Most Read Contributor in Hong Kong, September 2016
Keywords: joint ventures
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:
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.
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
The First Conduct
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
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
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
Joint production arrangements, joint buying arrangements, joint
selling, distribution and marketing arrangements, and joint R&D
ventures are usually non-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
Non-full-function JVs and Horizontal Cooperation
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
Next week we will take a closer look at several common forms of
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This article provides information and comments on legal
issues and developments of interest. The foregoing is not a
comprehensive treatment of the subject matter covered and is not
intended to provide legal advice. Readers should seek specific
legal advice before taking any action with respect to the matters
discussed herein. Please also read the JSM legal publications
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