assessment of joint ventures under competition laws …
TRANSCRIPT
ASSESSMENT OF JOINT VENTURES UNDER
COMPETITION LAWS OF INDIA
Dissertation submitted in part fulfillment for the requirement of the
Degree of
LL.M
Submitted by Supervised by
DEWA PALJOR DR. VIJAY KUMAR SINGH
NATIONAL LAW UNIVERSITY
DELHI (INDIA)
2016
TABLE OF CONTENTS
S. No TITLE PAGE NO.
COVER PAGE
Declaration by the Candidate i
Certificate of Supervisor ii
Acknowledgment iii
List of Acronyms and Abbreviations iv
List of Statutes v
List of Cases vi-viii
CHAPTER 1
INTRODUCTION
1 - 20
ABSTRACT 2 - 3
INTRODUCTION 3 - 6
REVIEW OF LITERATURE 7 - 8
RESEARCH QUESTIONS 9
METHODOLOGY 9
MEANING AND DEFINITION OF THE TERM ‘JOINT
VENTURE’
9 - 14
CONCEPT OF JOINT VENTURES 14 - 19
JOINT VENTURES AND INDIA’S COMPETITION
LAWS
19
CONCLUSION 20
CHAPTER 2
TYPES OF JOINT VENTURES
21 - 31
Full Function Joint Ventures (Merger-type joint ventures) 22 -23
Network Joint Ventures 23 - 25
Production Joint Ventures 25 - 26
Marketing and Distribution Joint Ventures 26
Purchasing Joint Ventures 26
Research and Development Joint Ventures 27
Joint ventures classified on the basis of their constitution 28
Collaboration Agreement 28
Consortium Agreement 29
Joint Ventures Classified on the Basis of Strategy 29
FORMS OF JOINT VENTURE 29
Jointly Controlled Entities 29
Jointly Controlled Assets 30
Jointly Controlled Operations 30
Green field joint ventures 30
Brown field joint ventures 30
CONCLUSION 31
CHAPTER 3
JOINT VENTURES AND ANTI-COMPETITIVE
AGREEMENTS
32
INTRODUCTION 33 - 35
LEGISLATIVE FRAMEWORK 35 - 37
CARTEL INVESTIGATION AND JOINT VENTURE
EXEMPTION
37 - 38
EFFICIENCIES 38 - 42
AMERICAN PERSPECTIVE 42 - 47
EU PERSPECTIVE 47 - 50
JOINT VENTURES AND ANTI-COMPETITIVE
AGREEMENTS IN INDIA
50 - 53
CONCLUSION 54 - 55
CHAPTER 4
JOINT VENTURES AND COMBINATIONS
56
INTRODUCTION 57 - 58
JOINT VENTURES CONSIDERED AS MERGERS 59
CONCENTRATION 59 - 60
COMMUNITY DIMENSION 60 - 61
APPRAISAL UNDER ECMR 61 - 62
COMBINATION REGULATIONS OF INDIA AND
JOINT VENTURES
62 - 67
CONCLUSION 67
FINAL COMMENT 68
BIBLIOGRAPHY 69 - 71
i
DECLARATION BY THE CANDIDATE
I hereby declare that the dissertation entitled “Assessment of Joint Ventures under
Competition Laws of India” submitted at National Law University, Delhi is the outcome
of my own work carried out under the supervision of Dr. Vijay Kumar Singh. I further
declare that to the best of my knowledge, the dissertation does not contain any part of work,
which has not been submitted for the award of any degree either in this University or in any
other institution without proper citation.
Dewa Paljor
New Delhi Roll No. 31 LLM 15
May 30, 2016 National Law University, Delhi
ii
CERTIFICATE OF SUPERVISOR
This is to certify that the work reported in the LL.M dissertation entitled “Assessment of Joint
Ventures under Competition Laws of India” submitted by Dewa Paljor at National Law
University, Delhi is a bona fide record of his original work carried out under my supervision.
To the best of my knowledge and belief, the dissertation: (i) embodied the work of candidate
himself; (ii) has been duly completed; and (iii) is up to the standard, both in respect of content
and language, for being referred to the examiner.
Dr. Vijay Kumar Singh
New Delhi Head, School of Corporate Law
May 30, 2016 Indian Institute of Corporate Affairs
iii
ACKNOWLEDGMENT
Though only my name appears on the cover of this dissertation, a great many people have
contributed to its production. I owe my gratitude to all those people who have made this
dissertation possible and because of whom my LL.M experience has been one that I will
cherish forever.
My deepest gratitude is to my guide, Dr. Vijay Kumar Singh. I have been amazingly
fortunate to have an advisor who gave me the freedom to explore on my own, and at the same
time the guidance to recover when my steps faltered. His patience and support helped me
overcome many crisis situations and finish this dissertation. I hope that one day I would
become as good an advisor to my students as he has been to me.
I would like to extend my gratitude to the whole NLU, Delhi family, for keeping me
motivated, and providing me with one of the most enriching years of my life.
Finally, I would like to thank my dear parents and my wife, for all the love and support that
they bestowed upon me. They have always have been, and will be the key to my success.
Dewa Paljor
New Delhi Roll No. 31 LLM 15
May 30, 2016 National Law University, Delhi
iv
LIST OF ACRONYMS AND ABBREVIATIONS
CCI Competition Commission of India
EU European Union
FDI Foreign Direct Investment
LLPs limited liability partnerships
USA United States of America
OECD The Organisation for Economic Co-operation and Development
ECMR European Community Merger Regulation
TFEU Treaty on the Functioning of the European Union
AAEC Appreciable Adverse Effect on Competition
FTC Federal Trade Commission
DOJ Department of Justice
R&D Research and Development
v
LIST OF STATUTES
Indian Competition Act, 2002 (Act 12 of 2003)
The Indian Partnership Act, 1932 (Act No. IX of 1932)
European Community Merger Regulation
Treaty on the Functioning of the European Union
US Antitrust Guidelines for Collaborations among Competitors
US Horizontal Merger Guidelines
vi
LIST OF CASES
1. Blackburn v. Columbia Med. Ctr. of Arlington Subsidiary, 58 S.W.3d 263 (Tex. App.
Fort Worth 2001)
2. Faqir Chand Gulati vs. Uppal Agencies Pvt. Ltd. and Anr. [(2008) 10 SCC 345]
3. New Horizons Ltd vs Union of India 1995 SCC (1) 478
4. In Gvprel-Mee (J.V.), vs Government of Andhra Pradesh, 2005 (5) ALD 450, 2005
(5) ALT 325, 2005 (2) CTLJ 307 AP
5. Asia Foundations & Constructions Ltd. v. State of Gujarat: AIR 1986 Guj 185
6. In Chahal Engg. and Construction Co. (P) Ltd. v. State of Gujarat, (1987) 1 Comp. LJ
1 (Guj.) (D.B.)
7. United Dominions Corp Ltd v Brian Pty Ltd (1985) 157 CLR 1
8. Yogesh Ganeshlaji Somani v. Zee Turner Ltd, CCI, case no. 31/2011
9. M.P. Mehrotra V. Jet Airways (India) Ltd. & Ors., CCI, Case no. 04 of 2009
10. FICCI Multiplex Association of India, New Delhi v. United Producers/Distributors
Forum, Mumbai, CCI, case no. 01 of 2009
11. Uniglobe Mod Travels Pvt. Ltd. v. Travel Agents Association of India & Ors, CCI,
case no. 03 of 2009
12. Hoffmann‐La Roche, Case no. 85/76
13. Portugal v Commission, Case no. C-88/03
14. Telia Sonera, Case no. C-52/09
15. British Airways vs. Commission, Case no. C-95/04 P
16. Metro vs. Commission, Case no. 26/76 1977 ECR 1875
17. Ford/Volkswagen, Oj 1993 L 20/14
18. UEFA Champions League, Oj 2003 L 291/25
19. Laurent Piau vs. Commision, Case T-193/02 2005 ECR II-209
20. Stiching Baksteen, OJ 1994 L 131/15
21. CECED, OJ 2000 L 187/47
22. Metropole television vs. Commission, Cases T-528/93
23. GlaxoSmithKline Services Unlimited vs. Commission, Case T-168/01
24. OTOC Case, Case C-1/12
25. Pasteur Mérieux-Merck, 94/770/EC
26. Tradebe environmental services ltd/ Sita UK Ltd, (2013) ME/6132/13
vii
27. Taxibot joint venture by EADS and Israel Aerospace Industries, Case No
COMP/M.6490.
28. Joint venture between Amcor and Sidel, 2015/C 290/07
29. Continental TV, Inc. v. GTE Sylvania Inc., 433 U.S. 36, 50 n.16 (1977)
30. FTC v. Superior Court Trial Lawyers Ass’n, 493 U.S. 411, 432-36 (1990)
31. California Dental Ass’n v. FTC, 119 S. Ct. 1604, 1617-18 (1999)
32. FTC v. Indiana Fed’n of Dentists, 476 U.S. 447, 459-61 (1986); National Collegiate
Athletic Ass’n v. Board of Regents of the Univ. of Okla., 468 U.S. 85, 104-13 (1984)
33. Palmer v. BRG of Georgia, Inc., 498 U.S. 46 (U.S. Supreme Court, 1990)
34. United States v. Trenton Potteries Co., 273 U.S. 392(U.S. Supreme Court, 1927)
35. Arizona v. Maricopa County Medical Soc’y, 457 U.S. 332, 339 (U.S. Supreme Court,
1982)
36. Areva/Urenco/ETC joint venture, Case No COMP/M.3099
37. P&W/GE, Case No IV.36.539.
38. Automobiles Dealers Association v. Global Automobiles Limited &Anr., Case No 33
of 2011
39. FICCI – Multiplex Association of India vs. United Producers/Distributors Forum &
Others, Case No. 01/2009
40. Uni globe Mod Travels Pvt. Ltd. v. Travel Agents Association of India &Ors., Case
No. 03/2009.
41. Yogesh Ganeshlaji Somani vs. Zee Turner Ltd. and Star Den Services Pvt. Ltd., Case
No. 31/2011.
42. TNT/Canada Post etc. of December 2, 1991, Case IV/M.102
43. EDS/Lufthansa of 11 May 1995, Case IV/M.560
44. Nokia/Autoliv of 5 February 1996, Case IV/M.686
45. RSB/Tenex/Fuel Logistics of 2 April 1997, Case IV/M.904
46. Preussag/Voest-Alpine of 1 October 1997, Case IV/M.979
47. Siemens/Italtel of 17 February 1995, Case IV/M.468
48. Union Carbide/Enichem of 13 March 1995, Case IV/M.550
49. Sumitomo Corporation, Sumitomo Corporation Asia Pte Limited, Mukand Limited
and Technosys Metal Processing Limited, Combination No. C- 2012/11/93.
50. SunCoke Europe Holding B.V. and VISA Coke Limited, Combination No.C-
2012/12/101
viii
51. INEOS Group Investments and Solvay S.A./N.V. (SPVC), Combination No. C-
2013/12/147
52. Mitsui Sumitomo Insurance Company Limited, Max India Limited and Max New
York Life Insurance Company Limited. Combination No. C-2012/05/56
1
CHAPTER I
INTRODUCTION
2
ABSTRACT
This dissertation aims to assist lawyers, law students and other stakeholders to
develop a superior understanding of the position of joint ventures in India, and to
understand how joint ventures are assessed under the Indian Competition Act, 2002.
The research herein looks at the current international views on joint ventures in
various anti-trust jurisdictions, as well as the evolution of joint ventures. The research
would analyse the treatment of joint ventures subject to the competition laws of the
European Union (EU), we shall also try to understand the “definitional issue” faced
by India and other jurisdictions. The goal is to show that the concept of efficiencies
can be borrowed from all policy areas such as agreements, abuse of dominance and
combinations.
We shall commence with the introduction to joint ventures and focus on the nature of
joint ventures under anti-trust perspectives of various jurisdictions. The primary focus
would be on India as understanding the Indian take on joint ventures is the key
ingredient in helping the legal community to further their understanding about joint
ventures and how the same ought to be treated under the competition laws of India.
The concept of joint ventures shall be understood in light of Supreme Court decisions.
Further, in the later chapters we would discuss the various types and forms of joint
ventures that concern the application of competition laws. The list provided is not
conclusive, and the most significant types of joint ventures have been briefly
discussed. We would then analyse joint ventures in the context of anti-competitive
agreements. Wherein would discuss the concept of joint venture defence applying to
cartels that are a form of horizontal agreements. The defence can be said to be one of
the most efficient methods for a cartel to either get exempted or penalized. As the task
of investigation of cartels very complicated, especially in India. The Competition
Commission of India (CCI), must look to jurisprudence from other senior jurisdictions
and find an alternative. The research highlights the importance of understanding the
term efficiencies and how the CCI should act on and develop the concept of joint
3
venture defence in India. The chapter shows the important aspects of the analysis of
joint ventures under agreements.
Finally, we shall analyse joint ventures under the context of combinations. The
research would discuss joint ventures, which have the nature of mergers as the created
entity may have all the requirements of a merger or a combination and must be
analysed using the same approaches used for the regulation of combinations. The
literature review, shall highlight the previous works done by various authors about
joint ventures and their anti-trust analysis.
INTRODUCTION
Since the time human civilizations walked the earth, we have found that it is
impossible to be truly self-sufficient. In order to survive man realized the need for
various resources. As one person cannot possibly create all the required necessities,
man learnt to co-exist with others. This in turn led to the formation of societies. As a
result each individual of the society played a key role, in creating a sustainable
environment, by way of their contributions. This evolutionary example may be
obsolete in this day and age but we can surely appreciate the fact that these were the
stepping stones to better things to come.
