The ECJ has confirmed that acquisitions of joint control of businesses only fall under EU merger rules if the JV acts as an autonomous economic entity on a market (and the relevant turnover thresholds are met).
The criteria JVs must satisfy in order for changes of control to fall under EU merger rules has been an area of significant legal uncertainty. This has been an important practical point for a number of transactions where companies have sold stakes in parts of their existing businesses to financial investors or other participants in their industry.
The ruling provides welcome clarity for companies engaged in such transactions and provides a timely reminder for JV parents of their antitrust obligations and potential liabilities. The ECJ confirmed that:
- acquisitions of joint control only fall under EU merger control if the JV is so-called “full function”: it has sufficient resources to operate independently on a market, plays an active and autonomous role on that market and will operate on a lasting basis. JV parents benefit from the Commission’s exclusive competence to review the JV in the EU, but they must pre-notify the deal and suspend closing until clearance;
- changes in control of JVs that do not operate autonomously on a market (e.g. because the JV’s activities are limited to supplying or selling goods or services to or for its parents or the JV does not have access to sufficient resources to operate independently) are not caught by EU merger control. However, some national merger control laws which do not have the concept of “full functionality” may apply. The parents also remain subject to antitrust laws and face heavy penalties if the JV or their cooperation infringe those laws. Careful risk assessments are required in each case.
The Austria Asphalt case: key findings
The case involves an Austrian asphalt plant which was originally owned by a single construction company but was to be operated jointly by that company and another construction company. The plant’s business was confined to supplying goods to its parents. Given the lack of clarity in the regulation and the Commission’s guidance, Austria’s Supreme Court asked the ECJ to confirm whether a move from sole to joint control falls under EU merger control only where the JV operates on the market as an autonomous economic entity.
Applying the principle that EU merger control is intended to govern only lasting structural changes in a market, the ECJ confirmed that JVs must have an autonomous market presence in order for any change of control to fall within the regime. This applies whether or not the parents are creating a new greenfield venture or acquiring a stake in an existing business. As some companies had experienced different approaches being adopted by the authorities to these situations, clarity from Europe’s highest court is welcome.
EU antitrust risks and obligations of JV parents: the ground rules
On any acquisition of a jointly controlling stake in a business, parents must assess their respective obligations and liabilities. These will depend on the nature of the JV business, the structure of ownership and level of control exercised. Typical scenarios include:
- Company A acquires joint control of an existing business with Company B (or creates a new JV business) which operates independently on a market: the parents must determine whether any EU or other merger control filings are triggered which may require the transaction to be suspended until clearances are received. In cases raising competition concerns, sufficient advance planning will be needed in order to manage potentially multiple and lengthy investigations within deal timetables. Under EU merger rules, the Commission assesses the competitive impact of the JV and the risk of any coordination between parents as part of its review. In some jurisdictions, authorities may assess the risk of coordinated behaviour by parents separately to any merger review. Depending on where the JV will be active, the risk of merger and antitrust reviews should be assessed.
- Company A acquires joint control with Company B of a business not operating autonomously on a market (e.g. A forms a cooperation arrangement with B where the business sells goods solely to (or on behalf of) A and/or B or the business carries out a specific activity on behalf of A and/or B (e.g. R&D or production)): EU merger control will not apply to this change of control but:
- A and B must ensure that their stakes in the business and their on-going cooperation do not result in any restriction or distortion of competition between them. Any market sharing, price-fixing, coordinated behaviour or sharing of competitively sensitive information between A and B is likely to attract significant financial penalties, private damages actions and, in some countries, criminal prosecution of individuals. Risks are particularly high if A and B are competitors;
- A and B should carry out a merger control assessment to confirm whether any national filings may be needed in the EU and whether any non-EU merger filings are required. The requirement for “full functionality” does not exist in many regimes both within and outside Europe so merger filings in those countries may be triggered.
- On-going antitrust liability of parents for JV activities: regardless of whether the JV is full function or not, if a JV business engages in anticompetitive behaviour which infringes EU competition law, the parents are likely to be jointly and severally liable for its conduct. Parents are advised to conduct an antitrust audit of any businesses they control (solely and jointly) and ensure on-going compliance by the business with all relevant competition laws.
- Changes in the JV’s business after the acquisition of joint control: companies buying stakes in JVs which rely on their parents for resources or sales for an initial start-up period should assess the need to notify the Commission if the JV will become full function over a period of time. A notification obligation may arise where the activities of a JV change so that it acts more autonomously on the market and it may be difficult to determine the precise point at which this arises. Parents failing to notify a transaction which meets EU merger control criteria may face significant penalties for “gun jumping”, an area where the Commission has recently stepped up its enforcement activities.
- Exit of a jointly controlling shareholder: if Company A exits so the JV becomes solely controlled by Company B, or A’s stake is sold to Company C, the change in control may be another notifiable transaction and require pre-clearance from the Commission. B (and C) should carry out a merger control assessment before acquiring sole (or joint) control.
Companies involved in forming or buying stakes in JV businesses should watch out for the results of a recent Commission consultation which proposed removing JVs that operate outside the EEA and have no effect on competition on markets within the EEA (so-called “extra-EEA JVs”) from the scope of EU merger control. If such a proposal was carried forward, companies involved in such businesses will welcome the resulting reduction in regulatory burden and cost.