Treatment to Joint Ventures Under The European Commission On Merger Regulations.
"To evaluate in an individual case whether the formation of a joint venture in the production field restricts potential competition, the commission may use a checklist of questions with respect to each of the parties..."1 A joint venture could be used to describe practically any commercial agreement concerning two or more firms. In other words, this is the coming together of two or more undertakings (parents) in order to achieve a goal by integrating part of their operations and putting it under joint control. Joint ventures cover wide commercial activities, ranging from full-merger like activities, to activities limited to some functions which include research and development (R &D), production and distribution and so on.2
Co-operation between undertakings which are on the same level in the market may not always necessarily be anti-competitive. Co-operation between such firms may, in some circumstances facilitate economies of scale and even encourage new products to be brought into the market.
Competition authorities such as the commission, usually encourage such co-operations however, keep a watchful eye against concerted practices which are not in line with the market. Examples of such agreements or Joint ventures encouraged by the commission include where two or more parties put their resources together in order to develop a project. This may only be limited in time to the development period, with usually no co-operation between the parties beyond the project. In addition, two parties can also come together to develop a project and decide together how collectively, they will embark on it. Another example is when parties combine part of their resources in a particular field, thus initiating a new jointly-owned corporate channel, with its own administration and resources, that is, finance, staff, and so on, to enable it manage its activities on a long-lasting basis.
In the case of Hitachi/Necdram/Jv3, this form of activities was found since after a joint venture was established, the commission found that after two years, the joint venture established an independent channel and had exclusive use of its own brand.
Having discussed the definition of a joint venture and the basics of what a joint venture entails, this essay will focus on how the commission treats joint ventures under the European Commission on Merger Regulations and Article 81 of the treaty expanding on how a joint venture is found based on commission requirements.
Since May 2004, major changes have been made in the application of Article 81 of the treaty and the Merger Regulation, in relation to joint ventures4, hence, these new applications would be focused on in this essay to see the commissions attitude towards joint ventures.
Treatment to Joint Ventures Under The European Commission On Merger Regulations.
A joint venture would usually be assessed under the merger regulations if it amounts to a concentration and if it has community dimension, that is where the relevant turnover thresholds are exceeded.
Concentration.
Under article 3(1)(b) of the merger regulations, "a concentration emerges when there is a change of control on a lasting basis which results from the merger of two or more previously independent undertakings, or where there are more people controlling at least one undertaking. Also, when one or more undertaking acquires direct or indirect control of the whole or part of other undertakings".5 In order for a joint venture to be eligible as a concentration under article 3(1)(b)of the merger regulation, there must be an acquisition of joint control by two or more independent undertakings, the joint venture must 'on a lasting basis perform all the functions of an autonomous economic entity, in other words, it must be a full function joint venture' as stipulated in article 3(4) of the European commission merger regulation6 and the joint venture must have community dimension. All the requirements for the existence of a joint venture under the Merger regulation would be explained separately below.
Acquisition of Joint Control.
There are various principles for determining joint control set out in the commissions notice on the concept of concentration7, however, only one of these principles would be assessed in this discussion.
The commissions notice on the concept of concentration expands upon the definition of concentration to state that "Joint control exists when two or more undertakings have the possibility of exercising decisive influence over the joint venture".8 Decisive influence means the power to block actions which establish tactical business-related behaviours of an undertaking. The critical characteristic of a joint control is the possibility of a deadlock arising from the power of the parent companies to reach strategic decisions, which require them to arrive at an understanding in determining the commercial policy of the joint venture. Under article 3(3) of the merger regulation, control is constituted by rights or any means, having regard of fact or law involved, confer the possibility of exercising decisive influence on the undertakings concerned. A recent case where the merger regulation applied the acquisition of joint control under the merger regulation is Hutchinson/Rcpm/Ect9. However, if only one parent can effectively take all the decisions by itself without the interference of any of the other parents, then it does not constitute joint control under the merger regulation.
Examples of Joint Control Under the Merger Regulation.