The modern age is a complex, the rate of expansion today knows no bounds, and
individuals have been replaced by corporates, who are further backed by
governments, which in turn have to work in harmony with other governments in order
to attain the so called sustainable development. The interdependence of various states
is now crucial to sustain the ever-growing populations.
To be at power with their neighbours sovereign states now seek to expand their
economies by the means of various policy changes that liberalize their markets,
because big business is the key to economic growth of a state.
India being a developing nation has adopted such policies of economic liberalizing in
various sectors, although there still is the need for adoption of better practices in many
4
spheres. India’s economic liberalization policies of the early 1990’s undoubtedly have
attracted various international corporates and businesses to our shores.
International stake holders continue to be weary of new jurisdictions as they may not
be aware of the hurdles awaiting them, both in respect of business and legal
environments. Setting up an offshore business is a risk in itself, especially for players
who do not have the deepest pockets.
A joint venture can be viewed as a saving grace for these businesses who want to
swim in unchartered waters. Although the risks involved may often vary. Control and
legal dynamics continue to be a cause of concern. The volume of the business is
directly proportionate to the profits it may incur. Now a corporation need not be
behemoth to enjoy such benefits, joint ventures provide a platform where smaller
players can achieve equal growth. The only way businesses grew in the past were
either from scratch or by way of acquisition. Now the trend has shifted towards
alliances such as joint ventures.
As of today India allows foreign investment in various sectors, although this provision
comes with its own set of restrictions. To participate efficiently foreign firms must be
aware of the ideal corporate structure most suitable to them. Joint ventures can be
seen as such corporate structures, where the alliance can easily be based on the
objectives of the business, the intended relationship and the time duration of
operations etc. As the Government of India allowed Foreign Direct Investment (FDI)
into limited liability partnerships (LLPs), equity based joint ventures have been taking
to the path of LLPs from the traditional corporate structure such as companies.
The basic aim of any business is to break even and to earn profits by providing goods
and services to consumers. Starting any business has its inherent risks, then there is
always the concern of resources such as manpower, machines and raw materials.
Maintaining a constant supply of resources especially for big projects can sometimes
be a hindrance in the smooth operations. To achieve economies of scale, corporates or
individuals come together and form joint ventures which allows them to undertake big
projects, as combined capital and resources ensures stability, by pooling of expertise,
experience.
5
As capital remains an integral part of joint ventures it is of utmost importance to have
a pre-planned strategy regarding the future and the processes involved in the venture.
Thinking about self-interest and profits cannot be on the agenda of an enterprise
unless the critical issues such as terms of operations and liabilities have been mutually
carved out. A joint venture is a relationship of trust, integrity, honesty and
communication between the co-ventures. These qualities lead to successful business
endeavours.1
As joint ventures are primarily entered into by competitors and/ or players on the
vertical chain, there exist inherent issues associated with competition laws. Since
India is a developing jurisdiction there is lack of surplus guidance regarding the
assessment of joint ventures. Till date the scope of joint ventures under the Indian
Competition Act, 2002, remains vague. This vagueness and uncertainty becomes a
hindrance for the Competition Commission of India, legal advisors as well as the
business community and other stake holders. A reason for such vagueness can be said
to be the scope of the term joint ventures under the Competition Act, 2002, as joint
ventures fall under both anti-competitive agreements (Section 3) and combinations
(Section 5) of the Competition Act, 2002.
An explosion in cooperation can be seen due to the emergence of joint ventures. Joint
ventures play a significant role in changing industry structures and behaviour between
competitors. Firms with enough capital to provide financial support to businesses tend
to enter into joint ventures, as it is a means for them to sustain their strategic position
in the markets. Maintaining a position in the market can even be overwhelming for an
independent firm. A joint venture can allow a strong firm to exercise its dormant
muscles, and allow weaker firms to develop their own. New firms may get access to
technologies which would never have been possible to access independently.
The consistent inflow of FDI by way of joint ventures can be ensured if the laws
governing them are similar in nature to the laws existing in foreign jurisdictions.
Consistency in laws would yield optimum results with lower abandonment of
1 Kamil Sayeed, Law of Joint Ventures in India,
https://www.indiafinancing.com/Law%20of%20Joint%20Ventures%20in%20India-%20Article.pdf
6
projects. It is of utmost importance to see the international best practices on joint
ventures and to clarify the applicability of the Competition Act, 2002.2 Through this
dissertation the researcher aims to bring a sense of clarity towards the Indian approach
towards joint ventures.
2 Joint Ventures under India’s Competition Act- Co-authored by Mayer Brown and Khaitan and Co.
(Feb 14, 2011).
7
REVIEW OF LITERATURE
Majority of the literature on analysis of joint ventures under competition laws, are
from mature jurisdictions like the European Union and the USA. The work done by
various authors are mostly limited to their own jurisdictions. Most literature on joint
ventures pertain to the field of management. There is limited literature on joint
ventures in the legal sphere. Below we shall see some of the most important sources
used for this dissertation.
The nature of joint ventures have been discussed by various authors. Various judicial
interpretations, the meaning of joint ventures as seen under the Indian Accounting
Standards with emphasis on the contents of a joint venture agreement vis a vis the
Shareholders’ Agreement along with the various approvals to be obtained from the
Government in respect of joint ventures have been discussed in the Law of Joint
Ventures in India by Kamil Sayeed. A brief discussion about the analysis of joint
ventures in European Union (EU), the definitional issue, lessons learned from the
development of the EU’s competition laws and how India could benefit and avoid
some of the issues faced by the EU has have been provided in an article, Joint
Ventures under India’s Competition Act- Co-authored by Mayer Brown and Khaitan
and Co. This article has paved a clear path for this dissertation as it provided an
insight to the most important issues. A look into the definitional issue of joint
ventures and has been discussed by a variety of joint venture cases of the US by Peter
A. Donovan. The treatment of joint ventures and analysis of various joint venture
structures have been provides a better understanding of the situation in India and
allows us to appreciate joint venture analysis in regard to combination regulations in
India, this has been briefly provided in Competition Law in India, Abir Roy, Jayant
Kumar. Discussion about the important ingredients of a joint venture agreement have
been discussed in Joint Ventures in India, Majumdar and Co.
Further the definition of joint ventures have been seen in the works of Pearsall and
Trumble (1995), Competitive Policy and Joint Ventures (1987) OECD, Business
Consortia in 1961 referred by Herzfeld (1983) and Hoghton (1963). The importance
of joint ventures in bringing about foreign investment has been pointed out by
Sornarajah (1992) and Beamish (1988).
8
The basic ingredients of a joint venture have been discussed in International Joint
Ventures in the Construction Industry, Gadsby and Hannah (1985). The full-function
character of joint ventures has been discussed by Richard Whish, Competition Law
826 (Oxford University Press, NewYork, 6thedn., 2009).
Network joint ventures have been discussed in Refusals to Deal in the Context of
Network Joint Ventures Author(s): William H. Pratt, James D. Sonda and Mark A.
Racanelli. Efficiencies of cartels have been pointed out by Rajat Sethi, Simran Dhir,
in “Anti-Competitive Agreements under the Competition Act, 2002. The sharing of
profits or losses of joint ventures have been discussed by Ian Hewitt, Joint Ventures
(Sweet & Maxwell, London, 4th edn., 2008). The analysis of joint ventures as
agreements in the EU have been provided by Valentine Korah, An Introductory Guide
To EC Competition Law and Practice (Hart Publishing, Portland, 9th edn., 2007).
The rule of presumption and joint ventures are seen in D.P. Mittal, Competition Law
and Practice 233 (Taxmann Publications, New Delhi, 3rd edn., 2011). The onus of
proof of efficiencies is mentioned in Amit Kapur, Manas Kumar Chaudhuri, Mansoor
Ali Shoket, Competition Act(2009). The test of efficiencies have been mentioned in
Ram Tamara, Vasanth Adithya, Rasika Raghavan, Arshad (Paku) Khan, Harman
Singh Sandhu, Usage of Efficiency Tests in assessing Competitive Effects of Joint
Ventures - Case For India (2011).
All the prior work on joint ventures assists us immensely to understand the
application of theories and the law, yet India lacks a set of established rules and
regulations that govern joint ventures. The dissertation is an attempt to understand
prevailing practices which can help in the development of jurisprudence of joint
ventures in India.
9
RESEARCH QUESTIONS
To understand the international position of Joint Ventures in respect of competition
laws of various jurisdictions.
To understand the analysis of Joint Ventures under the Indian Competition Act, 2002
in respect of anti-competitive agreements as well as combinations.
The research also aims to understand the meaning of efficiencies, in reference to joint
venture defence under competition laws
METHODOLOGY
In order to develop a clear idea and sound understanding of the topic, the research
methodology adopted by the researcher is doctrinal in nature. Consultation of various
books, statutes, articles, and journals are pursued; the assistance of the internet shall
also be taken.
MEANING AND DEFINITION OF THE TERM ‘JOINT
VENTURE’
A joint venture is collaboration between two or more firms. The parties to such
collaborations may also be known as co-venturers. These collaborations may be
financial or technical or both. India however does not have a legal definition for joint
ventures. Certain guidelines allow the government and its agencies to distinguish
between joint ventures and other forms of collaborations. In India a joint venture
usually comprises of individuals and/or enterprises where a party may even be a non-
resident of India, but may collaborate with a co-venturer to form a private or public
limited company in the territory of India, where the portion of holding of the share
capital would be pre-defined in the joint venture/ shareholders agreement.3
3 Joint Ventures in India, Majumdar and Co.
http://www.majmudarindia.com/pdf/Joint%20ventures%20in%20India.pdf
10
Due to the lack of a pinpoint definition, certain factors arising in contracts between
enterprises are generally looked into while deciding the nature of the business
arrangement. The existence of an expressed or an inferred agreement among the
parties, provisions of joint pooling of capital and other assets, predetermined sharing
of profits and losses and the rights over control of the project are key indicators of
existence of Joint ventures.
The Oxford English Reference Dictionary defines collaborate as to work jointly; or
cooperate traitorously with an enemy.4 Enemy has further been defined as a person or
group actively apposing or hostile to another, or to a cause etc.; or an adversary or
opponent. Collaboration may be defined as any arrangement between two or more
firms that entails acts of cooperation. This collaboration can see in many forms.
Firms may co-operate by working for one another by way of licensing and cross-
licencing agreements. The bargaining power of a firm usually decides the firms hold
on the ratio of equity. In this technically advanced age, ‘expertise’ can be a factor by
which a firm holding lower equity shares can also have significant controls. A joint
venture can be formed between two or more firms belonging to the same country or
between two or more firms belonging to different countries in projects where either of
the co-venturers have a base in the third country. A foreign collaboration can exist
when two or more firms enter into a joint venture in a foreign territory where they do
not have a base. This form of joint venture usually involves payment in foreign
exchange in terms of management and/or technical know-how fee, royalties, and
dividend towards foreign equity. These are subject to stringent controls by foreign
governments and are also promoted as they improve the competitiveness of industries
of the foreign country.
A joint venture in many respects is similar in nature to a partnership,5 yet they are
unique and must be distinguished. A partnership usually involves an ongoing, long-
term business relationship, whereas a joint venture is based on a single business
transaction. Firms may choose to enter joint ventures in order to share their strengths,
4 PEARSALL AND TRUMBLE, THE OXFORD ENGLISH REFERENCE DICTIONARY (1995)
5 Blackburn v. Columbia Med. Ctr. of Arlington Subsidiary, 58 S.W.3d 263 (Tex. App. Fort Worth
2001).
11
minimize risks, and increase competitive advantages in the marketplace. A joint
venture can be an entirely new business entity or can be a collaboration between
businesses. As an example, a partner dealing in high-technology may co-operate with
a manufacturer who can effectively create the product and even introduce it to the
market.
Entering into a joint venture contract/agreement is the most important, as it allows
parties to avoid disagreements and confusion which may occur at a later stage when
the joint venture has mature. The co-venturers must be clear about their intentions,
rights, obligations and duties. During the mid-twentieth century joint ventures
dominated the manufacturing sector. There after the late 1980’s saw an increase in
joint ventures in service industries as businesses looked for new, competitive
strategies. This expansion of joint ventures through various sectors caught the eye of
lawmakers as well as sector regulators. When a joint venture is entered into by
competitors or horizontal players they may cause anti-competitive effects such as
restricting competition by raising entry barriers.
Defining a joint venture can be a cumbersome task as it has been described to be a
‘chameleon’ due to its several forms. This is due to their temporary or permanent
nature ranging from a loose ad hoc association formed for a single or limited purpose
to the creation of a permanent business establishment involving capital investment of
unlimited duration.6
A developing country perceives a joint venture as an instrument to cater to
competitive interests of national development and aims to prevent the domination of
the domestic economy by foreign investors. Joint ventures are perceived to bring
benefits to the host country via technology transfer, job creation and capital inflow.7 It
has been seen that foreign investments in the form of joint ventures tend to be more
successful than foreign investments via other mechanisms.8
6 Peter A. Donovan, Joint Ventures, Vol. 43, No. 3, Antitrust Law Journal pp. 563-570(August 12-14,
1974). 7 SORNARAJAH, LAW OF INTERNATIONAL JOINT VENTURES (1992).
8 BEAMISH, MULTINATIONAL JOINT VENTURES IN DEVELOPING COUNTRIES (1988).
12
The last few decades have seen a significant increase in the term ‘Joint Venture’.
Numerous books, articles and blogs talk about the various aspects of joint ventures.
