Competition regimes are in place in over 140 jurisdictions worldwide. In the majority of these jurisdictions, including the regulations in the EU, notification of joint ventures to the respective competition authorities is required under their merger control regimes when certain criteria are fulfilled.
There are three principal questions that determine whether the EUMR applies to a joint venture namely:
- Is there an acquisition of joint control?
- Is the joint venture an autonomous i.e. a full-function joint venture?
- Does the joint venture have an ‘EU dimension’?
It is paramount to undertake a competition law assessment in order to decide whether or not to notify to the respective competition authority. In this respect legal competition advice would help to ensure that notification takes place where necessary and subsequent clearance obtained so as to provide comfort to businesses. If one fails to notify a joint venture, this may result in costly penalties. For example, two fines of €20 million each were also imposed on Electrabel and Marine Harvest for implementation of their transactions prior to clearance.
A joint venture may fall within the scope of the EUMR where there is an acquisition of joint control by two or more undertakings, i.e. its parent companies (Article 3(1)(b) EUMR).2 Article 2 of the EUMR provides that control is based on the possibility of exercising decisive influence over an undertaking that may be determined by both legal and factual considerations.
In its decision regarding the ONE JV Merger3 the Commission pointed out that “joint control can occur on a de facto basis, where strong common interests exist between the minority shareholders to the effect that they would not act against each other in exercising their rights in relation to the joint venture”.
Another key factor pointing to joint control under the EUMR is the ability to veto strategic decisions of the joint venture. Therefore, joint control can even be held by a party who is not a shareholder, and has no equity or ownership rights provided that the party has been granted sufficient control rights by contract.4
The principles for determining joint control are set out in detail in the Commission’s Notice on the concept of 'concentration'.5
A joint venture is considered to be a full function joint venture, if it can operate independently in its relevant market and carry out the same functions as the other undertakings in that market.6
In Austria Asphalt7 the Court of Justice of the EU (CJEU) confirmed that the requirement for full-functionality applies not just to the creation of new jointly controlled undertakings, but also to those existing undertakings that change their legal form from sole to joint control. Furthermore, if the joint venture is considered a full-function venture, it will be deemed a concentration for the purposes of the EUMR. An example of a full-function joint venture is the case of Ericsson/STM/JV8, where the parties set up two joint ventures (JVD and JVS), that were treated as a single economic entity and a single full-function joint venture by the Commission. This is because Ericsson had the majority shareholding in JVD, and STM has a majority shareholding in JVS, although both joint venture shared the same management.
In order to assess whether the joint venture will be capable of performing functions usually carried out by competing undertakings, the Commission will look at a number of different criteria and elements. These include the following:
A joint venture that is substantially dependent on its parent companies for its purchases or sales is not functionally autonomous. In addition, if only specific functions within the parent companies’ business activities have been taken over for example, production, without the joint venture having its own access to, or presence on the market, then the joint venture it is not considered to be 'fully function' joint venture from a competition law perspective.
Moreover, the joint venture need not have autonomy with regard to its commercial strategy, in fact where a joint venture retains autonomy in this regard it may not satisfy the requirement for ‘joint control’ described above. However it is fundamental that a joint venture has independence in relation to its day-to-day operations in order to display functional autonomy. The strong presence of the parent companies in upstream or downstream markets is also a factor to be taken into consideration when assessing the autonomous character of a joint venture.
Case law has demonstrated that relying almost entirely on parent company sales during the joint venture’s start-up period does not normally affect the full-function character9. This period may be necessary to establish the joint venture in the market and will normally not exceed three years.
The joint venture must be intended to operate on a 'lasting basis' as specified in Article 3(4) EUMR. However, what considered a 'lasting basis' has been debated though case law. In Banco/Santander/BT10 a three-year fixed was deemed insufficient. However in Go Ahead/VIA/Thameslink11 a seven-year term was accepted to satisfy the definition. It is important to note that deadlock and termination provisions do not preclude the joint venture from satisfying the test.
The joint venture must have necessary resources to be considered autonomous. Resources include, for example, finance, staff, assets, and necessary facilities to obtain a substantial proportion of supplies not only from its parent companies, but also from other competing sources12.
