European Union: The evolving assessment of joint ventures under EU law

In summary

This chapter provides an overview of the application of EU competition law to joint ventures, as it relates to the EU Merger Regulation, article 101 TFEU and other relevant aspects of EU law.

Discussion points

• Application of the EU Merger Regulation to the creation of joint ventures
• Impact of the foreign investment and foreign subsidies regimes on joint ventures
• Assessment of joint ventures under article 101 TFEU
• Consequences of the breach of article 101 TFEU and issues that arise under the single economic unit doctrine

Referenced in this article

• EU Merger Regulation and article 101 TFEU
• EU regulation on foreign direct investments and EU regulation on foreign subsidies
• European Commission’s consolidated jurisdictional notice
• European Commission’s guidelines on the applicability of article 101 TFEU to horizontal cooperation agreements and a proposed update of 2022
• The European Commission’s block exemption regulations on research and development agreements and on specialisation agreements, and proposed updates of 2022
• European Commission’s guidelines on vertical restraints
• European Commission’s block exemption on the application of article 101(3) TFEU to categories of vertical agreements and concerted practices
• Thyssenkrupp v Commission
• CK Telecoms
• Commission v CK Telecoms
• Skanska
• Sumal v Mercedes Benz Trucks España

Introduction

Joint ventures take a wide range of forms, from structural arrangements comprising the transfer by parents of assets or businesses into a commonly owned legal entity, to looser forms of cooperation that seek to achieve more discrete goals.

Within the context of EU competition law, the structure chosen will determine whether the creation of a joint venture is subject to mandatory notification and review under the EU Merger Regulation (EUMR) or to ongoing assessment under article 101 of the Treaty on the Functioning of the European Union (TFEU).

In both cases, substantive review will assess the consequences of the combination of resources on competition and potential anticompetitive implications outside of the joint venture.

• Will any combination of resources distort competition? The European Commission (the Commission) will consider whether the combination will impede competition or, particularly if the resources or assets are complementary, generate efficiencies that benefit consumers.
• Will the parents’ participation in the joint venture distort broader competition between them? The collaboration may reduce the ability or incentive of the parents to compete or even provide a forum for anticompetitive coordination between their other activities (known as spill-over effects).
• Will the joint venture generate efficiencies that may benefit consumers?
• What would have happened absent the joint venture? Would the contributed resources have been viable on a stand-alone basis and could any efficiencies have been generated differently?

Many of these considerations are addressed elsewhere in this GCR EMEA 2024 Review. Nevertheless, a range of issues warrant more specific consideration here. This article first considers the jurisdictional and substantive assessment of joint ventures under the EUMR considering the Commission’s recent decisional practice and judgments of the EU courts. It also addresses the increasing prominence of foreign direct investment regimes that assess whether inbound investments raise national security issues, and the potential impact of the new EU Foreign Subsidies Regulation (FSR), which empowers the Commission to review the distortive effects of ex-EU government investments on competition in the EU. Finally, it considers the assessment of joint ventures under article 101 TFEU, including as regards the attribution of liability, and reflects on proposed updates to the Commission’s guidelines and block exemptions regarding horizontal cooperation and vertical agreements.

Appraisal of joint ventures under the EU Merger Regulation

The EUMR^[1] obliges parties to concentrations with an EU dimension to notify and secure approval for those transactions prior to implementation. Reflecting an aim of providing a one-stop shop system of review in the EU, the EUMR’s application to a transaction has the effect of automatically disapplying the national merger control rules at the member state level, as well as article 101 TFEU and its national equivalents.