The extent to which the joint ventures have been discussed is definitely worth
mentioning. Yet one fails to find a uniform definition for the term. An OECD
publication9 confirmed the same. It read as:
"The specialist literature gives many definitions.., although none provides a truly
definitive answer. They are based on one or other of the following criteria:
comparisons with mergers, common objective, decision making procedures, legal,
economic and financial structures. Each of these definitions is in fact open to
criticism, because none covers all the characteristics of joint ventures, in particular
all the different actors, objectives, types of organisation and contractual
relationships."
An English publication by Bolton is said to have dealt with a concept which can now
be described as a joint venture. The book does not mention the term joint venture per
se, but experts consider it to be an almost perfect definition for the term joint venture.
Bolton has defined ‘consortium’ as;
"The organisation which is brought into being to enable two or more companies to
operate as a single entity for a prescribed and limited purpose".
He further grouped consortia into two classes, "single" purpose consortium and
"continuing" consortium.10
The purpose to create a consortium is for a prescribed and limited purpose. It is seen
as a better option for firms which do not want to engage in a permanent association,
but want a simper form of organization. The literature shows that the terms
consortium and joint venture are synonymous to each other, as the two refer to the
same process of forming a single temporary organisation by two or more parties,
9 Competitive Policy and Joint Ventures (1987) OECD.
10 SWEET & MAXWELL, BUSINESS CONSORTIA, LONDON (1961).
13
preferably disparate, operating under joint control, for a prescribed and limited
purpose.11
A study of international joint ventures in India and Pakistan with U.S. firms defined
joint venture as "A commitment, for more than a very short duration of funds,
facilities and services by two or more legally separate interests, to an enterprise for
their mutual benefit". This definition points to the permanent nature of the term.12
A joint venture can also be defined as;
"Shared equity undertakings between two or more parties, each of whom holds at
least five percent of the equity".
The research intends to bring the issues of sharing and control into the definition of
Joint ventures.13
Another research doubts the ability of a minimum five percent shareholder to make
anything but a token contribution to the management of the joint venture. In their
view, an international joint venture is:
“A separate legal organisational entity representing the partial holdings of two or
more parent firms, in which the headquarters of at least one is located outside the
country of operation of the joint venture. The entity is subject to the joint control of its
parent firms, each of which is economically and legally independent of the other."14
According to the abovementioned research a minimum shareholding of at least 25
percent for the minor shareholder is said to have any meaningful joint management
control. We must agree that it is not the percentage of shareholding that is important,
11
Andrews, Construction Project Management in Joint Ventures, (1987) 12 JAMES W C TOMLINSON, THE JOINT VENTURE PROCESS IN INTERNATIONAL BUSINESS:
INDIA AND PAKISTAN CAMBRIDGE, U.S.A. (1970). 13
Beamish, P.W. Joint Venture Performance in Developing Countries, (1984) (Ph.D. Dissertation). 14
ZAIRA, Y. AND SHENKER, 0. Interactive and Specific Parent Characteristics, Implications for
Management and Human Resources in International Joint Ventures, Vol 30, Management International
Review, (1990) pp. 7-22.
14
but the terms of the joint venture agreement which clearly mention the limits of the
rights of control.
A research paper15
has identified five essential traits of a common law joint ventures.
To partake in a joint venture the co-ventures must:
1. Agree usually in writing, to form a joint venture.
2. Contribute some resources or skills to the common undertaking.
3. Limit the venture to a single identified project or transaction or group of projects or
transactions.
4. Share a right of mutual control over the enterprise.
5. Share all profits or losses.
These five key criteria encompass all the ingredients of joint ventures recommended
by various researchers and should be used to characterise a joint venture.
The European Commission has recognized that "joint ventures can form the basis for
cooperation in all fields of business activity."16
CONCEPT OF JOINT VENTURES
The Indian Judiciary has time in again tried to interpret the term ‘Joint Venture’ via
case laws, few of the important precedents are as follows;
Faqir Chand Gulati vs. Uppal Agencies Pvt. Ltd. and Anr. [(2008) 10 SCC 345]
The issue in the said case was, whether an agreement under which the builder agreed
to make a housing construction for the land owner was a “collaboration agreement or
a joint venture” or was it simply a form of “service”. The Apex Court observed that
the title or caption or the nomenclature of the document cannot decide the true
purpose of the document. The terms of the document that express the true intention of
the parties must me the deciding factor. Following this the Apex Court proceeded to
define the term “joint venture”. It was held that the expression “joint venture” 15
GADSBY AND HANNAH, INTERNATIONAL JOINT VENTURES IN THE CONSTRUCTION
INDUSTRY, (1985). 16
Notice Concerning the Assessment of Cooperative Joint Ventures Pursuant to Article 85 of the EEC
Treaty, 1993 O.J. (C 43)2, available at http://europa.eu.int/comm/dg04/lawenten/en/93c4302.html
15
suggests the existence of a legal entity, which has the nature of a partnership that is
engaged in the joint undertaking of a particular transaction for mutual profit or an
association of persons or companies jointly undertaking some commercial enterprise
wherein all contribute assets and share risks. Thus, an absence of the provisions of
share of control of the enterprise and shared liability of losses, would indicate that the
transaction does not fall into the scope of a joint venture even if the documents use the
terms ‘joint ventures’ or ‘collaboration’. The Hon’ble Supreme Court of India,
defined joint venture as, “an association of persons or companies jointly undertaking
some commercial enterprise wherein all contribute to assets and share risks”.
New Horizons Ltd vs Union of India 1995 SCC (1) 478
The issue in this case was whether a particular company would be joint venture or not.
The Hon’ble Supreme Court of India rejected the earlier view of the High Court. The
High court had held that a company cannot be called as joint venture when there is
only a certain amount of equity participation by a foreign company. The Apex Court
held that, to be termed as a joint venture, the participants, apart from having equity
participation there would have to be a pooling of their resources and all the
constituents of the company would thus contribute to its resources which would show
that the Indian company and the foreign based company were an association of
companies that would jointly undertake the form of a commercial enterprise wherein
they would mutually contribute towards assets and would also share risks and have a
community of interest. The Hon’ble Supreme Court held:
“This shows that NHL is an association of companies jointly undertaking a
commercial enterprise wherein they will all contribute assets and will share risks and
have a community of interest. We are, therefore, of the view that NHL has been
constituted as a joint venture by the group of Indian companies and IIPL, the
Singapore-based company and it would not be correct to say that IIPL which has a
substantial stake in the success of the venture, having 40% of shareholding, is a mere
shareholder in NHL.”
16
What can be comprehended from the judgement is that a common interest, risk
sharing, providing resources and the resolve to mutually run the business together are
the vital components of a joint venture.
In para 24 of the judgment, the Supreme Court had the following to see about the
meaning of joint ventures:
“The expression "joint venture" is more frequently used in the United States. It
connotes a legal entity in the nature of a partnership engaged in the joint undertaking
of a particular transaction for mutual profit or an association of persons or
companies jointly undertaking some commercial enterprise wherein all contribute
assets and share risks. It requires a community of interest in the performance of the
subject-matter, a right to direct and govern the policy in connection therewith, and
duty, which may be altered by agreement, to share both in profit and losses. (Black's
Law Dictionary, 6th Edn., p. 839) According to Words and Phrases, Permanent Edn.,
a joint venture is an association of two or more persons to carry out a single business
enterprise for profit (p. 117, Vol. 23). A joint venture can take the form of a
corporation wherein two or more persons or companies may join together. A joint
venture corporation has been defined as a corporation which has joined with other
individuals or corporations within the corporate framework in some specific
undertaking commonly found in oil, chemicals, electronic, atomic fields. (Black's Law
Dictionary, 6th Edn., p. 342)”
In Gvprel-Mee (J.V.), vs Government of Andhra Pradesh, 2005 (5) ALD 450,
2005 (5) ALT 325, 2005 (2) CTLJ 307 AP
The High Court of Andhra Pradesh agreed that the Indian laws do not have a
definition of the term ‘joint venture’, but went ahead to say that the provisions of
Section 8 of the Partnership Act, 1932, may be looked at in order to interpret the term.
According to the wording of the section a partnership is given the same meaning as a
joint venture, as a person may enter into a partnership with another individual to
partake in an adventure or an undertaking. This form of "particular partnership" is
understood to come into existence upon the start of operations or the purpose of
collaboration. The Court further emphasised that such a venture or partnership would
17
cease to exist upon the completion of the purpose, it had set out for. The co-venturers
would be liable until the partnership is dissolved. Further the court said that stated that
such arrangements were entered into a particular project and the co-venturers were
jointly responsible in it, from the commencement till the culmination of the venture.
The court stated that common law only recognized incorporated entities, although this
trend is changing. The law now upholds ‘joint venture’ as recognised entities where
two or more co-venturers pool their assets and capital in order to pursue specific
businesses and incur profits.”
Asia Foundations & Constructions Ltd. v. State of Gujarat: AIR 1986 Guj 185
While discussing the nature of a joint venture and the rights and liabilities of the co-
venturers a Gujarat High Court division bench held that common law jurisdictions,
generally did not recognise the relation of individuals who collaborate of a particular
venture. Although, the court stated that this has changed and now courts have begun
to accept the existence of a relationship between co-venturers, The courts have started
to recognise ‘joint ventures’ wherein two or more co-ventures co-operate with each
other and combine assets and finance to enter in business activities and aim to incur
profits. Even though joint ventures have similarities to a partnership agreement, courts
do not view them identically. The distinguishing factor is that a joint venture is
entered into to pursue a particular business project, without an actual partnership, as
firms would go their separate ways upon completion of the specific project. A joint
venture would be for a limited period and would conclude upon the sharing of profits
from the final result.
The court describes it to be a commercial endeavour with joint participation, the term
limited refers to the limited scope and duration of the venture and not the rights and
liabilities of the co-venturers. Generally the difference between a joint venture and a
partnership is that in a joint venture is a single transaction, even if it may be for a
substancial number of years, whereas a partnership may be permanent in nature and
would be for a particular business.17
. To be considered as a joint venture co-venturers
must have an explicit interest and right to have a joint control on operations,
18
regardless of delegation of control to a co-venturer. The rights, duties and liabilities
may be identical in nature in both forms of businesses. Participants in a joint venture
can be jointly and severally liable to third parties for the debts of the venture18
. In the
international sphere joint ventures are recognised to be common in the construction
industry. Joint venture agreements in the said industry are entered into by independent
contractors that jointly pursue construction services that have a fixed scope and
duration. All co-ventures would be jointly and severally liable for the business
activities irrespective of the control of operations. The co-venturers would be
accountable to customers for any and all activities of their co-venturers.
In Chahal Engg. and Construction Co. (P) Ltd. v. State of Gujarat, (1987) 1
Comp. LJ 1 (Guj.) (D.B.) (Justice B.K. Mehta)
In this case a Division Bench of Gujarat High Court decided, that in case one of the
co-venturers withdrew from the joint venture, the joint venture would continue to
function. It was held that;
“The case, therefore, is not of termination of the joint venture agreement or it ceasing
to be in effect on the expiry of 12 months, but is virtually a case of withdrawal by one
of the co-venturers. The question which, therefore, arises is whether a co-venturer is
entitled to withdraw before the purpose of the venture is accomplished or has failed;
and if he does not do so, what is its effect? Whether a party has a right to withdraw
and what is the effect of such withdrawal upon the Joint venture depends upon the
terms of the agreement and/or upon the circumstances. Generally, no co-venturer has
a right to withdraw from or abandon it without the consent of his co-venturers where
the venture has not fulfilled its purpose. In absence of a decree of a Court or on an
agreement fixing the time of termination or voluntary abandonment of the enterprise
by one of the co-venturers, the joint venture agreement remains in force until its
purpose is accomplished or becomes impossible for fulfilment and while it is in force,
ordinarily, one joint venturer has no right to withdraw himself from the arrangement.
It is only where the joint venture agreement is silent about this duration or
termination, that a co-venturer has right to withdraw, since it is virtually a limited
18
AMERICAN JURISPRUDENCE, Second Edition, Vol.46, (1994)
19
partnership at will. Even the abandonment of a joint venture by one of the
participants, and his active opposition to its operation by his co-venturers will not
forfeit his interest in the enterprise or deprive him of his right to share in the profits.”
The above judgments go to show that even a form of partnership between two or more
persons would act as a common enterprise for a single project and can be considered
to encompass a joint venture, as long as certain criteria are met. To reiterate these
essential ingredients are capital contributions by the co-venturers, expertise, efforts,
know-how and other assets to operate the venture, joint property interests in the
subject matter of the venture, right of mutual control of management of the enterprise,
expectation of profits and losses, right to participate in the profits and to be mutually
liable for the losses and the limitation of the objective of the venture. Although there
are many criticisms above judgement.
