Joint ventures and the EU and Czech control of concentrations: towards consistent approach or not?

The establishment of joint ventures (JVs) is a vital motor for innovation and development in any modern economy seeking to remain competitive. Through the pooling of resources, know-how and logistics, JVs are capable of creating noticeable changes on a specific market, which is attested by their prevalence under the EU Merger Regulation ("EUMR"): nearly half of all merger procedures concern JVs.^[1] Nevertheless, despite their frequency, different interpretations of what actually constitutes a JV exist on the EU and Member State level. This article aims to offer a brief overview of these differing views and, on the basis of Czech case law, examine the different national reasoning, as well as what potential problems these inconsistencies might cause in future mergers.

Below, we focus on three practical aspects of assessing joint ventures under a merger control regime. First, we discuss a definition of the joint venture from the perspective whether it must create a new, or can relate to an existing business. Second, we address the details of a definition of a full-functionality criterion. Third, we discuss whether the criterion is necessary to be met in all circumstances for a merger regime to apply.   

1. Defining a joint venture - New and/or existing business?

As a starting point, both the EU and national competition authorities require two preconditions for a target to be deemed a JV: 1) the transaction has to lead to the establishment of joint control over the target by the parties, and 2) the JV has to be able to perform all the functions of an autonomous economic entity. This corresponds to both the EU legislation (Art. 3(4) EUMR) and, as the focus legislation of this article, Czech national law (Art. 12(5) Czech Act on Protection of Competition), meaning that, ideally, both should define JVs identically. And yet, differences remain.

One of the central questions regarding the definition of a JV is whether or not already existing companies, previously controlled by one undertaking, which in the course of an acquisition come under joint control of several undertakings, can be seen as JVs. On one hand, the situation can be seen from the perspective of the incoming controlling undertakings – simply as an acquisition of control comparable to a situation when such undertakings are acquiring control over a target that has previously been controlled by a seller exiting the company. On the other hand, the scenario can also be seen as the currently controlling undertaking creating essentially a new business unit, which it will jointly control with the incomers, and contributes the whole existing business into it.

1.1. Czech approach

It is no surprise that regulators and courts have formulated different views on this, both on the European and national level. As a prominent example of the former viewpoint, the Czech Competition Authority ("CCA") under its Notice on the Notion of ‘Undertakings Concerned’ under the Act on Protection of Competition ("CCA Notice") explicitly differentiates between the acquisition of control of newly-created and preexisting undertakings. The difference to the second viewpoint, which is taken e.g. by the European Commission ("EC"; see below), is thin, but may have major implications in practice.

In order to see the implications, one needs to be reminded of the construction of the merger control thresholds in the Czech Republic as well as in the EU. The Czech thresholds are two-fold. The first set of thresholds requires:

• a local turnover combined by all undertakings concerned^[2] of CZK 1,500 million and
• an individual local turnover of at least two of the undertakings concerned of CZK 250 million.

The second set of thresholds combines:

• a global turnover of one undertaking concerned of CZK 1,500 million and
• a local turnover of the second undertaking concerned of CZK 1,500 million, while this second undertaking concerned is either one of the merging parties (in a merger scenario), the target undertaking (in an acquisition scenario) or one of the parents of a JV (in a JV scenario).

First of all, it needs to be remembered that the merger control laws are generally agnostic to the formal construction of the transaction, nor do they give any relevance to the parties' perception of the transaction. Hence, it is irrelevant if the transaction documentation speaks about an acquisition, a purchase of shares, joint venture establishment or cooperation.

The CCA Notice elaborates on the notion of undertakings concerned as follows. First, for a greenfield JV, the CCA considers only the parents of the new, not yet existing undertaking, as the undertakings concerned.^[3] This is quite logical as the new JV is not yet an undertaking in the classical antitrust sense (it is not economically active) and does not generate any turnover. In this case, one parent with local activities generating a local turnover over CZK 1,500 million is sufficient to trigger the notification obligation under the second set of thresholds.