When two or more participants with equal voting rights come together in a joint venture, they are said to have equal voting rights. To have equal rights, the consent of both parties is necessary before any decisions can be made. Parents are also said to have joint control when they enjoy equal shareholdings, in other words, equal rights in shareholding dealings. In the case of Alba/Beko/Grundig10 ,all the decisions had to be made by majority voting pursuant to the shareholders agreement of the joint ventures' partners. In this case, ...
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Examples of Joint Control Under the Merger Regulation.
When two or more participants with equal voting rights come together in a joint venture, they are said to have equal voting rights. To have equal rights, the consent of both parties is necessary before any decisions can be made. Parents are also said to have joint control when they enjoy equal shareholdings, in other words, equal rights in shareholding dealings. In the case of Alba/Beko/Grundig10 ,all the decisions had to be made by majority voting pursuant to the shareholders agreement of the joint ventures' partners. In this case, the commission established that both partners had the likelihood of exercising decisive influence over the joint venture, hence, it was held that they had joint control.
Although parents which have joint control over their joint venture are usually regarded as 'concentrated', it is not always in all situations where joint ventures are jointly controlled. If a joint venture is subject to joint control for a start up period only, and subsequently controlled by only one of the undertakings, the venture would not be considered as jointly controlled.
In the case of BS/BT11, the commission held that the joint venture was not jointly controlled since the two parents held 50% of the company shares, but the previous agreement stated that they each would not posses equal voting rights. The parent holding the lower voting strength was given protection in form of voting rights for three years, which expired after the time, hence allowing the commission come to its decision.
Having established what a concentration is and how it is established, the second requirement of the merger regulation to determine what is to be satisfied in order to qualify as a concentration in a joint venture, is to determine if it is a full function joint venture.
Full Function Joint Ventures.
Article 3(4) of the merger regulation defined a full function joint venture as, "when a joint venture performs on a lasting basis all the functions of an autonomous economic entity".12 The commission described in its notice on the concept of full function joint ventures stating that, "a joint venture would be full function if it performs the functions normally carried out by an undertaking on the market in which the joint venture operates".13
In order to be full function, a joint venture must operate in a particular manner. These include possessing sufficient assets in order to perform independently of its parents. In Hitachi/Necdram/JV, the commission held the venture to be full function because at the end of two years, the venture established an independent sales channel and had exclusive use of its own brand. This led the commission to conclude that the venture had all the necessary resources including assets, finances and staff, to operate as an autonomous economic entity.
In addition, the commission treats full function joint ventures in a manner which enables them to have the ability of conducting its own commercial policy. In this sense, a full function joint venture will perform its own commercial policy and simply not represent aspirations of its parents. In Carlsberg/Allied Lyons14, the commission found that a full function joint venture did not exist because, although the two companies created a joint venture by joining their beer and brewing activities, thus creating Carlsberg-Tetley, the two companies where to hold full ownership of their beer brands, hence the newly created joint venture could not determine its commercial policies.
In deciding whether a joint venture is full-function under the merger regulation, the commission also takes into account the existence of any commercial relationship between the joint venture and its parents. In the commissions notice on the concept of full function joint ventures15 it establishes that, " in its initial years, the joint venture may have to sell almost exclusively to its parents in order to establish itself on the market, as long as this trading does not surpass three years".
In the case of Linde/Sonatrach/JV16, the commission held that this was a full function joint venture even though 50% of its production was sold to its parents, this however not exceeding its three year stepping stone, allowed the commission establish the joint venture as full function.
The final requirement in order for a joint venture to be regarded as full function is for it to be of a sufficiently long period so as to bring about a lasting change in the structure of the undertakings involved. In the case of Eastman Kodak/Sun Chemical17, although the joint venture was established for a ten year duration, the commission still found this to be on a lasting basis. Since there were options for the agreement to be renewed for five more years. On the other hand, if a joint venture is not established on a lasting basis, it cannot be regarded as full-function. The final basis to establish how the commission treats joint ventures in order for it to apply under the merger regulation is it must have a community dimension.
