Austria Asphalt: Only Full-function Joint Ventures Subject to Review Under the EUMR

Austria Asphalt: Only Full-function Joint Ventures Subject to Review Under the EUMR Abstract The Court of Justice clarifies that a change from sole to joint control of an existing undertaking is notifiable under the EU Merger Regulation only if the resulting joint venture is full-function, i.e., performs on a lasting basis all the functions of an autonomous economic entity. I. Legal context On 7 September 2017 the Court of Justice of the European Union (the ‘Court’) delivered its judgement responding to the Austrian Supreme Court’s (Oberster Gerichtshof) request for a preliminary ruling, seeking clarification on whether the change from sole to joint control over an existing undertaking is only subject to the Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings (OJ 2004 L 24/1) (‘EUMR’) when the created jointly controlled undertaking is full-function. The Court followed Advocate General Kokott’s opinion and found full-functionality to be a prerequisite for these jointly controlled undertakings to fall under the EUMR. II. Facts In August 2015, Austria Asphalt and Teerag-Asdag notified Austria Asphalt’s proposed acquisition of 50 per cent of the shares in an undertaking operating an asphalt mix plant from its sole owner, Teerag-Asdag, to the Austrian Federal Competition Authority (‘FCA’). The plant was intended to be a non-full-function joint venture post-transaction, supplying mainly to its parents. The parties had consulted the European Commission (‘Commission’) and received a non-binding comfort letter that the transaction did not appear to constitute a concentration within the meaning of the EUMR as it lacked the characteristics of a full-function joint venture. The transaction was therefore notified to the FCA because non-full-function joint ventures are subject to review in Austria. During the review process before the FCA, the Federal Cartel Prosecutor (Bundeskartellanwalt) raised jurisdiction concerns resulting in the opening of an investigation before the Austrian cartel court (Kartellgericht). The cartel court ruled that the transaction should have been notified to the Commission. Austria Asphalt appealed the court’s ruling to the Austrian Supreme Court. The Supreme Court referred the following preliminary question to the Court: in the case of a change from sole to joint control over an existing undertaking, is there a concentration under the EUMR only if the created joint venture is full-function? Interestingly, showing the controversy over the question, before the Court, the Commission submitted observations that were in direct contradiction to the non-binding comfort letter it had sent to the Parties. III. Analysis The Court decided the important questions whether Article 3(4) EUMR (i) is meant to limit the scope of application of Article 3(1)(b) EUMR for joint ventures or (ii) defines, independently of the application of Article 3(1)(b) EUMR, an additional notifiable event if a full-function joint venture is created, in favour of the first option. The Court applied the full-functionality criterion laid down in Article 3(4) EUMR also to changes of control over existing undertakings which fall under Article 3(1)(b) EUMR as long as they were previously owned by one or more of the shareholders that have co-control post-transaction. While the ruling provides welcome clarity for companies, its reasoning (in paras. 22 and 34) that non-full-function joint ventures ‘are not capable of having an effect on the structure of the market’ and should therefore not ‘be included within the ambit of the regulation’ is doubtful. If a company contributes one of its businesses to a joint venture and ceases to be active on the markets concerned, it is difficult to argue that there is no change to ‘the structure of the market’ only because the joint venture will be non-full-function post-transaction, e.g., because it supplies post-transaction all the output to the other joint venture partner. The effect is that one independent competitor exits the market—which would be, in my view, a (clear) structural change merger control is supposed to cover. If a change to ‘the structure of the market’ was indeed the relevant test, the question should be whether (sole or joint) control over assets constituting an undertaking (as defined in para. 24 of the Commission Consolidated Jurisdictional Notice under Council Regulation (EC) No 139/2004 on the control of concentrations between undertakings (OJ 2008 C 95/1) (‘Consolidated Jurisdictional Notice’)) is conferred on a new party. If sole or joint control over such an undertaking is acquired, this should fall within the ambit of the EUMR, regardless of whether or not (i) it was previously solely controlled or jointly controlled; (ii) a previously controlling owner retains control (e.g., joint control instead of sole control); and (iii) it is full-function pre- or post-merger. The Court further surprises with its unsubstantiated statement (in para. 27) that there would be ‘an unjustified difference in treatment between, on the one hand, undertakings newly created as a result of the transaction in question, which would be covered by the concept of concentration only if they [were full-function], and, on the other, undertakings existing before such a transaction, which would be covered by that concept regardless of whether’ they were full-function. The distinction justifying different treatment is that scenarios of newly created ventures (greenfield) are comparable to internal growth within a company, which is never subject to merger control, while joint ventures involving pre-existing undertakings result in a change of control over assets with pre-existing market relevance, i.e., directly affecting the structure of the market. Finally, the Court’s reference (in paras. 