venture activity.
Joint ventures that do not influence the relevant boundaries of competition.
The Guidelines, further provide that joint ventures that have as their object the restriction of competition through means of price-fixing, output quotas or market or customer sharing will almost always fall under Article 101(1). An exception to this are production joint ventures which by their very nature envisage that output decisions be taken jointly. Provisions for such joint decisions in production joint ventures will be assessed together with the other elements of the joint venture to determine their effect on the relevant market.
According to the Guidelines, joint ventures that do not fall into the categories mentioned above may still fall under Article 101(1), depending on the parties' market position, the structure of the relevant market and, generally, the effect of the transaction on the market.
The Guidelines set out the relevant factors for the assessment of the parties' market position, the market structure and competitive effects in ascertaining whether a joint venture is restrictive of competition:
Whether the joint venture will cause the maintenance of or an increase in the parties; market power on the markets affected by the joint venture.
A low combined market share will usually indicate that a restriction on competition is unlikely and further assessment is not generally required. On the other hand, a high combined market share is not necessarily indicative of a restrictive effect on competition, in particular where one of only two parties has an insignificant share and does not have important resources. The Guidelines do not provide a general market share threshold above which it can be assumed that market power will be restrictive of competition. However, the Guidelines set market share based safe harbours depending on the type of agreement in issue. An agreement between parties whose combined market share does not exceed the relevant market share threshold will not normally raise significant competition concerns if it does not contain any hardcore restrictions of competition.
The number of competitors on the market and their respective market position.
Depending on the parties' market position, market share stability over time, barriers to entry, potential competition, buyer power and product characteristics (such as stage in product life cycle) may all be relevant to the assessment of the restrictive effect the joint venture may have on competition.
The Commission's case law reflects that the scale of a joint venture's effects on competition depends on a number of factors (see box, Checklist: the effect of a joint venture on competition).
Basic principles for assessment under Article 101(3)
As mentioned above, an agreement or a concerted practice that infringes Article 101(1) is void and unenforceable in respect of the provisions that restrict competition, and the parties may be subject to fines, unless the joint venture can be brought within the terms of a block exemption or each of the conditions under Article 101(3) are satisfied.
R&D joint ventures and specialisation joint ventures may be covered by the R&D and specialisation block exemptions respectively (see generally Collaborative agreements (www.practicallaw.com/A14478)). Certain restrictive technology licensing arrangements between a joint venture and its parents may be exempted by the technology transfer block exemption (see Intellectual property transactions: Block exemptions (www.practicallaw.com/A14481)). Specific block exemptions also apply to certain agreements, including joint ventures, in the transport sector (as listed in Competition regime, Article 101: box, Current block exemptions (www.practicallaw.com/A14484)), although discussion of them is beyond the scope of this Practice note.
Individual agreements and the exception rule
Individual agreements that are caught by Article 101(1) may nevertheless escape prohibition if the meet the conditions for the application of Article 101(3) (the exception rule). The latter provision expressly acknowledges that restrictive agreements may generate objective economic benefits so as to outweigh the negative effects of the restriction of competition.
Before 1 May 2004, only the Commission was able to apply Article 101(3) in individual cases. Now, national competition authorities and national courts can apply Article 101 in full. On 1 May 2004, with entry into force of Regulation 1/2003, the system of advance notification and approval of agreements was abolished. Agreements that satisfy the Article 101(3) conditions are valid from the outset. Therefore, if no appropriate block exemption is available, or if the joint venture does not fulfil the conditions of the relevant block exemption, it is necessary for the parties to assess for themselves whether the joint venture satisfies the conditions for the application of Article 101(3) (see Competition Regime, Article 101:Exemption (www.practicallaw.com/A14484)).
The Commissions Guidelines on the assessment of horizontal agreements (see Restrictions of competition) set out the principles to be followed in deciding whether Article 101(3) applies to an agreement. The application of the exception rule of Article 101(3) is subject to four cumulative conditions, two positive and two negative. There is a presumption that where these four conditions are satisfied the agreement will enhance competition within the relevant market because it will result in cheaper and/or improved products for consumers.