Community Dimension.
Under the merger regulation18 a full function joint venture must be notified to the commission before it is implemented if it has community dimension. Community dimension is established if the turnover figures for the parent companies meet the thresholds set out in the regulation.
Under article 1(2) of the merger regulations, the turnover thresholds must have a worldwide turnover of more than Euro 5 Billion, mainly for large companies and Euro 2.5 Billion for medium to small companies.
Article 1(2), it explains that, "the thresholds which must first be checked in order to establish if the thresholds has community dimension...the worldwide turnover threshold is intended to measure the overall dimension of the undertaking concerned...it seeks to determine whether the concentration involves a minimum levels of activities in the community; and two thirds rule aims to exclude purely domestic transactions from community jurisdiction."19 in calculating the turnover thresholds, the commission mainly takes into account undertakings exercising a joint control over joint ventures.
It is very important for the commission to establish if a joint venture is concentrated and full function before assessing it under the Merger regulation. Since the necessary steps have been taken to establish the commissions approach towards a joint ventures under the merger regulation, the way it is treated would now be identified.
Treatment of Joint Ventures Under the European Commission Merger Regulations.
Since the changes made in May 2004, the commission have used Article 2(3) of the merger regulation to establish that, "a concentration which would significantly impede effective competition in the 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 common market".20
In assessing a concentration, the commission have incorporated article 2(1)(a) (b) in determining if it is compatible with the common market, that is, if the joint venture impeded competition taking into account the market position of the parent companies and their economic power, the need to maintain and develop effective competition and any legal barriers.
The commissions approach to concentrations and joint ventures have a wider scope of application under the new tests under the merger regulation. The commission now have a more thorough investigation of the impact of the transaction on competition. Also, the commission now considers the parents ability to maintain prices above competitive levels or to maintain output below competitive levels. In Sony/BMG21, the commissions approach to the outcome of the case focused on not allowing the dominant position to be created or strengthened as a result of the concentration. The commission here focused on the pricing effects of the transaction.
In addition, the commission also does not allow co-ordination of competitive behaviour. In doing so, the commission assesses that the market position that will result from the combination of the business being contributed by the parent companies as well as the competitive effects of the transaction in the relevant market, in newly created joint ventures or for old joint ventures, the impact of a change in control.
Furthermore, under the new notice given by the commission in relation to the merger regulation, the commission has stated that, "if a joint venture is not in itself restrictive of competition, then restrictions that are essential for the functioning of the parties agreement are deemed to be ancillary to the main transaction and are caught under the merger regulation".22 Ancillary restrictions are contractual restrictions between the parties which accompany the creation of the joint venture. In the case of TPS23, the commission concluded that a restriction obliging the parties not to be involved in companies involved in the distribution of television programmes by satellite was ancillary to the creation of the parties' joint venture during the initial phase.
The new notice has also now envisaged a residual role with respect to ancillary restrictions. It now relieves the commission of the obligation to assess ancillary restraints in individual cases, leaving it to the parent companies for self-assessment.
Despite many joint venture transactions being drawn into the scope of the merger regulations, there nevertheless remain many joint ventures which are not-full function. Joint ventures falling into this category are subject to whether the establishment of such joint ventures would significantly impede effective competition, if so, then it would be assessed under Article 81.
Treatment of Joint Ventures Under Article 81
A joint venture that does not constitute a concentration within the meaning of a merger regulation will be subject to assessment under Article 81 of the European Commission treaty. Under Article 81(1), the following shall be prohibited as incompatible within the common market, "all agreements between undertakings, decisions by associations of undertakings, which may affect trade between member states and which have as their object or effect the prevention or restriction of competition within the common market."24 'In determining whether article 81(1) is applicable to a joint venture, it must first be determined whether cooperation agreements has the object or effect of appreciably restricting competition between the parents. If the parents are clearly and actually competitors, article 81(1) will apply, if the restrictive effect on competition in the relevant market and the effect on inter-state trade are perceptible'.25
Article 81(1) may therefore apply to a joint venture, which is usually established on agreement between the shareholders, or de-facto26 co-ordination of controlling it. Agreements therefore that infringe article 81(1) are void and unenforceable in respect of the provisions that restrict competition.
