With regards to any joint venture in whatever form – a company, partnership or in any other form, it is prudent to consider the application of competition law on the joint venture and/or special purpose vehicles. 

We provide herewith an Update issued by the Competition Commission regarding these matters.

While this Update is not binding on the Commission, it sets out the approach the Commission is likely to adopt in respect of certain transactions and may be updated from time to time to account for future developments.

 

1.            Introduction

Since the Competition Act 89 of 1998 (“the Act”), came into operation on 1st September 1999, practitioners and company advisors have raised questions about the extent of the application of merger provisions contained in Chapter 3 of the Act to joint ventures.

Some have argued that since the definition of a merger in the Act does not expressly mention joint ventures, it would not be appropriate or fair to business to interpret the definition to include transactions that, in their view, the legislature did not intend to include in the Act.  

Therefore, this document is an attempt to clarify how joint ventures fall within the ambit of Chapter 3 in order to assist business to comply with the requirements of the merger provisions of this Act. For more clarity, decided cases and approaches adopted in other international jurisdictions have been considered.

 2.            What does Chapter 3 of the Act entail 

Firstly, it must be understood that section 3 of the Act provides that the Act applies to all economic activity within, or having an effect within, the Republic. Only those instances provided for in sections 3(1) (a)-(e) are excluded from the application of the Act. It is therefore clear from this provision that the Act is not only concerned with the geographic location of the activity in question, but is concerned with the effect of that activity within the Republic. The effect of such activities in the Republic may be determined, inter alia, through the firm’s sales in or into the Republic, whether through distributors, subsidiaries or direct sales.

In light of this section, all joint ventures, in whatever form, which take place in the Republic, or outside the Republic with an effect in the Republic, clearly fall within the ambit of the Act. The question would therefore be whether such joint ventures constitute mergers in a manner contemplated in the Act.

Chapter 3 of the Act deals with mergers and the term “merger” is used to include amalgamations, takeovers and acquisitions. This chapter requires that all transactions entered into by firms, which falls within the definition of a merger and meet the thresholds determined in Notice 254 of 2001, be notified to the Commission before they are implemented.

 A merger is defined is section 12 as occurring when one or more firms directly or indirectly acquire or establish direct or indirect control over the whole or part of the business of another firm. A firm is defined in section 1(ix) for the purpose of the Act to include a person, partnership or a trust. The words “one or more” firms in the definition clearly indicate that a merger may involve the acquisition of either sole or joint control. A merger contemplated in section 12 may be achieved in any manner including the following:

(a)   purchase or lease of the shares, an interest or assets of the other firm in

question; or

(b)   amalgamation or other combination with the other firm in question.

Therefore, the manner in which a merger may occur is not limited to the instances mentioned above. Any acquisition of control by a firm through any means, not necessarily included in the definition, may constitute a merger.  Although the definition of a merger does not specifically mention the types of transactions that are covered by the definition, it is clear that all transactions that result in the acquisition of control would constitute mergers.

In the application of the law, a generally applicable rule is that words, phrases and sentences of a statute are to be understood in their natural, ordinary or popular and grammatical meaning, unless such construction leads to an absurdity or the context or object of the statute suggest a different meaning. It follows from this rule, therefore, that if the words of a statute are clear and unambiguous, then effect should be given to their ordinary, literal and grammatical meaning.

Therefore, the argument that the definition of a merger does not expressly mention joint ventures is not relevant as no other type of transaction is mentioned either. Therefore, the definition appears to be broad and abundantly clear and unambiguous.

In the premise, it is evident that for a merger to occur, there must be a change of control in the firm that is being acquired. Section 12(2) of the Act goes on to enumerate various formats that control may take. It has been accepted that these enumerated forms of control do not attempt to exhaustively define the parameters of control that may be relevant for purposes of the application of Chapter 3 of the Act.

In Bulmer SA & Seagram Africa (Pty) Ltd v. Distillers Corporations & others, the Competition Tribunal (“the Tribunal”) held that acquisition of control is “event-based”.  Therefore for the purpose of section 12 the language of 12(1) must be interpreted and the instances of 12(2) must be seen as ancillary to but not determinative of that enquiry. This therefore outlines the broad nature of the application of the definition of the merger.

The reference to instances of control listed in section 12(2), though not necessarily determinative of how control must be conceived, indicates that mere cooperation between firms or parts thereof, does not suffice as acquisition of control. Though these comments were made in relation to the notion of the application of the concept or the principle of “single economic entity”, the outline is helpful in understanding the broad nature of the definition.

A further point to note is that section 12 does not distinguish between permanent and short-term acquisition of control. Therefore, the duration of the joint venture does not appear to be relevant for the purpose of determining notifiability. Furthermore, control is based on the possibility of exercising decisive influence over a firm or business, which is determined by both legal and factual consideration.