32, 34) to Article 21(1) EUMR, according to which ‘concentrations’ should be assessed only under the EUMR and not (also) under Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of Articles 101 and 102 TFEU (OJ 2003 L 1/1), to support its position is not cogent. Contrary to the Court’s insinuation, a broad interpretation of Article 3 EUMR would not exclude the application of Article 101 TFEU; Article 2(4) EUMR remains applicable and, therefore, an assessment of potential coordination of the competitive behaviour of undertakings under Article 101 TFEU possible. IV. Practical significance The Court’s clarification removes significant uncertainty that affected many proposed joint venture transactions, not least due to the Commission’s incoherent decisional practice (see Rudolf/Leupold, Joint Ventures—The Relevance of the Full Functionality Criterion under the EU Merger Regulation: There Remains a Need for Clarification, JECLAP 2012, 439). The Court decided the question only for a change from sole to joint control over an existing undertaking. However, the Court’s reasoning suggests that full-functionality should be a prerequisite to fall under the EUMR for all joint ventures, at least as long as the pre-existing undertakings, which are contributed or over which control changes, were previously owned by one or more of the undertakings that will have co-control post-transaction. The situation is less clear for the establishment of, or change of control over, a joint venture if it involves the acquisition of control over a pre-existing undertaking from a third party. The Court’s Austria Asphalt case did not concern this situation, so it could be argued that para. 91 of the Consolidated Jurisdictional Notice, which clarifies that ‘[a]s in the case of the acquisition of sole control of an undertaking, such an acquisition of joint control will lead to a structural change in the market even if, according to the plans of the acquiring undertakings, the acquired undertaking would no longer be considered full-function after the transaction’, should remain unaffected. However, in para. 28, the Court casts doubts about such delineation when referring broadly to all ‘transaction as a result of which an undertaking controlled jointly by at least two other undertakings emerges in the market, regardless of whether that undertaking, now jointly controlled, existed before the transaction in question,’ without distinguishing whether, in case of an existing undertaking, it was previously owned by a third party or one of the undertakings having co-control post-transaction. Such a distinction is also missing in Advocate General Kokott’s assessment (see paras. 28, 31, 38, and 44). This suggests that the Court (following the Advocate General) supports a very general proposition, namely that transactions resulting in jointly controlled ventures are subject to the EUMR only if they are full-function post-transaction. All other jointly controlled ventures are subject to Regulation No 1/2003 and, possibly, merger control regimes of the Member States. The full-functionality criterion should, however, not play a role if there is a change from joint to sole control. The Court’s judgement did not concern this situation, there is no ‘joint venture’ post-transaction, and there is, therefore, no risk of a conflict with Article 21(1) EUMR and the application of Regulation 1/2003 (to which the Court refers in paras. 32, 34). The welcome removal of (some of) the uncertainty as to the relevance of the full-functionality criterion still leaves the parties with the question of whether ‘their’ joint venture will be full-function. The Commission’s assessment of this question is neither straightforward nor wholly predictable, and typically depends on a detailed examination of the factual and economic context of the joint venture and, in borderline cases, on the Commission’s desire to review the transaction on the merits. If the parties conclude that the joint venture will be non-full-function and not caught by the EUMR, it may still be subject to merger control review by the regulators of some Member States (namely Austria, Germany, and Poland) and non-EU countries, as well as to review under Regulation No 1/2003. Author notes Judgement of 7 September 2017, Austria Asphalt, C 248/16, EU:C:2017:643 © The Author 2017. Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oup.com http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of European Competition Law & Practice Oxford University Press

Austria Asphalt: Only Full-function Joint Ventures Subject to Review Under the EUMR

