By Oliver Bretz, Founding Partner
At the beginning of June the European Commission adopted the revised Research & Development Block Exemption Regulation, Specialization Block Exemption Regulation and the revised Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to cooperation agreements between competitors (Horizontal Guidelines)
In addition, it published a Q&A document on the adoption of the new rules.
The new Regulations and Guidelines are intended to provide greater clarity on the application of the Article 101 prohibition of anticompetitive agreements to common forms of agreement between competitors (especially around sustainability and the digital transition). While the new documents provide helpful clarity in a number of areas where uncertainties had arisen, including joint purchasing, innovation competition, information exchange, bidding consortia, mobile infrastructure sharing, standardisation agreements and collaboration to achieve sustainability goals, one area where significant uncertainty remains is the application of Article 101 to the relationship between Joint Ventures (JVs) and their parent companies.
First a bit of history – the application of Article 101 to the relationship between parent companies and JVs first raised its head in 2010 when the Commission consulted on a draft horizontal guidelines which stated: “Art 101 does not apply to agreements between the parents and [JV that is under decisive influence], provided that the creation of the JV did not infringe EU competition law.”
Unfortunately, this proposed wording was ultimately dropped when the final Guidelines were adopted in 2010.
The 2023 Horizontal Guidelines (para 12) are less categorical than the 2010 draft – and potentially provide less legal certainty:
“In light of this case-law, the Commission will, in general, not apply Article 101 to agreements or concerted practices between parent companies and their joint venture to the extent that they concern conduct that occurs in relevant market(s) where the joint venture is active and in periods during which the parent companies exercise decisive influence over the joint venture.
However, the Commission will generally apply Article 101 to the following categories of agreements:
- agreements between parent companies to create a joint venture;
- agreements between parent companies to modify the scope of their joint venture;
- agreements between parent companies and their joint venture concerning products or geographies in which the joint venture is not active; and
- agreements between parent companies not involving their joint venture, even if the agreement concerns products or geographies in which the joint venture is active”
Does that mean that we can now throw away the JV compliance manuals and merrily coordinate competition between parents and competing JVs in the JV markets, as some have suggested? Not quite.
The wording in the Guidelines echoes the Court of Justice ruling in LG Electronics , which noted that a JV can form part of the same undertaking as its parents in certain markets and not in others. In other words, a JV can in certain circumstances be viewed as an arm of its controlling parents in the same way as a wholly-owned subsidiary. That is uncontroversial. The challenge lies in working out where the dividing line lies and on this point the case law is not clear.
In particular, there is a fundamental inconsistency in the caselaw between Gosme/Martell-DMP and Welded Mesh Steel on the one hand (where the Commission treated the JV as a separate undertaking) and E. du Pont de Nemours where an JV and its parent were considered to be part of the same group for the purpose of establishing liability.
The fact that the Commission has chosen a wording that refers to its own enforcement priorities (“the Commission will, in general, not apply”) rather than a statement based in law (“Art 101 does not apply”) acknowledges that it cannot itself fix the case law, while providing a helpful steer on its priorities. As an aside, the words “in general” have replaced the word “typically” that was contained in an earlier draft of the new Guidelines. Whether that is more than semantics remains to be seen.
What is clear is that the Commission is unlikely to look into the competitive dynamics between controlling parents and their JVs in the markets where the JV is active. Other forms of coordination may still be subject to close scrutiny, however. So much we know.
What should companies do in the absence of an explicit Court of Justice ruling on the point to help clarify the guiding line?
The creation of a jointly controlled JV may be subject to notification under the EU Merger Regulationwhere its parents have sufficient revenues. In such cases, the merger review should itself resolve any uncertainty and mitigate any legal risk under Article 101. On this, it is first worth checking whether the relevant provisions are ancillary to the concentration under Paragraph 36 of the Commission Notice on Ancillary Restraints:
“A non-competition obligation between the parent undertakings and a joint venture may be considered directly related and necessary to the implementation of the concentration where such obligations correspond to the products, services and territories covered by the joint venture agreement or its bylaws. Such non-competition clauses reflect, inter alia, the need to ensure good faith during negotiations; they may also reflect the need to fully utilise the joint venture’s assets or to enable the joint venture to assimilate know-how and goodwill provided by its parents; or the need to protect the parents’ interests in the joint venture against competitive acts facilitated, inter alia, by the parents’ privileged access to the know-how and goodwill transferred to or developed by the joint venture. Such non-competition obligations between the parent undertakings and a joint venture can be regarded as directly related and necessary to the implementation of the concentration for the lifetime of the joint venture.”
It will remain possible to have an explicit non-compete and to have that approved (implicitly) as part of the merger clearance process, thereby disapplying Art 101 in its entirety. But more often than not, the delimitation of the relationship is left open in the merger filing and many JVs compete either partly or fully with the parent companies.
As an aside, Article 2(4) of the EU Merger Regulation on coordinated effects (between the parent companies), specifically states that the parents of a JV remain independent.
Under the new framework any assessment of risk (and that is what it will have to be in the absence of a clear Court of Justice precedent) will involve a number of screening questions:
Question 1: What is the shareholding in the JV?
We know from the caselaw in Parker Pen that in the case of a 100% subsidiary there is an almost irrebuttable presumption both the parent and the subsidiary will be part of the same undertaking. It is therefore important to first ascertain whether the decisive influence over the JV is the result of a majority shareholding. The consolidation of the JV’s revenues into the accounts of the parent company may also be a relevant factor. These will be important factual points. The second question that follows is what rights the other parent has – if those are limited to certain negative veto rights over strategic decisions but with the majority shareholding having positive control, then there will be a stronger argument that Art 101 should not apply to the relationship with the majority shareholder but may well apply to the relationship with minority shareholder parents.