JOINT VENTURES AND INDIA’S COMPETITION LAWS
The Competition Act, 2002 (hereinafter referred to as ‘the Act’) has provisions for the
trinity of anti-competitive conduct that forms the basis of competition law throughout
each jurisdiction. Section 3 of the Act deals with anti-competitive agreements, Section
4 deals with abuse of dominance and Section 5 and 6 deal with combinations and
provides for their regulation. For the purpose of analysis of joint ventures, we shall
only concern ourselves with ‘agreements’ and ‘combinations’. The European
Commission in its competition law distinguishes between the concept of full-
functionality and non-full-functionality, whereas this is not the case in the Indian
context. In India joint ventures can be classified primarily as equity or contractual in
nature, another reason for adopting these classifications is due to a lack of a definition
of the term ‘joint venture’. The European Commission’s competition law certain joint
ventures that are classified as combinations are regulated under the European
Community Merger Regulation (hereinafter referred to as ECMR) and the
anticompetitive characteristics of joint ventures classified as co-cooperative
agreements are analysed under Article 101 of Treaty on the Functioning of the
European Union (hereinafter referred to as TFEU). European competition law clearly
demarcates, the criteria for a joint venture to be an agreement or a combination. On
20
the other hand, the Indian competition law fails to provide a reliable or clear picture in
this context. Classifying a joint venture as an agreement under Section 3 of the Act or
a combination under Section 5 of the Act still remains uncertain. As the Competition
Commission of India in its jurisprudence has assessed the Appreciable Adverse Effect
on Competition (hereinafter referred to as AAEC) while considering the structure of
the joint venture, while analysing the aspects of collusion separately. The Competition
Commission of India conducts a case by case analyse of the agreements signed
between the co-venturers and would also go through the material available on
record.19
CONCLUSION
There can be varied conclusions that can be deduced from this chapter. The
underlying meaning and essential character of joint ventures stays the same, however,
the contexts may vary owing to different factors. Although joint ventures have not
been very popular for some years, but they are slowly gaining momentum thanks to a
much globalised world as well complex business models. Joint ventures are wonderful
tools which can double the income and wealth of small enterprises helping them
thrive, while they help big enterprises to forge stronger relationships. Joint ventures
hold all the more value today as they are a great tool for the parties coming together in
them to share assets, critical expertise, experience, costs and business risks. Forging
joint ventures can also help the businesses access new markets, which has become an
essential element for the enterprises in this globalized world if they want to grow,
thrive and diversify both domestically and internationally. If effectuated effectively,
these alliances are a wonderful possibility for both small businesses to come together
to take on the industry behemoths as well as an opportunity for big enterprises to
capitalize on some of the efficient methods utilized in smaller companies. However,
due diligence, research and patience is required to forge these kinds of collaborations.
Collectively, the basic definition may remain the same, nonetheless, the vast
explanation of joint ventures is still obscure which in my opinion should be vague as
19
Definition of transaction for the purpose of merger control review, OECD Competition Policy
Roundtables (2013). Available at: http://www.oecd.org/daf/competition/Merger-control-review-
2013.pdf
21
it leaves the discussion on it to be open-ended. The unrestricted flexibility in approach
to its meaning is a good thing as it leaves the scope for the parties involved to etch out
new scenarios and outline unusual and innovative solutions and definitions.
22
CHAPTER 2
TYPES OF JOINT VENTURES
23
TYPES OF JOINT VENTURES
Joint ventures can be of various types, the following are a few types that are notorious
for causing adverse anticompetitive effects by way of limiting independent decision
making or combining control or financial interests.
Full Function Joint Ventures (Merger-type joint ventures)
A joint venture that can be categorized as an autonomous economic entity, that can
perform all the functions of an independent enterprise, that operates on long term
basis, having its own independent management and access to resources such as
finance, staff and assets. As these types of joint ventures can operate independent of
its parents, most antitrust authorities the world over consider then to be synonymous
of combinations and do not generally view them as agreements between competitors.
According to article 3 paragraph 4 of the ECMR, the creation of a joint venture
performing on a lasting basis all the functions of an autonomous economic entity shall
constitute a concentration which falls within the scope of the ECMR. This so-called
full function criterion is decisive for the ECMR to be applicable. The Commission has
explained in its Joint Venture Notice what it takes for a joint venture to be fully
functional.
Paragraph 12 and 13 Joint Venture Notice reads;
“Essentially this means that a joint venture must operate on a market, performing the
functions normally carried out by undertakings operating on the same market. In
order to do so the joint venture must have a management dedicated to its day to-day
operations and access to sufficient resources including finance, staff, and assets
(tangible and intangible) in order to conduct on a lasting basis its business activities
within the area provided for in the joint-venture agreement. “A joint venture is not
full-function if it only takes over one specific function within the parent companies’
business activities without access to the market. This is the case, for example, for joint
ventures limited to R&D or production. Such joint ventures are auxiliary to their
parent companies’ business activities. This is also the case where a joint venture is
24
essentially limited to the distribution or sales of its parent companies’ products and,
therefore, acts principally as a sales agency. However, the fact that a joint venture
makes use of the distribution network or outlet of one or more of its parent companies
normally will not disqualify it as ‘full-function’ as long as the parent companies are
acting only as agents of the joint venture.”
A joint venture is not considered to be a full-function if it operates over one specific
function within the parent companies' business activities without access to the market.
This is usually seen in joint ventures that are limited to Research and Development,
Production, Distribution or Sales (addressed below). Such joint ventures function in
an allied manner with their parent companies and lack independent operations. If a
joint venture utilizes the distribution network of its parent companies, it would
generally be considered as a 'full-function joint venture' provided the parent
companies act as agents.1
In the Europe these joint ventures require prior notification.2 The full-function
character of the venture is crucial to decide the applicability of the ECMR. In case it
is a non-fully functional it may be analysed under Article 101 of the TFEU.3
Collaborative alliances also referred to as co-operative joint ventures are featured in
the European Commission in these the co-venturers do not lose their own identities
and businesses. The adverse effects on competition include consumer harm and
reduced competition, which occurs when competitors become co-venturers.
Network Joint Ventures
As the term suggests, a ‘network’ is a system that allows the exchange of information,
money goods or services among enterprises. Network joint ventures allow for
transaction processing facilities or provision of products to consumers, for firms that
do not have the ability to independently provide such services. An example of a
network joint venture would be the telephone and mobile services sector. As a long
distance phone call is made the call would go through an interexchange process where
1 TNT/Canada Post, Case IV/M.102 - (1991)
2 COUNCIL REGULATION No 139/2004 of January 20, 2004 on the control of concentrations
between undertakings (“ECMR”). 3 RICHARD WHISH, COMPETITION LAW (2009).
25
by a local provider would pass it to a long distance carrier, who subsequently would
pass it to another local provider. This allows for callers all across the globe to connect
with other. No single firm could have the capacity to provide such a service, mostly
due to its own technological and financial constraints.
These joint ventures allow for rapid development of technology, and as the number
of firms engaged in the provision these services increase, there is substantial decrease
in costs associated with it. The availability of faster, cheaper, more powerful and
advancing technology has allowed firms in this sector to expand exponentially. The
development of network joint ventures allows for rapid sharing of data and has
bridged the divide and limitations between businesses. Other examples of network
joint ventures would be credit card, ATM and money gram industries. In the credit
card industry we see that a network exists between the card-issuing bank, the
consumer, the merchant bank and the shop owner. The credit card contract allows all
the stakeholders to coordinate their activities and form a safe and secure system of
business.
A network joint venture is similar to a traditional joint venture in many respects, yet
they have their own distinctive characteristics. These include the creation of
completely different forms of efficiencies, in addition to traditional efficiencies such
as economies of scale and economies of scope. The creation of network efficiencies is
perhaps the most important. Creating a service that no one else could provide leads to
development of the particular sector. This termed as positive externalities.
An example of the telecommunications industry shows us that as technology and
networks developed, almost every individual now has access to communications. This
technological innovation increased the units of telecommunication devices and
ultimately added value to network of consumers. Similar is the situation of the ATM
networks, as the expansion of ATM networks allows for inter-bank transactions,
leading to convenience of consumers as well as profits by the increase in transaction
fees. Creating a whole new source of revenue. This even hold true for the credit-card
26
industry, where the growth in the network allows more players to coordinate and
conduct their businesses with ease. Thereby creating a uniformity in the sector.4
Microsoft, AT&T, the Baby Bells, IBM and Apple are companies that build software
that allow televisions, computers, various mobile devices to interconnect by the use of
high speed electronic networks.5 Information superhighways make innovations such
as e-mail, net-banking and e-commerce possible.6
Production Joint Ventures
This form of a joint venture can be said to be a collaboration that is specifically
designed for the production of goods. Joint ventures in the field of research and
development or other activities, may also be involved in production.7
A production or a manufacturing joint venture are unique as they also enhance
distribution facilities. These joint ventures are crucial in aiding enterprises attain
access to new markets. They could be entered into for both short and long term
operations. Joint ventures tend to act as separate entities in the production sector.
While engaging in these production ventures the production unit is usually situated in
the targeted market. State regulatory approvals are mandatory before the commencing
the production.8
Manufacture joint ventures are game changing as co-venturers tend to complement
each other as they have different objectives. This leads to a form of efficiency as there
may be a creation of a separate entity that would have never otherwise come into
existence. Production joint ventures benefit co-venturers by providing manufacturing
units to the financing enterprise in a region where it may be cheaper to manufacture
goods and expand their markets. The co-venturers of the host country may benefit by
access to better technology, creation of jobs, diversification. In order to achieve this 4 William H. Pratt, James D. Sonda and Mark A. Racanelli, Refusals to Deal in the Context of Network
Joint Ventures, Vol. 52, (1997) 5 Bill Gates, They're Talking, We're Selling, WALL ST. J., (1995)
6 Ilene Knable Gotts & Alan D. Rutenberg, Detours on the Information Superhighway: Legal and
Regulatory Issues to be Addressed, Paper presented to the 43d Annual Spring Meeting of the American
Bar Association Antitrust Section 1-2 (Apr. 6, 1995) 7 CHRISTOPHER BELLAMY & GRAHAM D. CHILD, COMMON MARKET LAW OF COMPETITION,
(1987) 8 http://www.wisegeek.com/what-is-a-manufacturing-joint-venture.htm#didyouknowout
27
the host country may even give tax breaks to the foreign partners, as seen in the
Middle East.
These may also be referred to as ‘Production Collaborations’. Agreements in these
ventures encompass products sold to others or used by the participants as an input.
The pro-competitive effects of these, include combining various technologies that
complement each other, leading to more efficiencies, by sharing know-how and other
valuable assets. Agreements may also focus on quantity of production, use of assets,
prices of marketing of the manufactured goods by the venture and other variables,
such as quality, service, or promotional strategies. These can cause severe adverse
effects on competition.
The agreements tend to increase market power by controlling the independent
decision making of the participants which in turn could reduce individual participant
control over assets necessary to compete and thereby reduce their ability to compete
independently, combine financial interests in ways that undermine incentives to
compete.
Marketing and Distribution Joint Ventures
These forms of joint ventures involve agreements to collectively sell, distribute, or
promote goods or services. The goods or services may be produced individually or
jointly. The procompetitive aspect of such a venture is that, products reach the market
without delays, while saving costs. As these agreements concern prices, amount of
production and distribution networks, they have inherent tendencies to cause adverse
competitive effects. Such agreements tend to increase market power by limiting
independent decision making. This would reduce the competing power of the co-
venturers. For example, joint promotion might reduce or eliminate comparative
advertising, thus harming competition by restricting information to consumers on
price and other competitively significant variables.
Purchasing Joint Ventures
These forms of joint ventures contain agreements purchase necessary inputs. These
are considered to be primarily procompetitive as they do not cause any serious harm
28
to competition. They enable co-venturers to centralize ordering, to combine
warehousing or distribution functions more efficiently and to achieve other
efficiencies. Such arrangements create monopsony power9 or facilitate it by driving
prices which in turn would depress output below the levels existing before the
venture. Purchasing joint ventures would also give way to collusion by standardizing
participants’ costs or by enhancing the ability to project or monitor a participant’s
output level through knowledge of its input purchases.
Research and Development Joint Ventures
These arrangements are for joint research and development projects. As they are
procompetitive, the rule of reason approach is the preferred method to analyse them.
By combining complementary assets, technology, know-how, co-venturers can
efficiently engage in research and develop new or improved goods, services and
production processes. The agreements have the tendency to curb independent
decision making and control assets required for individual competitive research and
development efforts. These arrangements give way to tacit collusion. Consumer harm
can occur if innovation is reduced to a level below than what existed before the
operations of the venture. Consumer have less available options, inferior quality of
products become a concern and there may be delays in the availability of the product.
A decline in the number of competitors also adds to consumer harm, by higher prices
or reduced output, quality and services, this is due to an increase in market power as
there would be less players. These arrangements may hamper innovation by reducing
the incentive to pursue research and development, due to long gestation periods. In
addition, anticompetitive harm generally is more likely when the competition is
confined to firms with specialized characteristics or assets, such as intellectual
property, or when a regulatory approval process limits the ability of late-comers to
catch up with competitors already engaged in the research and development.
9 A monopsony occurs when a firm has market power in employing factors of production. A
monopsony means there is one buyer and many sellers. This is a similar concept to monopoly where
there is one seller and many buyers. http://www.economicshelp.org/labour-markets/monopsony/
29
Joint ventures classified on the basis of their constitution
a) Incorporated Joint Ventures
An incorporated joint venture, also known as an ‘equity joint venture’ comes into
existence when each co-venturer finances a common business, which is operated as an
independent enterprise, which can be said to have an independent management. The
control by the management may vary from venture to venture. The co-venturers agree
to share the incurred profits and the losses. This may be done by direct or indirect
methods.10
These types of ventures are mostly visible in businesses that have a
perpetual character, like supply of raw materials, manufacture of goods and sharing of
technology. A new enterprise could be created or an old one could have been re-
organised.
b) Un-incorporated Joint Ventures
Un-incorporated joint ventures also referred to as ‘Non-Equity Alliances’ or
‘Contractual joint ventures’ are contractual in nature wherein, co-venturers enter into
legally binding agreements. These are not incorporated. The nature of the created
entity is not independent. It does not provide for direct profit or equity sharing. These
joint ventures are initiated when co-venturers seek to have an association for a
particular duration or for a one-time project. The joint venture agreement clearly
states all the rights and liabilities of the participants.