Interestingly, the CCA Notice also states that if a parent contributes its subsidiary or a part of its business to a JV, the same approach needs to be taken. The contributed subsidiary or the part of the business shall be considered as a part of the parent for the threshold purposes.^[4]

However, if the transaction shall result in a joint control over an existing undertaking, the CCA Notice explains that such a transaction is understood as an acquisition of control, the notifying parties are each of the undertakings acquiring joint control (parents) but the undertakings concerned are, for the purposes of the assessment of meeting the thresholds, not only the parents but also the target business.^[5] The outcome is that under the current Czech thresholds, the transaction requires the local activity resulting in a turnover of either the target business (EUR 1,500 million under the second set of thresholds, where only the target can meet the (b) limb), or at least two undertakings concerned (EUR 250 million under the first set, possibly the two of the parents, or one of the parents and the target business). The logic for the different approach for an existing undertaking is stated to be that it already generates turnover.^[6]

The thin but crucial issue comes in the above-described situations, where there is an existing business (EB), which can be seen as an undertaking, solely controlled by one party (party A). Party A decides to sell a part of its shareholding in EB (e.g. 50%) to Party B, resulting in a joint control of Party A and Party B over EB.

The CCA decision-making practice defined these transactions mostly as indirect acquisitions of a joint control (via jointly controlled SPV). In Chytry Honza,^[7] the transaction was structured as follows. First, Party A established an (empty) special-purpose vehicle (SPV). Second, Party B gained joint control over it. Third, Party A transferred the target company from its sole control to the SPV. The second party thereby indirectly gained joint control over the formerly solely owned subsidiary (becoming a JV). The CCA assessed the case as an acquisition of (joint) control. In a more recent case CzechToll/TollNet,^[8] the target business solely controlled by Party A was carved-out into a newly established SPV originally owned by Party A. By acquiring a shareholding of the SPV, Party B gained joint control over the SPV. Again, this was considered to be an acquisition of joint control.^[9] Finally, in AFRAS, the structure was somewhat different as the target company's shares owned by Party A were first transferred to a subsidiary of Party B and second, by increasing the share capital of the subsidiary Party A gained joint control with Party B. Importantly, the transaction documentation was marked as a joint-venture agreement, but the CCA still assessed it as an acquisition of joint control.

The approach, however, might be difficult to square with para. 22 of the CCA Notice that states that when a parent contributes a subsidiary or a part of its business to a JV, it should be considered as a JV scenario. One possible explanation is that, if reading it together with paras. 23, 30 and 31 of the CCA Notice, the line between the acquisition and the JV scenarios lies in the future activities of the JV. If the JV simply carries on with the business as when it was solely controlled by one of the parents, it      seems to be closer to the joint control acquisition scenario. On the other hand, if the JV's business differs from the original activities of the business being contributed to the JV, it effectively marks a creation of a new undertaking. This interpretation is supported by Bain Capital/J.H. Whitney,^[10] where both parents combined their business by both contributing their subsidiaries to the JV. In theory, it could also be seen as Party A gaining joint control over the previously solely controlled subsidiary of Party B and vice versa, but the fact that these subsidiaries were combined under the common umbrella of an SPV jointly controlled by both parents points to a conclusion that a new undertaking (JV) was created.

1.2. EU approach     

On the EU-level, the differentiation between an acquisition of control and an establishment of a JV is not as pressing as in the Czech Republic. The reason is that the EU thresholds do not differentiate between acquiring and acquired company, merging parties or JVs, and creation of full-function JVs are a subtype of acquisitions of control.^[11] However, it is still relevant because in the scenario of an acquisition of joint control, there would be three undertakings concerned (the parents and the target), while in the JV scenario only the parents are considered as undertakings concerned.

The EC's Consolidated Jurisdictional Notice ("EC Notice") lacks, compared to the CCA Notice, provisions on change of quality of control from sole to joint,^[12] which makes a significant difference. For the above-described scenario, only the paragraph of the EC Notice stating that in scenarios where one undertaking contributes a pre-existing subsidiary or a business (over which it previously exercised sole control) to a newly created joint venture, only the parents are undertakings concerned (and the contributing parent's turnover includes the turnover of the contributed subsidiary or a business).^[13]

Based on this, the situations where originally solely controlled existing business (EB) becomes jointly controlled by the original parent (Party A) and a new parent (Party B), are considered to be the establishment of JVs.

1.3. Conclusion

Transaction structures are diverse and even apparently clear-cut rules on definitions of the undertakings concerned may have their hidden gems. Both positions as described above have their own logic and advantages. The Czech approach to drawing the line between acquisitions of joint control and JVs, which needs to be seen in the light of the threshold setting, seems to work well to exclude notifications in situations where only one future parent of the existing business is significantly active in the Czech Republic and the JV itself is not active in the Czech market. However, the line may become blurred in transactions when the existing business may transform slightly following the transaction. For example, along the argumentation of the Bain Capital/J.H. Whitney case, what if the new parent, apart from a monetary consideration to the seller (the other parent), contributes finances to the existing business in order to boost it? Is it still the same existing business, or does it result in the creation of a new undertaking?