In the light of the four conditions contained in Article 101(3), it is necessary to consider whether:
The joint venture contributes to improving the production or distribution of goods or to promoting technical or economic progress;
Consumers are allowed a fair share of the resulting benefit;
The restriction of competition is necessary to achieve the economic benefits claimed by the parties. In practice, the Commission will seek to understand whether the claimed benefits cannot be achieved by less restrictive means;
The parents or the joint venture are subject to restrictions which are not indispensable for the achievement of these objectives; and
The co-operation in the joint venture affords the parties the possibility of eliminating competition in respect of a substantial part of the products or services in question (see also Competition Regime, Article 101: Individual exemptions (www.practicallaw.com/A14484)).
Broadly, a joint venture will meet the criteria contained in Article 101(3) where the advantages brought about by it for economic progress and consumers outweigh its restrictive effect on competition.
The Commission's Guidelines identify such advantages as including the development of new or improved products or processes, the promotion of technical or economic progress, the opening up of new markets leading to sales expansion in new territories or the enlargement of a firm's product range, and increases in production and sales. Efficiencies claimed by the parties must be substantiated.
Joint ventures which consolidate or strengthen a dominant position and would bring about anti-competitive effects are not, in principal, covered by the exception rule, in particular as they may also infringe Article 102 (see Application of Article 102).
The Exxon/Shell case provides a useful illustration of how the Commission has applied the principles discussed above in practice (see box, Exxon/Shell).
Exception under Article 101(3) applies only for as long as the conditions of Article 101(3) are met, and ceases to apply when that is no longer the case. Therefore an assessment of whether the Article 101(3) criteria are satisfied at the time that the joint venture is entered into should in principle be kept under review during the life of the joint venture. However, where the parties have made initial sunk investments, the risk facing the parties and the sunk investment that must be committed to implement the joint venture can lead to the agreement fulfilling the conditions of Article 101(3) for the period of time required to recoup the investment (see also the judgment of the General Court in European Night Services  5 CMLR 401).
In addition, if the joint venture necessarily entails irreversible acts of its parents, the assessment of those acts must be made exclusively on the basis of the facts pertaining at the time of implementation. For instance, in the case of a research and development joint venture whereby each party agrees to abandon its respective research project and pool its capabilities within the joint venture , it may be technically and economically impossible to revive the abandoned projects. The assessment of the anti-competitive and pro-competitive effects of the agreement to abandon those projects must therefore be made as of the time of the completion of its implementation. If at that point in time the joint venture is compatible with Article 101, for instance because a sufficient number of third parties have competing research and development projects, the parties' agreement to abandon their individual projects remains compatible with Article 101, even if at a later point in time the third party projects fail.
In cases in which the Commission has issued individual exemptions under Article 101(3) (i.e. prior to 1 May 2004), it typically granted such exemptions subject to conditions. While the precedent value of these older decisions has, in some cases, been eroded by developments in economic and legal thinking, they may assist the parties in identifying ways in which they can reduce potentially restrictive effects of a joint venture in order to maximise the likelihood that the Article 101(3) criteria are satisfied. Conditions imposed by the Commission in these cases tended to be behavioural in nature (for example, a condition regulating the terms on which the joint venture or the parents provide to third party competitors access to a particular technology or infrastructure owned or controlled by the joint venture or its parents), rather than structural (such as a condition requiring the divestment of a particular part of a business), particularly where the Commission had concerns about possible market foreclosure effects. Such concerns have typically arisen in relation to joint ventures involving new or developing products in high-technology or innovation markets.
An example of a condition imposed by the Commission is provided by British Interactive Broadcasting (OJ 1999 L312/1). The case involved a joint venture between BSkyB, British Telecom, Midland Bank and Matsushita Electric Europe to provide digital inter-active television services, including home banking, home shopping, holiday and travel services. The Commission was concerned that, in creating the joint venture, BSkyB and British Telecom would be eliminated as potential competitors in the digital inter-active television services market. It therefore imposed several conditions in return for applying Article 101(3) for seven years, including a requirement that the parties must inform both end users and agents for the sale of set-top boxes that end users need not subscribe to BSkyB's digital pay television services as a condition of receiving a subsidised digital set-top box.
