Surely the Kids are Safe? – What the European Commission’s Updated Guidance Says About Joint Venture Agreements

What the European Commission’s Updated Guidance Says About Joint Venture Agreements

On July 1, 2023, the European Commission’s revised Guidelines on Horizontal Cooperation Agreements entered into force (see our previous alert for a comprehensive overview of the new rules, including the new horizontal block exemption regulations).

This is the second in a series of alerts in which we provide practical guidance on how to conduct an antitrust assessment for various types of agreements between competitors, in light of these revised Guidelines. In our last alert, we discussed the Commission’s treatment of sustainability agreements. In this alert, we take a closer look at the new guidance on agreements and concerted practices between joint ventures and their parent companies.

  1. How are joint ventures treated under the Horizontal Guidelines?

    The Guidelines on Horizontal Cooperation Agreements (Horizontal Guidelines) cover joint venture agreements between parent companies that are (actual or potential) competitors. A joint venture (JV) is an entity set up by at least two companies to cooperate on a specific business project. JVs can be set up for a wide variety of purposes. In the Horizontal Guidelines, they feature primarily in the context of joint research and development (R&D), and in relation to joint production. However, they are also referred to in examples relating to joint purchasing and joint commercialization. In addition to the general guidance on JVs in the introductory chapter of the Guidelines, any antitrust assessment should take into account the specific guidance provided in the chapter dealing with the relevant type of cooperation.

    The Guidelines do not apply to agreements between competitors constituting a “concentration” within the meaning of the EU Merger Regulation. Thus, they do not cover the creation of so-called full-function joint ventures (formerly known as “concentrative” joint ventures), as further discussed below.

  2. When is the creation of a JV caught by the cartel prohibition?

    Article 101 of the Treaty on the Functioning of the European Union (TFEU) prohibits agreements and concerted practices that restrict competition (so-called cartel prohibition). With regard to the creation of a JV, the new Horizontal Guidelines clarify that agreements between the parent companies to create a JV always have to be assessed under Article 101 TFEU, unless they fall within the scope of the EU Merger Regulation (EUMR) or can benefit from an exemption:

    • Agreements falling within the scope of the EUMR: The establishment of a full-function JV (i.e., a JV that performs on a lasting basis all the functions of an autonomous economic entity) constitutes a “concentration” within the meaning of the EUMR. Agreements creating a full-function JV are assessed by the Commission under the merger control regime rather than under the cartel prohibition. Nevertheless, the criteria of Article 101 TFEU remain relevant to the assessment to the extent that the creation of such a JV has as its object or effect the coordination of the competitive behavior of undertakings that remain independent. This will in particular be relevant where there is a risk of “spillover effects” between the parent companies of the JV because they remain active in the same market as the JV, or in a market which is downstream or upstream from that market, or in a neighboring market closely related to that market.
    • Safe harbor under the Block Exemption Regulations (BERs): Where a JV focuses on R&D activities or constitutes a form of production specialization, the R&D BER or the Specialization BER is the applicable lex specialis (see our previous alert). The BERs contain safe harbor conditions which, if fulfilled, exempt the agreement from the cartel prohibition.

If a JV-related agreement falls within the scope of Article 101(1) TFEU, it will still be lawful if its positive effects on competition outweigh its negative effects. JVs often have positive effects, as they allow their parent companies to use their resources more efficiently. However, JVs may not be used for anti-competitive purposes, to exchange competitively sensitive information beyond what is strictly necessary for the functioning of the JV, or as a means to coordinate the market behavior of the parent companies.

In the new Horizontal Guidelines, the Commission explains this in more detail and gives specific examples indicating how it will assess JVs in relation to a number of specific types of cooperation:

