Competition law considerations for joint ventures

Introduction

The benefits of joint ventures are well-rehearsed. However, competition authorities are inherently sceptical about companies cooperating, and there are notable cases of joint ventures having been investigated and sanctioned for anti-competitive behaviour.

The key challenge is in navigating where the legal boundaries lie to allow beneficial arrangements to take place. Competition authorities have offered guidance on this topic – the UK’s primary competition regulator, the Competition Markets Authority (CMA), for example, published advice on joint ventures and competition law in 2018.¹ This followed the imposition of fines against two services companies for breaching competition law by allocating territories and customers to each other “under the umbrella of a joint venture”.²

Whilst the joint venture in question had been terminated before the CMA opened its investigation and the companies involved were small, the CMA’s message on enforcement and deterrence of anti-competitive behaviour is clear. Although addressing non-compliance in the UK context, the CMA’s guidance establishes some useful key principles for businesses to evaluate the risks related to joint ventures not only in the UK but also potentially in jurisdictions beyond. That said, other jurisdictions also often have specific guidance of their own, which should be considered where relevant.³

Global review of joint ventures

Domestic and cross-border joint ventures, alliances or other forms of collaboration with competitors are a frequent source of competition law compliance questions, and are an area where the advice of experienced completion law practitioners should be sought.

Most regimes around the world, including the European Union, require notification of joint ventures to competition authorities under their merger control regimes where: (i) they are “full-function”, which, in essence, are those joint ventures that operate as self-standing, independent businesses; and (ii) the relevant jurisdictional thresholds are met. If a joint venture is notified and cleared, this provides certainty concerning the competition law assessment of the inception of the joint venture, but also involves some cost and will have implications for the parties’ timetable and whether/when the joint venture can be implemented.

However, there are some notable merger control regimes that do not apply a “full-function” test to joint ventures, including Germany and China. In these jurisdictions, the joint venture may have to be notified for clearance even if it is not a full-function joint venture – and this can be an unexpected hurdle for the deal to clear.

Where the joint venture does not qualify for notification under a merger control regime, companies will generally be required to assess for themselves whether the cooperation is compliant with competition law across the relevant jurisdictions (noting that in some jurisdictions notification of cooperative arrangements is required).

Alongside traditional competition considerations, another potential issue is whether the joint venture might trigger a foreign investment, national security or other public interest review.⁴

Using the CMA’s guidance to shape conduct and compliance

The CMA’s guidance on joint ventures is aimed primarily to assist: (i) companies that are conducting compliance self-assessments (i.e. where the joint venture is not notifiable under merger control regimes); and (ii) when monitoring compliance of pre-existing collaboration.

Collaborative arrangements should not be used to mask what is otherwise price fixing, market sharing, output restriction or bid rigging (so called “hard-core restrictions”), and the CMA has outlined various steps companies should take to satisfy themselves that any collaboration entered into with competitors does not breach competition rules.

Here is the key advice to consider and some practical questions to help analyse and prevent competition concerns:

• Define the true purpose of the joint venture at the outset and be precise as to what it aims to achieve.
• Be clear, specific and honest about pro-competitive goals and the limits of the collaboration and provide clarity on how proposed innovation will directly benefit customers or consumers.



Question: Can you show that the goal of the cooperation, i.e. a new technology, product or service, will provide customers with increased choice or quality?

• Demonstrate that the proposed innovation could not be achieved by the businesses acting alone. For example, bidding for and executing projects involving high costs and high risk for companies may be unattainable by one company alone and require investment with others. That said, ensure that such collaboration is limited in scope to what is really necessary.



Question: Can some parts of the project be done by the competing companies separately and, in the context of joint bidding, can one party supply the capacity itself?

• Ensure any reduction in competition brought about by collaboration is no more than is absolutely necessary to achieve your goals.



Question: Can the goals be achieved in a way that involves a lesser reduction in competition between the collaborating companies – for example, without sharing competitively sensitive information?

Question: Do all products / services need to be covered by the restrictions?

Question: Where collaborating in specific jurisdictions, are any restrictions also geographically limited and do not extend to the entire geographical scope of your business?

Question: Are any restrictions on competition limited to a proportionate duration such that they can still be justified once the cost of the investment has been recouped?

• Do not share sensitive information that is not absolutely necessary for the functioning of the joint venture. Joint ventures can easily be used as a vehicle for the parent companies to exchange competitively sensitive information that might influence their conduct in markets outside the joint venture (known as “spill-over effects”).



Question: Is the risk of spill-over effects carefully managed through appropriate precautions and protocols, including information barriers, use of non-disclosure agreements, and other steps such as an effective competition law compliance programme?

• Collaborations should be regularly monitored to ensure that marketplace changes, agreement specific changes or the evolution of the joint venture business do not change the analysis as to whether the collaboration is still competition law compliant.

Question: Do relevant management team members or employees discuss changes to current joint venture arrangements with internal or external counsel to alert them to any potential impacts on competition compliance?

Question: Is there a mechanism to revisit collaborations at appropriate intervals to determine if market or other changes have altered the competitive assessment?