Assessment of particular types of joint ventures
The Guidelines set out the Commissions approach in relation to specific types of joint ventures:
Commercialisation joint ventures cover agreements between competitors for the selling, distribution or promotion of products. Sales joint ventures, by their very nature, have as their object and effect competitor co-ordination of pricing policy, thereby restricting competition. Accordingly, joint ventures that amount to mere sales agencies are unlikely to satisfy the conditions in Article 101(3). For those joint ventures that fall short of joint selling, the Commissions concern relates to the prospect of exchange of sensitive commercial information. In addition, competition at the final sales level may be restricted where the joint venture represents a significant input in the costs of the competitors. The Commission will also be vigilant that commercialisation joint ventures do not lead to market partitioning (see also EU Co-operation between competitors: Joint selling (www.practicallaw.com/A14477)). In general, joint ventures between producers of fast moving consumer goods are likely to be viewed more positively than those between producers of industrial goods that are sold on a limited basis, as efficiencies from joint marketing are likely to be significantly greater for the former. Efficiencies claimed by the parties must be demonstrated
Purchasing joint ventures between competitors whereby the joint ventures purchases account for a significant proportion of the total purchasing market, such that the joint ventures buyer power could push prices below competitive levels or foreclose the purchasing market to third parties will be examined carefully. In particular, the Commission is concerned that efficiencies from such joint ventures may not be passed on to the consumer. Significant buyer power as described may also lead to increased prices for third parties, as suppliers raise prices in an effort to recoup price reductions negotiated by the joint venture. Therefore, purchasing joint ventures between parties who together do not have significant buyer or seller power may be viewed positively if the cost savings resulting from economies of scale in ordering or transportation are passed on to consumers (see also EU Co-operation between competitors: Joint purchasing (www.practicallaw.com/5-107-3700)).
Production joint ventures may be covered by the specialisation block exemption (Regulation 1218/2010 OJ 2010 L335/43). Production joint ventures that are not so covered may benefit from the exception rule contained in Article 101(3) if the parties can show improvements of production or other efficiencies. Under the Guidelines, the Commission will scrutinise production joint ventures that produce an important input into the parties end product as such joint ventures may lead to foreclosure effects where the parties have a strong market position on the relevant input market, and to spill-over effects where the input product represents a high proportion of costs and the parties have a strong position on the market for the end product (see also EU Collaborative agreements: Specialisation agreements (www.practicallaw.com/3-107-3701)).
R&D joint ventures may be covered by the R&D block exemption (Regulation 1217/2010 OJ 2010 L335/36) and if not they may meet the conditions in of Article 101(3). Generally, the Commission views R&D joint ventures positively. However, it also recognises that such co-operation may lead to market foreclosure if the R&D results are exploited on an exclusive basis and one of the parties possesses key technology. Likewise, where the parties have significant market power on existing markets, R&D joint ventures between competitors may cause negative effects on the market by restricting innovation, by leading to co-ordination of behaviour or foreclosure effects, again by virtue of exclusive exploitation of results and where one of the parties also possesses key technology (see further EU Collaborative agreements: Research and development agreements (www.practicallaw.com/A14478) and Applicability of Article 101(1) to collaborative R&D agreements (www.practicallaw.com/A14478)). Therefore, where considerable market power is created or enhanced through the R&D joint venture, the parties must be able to show significant efficiencies.
Where the joint venture combines different stages of co-operation, for example R&D and production of the R&D results, the Commission will assess each stage of the co-operation in accordance with the guidance that is applicable to that specific form of co-operation. However, where the guidance sets out different safe harbours for different types of conduct, or guidance on whether it will be viewed as having the object or effect of restricting competition, the Commission will determine the "centre of gravity" of the joint venture and will treat the safe harbour/guidance for that specific stage of cooperation as applicable for the entire scope of the joint venture. The Commission will assess a joint venture's "centre of gravity" by determining first the starting point of the co-operation and assessing the degree of integration envisaged by the parties in order to determine the initial focus of its investigation. Accordingly, a joint venture involving both joint R&D and production will usually have as its centre of gravity the R&D element of the agreement, given that joint production will only take place where the joint R&D has been a success. However, this will not be the case if only partial R&D integration is envisaged in combination with full integration of production. In such cases, the joint venture's centre of gravity will be the joint production element of the agreement.
Application of Article 102
In principle, Article 102 could apply to joint ventures which fall outside the Merger Regulation where the joint venture strengthens or constitutes an abuse of a pre-existing dominant position of either one or both of the parents. In practice, however, the Commission is more likely to rely on the application of Article 101 to control or sanction such joint ventures.
In addition, the Guidelines explicitly provide that its assessment under Article 101(1) of the TFEU is without prejudice to the possible parallel application of Article 102 (paragraph 16).