Jurisdictional considerations

The EUMR applies to acquisitions of sole control and mergers of businesses.^[2] It also covers two categories of joint venture: (1) transactions that result in the acquisition of joint control over a business; and (2) the creation of joint ventures that ‘perform on a lasting basis all the functions of an autonomous economic entity’,^[3] generally known as full-function joint ventures.^[4]

Joint control

In both cases, the application of the EUMR requires that two or more shareholders enjoy joint control over an undertaking. The EUMR defines control as ‘the possibility of exercising decisive influence’ over an undertaking.^[5] The Commission’s Consolidated Jurisdictional Notice^[6] provides further guidance, noting that joint control arises where ‘shareholders must reach a common understanding in determining the commercial policy of the joint venture and . . . are required to cooperate’,^[7] which will be the case in the following circumstances.

• Equality in voting rights: the clearest form of joint control exists where two parents equally share voting rights in the joint venture.^[8] No further agreement is necessary, though any agreement that does exist should not depart from this principle of equality.^[9]
• Veto rights may also confer joint control when granted to minority shareholders to the extent they allow the shareholder to block decisions that are essential for the joint venture’s strategic commercial behaviour.^[10] These rights must go beyond typical minority protection rights,^[11] and relate to strategic decisions on the business policy of the joint venture (eg, the budget, the business plan, the appointment or dismissal of senior management, and material investments).^[12]
• It is also the case when there is the joint exercise of voting rights, by two or more minority shareholders, where they together have a majority of voting rights and can be expected to act together.^[13]

Full-functionality

This concept limits the application of the EUMR to transactions that bring about lasting changes in market structure. The Consolidated Jurisdictional Notice provides detailed guidance, articulated around the following tests.

• Does the joint venture have sufficient resources to operate independently? A full-function joint venture performs ‘the functions normally carried out by undertakings operating on the same market’, with a dedicated management and access to sufficient resources, including financing, staff and assets.^[14]
• Does the joint venture undertake activities beyond one specific function? A full-function joint venture is not constrained to one function of its parents’ activities (eg, R&D or production) but should rather have its own access to, or presence in, the market.^[15]
• Are there substantial sales or purchases between the joint venture and its parents? Significant sales to the parents may undermine the idea that a joint venture is geared to play an active market role, whereas significant purchases may point to a joint sales agency.^[16]
• Is the joint venture intended to operate on a lasting basis?^[17] Joint ventures with an unlimited duration or that are created for a sufficiently long period ‘to bring about a lasting change in the structure of the undertakings concerned’ will satisfy this criterion.^[18]

The Commission applies this test strictly and will decline jurisdiction if a joint venture does not meet these requirements. There is little public record of those cases, but a recent case where the test was satisfied related to the creation of a joint venture between SNAM and ENI. The resulting entity now controls the Trans-Mediterranean Pipeline used to import gas from Algeria into Italy. The Commission concluded that it was full-function because it:

• independently owns or operates, or both, the relevant pipeline sections;
• has the permits, resources, personnel, rights and assets needed to carry out its functions independently from its parents;
• has an independent management dedicated to its day-to-day operations (a board of directors and a managing director); and
• has secure financial resources through contracts with the end users such that it can conduct its business activity independently from its parents.^[19]

The relevance of the full-functionality test increased in recent years following a preliminary ruling by the European Court of Justice in the Austria Asphalt case.^[20] This concerned a request from the Austrian Federal Cartel Court as to whether the full-functionality requirement also limits the application of the EUMR in transactions that do not relate to the creation of a greenfield venture, but where a sole shareholder sells a jointly controlling interest in an existing business to a third party. To the surprise of many, the Court held that it does, making the full-functionality requirement a prerequisite to the Commission’s jurisdiction in these circumstances.

EU dimension

Finally, the EUMR only applies to transactions with an EU dimension, limiting its application to situations where the parties generate sufficient turnover in the EU. A transaction has an EU dimension when the undertakings concerned satisfy either of two thresholds:

• the undertakings concerned jointly generate worldwide revenues of €5 billion and at least two generate EU turnover of €250 million (unless they all generate more than two-thirds of their EU turnover in the same member state);^[21] or
• the undertakings concerned jointly generate worldwide revenues of €2.5 billion, and in at least three member states they generate combined revenues of €100 million and at least two undertakings each generate €25 million (unless they all generate more than two-thirds of their EU turnover in the same member state).^[22]

In the context of a joint venture, both of the jointly controlling parents are undertakings concerned, but the joint venture is not, except where it comprises a business that is acquired by an entirely new set of controlling shareholders.^[23] One consequence of this rule is that the EUMR applies each year to a host of transactions between two large jointly controlling shareholders that satisfy the thresholds without recourse to the joint venture.