  • R&D JVs: The chapter on R & D agreements builds on the previous horizontal guidelines and discusses several examples of R&D agreements in the form of JVs. In particular, R&D JVs concerning the development of products and technologies that would create an entirely new demand are likely to infringe Article 101 TFEU if the parent companies are the only undertakings developing the new product and the aim is to eliminate competition risks between them by creating the JV.
  • Production JVs: The chapter on production agreements lists a number of scenarios in which a production JV may infringe Article 101 TFEU by directly restricting competition between the parent companies, e.g., if the parent companies attempt to use the JV to coordinate output levels, product quality or the price at which the JV sells its products (the parent companies may agree to limit their output through the JV, as compared to the output they would have had if each of them had produced and decided on its output independently).
  • Purchasing JVs: The chapter on purchasing agreements provides an example of producers jointly negotiating inputs through a JV. It explains that such a JV may, under certain circumstances, have anti-competitive effects. Relevant factors in the antitrust analysis include the degree of commonality of costs, the risk of collusion between the parent companies through their JV and the likelihood of pass-on of the benefits of the joint purchasing to downstream customers.
  • Commercialization JVs: The chapter on commercialization agreements details two infringing examples. In the first scenario, two companies decide to set up a distribution JV to market and sell their products, with the production and transport infrastructure remaining separate within each parent company. The JV negotiates prices and allocates orders to the closest production plant. According to the Horizontal Guidelines, this agreement restricts competition because it involves the allocation of customers and the fixing of prices by the JV. Given the absence of integration of production and transport infrastructure, the efficiencies created by the JV do not seem to outweigh the negative effects for competition. The second example concerns a JV created to launch an online video-on-demand platform. Given their high market shares in the national TV markets and their respective expansive libraries of audiovisual rights, both parent companies could have launched the video-on-demand platform independently. The agreement therefore eliminates price competition between the two broadcasters and coordinates the pricing of video-on-demand between them, which would constitute a restriction of competition. It then still needs to be determined whether the benefits of the collaboration outweigh the negative effects for competition. In the facts of the example given by the Commission, that is not the case.
  1. Once set up, how are subsequent JV-related agreements treated under EU competition law?

    The new Horizontal Guidelines clarify that the Commission will “in general” not apply Article 101 TFEU to agreements and concerted practices between a JV and its parent companies to the extent that they concern relevant markets in which the JV is active and during periods when the parent companies exercise decisive influence over the joint venture. In these circumstances, the JV and its parent companies are considered to form a single undertaking for competition law purposes. In other words, these agreements or practices are considered to be intra-group transactions that fall outside the scope of Article 101 TFEU, which only applies to agreements and concerted practices between independent undertakings.

    However, the new Horizontal Guidelines make it clear that just because a JV and its parent companies are considered to be part of the same undertaking in one market, that does not prevent the parent companies from being independent undertakings in another. As such, the following JV-related agreements will still fall under the cartel prohibition requiring further antitrust analysis:
  • Agreements between a JV and its parent companies concerning products or geographic areas in which the JV is not active;
  • Agreements to modify the scope of the JV, unless such modification relates to a full-function JV and may have to be assessed under the EUMR; and
  • Agreements between parent companies not involving their JV, even if the agreement concerns products or geographic areas in which the JV is active.

In addition, where a parent company is not a controlling shareholder in the JV but only a minority investor, the cartel prohibition applies to all agreements entered into between the JV and the investor.

  1. How can companies mitigate antitrust risks relating to JVs?

    Importantly, a JV-related agreement is only “safe” if it relates to the markets in which the JV is active and only for as long as the parent companies have a decisive influence over the JV. In all other cases, the parent companies and their JV are treated as separate undertakings and their activities fall within the scope of Article 101 TFEU. Consequently, a JV may not be used as a hub for anti-competitive conduct, for the exchange of competitively sensitive information beyond what is necessary for the JV to carry out its market activities, or as a platform for coordinating the conduct of the parent companies.

    Companies must have compliance measures in place to ensure that competitively sensitive information does not flow freely between the parent companies (through the JV). Such measures can include structural or organizational barriers (e.g., ensuring that employees of one parent company, who are involved in the JV and may have access to the other parent’s information in that capacity, are not involved in the relevant decision-making in their own parent company); information barriers (e.g., confidentiality agreements signed by employees); or technical barriers (technically restricting the access to certain information to a limited group of individuals), etc. Compliance measures should be regularly reviewed to ensure their continuous effectiveness.

    Compliance can be a very complex issue, especially if businesses are involved in a number of different JVs, with different parent companies, and in multiple markets. The level of complexity inevitably increases the potential risks. However, it is important to get it right in order to avoid misconduct which, if investigated by the Commission or a national competition authority, can lead to heavy fines and serious reputational damage.

Authors:
Thomas De Meese, Partner, Karl Stas, Senior Counsel, Benjamin Geisel, Counsel, Flavie Van Maldegem, Associate

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