The penalties for breach of Article 102 are similar to those for Article 101.
Article 102 is considered in detail in the Practice note, Article 102 (www.practicallaw.com/A14485).
Alex Nourry is a partner and Dan Harrison is a Professional Support Lawyer in the Antitrust Practice of Clifford Chance LLP.
Joint ventures: control under EU and national laws
Nature of joint venture
Full-function joint venture above Merger Regulation thresholds with no co-operative elements:
- where two-thirds rule does not apply
Commission has jurisdiction under Merger Regulation
No national jurisdiction (unless reference back)
- where two-thirds rule applies
No EU jurisdiction
Subject to national merger and competition rules
Full-function joint venture with co-operative elements above Merger Regulation thresholds:
- where two-thirds rule does not apply
Commission has jurisdiction under Merger Regulation: applies merger test to the joint venture and Article 101 to co-operative elements
No national jurisdiction (unless reference back). National authorities and courts must respect Commission decision in respect of co-operative elements.
- where two-thirds rule applies
No EU jurisdiction under Merger Regulation but Article 101 may apply to the co-operative elements
Subject to national merger and competition rules and national application of Article 101, but national authorities and courts must respect any Commission decision finding that Article 101 is not infringed (but not a decision to accept commitments).
Full-function joint venture with no co-operative elements below Merger Regulation thresholds
No EU jurisdiction under Merger Regulation (unless referral by a member state) or Article 101
Subject to national merger and competition rules
Full-function joint venture with co-operative elements below Merger Regulation thresholds
No EU jurisdiction under Merger Regulation (unless referral by a member state), but Article 101 may apply to the co-operative elements
Subject to national merger and competition rules and national application of Article 101, but national authorities and courts must respect any Commission decision finding that Article 101 is not infringed (but not a decision to accept commitments).
Non-full-function joint venture
No EU merger control, but Article 101 may apply
Subject to national competition and (possibly) merger rules and national application of Article 101, but national authorities and courts must respect any Commission decision finding that Article 101 is not infringed (but not a decision to accept commitments).
Situations in which a concentration may arise
The following are examples of situations in which a concentration in the form of a joint venture may arise:
Parties A and B subscribe for all the shares in a newly-formed joint venture company.
Parties A and B purchase a majority of the shares in an existing company from Party X.
The sole shareholder of a company, Party X, sells 50% of its shares to Party A.
Parties A, B, C, D and E subscribe for shares in a newly-formed joint venture company X in order to acquire 50% of shares and thereby joint control over company Y, the other 50% in company Y being owned by company Z.
Party A, who together with Parties B and C, jointly controls company Y, sells its shareholding to Party D.
An assessment under the Merger Regulation and Article 101
The Skandia/Storebrand/Pohjola case provides an interesting example of how the Commission assesses full-function joint ventures under the Merger Regulation and Article 101.
Three Scandinavian insurance companies, Skandia, Storebrand and Pohjola, agreed to create a joint venture for the sale of non-life insurance products in Norway, Sweden and Finland. In particular, the parties would transfer their property and casualty (P&C) products into the new joint venture company.
This case was reviewed under the old Regulation 4064/89. However, the case provides useful guidance on the Commission's approach to full-function joint ventures. Although decided under the old substantive (dominance) test, the case is still a useful precedent as the creation or strengthening of a dominant position remains the main way in which a merger is likely to "significantly impede effective competition" (under Article 2, Merger Regulation ).
The joint venture would be a full-function entity since the transfer of the non-life insurance activities of the parties would enable it to compete in the non-life insurance sector and to perform all the normal functions of an undertaking operating in that sector. The fact that the joint venture would share the distribution network of its parents did not affect this since the parents would only be acting as agents. The Commission also took into account the fact that the joint venture would be floated as soon as possible.
The Commission considered whether the transaction raised significant competition concerns, specifically whether it created or strengthened a dominant position. In doing so, it examined the combined market share of the parties to the joint venture in Sweden and in Norway for each non-life product separately (although it admitted that the product markets might in fact be broader). The increment in share in Finland was negligible.
The Commission found that in Sweden the transaction might possibly give rise to a dominant position with respect to transport insurance. The joint venture would have a market share of 43.9%, combining Skandia's market share of 40.6% with Storebrand's 3.3%. It concluded, however, that the transaction did not raise serious doubts as the customers were corporate entities who were able to switch between insurers more easily, and also, given the high degree of standardisation of transport insurance contracts, and that the two main competitors were not insignificant (with shares of 17.5% and 21.4% respectively).