Deciding whether a joint venture has an ‘EU dimension’ depends on the application of following turnover thresholds:
- The combined worldwide turnover of all the parties concerned is more than €5 billion and the EU-wide turnover of each of at least two parties concerned is over €250 million.
- The combined worldwide turnover of all the parties concerned is more than €2.5 billion and the EU-wide turnover of each of at least two parties concerned is over €100 million and, broadly, the parties have substantial operations in at least three Member States.
The EUMR does not apply in either case if each party concerned achieves more than two-thirds of its aggregate EU-wide turnover within the same Member State.
In principle, the thresholds can be met even if the joint venture has no turnover, presence or assets in the EU, provided that its controlling parents have sufficient EU turnover. This is because “parties concerned” refers to each of the parent companies with the ability to exercise decisive influence over the joint venture.
The EUMR operates as a one-stop shop. This means that once a joint venture falls within its scope, it cannot also be reviewed under the merger regimes of the EU Member States, except if the venture has a particular impact on that Member State.
Notification to the Commission of a 'concentration' with an EU dimension is mandatory. A full-function joint venture with an EU dimension must be notified to the Commission prior to the implementation of the joint venture agreement. A short-form notification13 is possible for joint ventures that are likely to have minimal activities within the European Economic Area (EEA) (the EU together with Iceland, Norway and Liechtenstein).14 This is possible where:
- the turnover of the joint venture and/or the contributed activities in the EEA is less than €100 million, and
- the total value of assets transferred to the joint venture in the EEA is less than €100 million.
- where two or more undertakings merge, or one or more undertakings acquire sole or joint control of another undertaking and:
- the combined market share of all the parties to the concentration that are engaged in business activities in the same product and geographical market (horizontal relationships) is less than 20 percent, and
- none of the individual or combined market shares of all the parties to the concentration that are engaged in business activities in a product market which is upstream or downstream of a product market in which any other party to the concentration is engaged (vertical relationships) at 30 percent or more.
A short-form notification may be disapplied by the Commission if there are horizontal or vertical relationships between the parties to the joint venture. This would be the case if the joint venture is likely to have significant sales or assets in the EEA in the future.
Where the joint venture does not qualify for notification under a merger control regime, companies will generally be required to assess, whether the cooperation is compliant with competition law across the relevant jurisdictions. Some jurisdictions, for example Ukraine, also require notification of cooperative arrangements. Furthermore in Germany, notification to the Federal Cartel Office is mandatory even in cases where the joint venture is not a full-function joint venture, since the German merger control regime differs from that of EU competition law.
The question of whether or not to file/notify a joint venture to the relevant competition authority is one that requires an assessment on a case by case basis. Given the penalties that may result from a failure to notify, it is fundamental that companies wishing to enter into a joint venture take account of competition regulations and concerns that may influence subsequent operations, prior to entering into such an arrangement.
- John Cook and Christopher Kerse, EC Merger Control (Sweet & Maxwell: 2005), para 1-008.
- Commission Notice on the concept of full-function joint ventures under Council Regulation (EEC) No. 4064/89 on the control of concentration between undertakings, 89/C 66/01.
- Nippon Yusen Kabushiki Kaisha / Mitsui Osk Lines / Kawasaki Kisen Kaisha / JV Merger (One, Case M.8472)
- Lehman Brothers/SCG/Starwood/Le Meridien, (Case COMP/M.3858).
- Commission’s Notice on the concept of concentration under Council Regulation (EEC) No 4064/89 on the control of concentrations between undertakings (98/C 66/02).
- See Cook and Kerse (n 1).
- Case C-248/16
- Case COMP/M/5332
- EDS/Lufthansa Case IV/M.560 or Nokia/Autoliv (Case IV/M.686)
- Case IV/M.425
- Case IV/M.901
- AgrEVO/Marubeni (Case IV.M.788) paras 9 and 10.
- More information in Annex II Short Form CO For The Notification of a Concentration Pursuant To Regulation (EC) No 139/2004.
- Fully explained in Commission’s Notice on a simplified procedure (OJ 2013 C366/5).
Client Alert 2018-225