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Oxford University Press
Copyright
© The Author 2017. Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oup.com
ISSN
2041-7764
eISSN
2041-7772
D.O.I.
10.1093/jeclap/lpx074
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Abstract

Abstract The Court of Justice clarifies that a change from sole to joint control of an existing undertaking is notifiable under the EU Merger Regulation only if the resulting joint venture is full-function, i.e., performs on a lasting basis all the functions of an autonomous economic entity. I. Legal context On 7 September 2017 the Court of Justice of the European Union (the ‘Court’) delivered its judgement responding to the Austrian Supreme Court’s (Oberster Gerichtshof) request for a preliminary ruling, seeking clarification on whether the change from sole to joint control over an existing undertaking is only subject to the Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings (OJ 2004 L 24/1) (‘EUMR’) when the created jointly controlled undertaking is full-function. The Court followed Advocate General Kokott’s opinion and found full-functionality to be a prerequisite for these jointly controlled undertakings to fall under the EUMR. II. Facts In August 2015, Austria Asphalt and Teerag-Asdag notified Austria Asphalt’s proposed acquisition of 50 per cent of the shares in an undertaking operating an asphalt mix plant from its sole owner, Teerag-Asdag, to the Austrian Federal Competition Authority (‘FCA’). The plant was intended to be a non-full-function joint venture post-transaction, supplying mainly to its parents. The parties had consulted the European Commission (‘Commission’) and received a non-binding comfort letter that the transaction did not appear to constitute a concentration within the meaning of the EUMR as it lacked the characteristics of a full-function joint venture. The transaction was therefore notified to the FCA because non-full-function joint ventures are subject to review in Austria. During the review process before the FCA, the Federal Cartel Prosecutor (Bundeskartellanwalt) raised jurisdiction concerns resulting in the opening of an investigation before the Austrian cartel court (Kartellgericht). The cartel court ruled that the transaction should have been notified to the Commission. Austria Asphalt appealed the court’s ruling to the Austrian Supreme Court. The Supreme Court referred the following preliminary question to the Court: in the case of a change from sole to joint control over an existing undertaking, is there a concentration under the EUMR only if the created joint venture is full-function? Interestingly, showing the controversy over the question, before the Court, the Commission submitted observations that were in direct contradiction to the non-binding comfort letter it had sent to the Parties. III. Analysis The Court decided the important questions whether Article 3(4) EUMR (i) is meant to limit the scope of application of Article 3(1)(b) EUMR for joint ventures or (ii) defines, independently of the application of Article 3(1)(b) EUMR, an additional notifiable event if a full-function joint venture is created, in favour of the first option. The Court applied the full-functionality criterion laid down in Article 3(4) EUMR also to changes of control over existing undertakings which fall under Article 3(1)(b) EUMR as long as they were previously owned by one or more of the shareholders that have co-control post-transaction. While the ruling provides welcome clarity for companies, its reasoning (in paras. 22 and 34) that non-full-function joint ventures ‘are not capable of having an effect on the structure of the market’ and should therefore not ‘be included within the ambit of the regulation’ is doubtful. If a company contributes one of its businesses to a joint venture and ceases to be active on the markets concerned, it is difficult to argue that there is no change to ‘the structure of the market’ only because the joint venture will be non-full-function post-transaction, e.g., because it supplies post-transaction all the output to the other joint venture partner. The effect is that one independent competitor exits the market—which would be, in my view, a (clear) structural change merger control is supposed to cover. If a change to ‘the structure of the market’ was indeed the relevant test, the question should be whether (sole or joint) control over assets constituting an undertaking (as defined in para. 24 of the Commission Consolidated Jurisdictional Notice under Council Regulation (EC) No 139/2004 on the control of concentrations between undertakings (OJ 2008 C 95/1) (‘Consolidated Jurisdictional Notice’)) is conferred on a new party. If sole or joint control over such an undertaking is acquired, this should fall within the ambit of the EUMR, regardless of whether or not (i) it was previously solely controlled or jointly controlled; (ii) a previously controlling owner retains control (e.g., joint control instead of sole control); and (iii) it is full-function pre- or post-merger. The Court further surprises with its unsubstantiated statement (in para. 27) that there would be ‘an unjustified difference in treatment between, on the one hand, undertakings newly created as a result of the transaction in question, which would be covered by the concept of concentration only if they [were full-function], and, on the other, undertakings existing before such a transaction, which would be covered by that concept regardless of whether’ they were full-function. The distinction justifying different treatment is that scenarios of newly created ventures (greenfield) are comparable to internal growth within a company, which is never subject to merger control, while joint ventures involving pre-existing undertakings result in a change of control over assets with pre-existing market relevance, i.e., directly affecting the structure of the market. Finally, the Court’s reference (in paras. 