The situation was different in Norway, with combined shares of over 60% in two of the different product segments, over 50% in two further product segments, with the two remaining segments at 44% and 48% respectively. Overall, this gave a market share of over 64%. The Commission concluded that this situation gave rise to serious doubts as to the compatibility of the transaction with the internal market. The parties were, however, able to address the Commission's concerns by agreeing to divest Skandia's Norwegian subsidiary, Vesta.
Article 101 test
In the second part of its analysis, the Commission investigated whether there were markets in which spill-over effects might occur by reviewing any upstream, downstream or closely related neighbouring markets on which the joint venture and at least two of the parents remained active. If so, any co-ordination between the parties would be checked against Article 101.
The Commission found that, after completion, both the parents and the joint venture would remain active in insurance in Sweden, Norway and Finland, although the parents would offer only life insurance whereas the joint venture's activities would be restricted to non-life insurance. Both markets were, however, neighbouring markets and therefore the Commission needed to examine whether the creation of the joint venture would lead to co-ordination on the life insurance markets.
Although in some instances the parties had a combined market share of nearly 40%, the Commission concluded that the parties did not have sufficient market power to make co-ordination worthwhile given that:
They had competitors of a comparable size.
New market entry was both possible and likely.
In any event, the joint venture did not give the parties the means to co-ordinate their competitive behaviour, mainly because different distribution channels were used for life and non-life insurance products as a result of which there was little or no overlap in practice.
Ancillary restrictions. An obligation on the parents not to offer competing non-life insurance products in Sweden, Norway and Finland was treated as ancillary to the transaction (see Ancillary restrictions).
(Case IV/JV.21 Skandia/Storebrand/Pohjola, 17 August 1999.)
Co-ordination of parents competitive behaviour
Factors indicating that co-ordination is not likely
Factors indicating that co-ordination is likely
A prohibited joint venture
The Gencor/Lonrho case provides guidance as to the circumstances in which the Commission will prohibit a joint venture. This case was reviewed under the old Regulation 4064/89. However, even though the substantive test under Article 2(4) has now changed, the old “dominance” test, still provides useful precedent. The creation or strengthening of a dominant position remains the main way in which a merger is likely to “significantly impede effective competition” (under Article 2, Merger Regulation).
This case concerned the acquisition by Gencor Limited of South Africa (Gencor) and Lonrho plc (Lonrho) of joint control of Impala Platinum Holdings Limited (Implats) and Lonrho Platinum Division (LPD). The proposed joint venture would have the effect of reducing the number of producers of platinum group metals in South Africa from three to two (the other producer being Amplats, a company controlled by the Anglo American Corporation of South Africa's platinum operation). The two companies would control approximately 90% of the world's reserves of platinum group metals, with Russia controlling most of the remaining 10%.
The Commission held that:
The proposed joint venture would create a collective dominant position (in the form of a duopoly) in the platinum and rhodium markets, consisting of Implats/LPD and Amplats, and was therefore incompatible with the internal market.
The joint venture would be anti-competitive since there would be no incentive for the merged entity to expand, as this would put pressure on Implats' high cost operations. Having taken into account the characteristics of the market, such as weak competition from Russia, similar cost structures and a lack of competition in the past, the Commission concluded that Implats/LPD and Amplats would have no incentive to compete. Although the parties had relatively low market shares in the EU, the Commission found that the anti-competitive effects of the joint venture would be felt in the EU, since the market for platinum metals was global.
Gencor brought an action for the annulment of the Commission's decision, on the grounds that the Commission lacked jurisdiction, that concentrations which created or strengthened a collective dominant position (such as a duopoly) were not covered by the Merger Regulation and that the Commission had wrongly found that the concentration would create a collective dominant position.
The Court of First Instance, however, upheld the Commission's decision. Since then the Court of First Instance appears to require the Commission to conduct a more rigorous competitive analysis in cases involving collective dominance (see Airtours v Commission, judgment of the Court of First Instance of 6 June 2002). Consequently the Commission appears to have found it more difficult to establish that a transaction raises collective dominance concerns (see, for example, Case COMP/M.333. Sony/BMG. 19 July 2004).