For the purpose of notification, Chapter 3 categorizes mergers into small, intermediate and large on the basis of thresholds. A small merger need not be notified to the Commission. The Commission may require that such a merger be notified if it raises competition or public interest concerns. Both intermediate and large mergers must be notified to the Commission, but the Tribunal makes a decision with respect to large mergers after the Commission has made its recommendations.

 3.            How merger provisions apply to joint ventures

 For purposes of determining the extent of application of the merger control provisions to joint ventures, it is important to consider the form that joint ventures may take. Various definitions, some elaborate and some restrictive, have been attached to the concept of a joint venture and the term is applied to a wide range of situations.

A joint venture is generally defined as a business arrangement in which two or more parties undertake a specific economic activity together. The joint undertaking can be achieved on a formal or informal basis. Engaging in or establishing a joint undertaking may enhance efficiencies and allow for economies of scale to be obtained and allow firms to enter markets, which are otherwise difficult to enter. Some firms use the ventures to turn under-utilised resources into profit or to create a new profit center. A joint venture is therefore usually created to perform a project that is beyond the capacity of a single entity.

The words joint venture and partnership are sometimes used interchangeably. A joint venture is similar to a partnership in that it must be created by an agreement between the parties to share in the losses and profits of the venture. It is different from a partnership in that the venture is normally for one specific project rather than a continuing relationship.

Under the European competition law, a joint venture has been defined as an undertaking which is jointly controlled by two or more other undertakings. A distinction has been drawn between “concentrative” joint ventures and “cooperative” joint ventures. Concentrative joint ventures are described as those that bring about a lasting change in the structure of the undertakings concerned, while cooperative joint ventures are conceived for specific purpose, for instance, research and development, marketing, distribution, networking, and production.

In Inter-City Tire and Auto Center, Inc. v. Uniroyal, Inc, the following were outlined as the basic element of a joint venture under the New Jersey or New York law:

(a)                   an agreement between the parties manifesting some intent to be associated as

                       joint ventures;

(b)                   each party contribute money, property, effort, knowledge or some other asset to

                       a common undertaking;

(c)                   a joint property interest in the subject matter of the joint venture;

(d)                   a right of mutual control or management of the enterprise; and

(e)                   an agreement to share in the profits or losses of the venture.

In Compact et al v. Metropolitan Govt. of Nashville & Davidson, TN, Wiseman, the Chief Judge held that banding together by parties, however benevolent the reason may be, does not make mere legal characterization of the transaction or conduct by the parties to it, a joint venture. Therefore, collusive mutual concessions by competitors are not necessarily joint ventures.

 The Compact case contemplated that a joint venture is a transaction where parent firms each, have a 50% interest or substantial responsibility and decision-making authority. Furthermore, a joint venture was defined as a separate enterprise characterized by an integration of operations between and subject to control by its parent firms which results in creation of significant new enterprise capability in terms of new productive capacity, new technology, a new product, or entry into a new market.    

 There is a view that sees a joint venture as any collaborative agreement between the actual or potential competitors, which falls between a cartel and a merger. There is, however, an appreciation of the fact that joint ventures may be between parties other than competitors. The specific reference to collaborative agreements between “actual or potential competitors” appears to be the only way in which the definition above sought to distinguish joint venture agreements from agreements such as concerted practices or collusions. A joint venture is further seen as an agreement that neither constitutes a merger in the strict sense of the word, nor conduct that falls squarely within the ambit of the restrictive practices.   

The view that appears to be predominant limits the notion of a joint venture to agreements that create a new and separate business entity under the joint control of independent parent firms. The Chairman of the Federal Trade Commission, Robert Pitofsky, indicated during the hearing on the joint venture project in 1997 that joint ventures and other competitor collaborations are increasing in number, taking on new forms and often growing more complex. The growing complexity of these arrangements makes it difficult to formulate a blanket approach to them.

In light of the above definitions, a joint venture appears to be a separate business enterprise over which two or more independent parties exercise joint control, and is created for a specific purpose. Furthermore, joint ventures may be distinguished into various types according to their purposes, which include research & development, production, distribution, purchasing, advertising and promotion, and networking.

The distinction between mergers and other forms of corporate cooperation is often difficult to draw, making it difficult to determine if joint ventures result in a merger or a restrictive practice. As a way of establishing the distinction between restrictive practices and mergers, it has been reasoned that restrictive practices influence competitive conduct of firms by lessening or eliminating competition, but firms remain independent. Mergers on the other hand bring about a lasting change in the structure of the merging firms resulting in merging firms giving up their economic independence.

 In determining the applicability of merger provisions to joint ventures, it is also important to note that the analysis of whether or not a transaction is notifiable does not take into account whether or not the transaction is pro-competitive. The examination of competitive effects of a transaction is relevant in determining whether the transaction ought to be approved or rejected and not to whether a transaction is a merger or not.

