Avoiding competition pitfalls in creating and operating JVs

1. Is the newly created JV full-functional?

The first question from a merger control perspective is whether the newly created JV (greenfield JV or previously owned asset contribution by the JV parents) will be fully functional i.e., whether the JV will be economically autonomous from an operational point of view to have independent market presence.

• Will the JV have a dedicated day-to-day management and sufficient resources and assets?

• Will the JV have activities beyond just taking over one specific function of the JV parents (i.e. it will for example not just take over R&D or production under a tolling agreement)?

• How substantial will be the purchase or sale relationship with the JV parents, or will the focus be on third parties sales and the JV play an active role on the market? We note that 20% third party sales can be sufficient to conclude on full functionality if sales by the JV to the JV parents will be on a truly arm’s length basis;

• Will the JV be intended to operate on a lasting basis?

2. Is the JV jointly controlled?

Only the creation of jointly controlled full-functional JVs constitutes a notifable event. The most obvious situation is a 50/50 shareholdings constellation with equal voting rights. But a JV can also be jointly controlled if two or more parent companies have the mere power to veto decisions that are essential for the strategic commercial behaviour of the JV, in other words whether these shareholders have rights that go beyond the veto rights normally accorded to minority shareholders to protect their financial investment. Such veto rights (often referred to as reserved matters in corporate documents) typically include a veto on the budget, business plan, the appointment of senior executives or major investments. Also, we should not forget that the entry of a new (additional or replacing) controlling shareholder might also trigger a merger filing.

3. Are the merger control thresholds exceeded?

To conclude the merger control assessment, it is essential to check if the merger control thresholds are exceeded. As a general rule, merger control thresholds are based on turnover, but in some jurisdictions, these can be based on assets or market shares or even transactional value. The relevant turnover is the group consolidated turnover of the controlling JV parents, and where relevant the pre-existing JV. For instance, a jointly controlled full-functional JV will be notifiable to the European Commission if the aggregate turnover of the undertakings concerned exceeds 5 billion EUR worldwide and turnover of at least two undertakings concerned each exceed EUR 250 million in the EU, although we should not lose out of sight the alternative EU turnover threshold test.

4. When can a JV benefit from simplified merger review?

The advantage of a simplified procedure is less paperwork and earlier clearance. Under the EU merger control regime, a JV will qualify for simplified treatment if the combined horizontal overlap between the JV and at least one of the JV parents remains below 20%, or market shares for vertical relationship between the JV and at least one of the JV parents remain below 30%, or where the combined horizontal overlap remains below 50% and the HHI increment below 150. JVs with turnover or transferred assets below EUR 100 million in the EEA at the time of the notification will also qualify for simplified treatment.

5. What is the timeline for merger clearance?

The moment of JVA signature is the best earliest point to approach the relevant competition authority, as by that time the control structure and shareholders identity will be final. In certain cases, a jurisdictional consultation on full functionality might be appropriate (which lasts approximately 1 month). The pre-notification process can take between 2 and 6 months, depending upon complexity of the case. From the moment of formal filing, the statutory EU approval deadline is 25 working days for an unconditional phase I clearance, and in practice approximately 15-17 working days for a simplified procedure.

6. When do we need clean teams to discuss JV plans?

The first thing we need to do is to map out any existing or future competitive overlap between the JV and the JV parents. If that is the case, clean teams will be needed to avoid that competitively sensitive information (CSI) ends up with competing businesses. In that context, one also needs to consider whether any such CSI exchange is objectively necessary and directly related (in time, form and substance) to the purpose of analysing the economics and viability of the JV project, and preparing and progressing the JV project. This test is applied strictly, and CSI should only be disclosed to those with a strict need-to-know. When discussing JV plans in working groups, it is recommended to have a compliance reminder at the beginning of each meeting and to follow a strict agenda.

7. How to deal with gun-jumping challenges for notifiable newly created JVs?

There is currently no real case law on gun jumping specifically in the context of JV structures. The potential gun-jumping issue here is what exactly can be done jointly by the future JV parents, for example towards potential JV customers, before having obtained merger clearance. Here again the first basic question is whether the preparatory joint action is objectively necessary and directly related to the preparation and the progress of the project. It also depends on the market environment: is there really genuine uncertainty on customer commitment required to justify the investment decision or is the market decision clear already? What can be done jointly before merger clearance is case specific and questions on the admissibility from a gun jumping perspective of for example preparatory engineering work on the feasability of the JV, jointly approaching potential JV customers, joint or individual signature of MOUs/non-binding term sheets required for FID etc... need to be carefully scrutinised on a case by case basis.

8. When is there a need for Chinese walls to operate the JV?

From an antitrust perspective, a jointly controlled JV needs to be considered as an independent entity that is run separately and to which competition law applies on the relationship with its JV parents. Whether there is a need for Chinese walls to operate the JV heavily depends on the type of JV, in particular whether or not the JV is market-facing, whether the JV competes with its parent companies or with other JV’s in which the JV parents have a shareholding – although even non-market facing or non-competing JVs can still be procurement competitors or be in possession of CSI. Obviously, a JV parent can for example legitimately receive JV CSI via an appointed JV board director to protect the value of the investment, but such CSI should not flow to competing business at the JV parents. In this respect, one should also pay attention to interlocking directorates.

9. Can the JV and its JV parents agree on non-competes?

The JV and its JV parents can agree on a non-compete at the moment of the signature of the JVA, and such non-compete will be considered as directly related and necessary for the lifetime of the JV if the geographic scope is limited to the area in which the JV parents were or planned to be active before the JV creation, and the product scope is limited to the economic activity of the JV. Such non-competes can only be agreed upon between the JV and its controlling shareholders.

10. Can the JV jointly purchase with its JV parents?

Under certain circumstances, the JV can jointly purchase with one or more of its JV parents but as a jointly controlled JV might be a procurement competitor information flows between the parties concerned should be properly organised in particular when it comes to procurement CSI. In addition, the usual joint purchasing criteria apply, i.e. the joint procurement is done openly towards the supplier, the combined market shares on the procurement market should not exceed 15% and there should be no spill-over effects on any downstream markets.