The commission in its guidelines on the application of article 81 of the treaty to horizontal co-operation agreements27 provide grounds for an analytic framework within which to assess joint ventures that potentially bring about efficiency gains, that is, agreements on research and developments, production and so on. The guidelines focus on criteria such as market structure and the competitive effects for assessment under article 81. It also presents that where a joint venture does not restrict competition, the possible effects on competition must be examined and shown to be likely to negatively affect prices, output or quality of goods and services in the market.
The guidelines furthermore set out relevant factors for assessment if the joint venture is restrictive of competition. They include whether the joint venture will cause the maintenance or an increase in the market power in the common market of the joint venture. Agreements between parties whose market share does not exceed the market share threshold would not raise worries if it does not have restrictions on competition, number of competitors in the common market and market share stability over time and the market position and barriers to entry in the market may all be relevant to the assessment of the restrictive effect the joint venture may have on competition. However, if the joint ventures between the parties do not compete and do not influence the competition, then it does not fall within the scope of assessment under article 81(1).
As discussed earlier, agreements that infringe article 81(1) are void and unenforceable and the parties may be subject to fines, however, the undertakings involved may escape their agreement being voided if their agreements meet the conditions laid out in article 81(3). In Elopak/Metal box (ODIN)28, the commission held that an agreement did not restrict competition, therefore it was cleared under article 81(1) rather than exempted under article 81(3).
Article 81(3)
Under Article 81(3), "the provisions of article 81(1) may be declared inapplicable if such agreements contribute to improving the production or distribution of goods or to promoting technical and economic progress, while allowing consumers a fair share of the resulting benefit..."29 Article 81(3) can be applied to agreements by way of block exemption regulations, the parties are relieved of the burden of assessing whether their individual agreement pertaining to the joint venture satisfies the conditions laid out in Article 81(3).
The commission has adopted a number of block exemption regulations which lay out conditions for the application of article 81(3). They include research and development block exemptions and specific block exemptions which apply to specific agreements.
As explained previously, agreements may escape prohibition by article 81(1) if they meet the conditions for application under article 81(3). For this to be possible, the provisions of article 81(3) specifically recognizes that restrictive agreements may generate purposeful economic benefits so as to outweigh the negative effects of the restriction of competition. Agreements that satisfy these conditions are applicable from the start. Therefore, if no appropriate block exemption is available, it is necessary for the parties to assess whether their joint venture satisfies the condition for application under article 81(3). Before parents of a joint venture can satisfy the application of article 81(3), they must satisfy some conditions. When these conditions are satisfied, the agreements will improve competition within the market. These conditions include: consumers are usually allowed a fair share of the resulting benefit, the joint venture has to contribute to improving the production or distribution of goods or to promoting technical or economic progress. In addition, the restriction of competition is essential to achieve the economic benefits claimed by the parties. In actual fact, the commission will seek to understand whether the claimed benefits cannot be achieved by less restrictive means. In other words, a joint venture will meet the criterion set out in article 81(3) where the advantages brought about by it for economic progress and consumers outweigh its restrictive effect on competition.30 In British interactive broadcasting31 case, the agreement was cleared under article 81(3) for a seven year period. Prior to this application, the commission was concerned that, in creating the joint venture, BskyB and British telecom (the parents) would be eliminated as competitors in the market. Article 81(3) was however applied based on the requirement that the parents must inform consumers of products and also, they need not subscribe to bskyb's digital pay television services.
Treatment of Article 81(3) under the new regulations on Joint ventures.
