In the European Union (EU), at the inception of a joint venture (JV), parent companies must determine whether the newly created structure presents a full-functionality nature, which depends on its degree of autonomy. The answer to this question will determine the legal framework applicable to it.
On the one hand, if the JV is full-function it will fall within the scope of the EU Merger Regulation (Council Regulation (EC) No 139/2004 of 20 January 2004), assuming that the turnover thresholds set out in the Regulation are met. Under these circumstances, the European Commission (EC) will assess the impact of the JV on competition on an ex ante basis.
On the other hand, if the JV is not full-function and takes the form of a partnership formalized by a legal structure to a large extent dependent on its parent companies, the creation of a JV will not have to be notified but the EC may operate a control ex post, in the light of Article 101(1) of the Treaty on the Functioning of the EU which prohibits anticompetitive agreements between undertakings. In such a context, it is up to the parent companies creating a JV to determine whether their JV is compatible with competition law rules.
The ex post control has the advantage of avoiding the notification process that delays the implementation of the JV. However, within that framework, companies may not obtain a clearance decision and the fate of their JV is subject to legal uncertainty. It is thus generally preferable for companies to make sure that their JV will fall within the scope of the Merger Regulation because a clearance decision is irrevocable and unlimited.
The Uncertainty of the Concept of Full-Functionality
In order to be considered full-function, a JV must operate on a market performing those functions typically carried out by undertakings operating on the same market.
In its Consolidated Jurisdictional Notice under the Merger Regulation (OJ C 95/1 (2008), the Notice), the EC has set out four criteria to ensure that a JV has sufficient autonomy towards its parent companies:
• The JV must have sufficient resources to operate independently on a market, i.e., sufficient assets, staff and financial resources to perform its business on a day-to-day basis;
• The JV must carry out activities beyond one specific function for the parents, i.e., it should not be limited to an activity that is essentially auxiliary to its parents and should have its own access to or presence on the market;
• The JV must have limited sale/purchase relations with the parents, i.e., no significant supply or purchase agreements with its parents affecting its autonomy; and
• The JV must operate on a lasting basis, i.e., during a sufficiently long period so as to change the structure of the undertakings concerned.
These criteria are clear in appearance. In practice, however, the EC adopts a pragmatic approach and case-by-case analysis in order to allow companies to benefit from a merger decision in situations where a JV would in principle not be considered as full-function. In consequence, the EC may accept to review a JV and issue a clearance decision even when the abovementioned criteria are not all fulfilled.
The analytical grid provided by the EC in its Notice is thus sometimes difficult to grasp for companies. Nonetheless, useful guidance can be found in the case law.
Guidance from the EC’s Decisional Practice
Beyond the four criteria set out by the EC in its Notice to
determine whether a JV is full-function or not, the EC’s
decisional practice provides us with useful guidance that companies
should bear in mind when creating a JV.
The documentation establishing the JV. The documentation provided by the parent companies at the time of the notification of a JV has a concrete impact on the EC’s assessment. In RSB / Tenex (case No. IV/M.904, 2 April 1997), the EC considered that the shareholders’ agreement clearly showed a lack of full-function character insofar as it was written that the main purpose of the JV would be to provide services to one of the parents. In case No. COMP/M.5740 (16 June 2010), the EC advised the parties to adopt a business plan showing the future diversification of the JV’s sale and purchase relations. Companies should thus bear in mind the importance of the documentation surrounding the creation of a JV (JV agreement, shareholders’ agreement, business plan, etc.) as such documentation could help tip the balance in favor of the EC concluding that the JV is of full-function nature.
The economic context in which the JV operates. The EU courts have ruled that it is appropriate to take into account the characteristics of the market on which a JV operates in order to assess the degree of autonomy it enjoys in relation to its parent companies (see e.g., judgement of the Court of first Instance of the European Communities (now the General Court of the EU), case T-87/96, 4 March 1999). In Mannesmann / Hoesch (case No. IV/M.222, 12 November 1992), the EC considered that a JV that was dependent on its parent companies for the supply of steel could still be considered as being full-function because vertical integration in the steel industry is normal and, to a certain extent, necessary. Market conditions may also come into play: in EDS / Lufthansa, the fact that the JV would rely on its parent companies during an initial startup period did not deprive the JV of its full-function nature because the market on which the JV would operate was expanding (case No. IV/M560, 11 May 1995). In TPS (case No. COMP/JV.57, 30 April 30 2002), the EC referred to the current situation of the pay-TV market to justify that a JV should be considered full-function. Accordingly, companies should be aware that the characteristics of the market on which their JV will operate may weigh on the EC’s analysis when determining whether a JV is full-function or not and that the EC is likely to conduct a prospective analysis on such market.
The JV’s access to resources. The EC has made it clear that it is not necessary for a full-function JV to actually own the resources necessary to its operation so long as they are “accessible” to the JV (see case No. COMP/JV.19, 11 August 1999). This may for example take the form of an exclusive access to the parent companies’ production units (see case No. COMP/M.3506, 11 June 11 2003). In some cases, the EC may consider that the practical impossibility for a parent company to transfer the resources is not an obstacle to considering that the JV is of full-function nature (see case No. IV/M.1042, 15 January 1998). The EC has adopted a pragmatic approach in relation to intellectual property rights. It is sufficient for parent companies to grant a license to a JV (see case No. COMP/JV.44, 3 May 2000). Regard must be had to the need for parent companies to retain intellectual property rights in order to carry out their own activities on markets separate from the market on which the JV will operate (see case No. IV/M.1332, 21 December 1998).
The extent of trade relations between parent companies and the JV. According to the Notice, full-functionality requires in principle that a JV achieves more than half of its sales with third parties. However, in practice the EC often finds that a JV is full-function even when the JV’s sales are mostly to its parent companies. The prospective analysis is paramount again since companies must show that sales to third parties are intended to increase. For example, the EC considered that a JV was full-function even when only 15 percent of its sales were directed to third parties in the first year of its creation, on the basis that this percentage was expected to rise to 65 percent by the third year (see case No. IV/M.1005, 15 January 1998). Regarding purchase relations with parent companies, there is no specific ratio provided in the Notice. The EC has constantly decided however that as long as transactions are operated at arm’s length, on a non-exclusive basis, and without any minimum purchase commitments, a JV may be full-function even if it largely purchases supplies from its parents (see case No. COMP/M.6503, 4 July 2012).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.