Collaboration Agreement
It can be said to be a sub-genre of a contractual joint venture, wherein the co-
venturers only seek to collaborate with each other and do not intend to partner up or
be shareholders in the venture.
As an example, a producer of a new product may lack the ability to manufacture the
same, would approach a firm that specializes in manufacturing to carry forward the
process. There would be no requirement for the two firms to form a separate company
to carry on their business, and an agreement by which the manufacturing company
10
IAN HEWITT, JOINT VENTURES, (Sweet & Maxwell, London, 4th ed., 2008).
30
agrees to manufacture the product for the producer can suffice. The manufacturing of
the product would be exclusively for the co-venturer.11
Consortium Agreement
As another sub-genre of the contractual joint venture it is entered into for projects of
shorter terms. Two or more co-venturers could collaborate in this manner in order to
jointly work on a project delegated by a third part. The massive infrastructure projects
sector often sees the existence of such ventures.
Joint Ventures Classified on the Basis of Strategy
These forms of joint ventures may be incorporated or unincorporated. This may differ
in each cases, as there may be different requirements. Strategic joint ventures allow
co-venturers to combine resources for specific projects, leading to efficiencies without
the loss of an independent market presence. These joint ventures are notorious as they
are an incentive to enter into anticompetitive conduct.
FORMS OF JOINT VENTURE12
Jointly Controlled Entities
“A jointly controlled entity is a corporation, partnership, or other entity in which two
or more venturers have an interest, under a contractual arrangement that establishes
joint control over the entity. [IAS 31.24]
Each venturer usually contributes cash or other resources to the jointly controlled
entity. Those contributions are included in the accounting records of the venturer and
recognised in the venturer's financial statements as an investment in the jointly
controlled entity. [IAS 31.29]”
Jointly Controlled Assets
11
SIMMONS & SIMMONS, JOINT VENTURES & SHAREHOLDERS AGREEMENTS (Bloomsbury
Professional, UK, 3rd ed., 2009). 12
http://www.iasplus.com/en/standards/ias/ias31
31
“Jointly controlled assets involve the joint control, and often the joint ownership, of
assets dedicated to the joint venture. Each venturer may take a share of the output
from the assets and each bears a share of the expenses incurred. [IAS 31.18]”
Jointly Controlled Operations
“Jointly controlled operations involve the use of assets and other resources of the
venturers rather than the establishment of a separate entity. Each venturer uses its
own assets, incurs its own expenses and liabilities, and raises its own finance. [IAS
31.13]”
Green field joint ventures13
Occurs when a parent company establishes a new venture, in a foreign country, with
the construction of new facilities, such as infrastructure. It may be more efficient to a
build new facility as it would be more compatible to meet the required standards and
needs of the new venture. Running in already established infrastructure, may have its
own drawbacks. New infrastructure, would be economically a better option as there
would be less repair and maintenance. It would also help in maintaining a company’s
image, while dealing with potential clients and employees.
Brown field joint ventures
Brown-field joint ventures occur when public or private enterprise purchases existing
infrastructure to commence production projects. This means that there are lower
starting costs, no delays in starting operations etc., due to the available infrastructure.
An enterprise can benefit immensely if the facility in use was used for similar
projects, regulatory hurdles may also be easy to avoid. These may have drawbacks,
such as not meeting infrastructure and technical requirements. Further, changes to
infrastructure may not be easy to accomplish, which can be a serious concern for the
foreign companies, who are on the lookout for serious investments.
CONCLUSION
13
http://www.investopedia.com/ask/answers/043015/what-difference-between-green-field-and-brown-
field-investment.asp
32
There can be varied conclusions that can be deduced from this chapter. There are
numerous reasons for different businesses coming in together to form joint ventures,
the most common reason being collaborating on a special project or a business
venture. The businesses coming together for joint ventures may be the ones operating
in different areas bringing in their expertise for a particular project or similar
businesses joining forces for a particular project.
The incidence of joint ventures is increasing especially in sectors where innovation
costs and, or competition are increasing. They can vary from industry to industry viz.
production, information technology, research and development as well as marketing
and distribution etc. Joint ventures render a broader view in terms of their benefits in
terms of costs where costs pertain to anticompetitive effects and benefits mean pro-
competitive efficiencies. Many joint ventures assert a competition evaluation based on
a measured estimation and consideration of pro- and anti-competitive outcomes.
Some joint ventures have few, anti-competitive effects, while at the same time
offering some real efficiency benefits.
However, the types of joint ventures defined in the chapter are not enough and cannot
be banded under one or other sub-heads as the markets, economies and business
environments are becoming more and more dynamic owing to complex business
networks these days. There can be many more joint ventures depending on nature and
type of agreements etched out between the co-venturers. Each and every venture can
have a different impact on competition in various markets. It may have adverse effects
or vice versa. Hence, binding them in typical forms may not hold veritable for the
enterprising business domains of today’s dynamic world.
33
CHAPTER 3
JOINT VENTURES AND ANTI-COMPETITIVE
AGREEMENTS
34
INTRODUCTION
If a joint venture does not meet the criteria to be treated as a combination, then it
automatically considered to be an agreement under Section 3 of the Competition Act,
2002. Agreements may be wide in scope and terms such as arrangements,
understanding and action in concert are generally accepted to be synonymous of each
other. To check if the said agreements cause an appreciable effect on competition in
India both the “Per se” and the “Rule of Reason” approaches are used by the
Competition Commission of India. The former is generally considered while looking
into conducts that include, price-fixing, sharing and allocation of markets; fixing of
quotas, setting limits on the production and supply of goods. Conducts such as bid
rigging and collusive bidding are also analysed by way of the “Per se” approach. This
is where the concept of efficiencies comes into play. Agreements that promote certain
efficiencies may get an exception from penalties, unless the Commission thinks
otherwise. The “Rule of reason” approach is relied upon when enterprises engage in
conducts such as the creation of entry barriers, intentionally driving existing
competitors out of the market and foreclosure of competition. The Commission may
analyse them on the basis of efficiencies such as benefits to the consumers,
improvements in production or distribution of goods and services, promotion of
technical, scientific and economic development.
The US Federal Trade Commission (FTC) and the Department of Justice (DOJ), have
defined ‘joint ventures’, although the term ‘competitor collaboration’ has been used
instead. The US Collaboration Guidelines available on the FTC’s official website
define joint ventures as;
A “competitor collaboration” comprises a set of one or more agreements, other than
merger agreements, between or among competitors to engage in economic activity,
and the economic activity resulting therefrom. “Competitors” encompasses both
actual and potential competitors. Competitor collaborations involve one or more
business activities, such as research and development (“R&D”), production,
marketing, distribution, sales or purchasing.
35
In Australia the term Joint Venture has been discussed by one of the High Courts in
United Dominions Corp Ltd v Brian Pty Ltd (1985) 157 CLR 1 as;
“The term "joint venture" is not a technical one with a settled common law meaning.
As a matter of ordinary language, it connotes an association of persons for the
purposes of a particular trading, commercial, mining or other financial undertaking
or endeavour with a view to mutual profit, with each participant usually (but not
necessarily) contributing money, property or skill.”
In India, the Competition Act, 2002 uses the term joint venture while providing a
defence for cartels. The joint venture defence to a cartel agreement is specified under
Section 3(3) proviso, Competition Act, 2002. A joint venture which is essentially a
horizontal agreement, becomes threatening when it also falls into cartel conduct.
Therefore, it becomes necessary for firms contemplating joint venture to get informed
legal advice so as to avoid any anti-competitive conduct.
Competition law is dynamic in its nature, every case cannot be defined by a fixed
formula, and moreover, it becomes difficult to distinguish between parallel behaviour
and concerted action. A joint venture is an economic and efficient way of conducting
business, but such activity should not be undertaken to start an “illegal practice of
price cartelization”. A formal cooperation to work as an entity should not be a garb to
carry out informal cooperation.
Market structure is a very crucial factor for conducting business. It is reasonably
believed that oligopolistic markets are most fertile for forming cartels, due to the
number of players being limited. This could also hold true for forming a joint venture,
i.e. if the market is stable and only a few players are operating, some would like to
form an alliance for a project and develop together. The Competition Act, 2002 aims
at promoting such ventures which want to grow and become efficient, and pass on the
benefits to the consumers.
A joint venture is basically an effort to research and develop, pool in resources to find
a permutation and combination that helps to realize greater profits, and innovate. So
36
while in consideration of creating a joint venture, it is a better to review the following
things-
1. It should not be about setting prices of goods and service
2. Decide how sales will be made
3. Decide the production quantity
4. To absolutely not allocate or assign customers, markets or territories
5. To not engage in any form of bid rigging
6. To intentionally not compete, or refuse to do business with either a supplier or
a customer.1
Joint ventures promote research and development and are often utilized to cash on the
distribution and marketing strategies of the other player, which is very well deemed to
be pro-competition, because this means better availability and accessibility to
products. It also helps in lowering administrative and logistical costs, leading to better
goods and services reaching the customer.
LEGISLATIVE FRAMEWORK
Competition Law is aimed at smooth flowing of transactions of business houses; it is
not a forum for consumer redressal. It is aimed at facilitating and forwarding progress,
innovation and development.
Section 3(3) of the Competition Act, 20022 talks about horizontal agreements which
are anticompetitive in nature, but in its proviso it exclude joint ventures,
1 Donald P. Gallo & Reinhart Boerner Van Deuren, Collaborations With Competitors And Antitrust
Compliance, (2012), http://www.pmahome.org/files/9513/6129/0568/Q4_Antitrust.pdf 2 Section 3(3) Competition Act, 2002 (Act 12 of 2003) - (3) Any agreement entered into between
enterprises or associations of enterprises or persons or associations of persons or between any person
and enterprise or practice carried on, or decision taken by, any association of enterprises or association
of persons, including cartels, engaged in identical or similar trade of goods or provision of services,
which—
(a) directly or indirectly determines purchase or sale prices;
(b) limits or controls production, supply, markets, technical development, investment or provision of
services;
(c) shares the market or source of production or provision of services by way of allocation of
geographical area of market, or type of goods or services, or number of customers in the market or any
other similar way;
(d) directly or indirectly results in bid rigging or collusive bidding, shall be presumed to have an
appreciable adverse effect on competition: Provided that nothing contained in this sub-section shall
apply to any agreement entered into by way of joint ventures if such agreement increases efficiency in
37
“Provided that nothing contained in this sub-section shall apply to any agreement
entered into by way of joint ventures if such agreement increases efficiency in
production, supply, distribution, storage, acquisition or control of goods or provision
of services.”
It is very clear and evident that any horizontal agreement causing appreciable adverse
effect on competition is presumed to be void and will consequently entail liability
under the Act. The abovementioned proviso provides for a “limited exemption” to
Joint ventures creating efficiency gains.
The facts of each case are of great significance to adjudge whether there is a joint
venture and if the same actually promotes efficiency and does not cause any unwanted
cartel conduct. This is so-called situation should be able to justify the application of
the Section 3(3) proviso. This proviso is not a blanket exemption clause under the
Competition Act, 2002, first such arrangement will be seen as a horizontal agreement,
and then its effects will be scrutinized to see the "efficiency criteria"3. It was also
discussed in Yogesh Ganeshlaji’s case as to how joint venture to form an enterprise to
aggregate channels and services with 50:50 shareholding was to increase efficiency
on all fronts ultimately resulting a better product to the consumer, and also to promote
digitization and bring down piracy.4
It is already seen as to how cartel requires a strict burden of proof, and carry a “shall
presume” presumption, leaving little discretion with the court. Moreover, to claim a
joint venture exemption will also be a difficult task because the challenge is to rebut
that evidence of cartelization. For instance, in a case before CCI the issue was to
judge whether a code-sharing arrangement was lawful and whether or not will be
considered a cartel. Here, CCI laid down the guidelines as to what all will be required
production, supply, distribution, storage, acquisition or control of goods or provision of services.
Explanation.—For the purposes of this sub-section, "bid rigging" means any agreement, between
enterprises or persons referred to in sub-section (3) engaged in identical or similar production or
trading of goods or provision of services, which has the effect of eliminating or reducing competition
for bids or adversely affecting or manipulating the process for bidding.
3 Yogesh Ganeshlaji Somani v. Zee Turner Ltd, CCI, case no. 31/2011.
4 Ibid. , CCI, case no. 31/2011
38
to meet the burden of proof, CCI held that it is on the party claiming the exemption to
prove that the arrangement/agreement was to,
1. To form a joint venture
2. This joint venture was helping gain more efficiency while providing goods
and services to the consumers
3. The pro-competitive effects definitely outweigh the anti-competitive effects5
The scope of this exemption is a little vague and ambiguous, however the scope was
defined by CCI and laid down that this exemption specifically targets efficiency-
generating agreements/ business arrangements and they will be excluded from causing
AAEC under section 3(3) only, provided the said enterprise meet the abovementioned
essentials to fulfil the onus of the exemption. It will not to be in any treated as a
“blanket exemption’ from section 3.6
It becomes sort of a requirement here that for this particular exemption, what is on
paper may not be that relevant, but the conduct of parties, facts and circumstances are
more important. It could very well be a cartel or any horizontal agreement trying to
defraud the authorities and the consumers. If the competition authority clearly sees an
anti-competitive effect generating out of such agreement then, the said entities have to
clearly show and prove the gains and pro-competitive effects and their value
surpassed and countervailed any negative effects.
