ECJ: No European merger control when a joint venture is created if it is not a full-function undertaking

The European Court of Justice (ECJ) decided on 7 September 2017 as part of a request for a preliminary ruling that the creation of a joint venture (JV) is only subject to merger control if it performs on a lasting basis all the functions of an autonomous economic entity, i.e. is a full-function undertaking. This applies regardless of whether the JV is newly created or an existing operational company which later becomes a JV by undergoing a change from sole to joint control (C-248/16). European Commission practice has been inconsistent to date: its decisions include cases in which the characteristic of a full-function undertaking was assessed upon its change from sole to joint control, as well as those in which this point was not addressed and thus apparently not analysed either. The judgment of the ECJ therefore brings about clarity on this point.

As a result, certain types of transactions are no longer subject to merger control by the European Commission. Since in many Member States of the European Union the merger control regulations emulate the European regulations, the ECJ judgment may also mean that these transactions can no longer by reviewed by national competition authorities either. This result sounds more advantageous than it is, since the joint venture can still be subject to a review using the cartel prohibition standard. In detail:

Context of the case

Teerag Asdag AG, a wholly-owned subsidiary of Porr AG, was the sole owner of an asphalt plant. The asphalt manufactured in this plant was used mainly by Teerag Asdag and other companies of the Porr Group. Austria Asphalt GmbH & Co. OG intended to acquire a stake in the asphalt plant. The intention was to form a new company in which Teerag Asdag and Austria Asphalt would each hold 50% of the share capital and jointly exercise control over it. This JV was to acquire and operate the plant. The parties planned to supply most of the asphalt production to the parent companies or their affiliates.

The parties notified the Austrian Federal Competition Authority of the planned transaction. The Federal Cartel Prosecutor submitted an application for review to the competition court, which was dismissed, however. The court held the view that the transaction was to be assessed as the acquisition of joint control within the meaning of the EC Merger Regulation (ECMR). As the sales revenues of the undertakings involved exceeded the thresholds of the ECMR, it was the European Commission which was responsible for reviewing the transaction from a merger-law perspective, and not the Austrian competition authorities, the court said. Austria Asphalt appealed against the decision before the Supreme Court of Austria on the grounds that a European merger review was not applicable because the JV did not have full-functionality. Yet this is an essential precondition for the application of European merger control (Art. 3(4) ECMR). The Supreme Court then asked the ECJ to interpret the corresponding provisions of the ECMR.

Decision of the ECJ

The ECJ confirmed Austria Asphalt’s viewpoint. The Court ruled that when there is a change in the type of control over an existing undertaking from sole to joint control, the criterion of a concentration within the meaning of the ECMR is only fulfilled when the arising JV performs on a lasting basis all the functions of an autonomous economic entity. Having full-functionality is a necessary criterion for ensuring that the JV has a market presence, according to the Court. In its view, it follows from the aims and system of the ECMR that a transaction is only to be subject to European merger control if it has a lasting effect on the market structure. But the creation of a JV which does not meet the full-function criteria before or at least after the transaction, cannot have an impact on the market structure and therefore preventive merger control is not required.

The Court of Justice also based its interpretation on the fact that not checking whether the future joint venture performs on a lasting basis all the functions of an autonomous economic entity would unlawfully limit the scope of the EU Antitrust Regulation No 1/2003. If there is a concentration within the meaning of the ECMR, in principle the EU Antitrust Regulation cannot be applied to the transaction and the undertakings involved in it. So if, upon a change from sole to joint control over an existing undertaking, full-functionality were not required, such a JV would also be removed from the scope of Regulation 1/2003.

Appraisal and consequences in practice

The decision of the ECJ appears to be legally consistent. Art. 3(4) ECMR explicitly mentions only that the “creation” of a JV as a full-function undertaking represents a concentration within the meaning of the ECMR. However, if control by a sole shareholder in an existing company is replaced by joint control by two or more shareholders, this can also be reviewed as such a creation. It is also a relevant argument that applying European merger control to the creation of a JV which is no longer a full-function undertaking as a result of the transaction limits the scope of Regulation 1/2003.

From a practical perspective, however, the decision of the ECJ appears to be more ambivalent:

1. From now on, in every transaction involving a shift in an existing company from sole to joint control, a review must be carried out as to whether the criteria for a full-function undertaking are met. This is the case if the JV is an autonomous economic entity, i.e. if in particular, it
   
   – has sufficient resources for an independent market presence,
   
   – appears independently on the market and does not simply fulfil a specific function for the parent companies,
   
   – does not only maintain buying/selling relationships with the parent companies, and
   
   – its economic activity is of a long-lasting nature.
   