The EU approach is more straightforward that regardless of whether it is new or an existing business, the thresholds apply to the parents only. However, it creates differences between completely identical transactions from the perspective of the new parent only on the basis of the future participation in the shareholding of the seller.

Leaving aside the necessarily open-ended discussion on which approach is better, the most important fact is that the merger control regimes diverge, which brings a level of uncertainty. One way or another, consistency between the Czech and EU regime is very much desired. The inconsistent treatment of what constitutes a JV both on the EU and member-state level is problematic, first and foremost because of Art. 21 EUMR’s one-stop shop system, whereby other national merger control rules are overruled. As a consequence of Austria Asphalt, certain transactions which would have usually fallen under the Commission’s jurisdiction are now not covered by a merger control regime, unless a Member State’s national regime applies a broader interpretation of notifiable transactions or if it does not require full-functionality of already existing undertakings.^[14] This is closely connected with the issue of whether national competition authorities follow the Court’s line of reasoning, as their interpretation of national legislation is not legally bound to that of the EUMR. For example, while the CCA has not adopted a corresponding view, the Danish Competition Authority has,^[15] leading to the situation where a continent-spanning merger (not recognised as a JV by the Commission) might impede competitiveness internationally, with national competition authorities only being able to address this on an isolated national level.

On the other hand, another issue might arise in the light of the Commission’s new broad interpretation of Art. 22 referral system pioneered by Illumina/Grail, by which national competition authorities can refer mergers to the Commission which in of themselves neither meet EU nor national merger thresholds but still possess the potential to affect trade between member states or affect competition within the referring state. For instance, a national competition authority that sees a joint acquisition as a JV which does not meet the national or EU thresholds, but is still able to impact competition, might want to refer the case to the Commission, which would ultimately have to reject its jurisdiction over the case, as it does not see the transaction as a concentration under the EUMR.

2. Full-functionality definition

A further point of contention between the interpretation of JVs between EU and national level concerns that of the full-functionality criteria, i.e. the JV's ability to operate independently on a market and perform the functions normally carried out by undertakings operating on the same market.^[16] The Commission insists on criteria for JVs regardless of whether they constitute greenfield or already existing enterprises.^[17] This autonomy is determined by a number of factors, which are further elaborated in the EC Notice, and encompass:

• Sufficient resources to operate independently on a market;
• Activities beyond a specific function for the parents;
• Substantial sales or purchases between the JV and the parent companies;
• Operating on a lasting basis.

While all of these criteria have to be met, they are still assessed cumulatively, hence their individual intensity may vary. It is exactly this assessment which sometimes forms discrepancies between the EU and national level. Looking back to the CCA, in applying the same criteria as the Commission, in Conti Tech Techno-Chemie GmbH/dk Beteiligungsgesellschaft mbH^[18] it deemed that the concentration did not result in the full-functionality of the JV due to the lack of business independence vis-a-vis its parents. This was concluded despite both parties arguing that the JV possessed sufficient operational autonomy and would sell most of its goods to third parties after an initial post-closing period.^[19] Citing the EC Notice,^[20] the CCA saw the long (>3 years) transitional period, during which the JV would be economically dependent on its parent companies, as being detrimental to the economic autonomy of the JV, regardless of the fact that the Commission itself does not cling to the specified 3-year deadline. The parties envisioned that the JV would start selling the majority of its goods to third parties only after a longer period of time (presumably longer than 3 years) and clarified that it would exclusively conduct “passive sales” i.e. it would not actively promote its products and seek customers, but would accept orders from them.^[21] While the CCA did assess all the aforementioned factors in their totality, it notably perceived the 3-year transitional timeframe and the necessity for the JV to provide the majority of its goods to third parties as thresholds, rather than indicators as intended by the EC Notice. The relevant parts of the EC Notice, paragraphs 97 and 98, specifically state that the analysis is to be done on a case-by-case basis in respect of the specific market conditions. An additional peculiarity of the decision’s analysis is the differentiation between “active” and “passive” sales, whereby the propensity for the latter was seen as an argument against the full-function character of the JV. The EC Notice makes no such differentiation, resting its analysis solely on whether the undertaking plays an active role in the market, which the JV in the present case did as it was intended for it to independently maintain business relations with third parties. Whether it did so by actively seeking out potential customers is irrelevant as its activities do impact the relevant market.