Under the new rule, the commission retains the power to decide that article 81(1) does not apply to an agreement only in exceptional circumstances., hence it will no longer be possible for parent undertakings to notify an agreement for exemption under article 81(3). The manner in which the commission approached clearance in individual cases will remain the same as previously and will form the basis for decisions and also provide guidance for the parties assessment of whether an agreement falls within article 81. Under the new rule, the commission approached certain types of joint ventures differently in applying article 81(3). One of these would be discussed.
In research and development, the joint ventures are usually protected by way of the research and development block exemptions.32 Under this block exemption rule, the parties have to prove that market power that is created or enhanced by through the research and development joint venture must show significant efficiencies on the on the market. In other words, the parties have to show that the agreement would not lead to a market foreclosure and also that the agreement would not cause a negative effect on the market by restricting innovation, thus leading to a co-ordination of behaviour.
If the joint venture combines their co-operation, for example, research and development or purchasing, the commission first determines the outset of the agreement. In such cases, assessment will start with the first level of co-operation, that is, the research and development. After this is successful, then assessment would begin on the joint production aspect.
Conclusion.
The commission, through the European Commission Merger Regulation and Article 81(1) and (3) has used different approaches in its attitude towards joint ventures and horizontal co-operations. The policy set out in these two statutes is aimed to take a realistic view based on economic analysis of whether an agreement really does restrict competition and focus on market power as the main concern for competition authorities.
Bibliography.
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2). R Whish: Competition Law, 5th edition, 2003, Lexis Nexis.
3). K Middleton, UK and EC Competition law documents, 3rd edition, 2003, Oxford Press.
4). The Evaluation of Concentrations Under the Merger Control Regulation: The Nature of the Beast," 14 Fordham International Law Journal 412 (1990-1991)
5). C Quigley & A H Collins, EC State aid law and policy, Oxford Publishing 2002.
6). V Korah, An introductory guide to EC Competition law in practice, 7th edition, Oxford publishing, 2001.
7). OJ 1998 C66/1: Commission notice on the concept of full function joint ventures.
8). BusinessWeek, 75th Anniversary Issue, 11 October 2004, p 58
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A Jones & B Sufrin: EC Competition Law: Texts, Cases and Materials: pg 821
2 K Middleton, UK AND EC Competition documents: pg 521, Commission notice on the concept of Full Function joint ventures (EEC) No. 4064/89 Part 1(3).
3 2000 (Case Comp JV/44)
4 www.practicallaw.com.
5 www.practicallaw.com, K Middleton, pg 559.
6 K. Middleton, Competition Law Documents, pg 520, Joint Ventures under article 3 of the merger regulation.
7 Para 18-39 of the commissions notice 1998, K. Middleton, Competition law documents, pgs 522-531
8 ibid: footnote 6.
9 2001 ( Case Comp/JV 55).
0 2004 (Case Comp./M.3381)
1 1994(Case iv/m.425)
2 ibid
3 OJ 1998 C66/1: Commission notice on the concept of full function joint ventures.
4 1992.
5 ibid
6 2002(Case comp/m.2868)
7 1998(Case iv/m.1042)
8 Regulation 4064/89: K Middleton, UK and EC Competition law documents, pg542.
9 Article 1: Para 2&3, K Middleton: UK and EC Competition documents,pg543
20 www.practicallaw.com.
21 2004 (Case Comp/M.3333)
22 2004 Merger notice: www.practcallaw.com
23 1999(OJ L9016)
24 K Middleton, UK AND EC Competition documents: pg 291 para 1.
25 A Jones & B Sufrin: EC Competition Law: Texts, Cases and Materials: pg 821: para 4.
26 Existing as a matter of fact rather than as a matter of right.
27 Or Joint Venture. Guidelines available at www.practicallaw.com
28 1991 4 MLR 832
29 Common rules on competition, taxation and approximation of laws: article 81 ex article 85. K Middleton, competition documents, pg 291.
30 ibid.
31 2000 (Case comp/JV.37).
32 Regulation 2658/2000.
Advanced Themes in Competition Law Essay. Student Ref: 0261111
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