Where a joint venture itself acquires a business, the General Court recently confirmed^[24] that it may be appropriate to look through the acquiring joint venture and identify the shareholders as the undertakings concerned either where the joint venture is a shell company or where the shareholders are ‘the real players behind the transaction’.^[25]

Substantive assessment

Simplified cases

As noted above, the broad scope of the EUMR’s turnover thresholds triggers notification obligations for many joint venture transactions with little to no EU nexus. In particular, the creation of a full-function joint venture or the acquisition of joint control of an undertaking based anywhere in the world is notifiable under the EUMR where the jointly controlling parents generate sufficient turnover in the EU.

Recognising that these transactions will rarely (if ever) raise substantive issues in Europe, the Commission encourages the use of its simplified procedure.^[26] This is available, among other circumstances, in acquisitions of joint control of an undertaking with no, or negligible, activities within the European Economic Area (assessed with respect to €100 million turnover and asset thresholds).^[27] This procedure reduces the information the parties must provide, which can curtail the length of pre-notification discussions. The Commission also does not undertake proactive market outreach or write reasoned decisions in simplified cases, which often reduces the typical Phase 1 review timeline (eg, from 25 to fewer than 20 working days).

Nevertheless, the Commission has been criticised for the continued burden that the EUMR imposes on these transactions. This led to the introduction of a super-simplified process in 2013 that in theory allows parties to proceed without engaging in any pre-notification process.^[28] However, very few transactions have made use of this process in practice (likely out of fear of a filing being rejected for incompleteness).

In light of this criticism, the Commission has been reviewing the rules on the simplified procedure and on 20 April 2023 adopted a revised Merger Implementing Regulation and a new Simplified Procedure Notice and Communication on the transmission of documents. This package of new rules will come into force in September 2023. The new rules will bring more transactions within the scope of simplified merger procedure, including in cases featuring limited horizontal or vertical relationships between the parties. The Commission will also have the discretion, among other things, to apply the simplified procedure to joint ventures with turnover and assets below 150 million in the EEA. Conversely, the new rules clarify the circumstances where the Commission will drop the simplified procedure to the benefit of the regular procedure (eg, where the relevant markets are difficult to define or where one of the parties has a significant user base or holds what is considered to be commercially valuable data). The regular procedure itself has been further streamlined, the Commission having dropped several information requirements and left more room for granting information waivers.

Business combinations

Where a joint venture combines two or more sets of businesses with activities in Europe, the Commission’s focus will often be similar to other types of transaction (ie, whether that combination would significantly impede effective competition).

A key issue in recent years has been the application of this criterion to transactions that do not create or strengthen a dominant position, but nevertheless might reduce competition in oligopolistic markets. Indeed, the Commission’s approach has been challenged (at least partially successfully) in two important cases with the EU courts.

In CK Telecoms, the General Court appeared to significantly increase the difficulty for the Commission to intervene in cases of this nature.^[29] The case related to an attempted merger between two UK telecommunications providers (Three and O2) that the Commission had prohibited on the basis that it would have eliminated an important competitive force. The General Court overturned the prohibition, requiring: (1) that the Commission needed to establish a ‘strong probability’ that a deal would eliminate an important competitive constraint on one of the merging parties; and (2) that this required a detailed assessment of the constraints that the merging parties actually exerted on each other.^[30]

