Keywords: joint ventures

JOINT VENTURES

An Overview

Joint venture (JV) is a general commercial term that encompasses a range of collaborative activity between businesses, often competitors. JVs may be formal or informal, short- or long-term, and may involve two or more co-venturers.

Full-function or Non-Full-function

In competition law, JVs fall into two broad categories to which different rules apply:

Full-Function JVs Non-Full-Function JVs
What is it? The JV performs, on a lasting basis, all the functions of an independent economic entity. The JV, or otherwise referred to as a horizontal cooperation agreement, entails a lower level of integration or cooperation compared to a full-function JV.
Which rule applies? The Merger Rule:

As the formation of a full-function JV brings about a lasting change in the control of the businesses involved, and alters the market structure, the merger rule may apply. In Hong Kong, only the telecommunications sector is subject to the merger rule at the outset.
The First Conduct Rule:

Whilst engaging in looser forms of cooperation that fall short of full integration, businesses remain independent competitors. Agreements between them are subject to the first conduct rule.
What are the distinguishing factors? The following factors provide an indication of whether or not a JV is full-function:
  • Whether the JV has a management dedicated to its day-to-day operations.
  • Whether the JV has access to resources enabling it to conduct business activities on a lasting basis.
  • Whether the JV takes over a specific, limited function.
  • Whether the JV has significant dealings with its parents.
  • Whether the JV is created for a meaningful period of time.
A JV may or may not take the form of a separate legal entity. Whether a JV is full-function or non-fullfunction is a matter of substance having regard to all relevant circumstances including the above factors.

Joint production arrangements, joint buying arrangements, joint selling, distribution and marketing arrangements, and joint R&D ventures are usually non-full-function JVs.

Full-function JVs

The formation of a genuine full-function JV, in any sector other than the telecommunications sector, will not be subject to regulation in Hong Kong. After it has been established, however, the JV and its parent companies will each be subject to the conduct rules.

Non-full-function JVs and Horizontal Cooperation Agreements

Horizontal cooperation agreements merit special treatment under competition law because, although they have the potential to restrict competition, especially where the agreement involves setting prices or the level of output, sharing markets, exchanging information and consolidating market power etc., they are more often than not pro-competitive by object and nature.

Unless a horizontal cooperation agreement contains seriously anti-competitive restrictions, such as the Cardinal Sins1, it will likely be permissible under competition law as long as it is appropriately and carefully managed.

Before entering into a horizontal cooperation agreement, parties should satisfy themselves of the following:

  • The agreement is for a legitimate, pro-competitive purpose and generates economic efficiencies.
  • Arrangements are properly structured in a manner least restrictive of competition.
  • Effective compliance safeguards are in place to prevent or minimise any harmful effect on competition that may arise from the implementation and operation of the cooperation agreement.

Next Week

Next week we will take a closer look at several common forms of horizontal cooperation.

Originally published 3 June 2015

Footnote

1. The four Cardinal Sins include: Cardinal Sin No. 1 – Price Fixing, Cardinal Sin No. 2 – Output Limitation, Cardinal Sin No. 3 – Market Sharing, and Cardinal Sin No. 4 – Bid Rigging.

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