CARTEL INVESTIGATION AND JOINT VENTURE EXEMPTION
This exemption was used as submission in the cement cartel case7 and in Uniglobe
case8, but it was not considered to be a legible defence by the CCI. A certain
combination of economic activities may result in gaining more efficiency than the
previous set of activities, which is why the essence of every business is to constantly
5 M.P. Mehrotra V. Jet Airways (India) Ltd. & Ors., CCI, Case no. 04 of 2009.
6 FICCI Multiplex Association of India, New Delhi v. United Producers/Distributors Forum, Mumbai,
CCI, case no. 01 of 2009. 7 Supra, note 4
8 Uniglobe Mod Travels Pvt. Ltd. v. Travel Agents Association of India & Ors, CCI, case no. 03 of
2009.
39
innovate. Firms keep trying to become more effective and efficient to gain more profit
with a limited set of resources.
Basically, it is up to the firm whether it wants to bring down cost on the same
product by improving into technology/distribution, or it may start into a new arena of
manufacturing/selling a different set of products and services. It is more of an
economies of scale or economies of scope preferred kind of approach. Or the firm
instead of cutting costs may like to indulge into quality-improving techniques, as it
always does not help to bring down the price, consumers are often looking for better
quality and variety of the existing product.
These efficiencies being enjoyed by the firms should not be limited to earning profits
only, then it becomes anti-competitive. It should be passed onto the consumers in
form of benefits like reduced prices, discount or even better products or better
availability etc. This implies that from the customer’s point of view there is no direct
or indirect negative effect on them with regards to goods and services.
The decisive reason here should be that in the relevant market consumers are better
off because of such agreement and there is no particular harm to a single individual
who is a customer in the said relevant market. Since we already know that, in
oligopolistic markets, players have more ability to influence factors such as price,
supply etc. than in a perfectly competitive market.
The passing of such efficiencies on to the consumers, can be decided by looking at
market structure, the quantum of efficiency gains and elasticity of demand. It is a very
important element of consumer welfare that the consumer has a continuous access to
improved goods and services.
EFFICIENCIES
A study of efficiencies including joint venture efficiencies, shows us that the
European Union tends to apply an approach wherein it analyses the effects an
agreement, conduct or combination would have on competition and consumer welfare
in a given market. It is important to check the possible anti-competitive effects on
40
prices, quantity, quality, product variety and innovation. The pro-competitive effects
such as ‘efficiencies’ play a great role in antitrust as well as merger cases.
Article 101 of the Treaty on the Functioning of the European Union (TEFU) is
designed to look into the abovementioned activities that have anti-competitive effects
and objects. According to it any improvement in production, distribution or
betterment in technology or the economy is said to fall under the category of
efficiencies. It has to be understood that these efficiencies must be of a considerable
value, as the agreements which are in question would have serious anti-competitive
effects. To reiterate we see that the efficiencies are the factors which may allow even
anti-competitive conduct for the overall good of the community. The EC has set many
guidelines to assist the commission to treat the efficiencies in the most effective
manner.
In case of mergers, the parties to the combination may consider “efficiency as a
defence” that would counteract the negative anti-competitive aspects of the said
merger by being pro-competitive in nature.
Under EU competition law there may be of various forms of efficiencies. These may
include "static and dynamic" efficiencies, "allocative, productive and dynamic
efficiencies" or "cost and qualitative" efficiencies. Joint production agreements may
bring about cost savings, increase technology, production and variety. Similarly a
research and development agreement may allow the development of technology and
innovation. In regard to anti-competitive combinations we notice that consumer
benefit plays a big role as an efficiency of lower prices and more options to choose
from truly is a pro-competitive aspect. The analysis of efficiencies have to be
considered individually for each case. As the burden of proof lies on the parties it is
important for them to bring forward convincing evidence in their support.
While talking about cartels we must see that that the joint venture defence is
applicable in certain cases. Yet In India this concept is yet to be practically and
successfully applied. In India cartels can in certain cases be exempted from the
purview of competition law only if such joint ventures bring about efficiencies in
41
production, supply, distribution, storage, acquisition or control of goods or provision
of services.
We notice that the ‘efficiencies’ considered in competition law revolve around the
same aspect no matter if the discussion is about agreements, abuse of dominance or
combinations. It is important to understand the ratio of the available precedents and to
apply the same on a case to case basis.9 In the case of Hoffmann‐La Roche
10 there
were efficiencies such as transaction‐specific genuine cost‐savings. Portugal v
Commission11
showed that large producers enjoy lower average unit prices.
Similarly consumer interest was considered to be a factor in Telia Sonera12
. The case
of British Airways vs. Commission13
also focuses on consumer benefit. In Metro vs.
Commission14
, the provision of employment was considered as a benefit as it would
improve production. This is considered to be a broader approach to analyse
efficiencies. In Ford/Volkswagen15
the commission noted a few exceptional
circumstances. Firstly it would be a joint venture to produce a ‘multi-purpose
vehicle’. This would directly increase the number of jobs, there would be a substantial
increase in foreign investment leading to harmonious development among EU states
and contribute in reducing regional disparities and act in the furtherance of EU market
integration. In UEFA Champions League16
it was seen that the sale of media rights
to UEFA would increase financial solidarity would ultimately support the
development of EU football. In Laurent Piau vs. Commision17
it was observed that a
mandatory licensing system of footballers’ agents would contribute to economic
progress by raising professional and ethical standards. In Stiching Baksteen18
the
restructuring of Dutch brick industry would tend to promote technical and economic
progress. In CECED19
– Agreements between manufacturers of domestic appliances
were allowed as they would lead to energy efficiencies and benefit consumers with
lower energy bills, another interesting efficiency would be collective environmental
9 RICHARD WHISH, DAVID BAILEY, COMPETITION LAW (2015).
10 Case no. 85/76.
11 Case no. C-88/03
12 Case no. C-52/09
13 Case no. C-95/04 P
14 Case no. 26/76 1977 ECR 1875
15 Oj 1993 L 20/14
16 Oj 2003 L 291/25
17 Case T-193/02 2005 ECR II-209
18 OJ 1994 L 131/15
19 OJ 2000 L 187/47
42
benefits. Metropole television vs. Commission20
and GlaxoSmithKline Services
Unlimited vs. Commission21
exceptions were in the nature of public interest. The
OTOC Case22
observed that efficiencies must be specific to an agreement. In the said
case the compulsory training for charted accountants was not considered essential for
guaranteeing the quality of accountancy services. The Star Alliance and MasterCard
cases showed that consumers need not gain from each and every efficiency achieved
provided they receive a fair share of overall benefits. Consumers must be
compensated through increased quality or other benefits.
As the joint venture defence is an important instrument for cartel defence it is
important to understand the efficiencies created by a joint venture. Even though the
examples provided do not pertain to cartel cases. We must solely observe the ratio put
forward by the commission. Other forms of efficiencies observed in joint venture
mergers include, customer benefit through efficiencies like rivalry enhancing23
,
operational efficiencies24
, development of new technology25
. In a decision on
vaccines, Pasteur Mérieux-Merck26
, the Commission authorised a research and
development joint venture that would increase the availability of new vaccines
throughout Europe. These case examples shine a light on the concept of efficiency
and how these benefits ought to be considered in cases of anti-competitive conduct.
Joint ventures are often the tool necessary for firms to innovate, as it helps in
increasing the pool resources at disposal. However, with regards to Competition law,
it is very important to know that such efficiency is very difficult to claim.
Provisions for efficiency-increasing joint ventures are similar in almost every
jurisdiction, be it India, USA, EU or even Australia. The intent and conditions behind
this exemption are also uniform in nature for analysis as anti-competitive agreements
or as combinations.
While considering the joint venture defence as a means to exempt a cartel from the
scope of competition law, the Competition Commission of India may choose to adopt
20
Cases T-528/93 21
Case T-168/01 22
Case C-1/12 23
Tradebe environmental services ltd/ Sita UK Ltd, (2013) ME/6132/13 24
Taxibot joint venture by EADS and Israel Aerospace Industries, Case No COMP/M.6490. 25
Joint venture between Amcor and Sidel, 2015/C 290/07 26
94/770/EC.
43
a broad method wherein, it can derive the concepts of efficiencies from various policy
areas. This is because of the fact that an efficiency in competition law is more or less
the same in agreements, abuse of dominance and combinations.
The investigations for cartel cases initiate when there is are prima facie facts that
point towards cartelization. Upon the submission of DG’s report the commission
summons the opposite party for necessary action. Therefore, this exemption even
though present in statute books, is very difficult to prove. Research on the issue has
consistently shown the same to be true, and that the criteria and application although
expanded and defined by case laws, the exemption is yet to be granted in India.
AMERICAN PERSPECTIVE
In order to understand the antitrust analysis of joint ventures as agreements one must,
look at the ‘Antitrust Guidelines for Collaborations among Competitors’, issued by
the Federal Trade Commission and the U.S. Department of Justice. A study of this
document would aid us in understanding the evaluation of joint ventures. The
preamble of the document, clearly shows that it has been designed to bring forth an
awareness to the business community, who actively engage in collaborations, but lack
an understanding of the methods adopted by the US anti-trust authorities while
analysing their collaborations. The analysis of agreements between competitors are
done by keeping in view the actual as well as the likely competitive effects. The term
“anticompetitive harm” refers to the adverse competitive consequences of agreements
without the consideration of any pro-competitive effects. The term “procompetitive
benefit” refers to favourable competitive effects, without considering any
anticompetitive effects caused by the agreement. The term “overall competitive
effect” or “competitive effect” are used in the guidelines while discussing the unified
anticompetitive harm and procompetitive benefit caused by the agreements. As
mentioned above the two approaches i.e. the Rule of Reason and the Per se are
followed by antitrust authorities in the US while analysing the agreements. In many
cases agreements or competitor collaborations such as joint ventures may be highly
anticompetitive and may not even generate any pro-competitive effects. The time and
resources of the antitrust agencies being very valuable, are not invested to investigate
44
these agreements (Continental TV, Inc. v. GTE Sylvania Inc., 433 U.S. 36, 50 n.16
(1977)). While dealing with these cases, antitrust agencies prefer to adopt the Per se
approach and render these agreements as unlawful. The application of the approach
was seen in the case of FTC v. Superior Court Trial Lawyers Ass’n, 493 U.S. 411,
432-36 (1990). Agreements that are not viewed as Per se illegal are investigated by
way of the Rule of Reason Approach, where the authorities conduct a detailed
analysis of the agreement keeping in view the facts of each case and the overall
competitive effects of the joint venture. In cases such as, California Dental Ass’n v.
FTC, 119 S. Ct. 1604, 1617-18 (1999); FTC v. Indiana Fed’n of Dentists, 476 U.S.
447, 459-61 (1986); National Collegiate Athletic Ass’n v. Board of Regents of the
Univ. of Okla., 468 U.S. 85, 104-13 (1984) the US Supreme Court explains, that the
Rule of Reason analysis to be flexible in nature, and the inquiry that unfolds from it
must focus on the scope and nature of the agreement and the unique circumstances
prevailing in the market.
In the US, agreements that inherently have the tendency to raise prices and/or reduce
the production of goods, fix prices, rig bids, or share or divide markets by allocating
customers, suppliers, territories, or lines of commerce are considered to be Per se
illegal.27
As mentioned above the courts would presume agreements involving the
abovementioned conduct as illegal and would not proceed to inquire about the
claimed business purposes, anticompetitive harms, procompetitive benefits and
overall competitive effects brought upon by the agreements. We must also keep in
mind that the US imposes a criminal liability upon hard-core cartels, which engage in
these practices. This method of prosecution may be highly efficient in deterring anti-
competitive behaviour.
On the other hand the Rule of Reason approach as seen in the United States, analyses
the overall complete effects of the agreement. Agreements analysed under this
approach may at first glance be considered Per se illegal, but the tests of reasonability,
must show that the effects are reasonable and necessary to achieve procompetitive
27
Palmer v. BRG of Georgia, Inc., 498 U.S. 46 (U.S. Supreme Court, 1990) (market allocation);
United States v. Trenton Potteries Co., 273 U.S. 392 (U.S. Supreme Court, 1927) (price fixing)
45
benefits.28
An example (Agreement Not to Compete on Price) in this context can be
seen in the US Antitrust Guidelines for Collaborations among Competitors. The
example shows that a joint venture where there is discussion on fixing prices may be
considered anti-competitive, yet the agencies must look into the efficiencies that are
attained from the venture. The conduct must be reasonably necessary to achieve
procompetitive benefits.
The potential of enhancing efficiencies that strengthen the economy must be viewed
with utmost care. If these are missed, we can say that the law has not been able to
fulfil its true duty. This approach considers the difference on the effect the
competition on the market, with and without the agreement in question. The agencies
look into the harms if any, on the competition in the relevant market by any increase
of the capability or incentive to incur profits by the reduction of prices or by reducing
the production, quality, service, or innovation below the level that would have been in
the absence of the agreement in question.
As mentioned earlier, this approach is flexible in nature, and the investigation of the
agencies vary according to each case keeping in view the scope of the agreement as
well as the condition of the market. The initial analysis by the agencies commence
with the examination of the agreement. This is achieved by accessing the true purpose
of the business venture. The co-venturers are required to furnish information to the
agencies which highlight their true intent. The agencies the look into the
anticompetitive harm caused by the agreement. This is done irrespective of the fact
that the agreement is in operation. The agencies do not challenge agreements when
the combined analysis of its nature and the absence of market power construe an
absence of adverse anticompetitive effects. On the other hand the agencies might
challenge agreements without a detailed market analysis, where the adverse
anticompetitive effects are likely to occur or may have occurred by the operation of
the said agreement. This shows that in some cases the absence of efficiencies can shift
the agencies’ focus to the anticompetitive aspects of an agreement. The agreement
may be scrutinized more deeply if the preliminary analysis shows signs of adverse
anticompetitive effects, provided the agreement is an absence of detailed market
28
Arizona v. Maricopa County Medical Soc’y, 457 U.S. 332, 339 (U.S. Supreme Court, 1982) (finding
no integration).