It should also be borne in mind that the Commission’s approach only applies to those parent shareholders with decisive influence. In JVs with multiple parents, some with decisive influence and some without, different rules will apply between them. For instance, competitively sensitive JV information may be shared with parents with decisive influence, but may not be shared or may require more robust ringfencing in the case of those parents without decisive influence.
Question 2: Is it a full-function JV?
It seems an obvious point – but in the case of a 50/50 JV which has its own brand, its own management and a strong presence in one or more markets where its parents are active, the risk of Art 101 being applied must be higher. There is a natural tension between on the one hand having an independent full-function JV, which brings about structural change in the market – and the idea that somehow it forms part of one or other of the parents. We can see this tension in the history of the Merger Regulation, this being a separate issue from considerations on parental liability that have formed much of the precedent in the case law on the concept of undertaking.
Paragraph 12 of the new Horizontal Guidelines does not refer to whether the JV is full-function and, technically at least, that is a term specific to application of the Merger Regulation, so not surprising of itself. But there is of course a direct link – the more economically autonomous (“full function”) the JV is, the more likely it would be regarded as an independent competitor rather than part of the same economic entity as its controlling parent(s). That said, the lack of any reference is itself telling – the statement of enforcement practice clearly relates to all types of JVs, including those that are “full function”.
Question 3: What are the practices under review?
Again, it may seem obvious but if you have a full function JV that is presenting itself to the market as an independent player, it would seem strange to then permit the covert sharing of markets, fixing of prices or other hard-core restrictions between the JV and its parent(s) of which customers would not be made aware.
To take an example: if a JV is competing with its parent company in relation to a public sector competitive tender, it would be high risk for them to coordinate their responses to it without disclosing that to the customer. In particular, there may be separate tender rules as a matter of contractual, criminal or public law which may be broken and there may also be a customer (especially if a public authority) willing to sue for breach (of both competition law and more specific tender rules).
But at the other end of the spectrum, it should be possible for the JV to share even competitively sensitive information with its controlling parent to allow that parent to exercise shareholder control and make strategic investment decisions across all its investments without the need for robust and intrusive ring-fencing and clean teams.
It is also inherent in the Commission’s approach set out in the new Guidelines that (i) it applies to multiple controlling shareholders in the same JV – indeed, this is inherent in the notion of joint control underlying JVs; and (ii) it applies to multiple JVs controlled by the same parent. Perhaps the more interesting question is whether, since the Commission will not apply Article 101 to the relationship between one parent and each JV which it controls, this means that one parent can coordinate the competitive behaviour of each JV that it controls. While that would appear to be a natural consequence of the justification for the Commission’s new approach, that parent companies and their joint venture form a single economic unit, where each JV involves different joint controlling parent companies, such a position would appear to be substantially higher risk.
Question 4: Is there a multinational context?
Of course, many JVs have a geographical reach that extends well beyond the EU. Although we have not yet conducted comprehensive research, many other jurisdictions may not share the Commission’s rather benevolent approach to relationships between parents and their JV. That said, at least we know that the EC’s approach is likely to be followed by the UK’s CMA, since their draft Horizontal Guidance published in January 2023 follows the approach in last year’s draft EC guidelines (including the “will not typically” language).
Question 5: Leaving the Commission enforcement risk aside, are there other risks?
I have already outlined the fact that the Commission has only included a statement about its enforcement priorities, in the absence of any firm precedent from the Court of Justice. That statement, although it could be introduced in evidence, does not bind the national courts courts or competition authorities of Member States. As such, any risk assessment should include a wider assessment beyond the enforcement risk from the European Commission. We have already identified above the risk of:
- Civil litigation, perhaps especially where customers may be directly affected
- Breach of tender rules
- Enforcement in other jurisdictions which retain a stricter approach.
Question 6: What compliance practices are already in place?
Many JVs have detailed compliance measures in place to regulate the information flow and interaction with their parent companies. These generally involve having separate board and shareholder representatives who receive information for a particular purpose. In addition, there may be measures to ensure that the actions of the JV are not influenced by the commercial interests of the parents by ensuring independence of decision-making in accordance with the fiduciary duties of the Board.
In as far as such measures are in place, their relaxation should only be undertaken after detailed consideration of all the risks, some of which have been explored above.
Question 7: Are there other considerations?
A lot has been written about the Horizontal Guidelines and sustainability. If you look at the context, it may be easier to justify a degree of JV coordination in circumstances where such coordination is aimed at achieving a sustainability objective.
For example, a parent coordinating the commercial behaviour of two competing hydrogen JVs in order to offer decarbonisation services to a client in a given geographic area (in a way that neither JV could do) may well be seen more leniently, even if it may raise potential issues under Art 101. This is a complex area, however, and a case by case assessment will always be needed.
If this all sounds deeply unsatisfactory, this is arguably inevitable given the fluidity of the undertaking concept and the inconsistencies in the case law. While the new wording on JVs in the Guidelines is welcome to the extent it clarifies the Commission’s enforcement approach, it leaves somewhat to be desired in terms of legal certainty. For the time being, it would be prudent not to throw out the baby with the bath water and to adopt a careful risk-based approach when applying Article 101 to relationships between JVs and their competing parents.
Case C-73/95 P, Viho v Commission, judgment of 24 October 1996; Case T-77/92, Parker Pen Ltd v Commission, judgment 14 July 1994.