However, the Commission has appealed this judgment arguing that the threshold required by the General Court to prohibit this type of concentration in oligopolistic markets was prohibitively high.^[31] A recent advocate general seems to side with the Commission that the relevant test is based on a balance of probabilities, recommending that the General Court’s judgment be set aside.^[32] Meanwhile, the General Court took a different approach in another case, Thyssenkrupp.^[33] In 2019,^[34] the Commission prohibited a proposed joint venture between Tata Steel and ThyssenKrupp that would have combined their respective European steel businesses in a full-function joint venture. In doing so, the Commission identified concerns that the merged business might enjoy a dominant position in the supply of metallic coated and laminated steel for packaging applications. The Commission also objected in relation to supplies of galvanised flat carbon steel to the automotive industry; in that area, the joint venture would not have had a dominant position, but the Commission was nevertheless concerned about the consequences of the removal of an ‘important competitive constraint’.

On 22 June 2022, the General Court dismissed Thyssenkrupp’s subsequent appeal of the Commission’s prohibition decision. This judgment seems in tension with the General Court’s position in CK Telecoms. Most interestingly, the General Court has ruled that the Commission must demonstrate ‘with a sufficient degree of probability, in its decision declaring a concentration incompatible with the internal market, that the transaction significantly impedes effective’.^[35] While it is not entirely clear what ‘sufficient degree of probability’ actually means, it does suggest a deviation from the ‘strong probability’ standard set out in CK Telecoms (which the Court did not cite in Thyssenkrupp). Thyssenkrupp has appealed the General Court’s judgment.^[36]

The Court of Justice’s judgments in both appeals will hopefully resolve the tension between these two judgments and will determine the future of the Commission’s ability to prohibit transactions (including joint ventures) that risk harming competition in oligopolistic markets.

Spill-over effects

In addition to considering the impact of the combination of the businesses or assets contributed to the joint venture, the Commission will consider whether there is any potential for an adverse effect on the competitive behaviour of the parent companies’ standalone business interests (known as spill-over effects).

Although the Commission routinely undertakes this assessment in joint venture cases, it has never prohibited a transaction on this basis. Neither have there been many controversial examples in recent years in this area, as the Commission has taken account of several factors that could prevent the parties from coordinating their behaviour on the market or trying to eliminate competition:

• the presence of efficient competitors that would disrupt any coordination;^[37]
• the low revenues generated by the joint venture relative to those of its parents;^[38]
• the lack of importance of the joint venture’s activities as an input for its parents’ activities;^[39]
• the complexity of the market and how it could frustrate coordination;^[40] and
• the existence of policies to ensure the joint venture will not function as a hub for its parents to exchange commercially sensitive information.^[41]

Ancillary effects

Finally, parents may need to restrict their own freedom to ensure that their joint venture functions properly. Ancillary restraints of this nature are covered by Commission approvals under the EUMR where they are directly related and necessary for the implementation of the joint venture.^[42] Restraints that do not meet this criterion fall to be assessed under article 101 TFEU.

The Commission’s Ancillary Restraints Notice provides that non-compete obligations between parents and a joint venture will generally benefit from the ancillary restraints doctrine where they are limited to the joint venture’s field of activities, as will many licence agreements and supply and purchase relationships between a joint venture and its parents.^[43] Indeed, these types of restriction simply reflect that the parents have withdrawn from the joint venture’s field of operation.

Foreign direct investment review

Investments made in the context of joint ventures may be increasingly subject to rules that scrutinise foreign direct investments. Several EU member states^[44] have adopted mechanisms to screen investments on grounds of security or public order, partly in response to encouragement from the European Commission through the adoption of the EU Foreign Direct Investment Regulation (the FDI Regulation).^[45] The FDI Regulation seeks to facilitate (and oblige) cooperation between member states and the Commission and imposes a minimum set of standards on national regimes. However, the regimes are not harmonised across the European Union, so their rules, procedure and substance vary by member state. Accordingly, their potential application to joint ventures will vary by country, but a broad range of investments (as low as 10 per cent in some countries) may be caught by national FDI regimes.