The different assessment of the full-functionality criteria between the EU and national levels has the capacity to become a major problem for the parent companies. The CCA’s decision in the present case forced the parent companies to endure a strict and costly continuous horizontal assessment of their JV, despite the parties assuming, on the basis of EU guidance, that the JV would be fully functional.

3. Full-functionality required or not?

As a systematic subtype of the acquisition of joint control,^[22] the EUMR encompasses all full-function JVs, be it greenfield operations or when assets are contributed to a JV that was previously owned individually (see above).^[23] The EC Notice furthermore specifies, that the establishment of joint control over an already existing undertaking leads to a change in the market structure, regardless of its full-functionality, concluding that this criterion is not to be examined in such concentrations.^[24] Hence, the Commission assumed that even creations of non-full-function JVs in its interpretation were notifiable (n.b. under Czech law, the situation would be considered as an acquisition of control), creating uncertainty over whether Art. 3(1)(b) or Art. 3(4) EUMR is to be applied in the case that the target does constitute an autonomous economic entity.

The ECJ famously tackled this gap in Austria Asphalt, where it first recapitulated that Art. 3(4) is to be understood as a concentration within the meaning of Art. 3(1)(b) with the caveat that the acquired undertaking must be fully functional.^[25] On the basis of the teleological scope of the EUMR, it furthermore concluded that the chief criteria governing its applicability on such fully-functional JVs is whether they cause a lasting effect on the structure of the market.^[26] Leaning on AG Kokott’s arguments, the Court criticised the Commission’s different treatment of greenfield and existing JVs as being unjustified, as it goes counter to the objectives of the EUMR, namely the protection and supervision of changing market structures.^[27] The Commission has nevertheless continued following its Notice, despite calls for aligning it with the ECJ’s decision,^[28] with a number of decisions still insisting that full-functionality is not a precondition for cases involving the acquisition of joint control.^[29]

While the rejection of this undue differentiation might be justified, the overall focus of the AG and Court on whether the JV causes a shift on the market structure can lead to the conclusion that even non-full-function JVs are within the scope of Art. 3(4) due to the obvious possibility of them affecting other competitors.^[30] Nevertheless, the importance of a changing market structure can be left unaddressed by solely following the Commission’s line. For instance, the acquisition of joint control over a real estate asset from a third party would be considered a JV, whilst the divestment of a 50% stake in a solely owned subsidiary to a competitor is not, despite the latter’s profound impact on the relevant market.^[31] Other voices have criticised the decision far more harshly, seeing the ruling as interpreting Art. 3(4) to be a restriction to Art. 3(1)(b), as targets formerly within the scope of the EUMR now potentially fall out of it if they lack full-functionality. Thus, despite the disappearance of a competitor and the ensuing change of the market structure, the acquisition would remain uncontrolled by the regulator, thereby counteracting the exact objective the Court ascribed to the EUMR.^[32]

Looking back to the position of the CCA, it appears that both the CCA Notice and the EC Notice agree that through the acquisition of joint control over a pre-existing undertaking a change in the market structure is caused per se, hence it would not be necessary to examine it as a JV. The ECJ’s decision flips this notion on its head, because it sets full-functionality as a precondition for the applicability of the merger control regime insofar as it also causes a change of the market structure. In other words, by differentiating between greenfield and pre-existing undertakings, the regulators fail to adequately assess the impact a transaction could have on the respective market, as the former is only assessed on the basis of its full-functionality, despite its potential irrelevance on the market, while the latter would be considered a concentration, despite it continuing to be an autonomous economic entity operating within the market.

Conclusion

With legal certainty in merger control law becoming ever more endangered in recent times, it appears beneficial to at least erase different legal interpretations in questions not under serious policy scrutiny, such as that of full functionality. A uniform interpretation would also be beneficial from an economic perspective, as it would promote the formation of JVs, encouraging companies to reach out and create creative and durable ways of pooling resources and know-how. The issue is of a particular relevance now, as the CCA announced its intention to thoroughly review its merger control laws. The practitioners would surely appreciate if the closest convergence possible on all levels to the EU regime would be one of the major aims of this exercise.