As joint ventures take various forms, which may result in a merger or anticompetitive conduct by the parties involved, the merger control provisions should be understood to be applicable to joint venture transactions in the South African law. However, not all joint venture transactions will constitute a merger, as this will depend on how they are structured.

 A joint venture that neither results in a change of control nor anticompetitive conduct, would not necessarily invoke the provisions of the Act. Since Chapter 3 is concerned with the change of control, only those joint ventures that result in a change of control and meet the threshold would be notifiable. However, those that do not result in a change of control may be examinable under chapter 2 of the Act to determine any anticompetitive effects.

To illustrate the notifiability of certain joint ventures, the following forms of joint venture transactions are examined to give some clarity:

(a)           Where two or more firms jointly form a new entity for a specific purpose (“SPV’s) 

In this case, parties would create a separate entity in which they jointly exercise control while remaining independent. The creation of such an entity on its own would not amount to a merger, as none of the parties would be acquiring any control over each other’s business. There would be no change of control over any of the firms or businesses, as the creation of the venture would not affect their independence with respect to the control structure.

However, the situation would be different if the parties to the joint venture transfer assets or interests into the newly created entity. An example is where two independent companies, Company A and Company B, who are competitors in manufacturing and distribution of certain products, decide to create a joint venture company, and transfer their respective distribution businesses into the said venture. In that case the assets that are transferred by the creating companies will constitute an acquisition by the joint venture, which is a separate entity, of control over the business, or a part thereof, of the creating companies.

In some instances, a special purpose vehicle company (“SPV”) is created, which then acquires certain divisions or businesses of the said creating companies. The creating companies therefore cease to operate their independent businesses in respect of the transferred divisions and operate them through the newly created entity. This technically and factually results in the creating companies merging their divisions or businesses into one operation.

On the basis of the transfer of interests, assets or business into the venture, the transaction in question would clearly constitute a merger contemplated in section 12 of the Act. The joint venture company will be regarded as the acquiring firm while the specific assets or businesses being acquired would be the target firms. 

(b)      Where two or more firms acquire joint control over an existing firm or business thereof

Two or more companies may acquire joint control over an existing entity or any part of the business thereof in which none of them had control prior to the said transaction. Through the acquisition, the creating parties will control the business for the purpose of which the joint venture is proposed. This would constitute a merger as defined in the Act since control of the acquired entity will change.  

In certain instances, the transaction may involve the issue of shares by the acquiring companies in consideration for the acquisition. Therefore, depending on the amount of shares issued, the share issue may result in a further notifiable merger. That may be the case if, for instance, the acquiring companies issue shares that confer control over their businesses or a part thereof to the seller.

An example of this is where Company A and Company B jointly acquire control over Company C in order to use it as a vehicle for a joint venture through a sale agreement. Instead of cash, the two companies each issue 50% shares to Company C in their respective businesses. Therefore, the shares issued may result in Company C acquiring control over the businesses of Company A and B respectively. This subsequent issue of shares by Company A and B may therefore constitute notifiable mergers if they meet the threshold. Therefore, one transaction may result in multiple mergers that may require notification. 

In as far as two or more firms acquire control over a firm, the acquisition by each firm may constitute an independent and separate notifiable transaction. The Commission may, after analyzing a said transaction, prohibit one and approve the other. The fact that the transactions occur simultaneously and are contained in one agreement is not sufficient motivation for the transactions to be notified as one. The purpose of merger regulation is to ensure that each transaction is analyzed and evaluated for competition effects and its impact on the public interests.

However, where transactions are interdependent and indivisible, the Commission may decide to consider them as one transaction for the purpose of analysis. This is however the discretion of the Commission and such decision may be reversed if the Commission deems it appropriate to do so. 

 4.            Conclusion

 

1.   It must be appreciated that the application of merger control provisions to joint venture transactions is not a straightforward matter. Furthermore, the growing complexity of these transactions makes it difficult for the competition authority to exempt them from the application of the Act.

2.   While joint ventures are seen as enhancing efficiencies, depending on how they are structured, they may create a fertile ground for collusion between competitors and eliminate or lessen competition in the market. A joint venture that results in a merger may not only result in lessening or elimination of competition but more importantly, may result in elimination of an effective competitor and therefore reduction in the number of market players.

3.   It is generally recognized that it may be necessary and beneficial for companies or corporate institutions, to enter into strategic alliances or form strategic co-operatives or joint ventures. However, it is important for the competition authorities to ensure that parties do not, in the way they structure such alliances, evade the provisions of the Act. Therefore, Chapter 3 of the Act will apply to all those joint ventures or alliances that fall within the definition of a merger.

4.   As indicated above, while this paper attempts to clarify the approach of the Commission to joint ventures, it does not constitute a binding legal document. Parties may approach the Commission with regard to specific enquiries where they require further certainty as to whether a particular joint venture constitutes a merger contemplated in Chapter 3.

(Content was issued by the Commission as a guidance note regarding joint ventures)