Foreign subsidies review

Finally, on 12 January 2023, the EU Foreign Subsidies Regulation entered into force.^[46] This new piece of legislation grants the Commission reviewing powers to assess whether subsidies from outside of the EU may distort competition in the internal market. Most importantly for the purpose of joint ventures, the FSR creates a mandatory notification system applicable to concentrations that meet specified thresholds. Corporate transactions resulting in a change of control (including joint ventures) must be notified for prior approval to the Commission where:

• at least one of the merging companies, the acquired company or the joint venture is established in the EU and has an EU turnover of at least €500 million; and
• all companies involved in the operation received foreign financial contributions of more than €50 million from non-EU countries in the three financial years prior to notification.

This new piece of legislation adds to the already long list of regulatory approvals that parties to joint ventures may need to secure to complete their deals.

Appraisal of joint ventures under article 101 TFEU

To the extent that the creation of a joint venture does not fall under the EUMR, the arrangement may be assessed under article 101 TFEU, which prohibits agreements, decisions by associations of undertakings, and concerted practices that may affect trade between member states and that have as their object or effect the prevention, restriction or distortion of competition.

An assessment under article 101 requires two steps: (1) to establish for purposes of article 101(1) whether an agreement has an anticompetitive object or effect; and (2) to establish for purposes of article 101(3) whether any pro-competitive benefits of the agreement may outweigh those restrictive effect. The latter step requires that the arrangement:

• contribute to improving the production or distribution of goods or to promoting technical or economic progress;
• allow consumers a fair share of the resulting benefit;
• not impose on the undertakings concerned restrictions, which are not indispensable to the attainment of these objectives; and
• not afford these undertakings the possibility of eliminating competition in respect of a substantial part of the products in question.

Relationship between a joint venture and its parents

Before considering how the Commission undertakes its substantive assessment, it is useful to consider the scope of the article 101 TFEU prohibition as it applies to joint ventures and their parents.

Article 101 only applies to the relationship between companies to the extent they do not form part of a single economic unit. This is the case where one company exercises decisive influence over another. A series of rulings from the European Courts^[47] has resulted in a (near irrebuttable) presumption that a parent with a 100 per cent interest in a subsidiary satisfies this standard, so arrangements within corporate groups are typically not subject to the prohibition.^[48]

The situation as regards the relationship between joint ventures and their parents is more complex. The European Court of Justice held in 2013 that parents and joint ventures do form part of a single economic unit where the parents exercise decisive influence over the joint venture.^[49] This led to some uncertainty as to the scope of the single economic unit doctrine, in particular as to how it applied to the relationship between the parents. This was partially resolved by the European Court of Justice’s 2017 judgment in LG Electronics, which held that the single economic unit doctrine only applied to the market where the joint venture was active.^[50]

The Commission is updating its guidelines on horizontal cooperation agreements (the Horizontal Cooperation Guidelines), which now expand on that principle in commenting that the Commission will not apply article 101 TFEU to the relationship between parents and their joint venture concerning activities in the relevant markets where the joint venture is active. However, this will not shield the parties as regards arrangements: (1) between the parents to create the joint venture (or to alter its scope); (2) between the parents and the joint venture outside the product and geographic scope of the joint venture’s activity; and (3) between the parents without the joint venture’s involvement, even concerning the markets where the joint venture is active. The application of article 101 TFEU to all of these categories is not explicitly supported by the Court’s case law, so there is room for further development in this area. In the meantime, it remains clear that there is significant scope for Commission scrutiny in the relationship between joint venture partners.

Restrictions on the commercial autonomy of a joint venture and its parents (such as non-compete or non-poaching clauses) can be covered by the ancillary doctrine mentioned above. If the joint venture agreement is otherwise legitimate and does not raise issues under article 101, restrictions should not breach article 101 if they are objectively necessary to the implementation of the commercial arrangement and proportionate to the objectives pursued by the restrictions.

