The Competition and Markets Authority (CMA) has published a short checklist of dos and don’ts for businesses to consider when setting up and managing joint ventures or other forms of collaboration.
Joint ventures are typically considered under both merger control rules and rules relating to restrictive agreements. The CMA guidance provides businesses and their advisors with useful insights, which will help them assess the legality under competition law of any collaboration with a competitor. The guidance can be found here.
The guidance follows the CMA’s decision to fine two suppliers of cleanroom laundry services, used by businesses as well as the National Health Service, £1.7 million for agreeing to share the market under cover of a joint venture and trade mark licensing agreement. The investigation was not a result of a leniency application or consumer complaint or market study, but instead came to the attention of the CMA in the course of two related merger reviews. This shows how scrutiny of merger notifications can trigger investigations into wider commercial conduct under competition law.
Merger control regime
The European Union and a majority of EU member states recognise that only ‘full-function’ joint ventures, which when constituted will act independently from the parties establishing them,1 bring about the kind of change in the structure of the market which triggers merger control review. There are some exceptions to this rule (for example, Germany and, looking further afield than the European Union, China), where notification of ‘non-full-function’ joint ventures is required if the relevant merger control thresholds are met.
Competition authorities are suspicious of competitor collaboration since they consider that, as a general rule, competitors should act independently from each other. The authorities are, however, conscious that not all forms of competitor collaboration are harmful: they may generate economic efficiencies that outweigh the adverse effects on consumers. For example, syndicated loans enable financial institutions to collectively provide borrowers with loans which may be too large or risky for institutions to finance alone.2
Where a joint venture does not fall within the definition of a merger under applicable merger control rules, businesses and their advisors must assess themselves whether the arrangements they are putting in place restrict competition, and if so, broadly, whether there are benefits associated with the arrangements which justify the level of restriction imposed. The parties may choose to compile a formal self-assessment of all the relevant considerations to be held on file to demonstrate steps taken to ensure compliance in the event of any subsequent competition investigation.
The guidance published by the CMA provides a broad outline of some considerations that businesses must take into account when contemplating competitor collaboration which does not constitute a notifiable merger, including:
- Purpose – businesses must be clear about the purpose, goals and limits of any collaboration. If the purpose and goals of the collaboration are broad, with no clear limits, the risk is greater.
- Necessity – businesses must have clear evidence that the benefits sought by the collaboration could not have been achieved independently by the parties. The starting point for competition law is competitors must act independently.
- Impact on competition – businesses must be wary of the impact that the collaboration will have on reducing or eliminating existing competition between the collaborators. The greater the reduction in competition, the more likely the collaboration will result in a breach of competition law.
- Proportionate basis – the collaboration must not go further than is absolutely necessary to achieve its goals. Reasonable and legitimate collaborations may be found to breach competition laws if the restrictions imposed by the parties are disproportionate.
- Information exchange – safeguards and procedures should be considered to ensure that information exchanges are limited to those that are necessary for and related to the collaboration.
- Hardcore restrictions – collaboration should not be used as a mask for what is otherwise price fixing, market sharing, output restriction or bid rigging.
The guidance provides a useful reminder that joint ventures may be subject to merger control, or to the wider principles of competition law that apply to agreements between competitors and potential competitors. As the cleanroom laundry services fine demonstrates, competition investigations are not only opened after leniency applications, consumer complaints or market studies, but also merger control reviews.