(Case IV/M.619 OJ 1997 L11/30; Case T-102/96  ECR 753.)
Checklist: the effect of a joint venture on competition
The Commission has traditionally taken the following factors into account in assessing the effect of a joint venture on competition:
The market shares of the parent companies and the joint venture.
The structure of the relevant market and the degree of concentration in the sector concerned.
The economic and financial strength of the parent companies, and any commercial or technical edge which they may have in comparison to their competitors.
The market proximity of the activities carried out by the joint venture.
Whether the fields of activity of the parent companies and the joint venture are identical or interdependent.
The scale and significance of the joint venture's activities in relation to those of its parents.
The extent to which the arrangements between the parties concerned are restrictive.
The extent to which the joint venture will negatively affect prices, output, innovation or the variety or quality of goods or services in the market.
The extent to which market access by third parties is restricted.
This case concerned agreements between Exxon and Shell relating to a joint venture with the principal purpose of producing linear low-density polyethylene (LLP) (to be distinguished from high-pressure low-density polyethylene or HLP), and also with the capability of producing high-density polyethylene (HP). LLP and HP are thermo-plastics produced from ethylene which are used for, among other things, packaging, injection moulding, blow moulding and pipes.
The parties were to supply the joint venture with ethylene and/or other raw materials for the production of plyethilene. The joint venture would in turn supply the parents with all polyethylene produced. Exxon granted the joint venture the necessary intellectual property rights. The products manufactured by the joint venture would be sold independently by the two parents.
The Commission found that the markets for LLP and HLP together formed a relevant product market, and that the market for HP was a separate relevant market (although the joint venture was primarily concerned with LLP, the LLP process used by the joint venture was also capable of producing HP). The Commission considered the geographic market to be EU-wide.
The Commission held that the joint venture did not perform all the functions of an autonomous economic entity and therefore assessed it under Article 101 of the TFEU. It held that the joint venture had as its object or effect the co-ordination of the competitive behaviour of the parties, that it was therefore a restriction of competition, and that it might affect trade between member states. The Commission noted that:
Exxon and Shell were competitors on both the oligopolistic EU-wide market for LLP/HLP and the HP market (although in relation to the HP market the restriction of competition was not significant because of Exxon and Shell's relatively low market strength).
An Exxon and/or Shell facility with only half the capacity of the joint venture would have been technically and economically feasible.
The significant investment in the joint venture and the sale of its output without further processing suggested a direct and permanent co-operation between the parents. In relation to production, the parents could take account of the other's plans and they could acquire significant information. Co-ordination was further strengthened by the ethylene supply contract. In relation to investment, the parents were to co-ordinate their investment plan, reducing the possibility that either parent would undertake costly investment in enlarging its own polyethylene business in competition with the joint venture.
Basis for clearance under Article 101(3)
The Commission decided that the joint venture agreement and related agreements, after some modification, met the conditions in Article 101(3):
Improved production, through utilisation of new technology, would promote technical and economic progress.
Various benefits would be passed on to customers, namely lower costs, the superior performance of LLP, a reduction in the use of raw materials and plastic waste and, because of ethylene exchange swap agreements, the avoidance of the environmental risks associated with the transport of ethylene.
The restrictions on competition in the modified agreements were indispensable to the attainment of the joint venture's objectives. The parents would not have had the incentive to invest the capital required for a plant of this magnitude on their own; a single plant rather than individual plants were technically and economically the most appropriate; because of complex technical and investment issues requiring the parties to oversee the joint venture, the objectives of the operation could not have been achieved by a long-term processing arrangement or mere financial participation in the joint venture. Not every decision concerning the production facility, however, needed to be taken jointly, and the structure of the joint venture was amended to guarantee a certain level of independent decision-making.
The joint venture did not eliminate competition. After the implementation of the joint venture, the aggregate LLP/HLP market share of Exxon and Shell would be approximately 22%. The size of other competitors in the market would guarantee that competition was not eliminated. Further, competitors would not be foreclosed from the relevant technology, since several companies, such as ICI and Dupont, licensed polyethylene technology.
The appropriate duration for the exemption was held to be ten years, which took account of the nature of the agreements and the short and medium-term outlook for the industry. A shorter duration would not reflect the importance of the parents' investment in the joint venture.
(Case IV/33.640 Exxon/Shell OJ 1994 L144/20.)