   In the merger control filing, it must then be demonstrated at least briefly that these criteria are met. The additional effort ought to be minimal, since previously this review was omitted only in cases in which there was undoubtedly and obviously a full-function undertaking.
   
   
2. If the above review shows that the JV is not a full-function undertaking at least after the transaction, European merger control can no longer intervene. But that does not mean that the transaction can be implemented without any merger control being required. Next it will have to be considered whether the transaction is subject to merger control by a national competition authority in one or more EU Member States.
   
   Theoretically, this review could be brief: in many EU Member States, the national merger control regulations also consider the creation of a JV to be a merger only if the JV is a full-function undertaking. Since the national lawmakers seem to have aligned themselves with the European model, it seems logical to also apply the current judgment of the ECJ to the interpretation of national provisions. That would mean that in these EU Member States, the creation of a non-full-function JV would not fall within (national) merger control either. This perspective sounds good – perhaps too good to be true – and should therefore be treated with caution. There is no obligation under European law to subject only full-function JVs to national merger control. The ECJ’s interpretation of Art. 3 ECMR does not necessarily apply equally to the interpretation of national law; national courts could certainly come to a different conclusion on this matter.
   
   Until it is clarified by the (supreme) courts in the individual EU Member States whether the provisions of national merger control law which are based on Art. 3(4) ECMR are to be interpreted exactly as specified by the ECJ for European law, the Austria Asphalt judgment leads to considerable uncertainty at a national level. This uncertainty could be reduced if the national competition authorities clarify their legal view of this matter. However, such a position would only be binding on the authority itself, but could be ruled on differently in future by the national courts.
   
   
3. It must also be noted that not all EU Member States consider it necessary for a JV to be a full-function undertaking. In Germany as well as in Austria, Poland and the United Kingdom, this is not a mandatory criterion for merger control to be applied. If the undertakings involved in the transaction also exceed the respective national thresholds for merger control, the parties to the transaction will thus in future not face one set of merger control proceedings at European level, but three or more separate sets of national proceedings. Other national merger control proceedings may be added to these if, as explained above, the national competition authorities and courts come to a different result than that of the ECJ in the Austria Asphalt case.
   
   If a transaction requires merger control in three or more EU Member States, the undertakings involved can apply for the case to be referred to the European Commission. However, such a referral takes additional time and effort, so in each individual case the related pros and cons must be weighed up.
   
   
4. Finally, regarding the applicability of Regulation 1/2003: If EU merger control still applied to the creation of a JV, reviewing the antitrust admissibility would be part of the merger control procedure under Art. 101 TFEU (cf. Art. 2(4) ECMR). Obtaining merger control clearance by the European Commission would therefore also “green light” the coordination between the JV parent companies. If, as a result of the judgment, the provisions of European merger control are not applicable as the JV is not a full-function undertaking, the European Commission and/or national competition authorities can still check whether the creation of the JV leads to concerted practices by the controlling shareholders in breach of the prohibition of cartels (Art. 101 TFEU).
   
   This also leads to certain additional uncertainties for the creation of the JV: firstly, according to the system of self-assessment introduced by Regulation 1/2003, it is primarily the responsibility of the parties involved in the transaction to check whether there is a breach of competition law in connection with or due to the activity of the JV. Misinterpretations are at their expense. Regulation 1/2003 does not provide for any procedure under which the parties could enforce a review of their plans at the European Commission. Even if the parties present their plans to the European Commission and the Commission does not initiate any proceedings as a result, this does not rule out a later investigation. This may take place years later. Protection of legitimate expectations due to intervention not taking place for many years can only be acknowledged in certain exceptional cases.
   
   Regulation 1/2003 also authorises the competition authorities and courts of the EU Member States to apply the European prohibition of cartels on a case-by-case basis. When a JV is created by a change from sole to joint control over an existing company that is not a full-function undertaking, this ultimately means that instead of the European Commission, one or more national competition authorities could carry out an antitrust review.

To sum up, the decision by the ECJ has clarified a legal question previously unanswered, but at the same time given rise to new legal questions, especially at the level of the national law of the EU Member States. Thus, legal certainty has not increased as a result. The decision may also lead to the situation that the acquisition of joint control over an existing undertaking that is not a full-function undertaking will, at least after implementation of the transaction, be subject to many national notification obligations and possibly also separate proceedings in which compatibility with the cartel prohibition will be checked.

Given the lack of publicly available empirical data, we cannot tell whether the above implications of the Austria Asphalt judgment will only be relevant for a few JVs. It would be welcomed, however, if the European Commission were to also take into account the possible negative consequences of this judgment by the ECJ in the context of the ongoing discussions about an amendment to the EU Merger Regulation and propose suitable remedies if appropriate.

Follow this link to read the ECJ judgment of 7 September 2017 in the Austria Asphalt case (C-248/16).