Joint ventures can be risky | In Principle

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Joint ventures can be risky

Creation of a joint venture by competitors, or obtaining joint control over a competing company through acquisition of its shares, may give rise to significant antitrust risks. Obtaining approval for the transaction from the competition authority may not ensure legal safety when competitors intend to pursue joint business initiatives.

Under competition law, arrangements made within a single capital group are considered relatively safe. This is because a capital group is regarded as making up a “single economic unit,” in which the subsidiary does not operate autonomously but complies with the instructions of the parent. Consequently, the members of one capital group are generally not regarded as competitors, even if they operate on the same market. This means that, for example, pricing arrangements and divisions made by the parent company and its subsidiary will not be evaluated in terms of potential violation of antitrust law.

The situation becomes more complicated in the case of exercise of joint control over an undertaking (e.g. each holding 50% of the shares in a company). The case law of the European courts and the decisions of the European Commission do not provide an unequivocal answer on whether the rigours arising out of the prohibition of anti-competitive arrangements (Art. 101 of the Treaty on the Functioning of the European Union) apply in such instances. For example, in the cases of IJsselcentrale (IV/32.732) and Gosme/Martell-DMP (IV/32.186), the Commission found that the actions of parent companies undertaken together with a joint venture cannot be excluded from these prohibitions, and thus TFEU Art. 101 is fully applicable. However, in EI du Pont de Nemours and Co. (Case C-172/12) the Court of Justice held that under analogous facts the parent companies together with the joint venture make up a single economic unit. But this judgment involved the potential liability of the parent companies for the actions of a subsidiary, rather than the possibility of establishing intra-group arrangements between these entities.

The position of the Polish competition authority on this issue seems more clear. According to the Guidelines on the Criteria and Procedure of Notifying the Intention of Concentration to the President of the Office of UOKiK, an undertaking over which joint control is exercised does not belong to the capital group of any of the undertakings controlling it (par. 3.6, p. 20).

This conclusion has far-reaching consequences. This is because it can be assumed that the mutual relations between the jointly controlling companies and the joint undertaking will not enjoy the privilege of exclusion from antitrust rigours enjoyed by intra-group actions. In this situation, as a matter of caution it is indicated to treat the joint venture (the controlled entity) as an entity separate from the parent companies. Thus the actions of the parent companies and the joint venture may be evaluated from the perspective of regulations on anti-competitive arrangements (Art. 6 of Poland’s Competition and Consumer Protection Act and TFEU Art. 101). Consequently, the actions of these entities may be subject to the prohibition on arrangements on prices, division of the geographic market or customers, and exchange of confidential information—particularly if these entities operate on the same relevant market (i.e. they are competitors). Any aspect of the commercial cooperation between the parties could potentially be of interest to the antitrust authorities. For example, the commonly encountered distribution of products of the parent companies via a joint venture company can raise significant antitrust risks if the parties establish retail prices of products or divide customers.

It should be added that in some instances there will be a conflict between the standards of competition law and regulations concerning ownership supervision (e.g. a shareholder’s right to appoint members of the management board or supervisory board, or the right to obtain information about the condition of the joint venture). In that case, the risks connected with potential violation of competition law should be weighed, and appropriate precautionary rules for exercise of ownership supervision introduced.

Conclusion of appropriately worded mutual non-competition obligations in dealings between the parent companies and the joint venture will be relatively safe. The Commission Notice on restrictions directly related and necessary to concentrations (2005/C 56/03) permits, among other things, non-competition clauses limited to the geographical area where the parent company offered its products prior to establishment of the joint undertaking or where it was planning to extend its operations.

Sabina Famirska, Competition Law Practice, Wardyński & Partners