[Kupčík, Jan, Jakšić, Marko. Společné podniky (joint ventures) a unijní a česká kontrola koncentrací: směrem ke konzistentnímu přístupu či ne? V tomto článku se zaměřujeme na praktické aspekty posuzování společných podniků na unijní a české úrovni. Konkrétně diskutujeme přístup k definici vytvoření společného podniku jako jednoho typu koncentrace v protikladu k získání (společné) kontroly, jak je pojímána v rozhodovací praxi. Na to navazujeme otázkami okolo kritéria plné funkčnosti společného podniku, konkrétně pojetí tohoto kritéria i potřeby splnění tohoto kritéria pro spuštění kontroly koncentrací. Přestože se jedná o samostatné otázky, úzce spolu souvisí a jiné pojetí společného podniku jako typu koncentrace může v konkrétních případech mít dopady i na další záležitosti rozhodující o aplikaci či neaplikaci režimu kontroly koncentrací, což zde popisujeme.]

 

authors: Jan Kupčík, Marko Jakšić

originally published in Antitrust 2/2024

 

[1] Immenga/Mestmäcker/Körber, 6th edition (2020), EUMR Art. 3, para. 120.

[2] For the concept of the undertakings concerned see below.

[3] CCA Notice, para. 21.

[4] CCA Notice, para. 22.

[5] CCA Notice, para. 23, 30 and 31.

[6] CCA Notice, fn 20.

[7] ÚOHS-S0504/2018/KS-38198/2018/840/ABi, Chytry Honza, 21.12.2018.

[8] ÚOHS-21323/2022/873, CzechToll/TollNet, 27.06.2022.

[9] Other similar cases from more distant past include AutoCont (ÚOHS-S0417/2017/KS-32870/2017/840/MWi), VS&A /3i Group (S 34/04-1307/04) and Mitsui / Toyota (ÚOHS-S331/2012/KS-11594/2012/840/RPl).

[10] ÚOHS-S0057/2017/KS-07010/2017/840/LBř.

[11] See EUMR, Art. 3(4).

[12] I.e. part II.4.7 of the CCA Notice.

[13] EC Notice, para. 139.

[14] Mayr, Austria Asphalt – Some observations on the European Court of Justice’s judgment, 17.09.2017.     

[15] Zinck/Bork/Koktvedgaard, Denmark: Competition Council and DCCA utilise tailored legislation to boost merger regime, 30 June 2023.

[16] EC Notice, para 95.

[17] Ibidem, para 92.

[18] ÚOHS-25080/2020/840/LBř, Conti Tech Techno-Chemie GmbH/dk Beteiligungsgesellschaft mbH, 13.08.2020, paras 36-38.

[19] ibidem, paras 41-45 and 67-69.

[20] EC Notice, para 97: Such a start-up period may be necessary in order to establish the joint venture on a market. But the period will normally not exceed a period of three years, depending on the specific conditions of the market in question.

[21] ÚOHS-25080/2020/840/LBř, Conti Tech Techno-Chemie GmbH/dk Beteiligungsgesellschaft mbH, paras 76-77.

[22] EUMR, Art. 3(4). See also Immenga/Mestmäcker/Körber, 6th edition (2020), EUMR Art. 3, para 123.

[23] EC Notice, para 139.

[24] Ibid. 92.

[25] C-248/16, Austria Asphalt, 07.09.2017, para 17.

[26] Ibid. para 22 and 25.

[27] Ibid. para 27-28.

[28] E.g. Kofler-Senoner/Frank/Hirner, Austria Asphalt: Eine richtungsweisende Entscheidung zur EU Fusionskontrolle, ecolex 11/2017/1087, 13.11.2017.

[29] von Brevern/Schöps, listed cases: M.10680, PERMIRA / SESTANT / KEDRION / BPL, 05.08.2022; M.9287, CONNECT AIRWAYS / FLYBE, 05.07.2019; M.8640, CVC / BLACKSTONE / PAYSAFE, 21.11.2017.

[30] Urlesberger, ECJ Confirms: Only Full-function Joint Ventures Notifiable in Brussels, 28.09.2017.

[31] von Brevern/Schöps, Not the right mix: the European Commission, Art. 3(4) EUMR and Austria Asphalt.

[32] Mayr, Austria Asphalt – Some observations on the European Court of Justice’s judgment (sic).