Do you need to notify a change from sole to joint control over an existing undertaking when the newly created joint venture (JV) is not full-function?
This question has been the subject of much debate with the European Commission’s (EC) case teams and has poisoned the life of companies and merger control practitioners for over a decade. In a much awaited judgement (September 7, 2017, Austria Asphalt, C-248/16), the EU Court of Justice (CoJ) finally answered the question, stating that non full-function joint ventures are not subject to EU merger control.
Simple Facts, but an Unclear Legislative Interpretation Leading to Inconsistencies in the EC’s Practice
The facts of the case are similar to tens of past cases where the issue arose. Suffice it to say that Teerag-Asdag, sole owner of an asphalt plant which essentially produces for its parent, agreed to form a 50/50 joint venture and share joint control over that plant with Austria Asphalt. Since the asphalt plant was going to keep producing for its parents, the fact that the JV was not full-function was not in debate. What was in debate though was whether, in the absence of full-functionality, the creation of the JV required merger control clearance, a question that was ultimately referred to the CoJ for preliminary ruling.
The debate finds its source in a tension at the heart of the definition of a concentration under the European Merger Regulation (EUMR). Under Article 3(1)(b) EUMR, any operation involving a “change of control on a lasting basis” is a concentration. However, Article 3(4) EUMR, which deals more particularly with JV scenarios, subjects the reportability of the creation of a JV to an “autonomous” presence on the market, i.e. to the fact that it is a full-function JV. These are different tests with possibly different outcomes when it comes to the analysis of a JV.
Unfortunately, until now, companies and their advisers were left to reconcile the irreconcilable on their own. The EC Consolidated Jurisdictional Notice attempted but failed to fully address the issue. As to the decisional practice of the EC on the treatment of changes in the structure of control of a JV, it fluctuated from time to time and from case to case, as exemplified by the case at hand where the case team concluded in a non-binding comfort letter that the JV was not a concentration, while the EC advocated the contrary during the court proceedings. In the words of Advocate General Kokott, “it is extremely regrettable that, on such a fundamental and recurrent issue of competence, the Commission did not first commit to a clear and uniform approach and then apply it consistently.”
And Then Came the Light!
The CoJ admitted the existence of an issue on the scope of Article 3 EUMR, as “it cannot be determined from the wording of Article 3 of the regulation alone whether a concentration, within the meaning of that regulation, is deemed to arise as a result of a transaction by which the sole control of an existing undertaking becomes joint when the joint venture resulting from such a transaction does not perform all the functions of an autonomous economic entity.”
Faced with an insolvable issue of textual interpretation, the CoJ resorted to a purposive approach to rule on the question put to the judges.
The objectives of the EUMR, as set out in its recitals, show that “the regulation seeks to ensure that the process of reorganization of undertakings does not result in damage to competition” and should apply to significant structural market changes.
According to the CoJ, in the case of JVs, “the realization of such effects depends on the actual emergence of a joint venture into the market, that is to say, of an undertaking performing on a lasting basis all the functions of an autonomous economic entity,” i.e. a full-function JV. In other words, a non full-function JV is not capable of bringing about structural market changes that should be reviewed by the EC under its merger control powers. However, it may still be subject to the control of European and national regulators since such non full-function JVs are “capable of leading to coordination between undertakings in breach of Article 101 TFEU.”
To summarize, going forward, under EU merger control rules (national merger control rules enforced by national competition authorities sometimes differ):
- All JVs will be subject to a full-function analysis, regardless of whether they existed before the transaction or not; and
- Only full-function JVs may be subject to merger control clearance by the EC.
This is a very welcome clarification of the rules for companies and their advisers, which will bring much needed legal certainty to some of their transactions.