32, 34) to Article 21(1) EUMR, according to which ‘concentrations’ should be assessed only under the EUMR and not (also) under Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of Articles 101 and 102 TFEU (OJ 2003 L 1/1), to support its position is not cogent. Contrary to the Court’s insinuation, a broad interpretation of Article 3 EUMR would not exclude the application of Article 101 TFEU; Article 2(4) EUMR remains applicable and, therefore, an assessment of potential coordination of the competitive behaviour of undertakings under Article 101 TFEU possible. IV. Practical significance The Court’s clarification removes significant uncertainty that affected many proposed joint venture transactions, not least due to the Commission’s incoherent decisional practice (see Rudolf/Leupold, Joint Ventures—The Relevance of the Full Functionality Criterion under the EU Merger Regulation: There Remains a Need for Clarification, JECLAP 2012, 439). The Court decided the question only for a change from sole to joint control over an existing undertaking. However, the Court’s reasoning suggests that full-functionality should be a prerequisite to fall under the EUMR for all joint ventures, at least as long as the pre-existing undertakings, which are contributed or over which control changes, were previously owned by one or more of the undertakings that will have co-control post-transaction. The situation is less clear for the establishment of, or change of control over, a joint venture if it involves the acquisition of control over a pre-existing undertaking from a third party. The Court’s Austria Asphalt case did not concern this situation, so it could be argued that para. 91 of the Consolidated Jurisdictional Notice, which clarifies that ‘[a]s in the case of the acquisition of sole control of an undertaking, such an acquisition of joint control will lead to a structural change in the market even if, according to the plans of the acquiring undertakings, the acquired undertaking would no longer be considered full-function after the transaction’, should remain unaffected. However, in para. 28, the Court casts doubts about such delineation when referring broadly to all ‘transaction as a result of which an undertaking controlled jointly by at least two other undertakings emerges in the market, regardless of whether that undertaking, now jointly controlled, existed before the transaction in question,’ without distinguishing whether, in case of an existing undertaking, it was previously owned by a third party or one of the undertakings having co-control post-transaction. Such a distinction is also missing in Advocate General Kokott’s assessment (see paras. 28, 31, 38, and 44). This suggests that the Court (following the Advocate General) supports a very general proposition, namely that transactions resulting in jointly controlled ventures are subject to the EUMR only if they are full-function post-transaction. All other jointly controlled ventures are subject to Regulation No 1/2003 and, possibly, merger control regimes of the Member States. The full-functionality criterion should, however, not play a role if there is a change from joint to sole control. The Court’s judgement did not concern this situation, there is no ‘joint venture’ post-transaction, and there is, therefore, no risk of a conflict with Article 21(1) EUMR and the application of Regulation 1/2003 (to which the Court refers in paras. 32, 34). The welcome removal of (some of) the uncertainty as to the relevance of the full-functionality criterion still leaves the parties with the question of whether ‘their’ joint venture will be full-function. The Commission’s assessment of this question is neither straightforward nor wholly predictable, and typically depends on a detailed examination of the factual and economic context of the joint venture and, in borderline cases, on the Commission’s desire to review the transaction on the merits. If the parties conclude that the joint venture will be non-full-function and not caught by the EUMR, it may still be subject to merger control review by the regulators of some Member States (namely Austria, Germany, and Poland) and non-EU countries, as well as to review under Regulation No 1/2003. Author notes Judgement of 7 September 2017, Austria Asphalt, C 248/16, EU:C:2017:643 © The Author 2017. Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oup.com

Journal

Journal of European Competition Law & PracticeOxford University Press

Published: Feb 1, 2018

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