46
analysis. The US FTC and DOJ would proceed by defining the relevant market,
calculate the market shares and the market concentration to analyse whether the said
agreement would create or increase market power or facilitate its operation. The two
agencies would look into the ability and incentives of the co-venturers as well as the
venture itself, to operate independently, while competing efficiently. The agencies
would also take into consideration the market circumstances such as entry and exit
barriers that may aid or curb anticompetitive conduct in the future. In case the
authorities find the lack of anticompetitive effects from the aforementioned factors,
the investigations would be terminated, without the analysis of procompetitive effects.
If this is not the case, then the authorities would run a reasonability test on agreement
and access if the operation of the agreement would be required to achieve any relevant
pro-competitive benefits.
While distinguishing joint ventures which are in the form of competitor
collaborations, from combinations such as mergers, we see that the competitive
effects between the two tend to differ, the reasons behind this are, that the merger of
two or more enterprises brings the competition between the players in the relevant
market/ markets to an end. On the other hand, most forms of collaborations such as
joint ventures tend to preserve competitiveness between the co-venturers. Joint
ventures may not cause anticompetitive concerns such as, the co-venturers colluding
to form entry barriers for other entrants in the market.
To reiterate, we see that combinations are permanent in nature, whereas a joint
venture have a predetermined period of operation. At the end of the joint ventures the
parties go their separate ways. The co-venturers in a joint venture may still coexist as
competitors, while the venture is operating. Yet they may keep their competitiveness
aside while engaging into joint research and development projects. This is where we
see the need to have processes designed to tackle the antitrust conduct of joint
ventures, which requires a different approach than one for combinations.
Even after acknowledging the differences between joint ventures and combinations,
we see that in certain cases the effect on competition may be identical by both the
forms of entities. The US FTC and DOJ treat joint ventures as horizontal merger in a
relevant market and analyse the venture in accordance to the Horizontal Merger
Guidelines, provided that;
47
The participants are competitors in that relevant market;
The formation of the collaboration involves an efficiency-enhancing integration of
economic activity in the relevant market;
The integration eliminates all competition among the participants in the relevant
market; and
The collaboration does not terminate within a sufficiently limited period29
by its own
specific and express terms.30
The effects of the joint venture on the competition in other markets are analysed under
the guidelines or other applicable precedents. This has been illustrated in the example
provided in the US guidelines; it shows that if a joint venture may enhancing
efficiencies by integrating the manufacture as well as the marketing of the product, it
may reduce competition reducing effects. The agency must analyse the venture in
accordance to the Horizontal Merger Guidelines and treat it like a merger.
Further the principles to evaluate competitor agreements, lead to show the importance
of ‘Potential pro-competitive Benefits’. The US FTC and DOJ appreciate the fact that
consumers benefit from joint ventures in many ways. A joint venture may allow co-
venturers to provide goods and services at a cheaper prices. There can be value
addition with the development of technology and networks. All these benefits can be
achieved within a short period by way of competitor joint ventures. It can be said that
without entering into competitor agreements it would be a mammoth task for an
enterprise to provide services of the same value. A joint venture would, allow co-
venturers to use their existing assets to their optimum potential, act as incentives to
invest in enhancing outputs etc. A wide array of contractual arrangements such as
joint ventures, trade or professional associations, licensing arrangements, or strategic
alliances can be utilized to attain efficiencies. Two examples addressed in the
guidelines are as follows;
29
In general, the US FTA and DOJ use ten years as a term indicating sufficient permanence to justify
treatment of a competitor collaboration as analogous to a merger. The length of this term may vary,
however, depending on industry-specific circumstances, such as technology life cycles.(as mentioned
in the guidelines) 30
This definition, however, does not determine obligations arising under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, 15 U.S.C. § 18a.
48
“For example, one participant may have special technical expertise that usefully
complements another participant’s manufacturing process, allowing the latter
participant to lower its production cost or improve the quality of its product. In other
instances, a collaboration may facilitate the attainment of scale or scope economies
beyond the reach of any single participant.
For example, two firms may be able to combine their research or marketing activities
to lower their cost of bringing their products to market, or reduce the time needed to
develop and begin commercial sales of new products. Consumers may benefit from
these collaborations as the participants are able to lower prices, improve quality, or
bring new products to market faster.”
A joint venture could consist of a wide set of agreements the US FTC and DOJ would
analyse the competitive effects of the individual agreements as well as the combined
set of agreements. More than two agreements are analysed together in case the
procompetitive effects or adverse anticompetitive effects interwoven. A separate
analysis would not lead to effective results in these circumstances. The US guidelines
provide for another example in this regard; by which it is seen that joint venture
agreements designed to assign markets and to fix maximum prices must be assessed
together and cannot be isolated as it would not show the true nature of the entity.
Due to many reasons such as, changes in inner restructuring, acceptance of fresh
arrangements as part of the venture, joining and departing of co-venturers, fresh
market circumstances or changes in market share, the competitive effects of a joint
venture agreement may change during the course of operation of the agreement.
Keeping this in mind the agencies analyse the competitive effects of the agreement at
the moment the adverse competitive effects may occur.
EU PERSPECTIVE
If a co-operative joint venture is not considered as a concentration (combination)
within the meaning of ECMR its competitive character would be analysed under
Article 101(1) of the TFEU, provided:
49
1. It is capable of having an appreciable effect on trade between member states; and
2. Its object or effect is of preventing, restricting or distorting competition within the
internal market.
Analysis under Article 101 reaches out to co-operative elements of joint ventures
considered to under the category of combinations provided, it is independent in nature
and the object or effect of the coordination is competitive in nature.31
In Areva/Urenco/ETC joint venture32
the concern of the European Commission was
that a joint venture could lead to a form of coordination between the co-venturers
(Areva and Urenco). This would lead to sharing of crucial information regarding
uranium enrichment. The covertures themselves committed to refrain from this
conduct. During the assessment of joint ventures under Article 101, the European
Commission analyses if two or more co-venturers significantly retain their activities
in the same as well as the vertical market as the venture. Allied markets are also
analysed as coordination, a side effect of joint ventures, increases the incentive to
eliminate competition in them.33
Hence, joint ventures in this criteria may undergo a
dual test, wherein the appreciable adverse effect of the creation of the joint venture
would be tested, followed by analysis of the co-ordination between the co-venturers.
The analysis would show is the co-ordination is violates Article 101(1) of the TFEU.
The conditions for analysing joint ventures as agreements under Article 101 (1) are
more stringent than the provisions existing under the ECMR, that look into the object
or effect that restrict competition, as against the analysis of the appreciable adverse
effect on competition.34
Most joint ventures are not within the purview of Article 101
as lack sufficient market impact and are small. Joint ventures where the co-venturers
are competitors and have less than 10% of a combined share in the relevant market
and where co-venturers who are not competitors, have a combined market share
below 15% are considered to not have any appreciable adverse effect on competition.
31
Article 2(4) of the ECMR (Council Regulation (EC) No 139/2004). 32
Case No COMP/M.3099. 33
Article 2(5) of ECMR (Council Regulation (EC) No 139/2004). 34
VALENTINE KORAH, AN INTRODUCTORY GUIDE TO EC COMPETITION LAW AND PRACTICE
(Hart Publishing, Portland, 9th ed., (2007).
50
Although, Article 101 (1) may be applicable in cases where agreements contain price-
fixing/ customer sharing or other hard-core restrictions.35
The ‘Horizontal Guidelines’ list the cases where the European Commission may
restrict competition in accordance to Article 101.36
It provides that when a horizontal
agreement lacks an object37
to restriction competition, the analysis of appreciable
restrictive effects38
on competition must be conducted. They also show the relevant
economic conditions for the analysis of the market position of the co-venturers, the
market structure and competitive effects while analysing whether a joint venture has
the potential to restrict competition.
In cases where co-operative joint ventures tend to restrict competition as understood
under Article 101 (1), the European Commission would validate them. The benefits
attained by cooperative agreements between competitors can in many cases allow the
European Commission to overlook their adverse restrictive effects on competition.
Joint ventures may be allowed if they fulfil the criteria of relevant “block exemptions”
or if it fulfils the conditions of Article 101(3). In case it does not, it will be considered
to be void. In order to apply Article 101(3), the joint venture entail the following:
Contribution of improving the production or distribution of goods or to promote
technical or economic progress (efficiency gains);
Consumers are allowed a fair share of the resulting benefit (fair shares for
consumers);
The parents or the JV are not subject to restrictions which are not indispensable for
the achievement of these objectives (indispensability of the restrictions); and
35
Commission Notice on agreements of minor importance which do not appreciably restrict
competition under Article 81(1) of the Treaty establishing the European Community (de minimis) OJ
(2001/C 368/07). 36
Guidelines on the applicability of Article 101 of the TFEU to horizontal co-operation agreements)
(OJ 2011C11/1). 37
Restrictions of competition by object are those that by their very nature have the potential to restrict
competition within the meaning of Article 101(1). 38
For an agreement to have restrictive effects on competition within the meaning of Article 101(1) it
must have, or be likely to have, an appreciable adverse impact on at least one of the parameters of
competition on the market, such as price, output, product quality, product variety or innovation.
Agreements can have such effects by appreciably reducing competition between the parties to the
agreement or between any one of them and third parties. This means that the agreement must reduce
the parties‟ decision-making independence, either due to obligations contained in the agreement which
regulate the market conduct of at least one of the parties or by influencing the market conduct of at
least one of the parties by causing a change in its incentives.
51
The co-operation in the JV does not afford the parties the possibility of eliminating
competition in respect of a substantial part of the products in question (no elimination
of competition).
In P&W/GE39
, the European Commission approved a joint venture known as Engine
Alliance, between Pratt & Whitney (P&W) and General Electric Aircraft Engines
(GE). The venture initiated to develop and sell new jet engines. P&W, GE and Rolls-
Royce were competitiors in the sector for manufacturing of big jet engines. It was
held that the Engine Alliance was under the purview of Article 81(1) as it reduced the
competition and limited consumer choice. It allowed P&W and GE to focus on their
individual technological expertise, and to create an engine that fulfilled stricter
performance targets than within a shorter time frame and at a lower cost, the joint
venture was eligible for an exemption under Article 81(3). This would not have been
possible without the formation of a joint venture. It is presumed fulfilment of the
abovementioned conditions enhance competition within the relevant market as it
allows co-venturers to offer goods of better quality at cheaper prices to consumers,
this neutralizes the adverse effects of the restrictions of competition.40
JOINT VENTURES AND ANTI-COMPETITIVE AGREEMENTS IN INDIA
Agreements that cause or are likely to cause an Appreciable Adverse Effect on
Competition (AAEC) in India are to be deemed anticompetitive.41
An enterprise42
or
an association of enterprises or a person or association of persons are prohibited from
entering into any agreement related to the production, supply, distribution, storage,
and acquisition or control of goods or services that cause or are likely to cause an
39
Case No IV.36.539. 40
Guidelines on the application of Article 81(3) of the Treaty (2004/C 101/08). 41
Section 3 of the Competition Act, 2002 (Act 12 of 2003). 42
As per Section 2 (h) of the Competition Act, 2002 (Act 12 of 2003).- "enterprise" means a person or
a department of the Government, who or which is, or has been, engaged in any activity, relating to the
production, storage, supply, distribution, acquisition or control of articles or goods, or the provision of
services, of any kind, or in investment, or in the business of acquiring, holding, underwriting or dealing
with shares, debentures or other securities of any other body corporate, either directly or through one or
more of its units or divisions or subsidiaries, whether such unit or division or subsidiary is located at
the same place where the enterprise is located or at a different place or at different places, but does not
include any activity of the Government relatable to the sovereign functions of the Government
including all activities carried on by the departments of the Central Government dealing with atomic
energy, currency, defence and space.
52
AAEC within the market in India.43
The Competition Commission of India (CCI)
declares these agreements as void.44
The important factors to be considered by the
CCI while determining whether an agreement has an AAEC in India as under Section
3 of the Competition Act, 2002 are:
i. creation of barriers to new entrants in the market;
ii. driving existing competitors out of the market;
iii. foreclosure of competition by hindering entry into the market;
iv. accrual of benefits to consumers;
v. improvements in production or distribution of goods or provision of services;
vi. promotion of technical, scientific and economic development by means of production
or distribution of goods or provision of services.45
The CCI must analyse the anti-competitive effect as well pro-competitive justification
of the agreement in question. Section 19(3) of the Act states that the CCI shall have
“due regard to all or any” of the aforementioned factors. The CCI held that it would
be would be wise to analyse an agreement in the framework of all the aspects
mentioned in Section 19(3). This was pointed out in Automobiles Dealers Association
v. Global Automobiles Limited &Anr.46
The Competition Act, 2002 (the Act) does not explicitly consider an agreement to be
horizontal or vertical in nature. Although, the wording in the statute, clearly signifies
that Section 3 (3) describe horizontal agreements while Section 3 (4) talks about
vertical agreements. According to the statute any agreement or a practice carried or
decision taken by enterprises or persons engaged in trade of identical or similar
products or provision of services are presumed to have AAEC in India, provided :-
Directly or indirectly fix purchase or sale prices;
Limit or control production, supply, markets, technical development, investments or
provision of services;
Result in sharing markets or sources of production or provision of services;
43
Section 3 (1) of the Competition Act, 2002 (Act 12 of 2003). 44
Section 3(2) of the Competition Act, 2002 (Act 12 of 2003). 45
Section 19 (3) of the Competition Act, 2002 (Act 12 of 2003). 46
Case No 33 of 2011.
