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28 September 2017

ECJ Confirms: Only Full-function Joint Ventures Notifiable in Brussels[1]

The European Court of Justice held in a preliminary ruling following a request by the Austrian Supreme Court that the creation of joint ventures does not constitute a concentration under the EC Merger Regulation ("ECMR"), unless the joint venture can be regarded as a full-function undertaking.

1. Facts of the case

Austria Asphalt GmbH & Co OG ("Austria Asphalt") is an indirect subsidiary of international construction group Strabag SE. Teerag Asdag AG ("Teerag") is controlled by Porr AG, another construction group, and is the sole owner of an asphalt plant in Mürzzuschlag (the "Target"), which supplies asphalt almost exclusively to Teerag. Austria Asphalt and Teerag sought to form a 50:50 jointly controlled company under Austrian law in order to buy the Target. As the Target should only supply its ultimate shareholders, it could not be regarded as a full-function joint venture.

In pre-notification contacts, Austria Asphalt was informed in a comfort letter by the European Commission ("Commission") that the transaction did not appear to constitute a concentration under the ECMR. As a result, Austria Asphalt notified the proposed transaction to the Federal Competition Authority ("BWB") in Austria in 2015, and the Federal Cartel Prosecutor ("BKAnw") applied to the Cartel Court for a phase II review of the matter. The court refused the application by denying its competence, holding that the proposed transaction constituted a concentration within the meaning of Art 3(1)(b) ECMR for which the Commission is exclusively competent. Austria Asphalt then filed an appeal to the Supreme Court, which found that there is no case law specifying the term "creation of a joint venture" as mentioned in Art 3(4) ECMR. It therefore decided to stay the proceedings, requesting a preliminary ruling from the European Court of Justice in order to clarify whether Art 3(1)(b) and Art 3(4) ECMR must be interpreted as meaning that

a change from sole control to joint control of an existing undertaking constitutes a concentration only where the controlled undertaking has – on a lasting basis – all the functions of an autonomous entity [= a full-function undertaking].

2. The court's judgment

The Supreme Court wanted to ascertain whether a change in the control structure of an existing undertaking must be regarded as a concentration within the meaning of the ECMR, even where the joint venture resulting from that transaction is not a full-function undertaking. In order to give guidance on this matter, the ECJ's main objective was to clarify the interaction between the following articles: 

  • According to Art 3(1)(b) ECMR, a concentration is deemed to arise where a change of control results from an acquisition by at least one or more undertakings; 
  • Art 3(4) ECMR states that the creation of a joint venture is a concentration within the meaning of Art 3(1)(b) only where that undertaking performs all of the functions of an autonomous economic entity on a lasting basis.

It therefore remains unclear how non-full-function joint ventures should be dealt with under the ECMR. The Commission did a 180-degree turn and argued before the ECJ that the restrictive reference that Art 3(4) ECMR makes to full functionality applies only to the creation of new joint ventures, not to the change of an existing undertaking into a joint venture controlled by two companies. By contrast, both the Advocate General and the ECJ emphasised that the purpose of the EU merger control regime is to aim at operations which (potentially) change the structure of the market. Such a change, however, can only take place if the undertaking concerned is actually active on the market or at least genuinely plans to be so. Art 3 ECMR therefore applies to joint ventures only insofar as their creation entails a lasting effect on the structure of the market. Such an interpretation is also supported by the fact that Art 3(1)(b) ECMR is directed to undertakings. Joint ventures without an autonomous market presence – in other words, without full functionality – are by definition not covered by the merger control regime.

3. Conclusion and practical implications

In this case the ECJ clarified that the creation of joint ventures does not constitute a concentration under the ECMR, unless the joint venture can be regarded as a full-function undertaking, meaning that it needs to perform all the functions of an autonomous economic entity on a lasting basis.

The judgment of the ECJ can be praised as the first to give guidance on the scope of the ECMR. The Court provides undertakings with legal clarity on whether or not a European merger control approval needs to be obtained for joint ventures. From a purely legal perspective, the outcome is well-reasoned, comprehensible and hard to criticise.

From a policy perspective, however, the judgment seems to pursue only the second-best solution. First, it is reasonable to assume that both joint venture partners typically have an incentive to resort to the services of their (non-full-function) joint venture, meaning that other market participants are inevitably affected, ie those with whom the joint venture partners would cooperate in the absence of the joint venture. Secondly, structural links such as shareholdings in another company (whether full-functional or not) are regularly established with a view to remain in place long-term. Hence, a case could be made for the Court to extend the scope of the ECMR to non-full-function joint ventures, as they affect third parties and lead to a lasting change of the market structure. This is exactly what merger control regimes should aim to scrutinise. This applies all the more to situations where two or more joint venture partners contribute valuable assets to the joint venture. Finally, for reasons of legal certainty, it would be preferable for joint venture partners to have lasting joint venture structures – which often involve substantial investments and cannot be dissolved easily – assessed once (and forever) in a streamlined merger control process rather than through a self-assessment under Art 101 TFEU. The latter may not only be vague but also change over time if market conditions change. This uncertainty resulting from the ECJ ruling is a disincentive to the establishment of potentially efficiency enhancing joint venture structures for which no EU clearance may be obtained. The approach taken in countries such as Germany or Austria, where certain non-full-function joint ventures may be notified as concentrations under their respective merger control regimes, is therefore to be preferred over the ECJ's interpretation of the ECMR in Austria Asphalt.

[1]     EuGH C-248/16 – Austria Asphalt GmbH & Co OG.



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