In a landmark decision, on 7 September 2017, the European Court of Justice (ECJ) ruled that the creation of a joint venture, whether by the formation of a new undertaking or through a change from sole to joint control of an existing undertaking, will only require competition filing and clearance from the European Commission if the joint venture resulting from the transaction is “full function” (i.e. an entity that acts independently on the market).
This is the first ever preliminary ruling of the ECJ on the EU merger control regime (EUMR) and will dramatically reduce the number of joint acquisitions and shareholder restructurings requiring competition approval from the European Commission. As Advocate General Kokott stated in her opinion in April 2017, this case has a “practical significance which cannot be underestimated”.
Major firms active in the real estate investment space in particular are likely to welcome the judgment. Previously, when such firms acquired joint control (through strategic veto rights) over tenanted land and assets, whether through a new joint venture or as a result of the entry of a new shareholder in an existing structure, they would in many instances had to have made competition filings to the European Commission and, as a result, may have been unable to close their transactions until after a long and onerous regulatory approval process.
The ECJ has now confirmed that if revenue-generating target assets do not meet the criteria of a “full-function” joint venture, no merger control filing (nor any EU competition clearance condition to closing) is required.
The question considered by the ECJ arose in the context of a transaction involving the acquisition by Austria Asphalt GmbH & Co OG (Austria Asphalt), a subsidiary of Strabag SE, of 50% of the shares in the Mürzzuschlag asphalt plant from its sole controlling parent company, Teerag-Asdag Aktiengesellschaft (Teerag-Asdag). After the merger, as was the case prior thereto, the plant’s activities would be limited to the production and supply of asphalt to its shareholders and not have any other presence on the market, such that it could not be considered a full-function undertaking for merger control purposes either before or after the change of control.
A joint venture will be considered “full-function” if it operates on a market preforming those functions typically carried out by undertakings operating on the same market. In particular, the joint venture must:
- have sufficient resources to operate independently on a market, including management dedicated to its day to day operations and access to sufficient assets, personnel and financial resources;
- have the ability to conduct its own commercial policy;
- carry out activities beyond one specific function for the parents, that is to say that it should not be limited to an activity that is essentially auxiliary to its parents and should have its own access to or presence on the market;
- have no significant supply or purchase agreements with its parents affecting its autonomy; and
- operate on a lasting basis.
Formation of a full-function joint venture is required to be filed under the EUMR insofar as the relevant financial turnover thresholds are met.
The transaction was notified to the Austrian Federal Competition Authority (FCA) and was subsequently referred to an in-depth Phase II review, triggering proceedings before the Austrian Cartel Court. The Cartel Court in turn ruled that the transaction should be notified to the European Commission. Austria Asphalt challenged the ruling before the Austrian Supreme Court, arguing that only the FCA was required to review the transaction.
The Austrian Supreme Court referred to the ECJ the question of whether or not the proposed merger was subject to the EUMR. Under Article 3(4) EUMR, the creation of a joint venture is to be considered a concentration provided that it performs “on a lasting basis all the functions of an autonomous entity”, while Article 3(1)(b) EUMR provides that a concentration arises where an undertaking acquires “direct or indirect control of the whole or parts of one or more other undertakings”.
ECJ’s Preliminary Ruling
Consistent with the opinion of Advocate General Kokott, the ECJ held that the creation of a joint venture will only be caught by the EUMR if the undertaking in question is full-function.
In particular, the ECJ rejected the European Commission’s view that a change from sole to joint control of an undertaking should be caught by the EUMR irrespective of whether or not the resulting joint venture is full-function, as this would “lead to an unjustified difference in treatment” between companies newly created by the transaction (which would be caught only if they acted independently on the market) and those that existed prior to the transaction (which would be caught irrespective of whether or not they acted independently). Indeed, the court considered that only transactions creating joint ventures performing on a lasting basis all the functions of an autonomous economic entity (i.e. full function joint ventures) will bring about a change in the structure of the market such as to justify merger control. Any decision to the contrary would “effectively extend the scope of the preventative control laid down in [the EUMR] to transactions which are not capable of having an effect on the structure of the market in question”.
The ruling is likely to have an immediate, lasting and positive impact on the deliverability of transactions which fall short of the acquisition of businesses with sufficient staff and resources to operate independently on the market. It will undoubtedly eliminate the risk for parties who previously did not notify such deals of enforcement action by the European Commission and reduce the volume of transactions notified to the European Commission.
CMA’s New Merger Intelligence Guidance
The ECJ’s preliminary ruling comes in the same week as the UK Competition and Markets Authority (CMA) published updated guidance on various aspects of its voluntary merger regime, including amendments to its guidance on its approach to non-notified deals.
Disappointingly, the CMA’s Merger Intelligence Committee has rolled back its policy of engaging with parties on the basis of confidential briefing papers prior to exchange in M&A transactions. The CMA does not wish to commit resources to transactions that may not ultimately be agreed, but its revised policy risks having a chilling effect on low value transactions where the cost of merger control clearance may be critical in determining whether or not a transaction proceeds.