Substantive assessment

Since 2004 (with the advent of Regulation 1/2003), parties are no longer able to notify proposed arrangements to the Commission for review.^[51] Rather, parties must self-assess whether their agreements are compliant with article 101 TFEU, which can be enforced not only by the Commission, but also national competition authorities and the courts of the member states.

There has not been a great deal of enforcement in the area of contractual joint ventures in recent years and most significant developments have been legislative.

In June 2022, the new Vertical Block Exception Regulation entered into force.^[52] The rules exempt vertical agreements from the application of article 101 TFEU if the parties’ market shares are below 30 per cent on their respective markets and if the agreement does not contain hardcore restrictions (such as non-competes).

Perhaps more importantly in the field of joint ventures, there is also significant guidance on how the Commission is likely to assess cooperative arrangements between competitors. The Horizontal Cooperation Guidelines stand alongside two block exemption regulations exempting categories of agreements from article 101 TFEU and are particularly relevant to joint ventures as they relate to: (1) research and development (the R&D Block Exemption Regulation); and (2) specialisation (the Specialisation Block Exemption Regulation).^[53]

The current versions of all these materials were supposed to expire on 31 December 2022. However, the Commission extended their validity to June 2023. Although the Commission issued new drafts in the course of 2022, it could not reach a landing point several important areas, which required the extension of the current versions.^[54] We provide an overview of the sections of the draft rules that are most likely to be relevant to joint ventures, though it bears emphasis that some of these changes may be amended or withdrawn in the coming months.

Consequences of breach

There are three main consequences of breaching article 101 TFEU that may be particularly important for joint ventures and their parents.

Voidness

First, agreements that infringe article 101 TFEU are not legally enforceable.^[55] This can have particularly profound implications in the context of a joint venture, especially if parents have contributed significant resources to the collaboration.

Fines

The Commission can impose fines on undertakings that infringe Article 101 TFEU of up to 10 per cent of the worldwide turnover of the undertaking concerned, though they rarely reach this limit. As set out in the Commission’s fining guidelines,^[56] to calculate the basic starting point for a fine, the Commission uses the value of sales of the relevant undertaking that relate to the infringement, which it multiplies by the duration of the infringement.

We discussed above the single economic unit doctrine in the context of the relationship between joint ventures and their parents. This can also play an important role in fine calculation. Most commonly in this context, where a joint venture is found to have infringed article 101 TFEU, its parents will be jointly and severally liable if they have exercised decisive influence over the joint venture. In addition, their turnover will be taken into account for two purposes: (1) the 10 per cent statutory cap; and (2) the value of sales that is used as the starting point for fine calculation.

This was confirmed in the Commission’s Cathode Ray Tube cartel decision and subsequent judgment by the European Court of Justice in LG Electronics.^[57] The Commission has applied these principles consistently in recent cases. For example, in Maritime Car Carriers,^[58] Wallenius Logistics AB and Wilhelmsen Ships Holding Malta Limited owned two joint ventures (Wallenius Wilhelmsen Logistics AS and EUKOR Car Carriers, Inc) 50 per cent-50 per cent and 40 per cent-40 per cent respectively. Although these companies were separate legal entities, the Commission treated them as a single undertaking and took account of the parents’ turnover to calculate the fine.^[59]

Private damages

Finally, victims of article 101 TFEU infringements can claim damages from national courts for harm they have suffered,^[60] a process facilitated by the 2014 Damages Directive.^[61]

There is a huge growth of activity in this area, which is addressed elsewhere in the GCR EMEA 2013 Review. Two points bear emphasis with regards to the single economic unit doctrine. First, the Court of Justice’s recent Skanska judgment confirmed the application of the single economic unit doctrine with respect to private damages.^[62] Accordingly, victims can sue parent companies for the harm caused by their controlled subsidiaries, theoretically also including their joint ventures. Second, the European Court of Justice extended that doctrine in Sumal,^[63] in holding that a subsidiary can be held liable for the harm caused by its controlling parents, provided it sells the products affected by the infringement. This principle could also presumably be extended to joint ventures.

Notes