53
Indulge in bid-rigging or collusive bidding.47
These provisions are applicable to cartels also. The burden of proof lies on the parties
entering to such agreements. The benefits and efficiencies achieved by these
agreements are generaly used as a defence. Although, cartels may face difficulties
while proving such efficiencies.48
The CCI in the case of FICCI – Multiplex
Association of India vs. United Producers/Distributors Forum & Others49
Noticed
that in context to the rule of presumption, it is the liability of the opposite party to
present a considerable piece of evidence in order to counter or refute the said
presumption. In Uni globe Mod Travels Pvt. Ltd. v. Travel Agents Association of
India &Ors.50
, CCI discerned that the parties to these kind of agreements can counter
such presumption (of considerable detrimental consequence on competition) by
evincing credible proof (corroboration) that their actions or activities are pro-
competitive or that as specified under Section 19(3) of the Act that there is no AAEC.
Horizontal agreements are generally considered to be more notorious, yet they cannot
be prohibited as the efficiencies achieved by way of collaboration are that are
adequate to balance out any adverse effects or restriction on competition. As
discussed earlier in the European context in case a co-operative joint venture curbs
competition as understood under Article 101 (1), the European Commission identifies
that there may be scope for the venture to be allowed under the scope of Article 101
(3). The Indian competition regime also uses a similar approach. Though Section 3(3)
of the Act disallows conducts such as price-fixing, market allocation etc. As
mentioned earlier in the chapter, certain joint ventures may have the benefit of
exemptions, if it is seen that the agreement would increase efficiencies in the sphere
of production, supply, distribution, storage, acquisition or control of goods or
provision of services. The rule of presumption is not applicable to these joint
ventures51
. They must be analysed by the rule of reason. Both the procompetitive as
well as the anticompetitive effects on competition caused by the agreements in
question would have to be considered and carefully analysed before the CCI comes to
47
Section 3(3) of the Competition Act, 2002 (Act 12 of 2003). 48
Rajat Sethi, Simran Dhir, Anti-Competitive Agreements under the Competition Act 2002, Volume 24
Issue 2, National Law School of India Review, 32 (2013). 49
Case No. 01/2009. 50
Case No. 03/2009. 51
D.P. MITTAL, COMPETITION LAW AND PRACTICE (Taxmann Publications, New Delhi, 3rd ed., 2011).
54
a suitable and just conclusion. Enterprises may enjoy certain benefits while entering
into joint ventures, it must be emphasized that true efficiencies occur when the end
consumers actually experience the true benefits by way of cheaper prices, more
options of substitutable goods in the market etc. The onus of proof of efficiencies lies
on the participants of the joint venture.52
In the case of Yogesh Ganeshlaji Somani vs.
Zee Turner Ltd. and Star Den Services Pvt. Ltd.53
, the CCI deduced that the situations
and the manner or type of market composition under which the joint venture came
into being, the productivity rationale vindicates it in the facets of the case.
In order to successfully utilize efficiencies as defence for joint ventures, the co-
venturers must present and support their operations in the market by addressing
aspects such as:
the precise nature of the claimed efficiencies,
the link between their transaction and the efficiency,
the realistic likelihood and magnitude of the claimed efficiency, and
how the efficiency will be generated. In such a submission, parties will need to
demonstrate to the CCI the details of the methodology in arriving at the claimed
efficiencies.54
Further, Section 3(4) of the Act provides that any agreement among enterprises or
persons at different stages or levels of the production chain in different markets, in
respect of production, supply, distribution, storage, sale or price of, or trade in goods
or provision of services shall be an agreement in contravention of Section 3(1) if such
agreements cause or are likely to cause an AAEC in India. Therefore, in India,
vertical joint venture agreements would be considered to be anti-competitive if they
cause or are likely to cause AAEC. The restraint on competition must be assessed
under the rule of reason.55
52
Amit Kapur, Manas Kumar Chaudhuri, Mansoor Ali Shoket, Competition Act (2009). http://www.jsalaw.com/admin/uplodedfiles/publicationfiles/competition-act-2002.pdf 53
Case No. 31/2011. 54
Ram Tamara, Vasanth Adithya, Rasika Raghavan, Arshad (Paku) Khan, Harman Singh Sandhu,
Usage of Efficiency Tests in assessing Competitive Effects of Joint Ventures - Case For India (2011). 55
T. RAMAPPA, COMPETITION LAW IN INDIA – POLICY, ISSUES AND DEVELOPMENTS 120
(Oxford University Press, New Delhi, 3rd
ed., 2013).
55
CONCLUSION
Joint ventures are often the necessary tools required for firms to innovate and
diversify, as it helps a great deal in increasing the pool resources at disposal.
However, with regards to Competition law, it is very important to know that such
efficiency is very difficult to claim.
Similarly, the provision for efficiency-increasing joint ventures is provided in almost
every jurisdiction, be it India, USA, EU or even Australia. The intent and condition
behind this exemption is also uniform in nature for agreement, dominance or
combinations.
While considering the joint venture defence as a means to exempt a cartel from the
scope of competition law, the Competition Commission of India may choose to adopt
a broad method wherein, it can derive the concepts of efficiencies from various policy
areas. This is because of the fact that the efficiency in competition law is more or less
the same in agreements, abuse of dominance and combinations.
As the investigation for a cartel case is only initiated when there are prima facie facts
pointing towards a cartel. On the submission of DG’s report the commission
summons the opposite party for necessary action. Therefore, this exemption even
though present in statute books, is very difficult to prove. The criteria and application
though expanded and defined by case laws, the exemption is yet to be granted in
India. Indian competition laws follow an "effects" based approach according to the
procompetitive and anticompetitive effects of a joint venture agreement, whereas the
EU utilizes both the ‘effects’ and ‘object’ approach. While assessing the joint
ventures agreements, the authorities must analyse the real as well as the expected
competitive effects before deducing a conclusion. Monetary welfare rising from
collaboration amongst the participants often counterbalances their adverse effects on
competition.
56
Efficiencies play a crucial role in the assessment of joint ventures as agreements.
Improvements in the production and distribution of goods, promotion of technical
development, economic development, benefit to consumers by way of cheaper goods,
more options are certain key efficiencies that must be analysed and evaluated. Further
there is dire need for the CCI to develop its jurisprudence in this sphere and adopt best
international practices, so as to suit India’s economy and business dynamics.
Presumptive rule is not applicable to such a joint venture and they are subject to the
rule of reason analysis i.e. the positive as well as the negative impact of such
agreements on competition will have to be taken into account before coming to any
conclusion.
57
CHAPTER 4
JOINT VENTURES AND COMBINATIONS
58
INTRODUCTION
The analysis of joint ventures under Section 5 of the Competition Act, 2002 if the
Joint Venture meets the requirements of the statute, and has to be reported as a
combination. The Competition Commission of India would essentially analyse the
Joint Venture by the Rule of Reason approach. The Commission would primarily
analyse the effects brought upon by the Joint Venture. The factors of consideration by
the Commission would include analysis of the market shares of the co-venturers and
their competitors in the same market. The entry barriers such as import duties and
various licenses are to be analysed. The level of market concentration must be
considered. Defences such as failing firm would then be considered in order to allow
the Joint Venture to function. The target firm in these cases must be successful in
showing their failure to sustain in the market. Similar to agreements, efficiencies play
a crucial role in determining the fate of Joint ventures. The commission must also run
a detailed analysis about the status of both the weaker and stronger competitors.
To understand the analysis of joint ventures under merger laws, it is important to
understand how the same developed in mature jurisdictions. Before analysing joint
ventures in the context of combinations is to understand the differences between the
two. An important difference between a combination between competitors and a joint
venture between competitors is that in a joint venture the competitors do not lose their
competitiveness in other realms of their respective businesses. This allows the co-
venturers to create a form of co-operation that would not exist in a combination. It is
important to understand that this by no means is a guarantee for the absence of pro-
competitive or anti-competitive aspects, resulting from them.
Combinations and joint ventures both have the potential to reduce the number of
competitors in the market. The stark difference is that in a the case of a combination
there is a permanent removal of competitors whereas in the case of joint ventures the
limited duration of the venture tends to be a less of threat to competition as the
competitors emerge back into the markets.
59
As combinations increase market concentration, there directly exists the risk of anti-
competitive conduct between the parties. The horizontal merger guidelines of the FTC
and the merger guidelines of the DOJ of the USA elaborate that any increase in
market concentration would give a unilateral ability to increase prices to the new
entity as well as the remaining players of the market. This is because the lower
number of players directly becomes an incentive to incur profits by limiting
production which would increase prices. The less number of players would also allow
enterprises to collude easily. It is an established fact that a joint venture is different
from a combination, yet it may have similar effects on the market just as a
combination would do. This is especially seen while the venture is in operation. To
have a control over joint ventures the FTC and DOJ analyse joint ventures as mergers,
provided they exceed a life span of 10 years. The effects of post-combination in many
cases are more pro-competitive in nature than the effects of joint ventures. The
permanent nature of a combination, brings with it factors like a single management
that overseas all the operations and activities of the entity. This allows the
combination to result in a stronger entity than its parents, this in turn allows the new
and stronger entity to be more efficient. The efficiencies brought upon by a strong
combination would range from consumer benefits to cheaper products, and the new
entity would also be able to provide superior quality and after sales services. These
efficiencies are reasons for international competition watchdogs to allow parties to
combine. On the other hand the temporary nature of a joint venture, does not allow it
to integrate to an optimum extent. This fact can be said to be a hindrance for a joint
venture to achieve the same strength and discipline of a combination. Even if a joint
venture generates efficiencies, they would not be at par with those of a combination.
This can be said to be the limitation faced by a joint venture. Apart from this this the
most important difference is that even after entering into a joint venture the co-
venturers continue to be competitors, which means that they are still liable for any
anti-competitive conduct, such as the discussion of process and market strategies. The
irony is that they are allowed to communicate and run joint operations. The anti-trust
watchdogs must expect the co-venturers to engage in discussions, but refrain from
colluding. This shows the difficulty of competition authorities while monitoring joint
ventures.
60
JOINT VENTURES CONSIDERED AS MERGERS
The merger controls in EU are addressed by ECMR. The said guidelines involve all
engrossments with group (community) aspect.1 Hence, a joint venture must ratify the
following conditions in order to come under the ECMR:
1. Be “concentrative” within the meaning of Article 3; and
2. Have a “Community dimension” within the meaning of Article 1 i.e. satisfy the
relevant turnover thresholds.
CONCENTRATION
A concentration appears when there is an accession of “control”. Precisely, a Joint
Venture comprises concentration if two or more enterprises procure direct or indirect
joint charge over the business in question. Hence, for the objective of the ECMR, a
Joint Venture is a venture, project or enterprise managed mutually by its parents
together. The ECMR will not hold valid where there is only one party administering
and managing the control over the undertaking while, the other party only has a
minority interest, or where none of the stockholders or a group of them are able to
wield control over it.
Joint control2 holds veritable where the parties involved in the control of the
undertaking have the prospect of practising significant sway or authority over another
undertaking. Significant sway in this context usually means the property to choke
1Article 1 of the ECMR (Council Regulation (EC) No 139/2004).
2Article 3(2) of the ECMR (Council Regulation (EC) No 139/2004) defines Control.
61
activities that decide the tactical commercial conduct of an undertaking.3 The
accession of joint control can also be formed on a de jure or de facto basis.4
Adding to joint control, a joint venture can uphold a concentration only if it is
functioning fully. Now, a “Full-Function” joint venture can be defined as a joint
venture “performing on a lasting basis all the functions of an autonomous economic
entity”.5
The full-functionality standard draws the layout of the ECMR for the formation of
joint ventures by the co-venturers, regardless of the fact that such a joint venture is
initiated as a “green field operation” or if the parties involved bring their own assets
which they owned earlier to the joint venture.6
We cannot call a joint venture a full-function one if it undertakes only one particular
role without its own existence in the market under the parent company’s commercial
activities. This holds true for joint ventures in production and R&Ds. These types of
joint ventures are supplementary to the commercial business activities of their holding
companies.7
The considerable presence of the holding enterprises in upstream or downstream
markets as well is an aspect reflected up on for evaluating the full-function disposition
of a joint venture, where this existence effects inadequate sales or purchases between
the holding companies and the joint ventures.8 Moreover, the joint venture must
exercise for a long period of time instead of a brief limited time span.
COMMUNITY DIMENSION
3Paragraph 62, Commission Consolidated Jurisdictional Notice under Council Regulation (EC) No
139/2004 on the control of concentrations between undertakings (2008/C 95/01). 4Paragraph 63, Commission Consolidated Jurisdictional Notice under Council Regulation (EC) No
139/2004 on the control of concentrations between undertakings (2008/C 95/01). 5Article 3(4) of ECMR Council Regulation (EC) No 139/2004.
6Paragraph 92, Commission Consolidated Jurisdictional Notice under Council Regulation (EC) No
139/2004 on the control of concentrations between undertakings (2008/C 95/01). 7Case IV/M.102 — TNT/Canada Post etc. of December 2, 1991.
8Case IV/M.560 — EDS/Lufthansa of 11 May 1995; Case IV/M.686 Nokia/Autoliv of 5 February
1996; to be contrasted with Case IV/M.904 - RSB/Tenex/Fuel Logistics of 2 April 1997 and Case
IV/M.979 — Preussag/Voest-Alpine of 1 October 1997. A special case exists where sales by the joint
venture to its parent are caused by a legal monopoly downstream of the joint venture, see Case
IV/M.468 — Siemens/Italtel of 17 February 1995, or where the sales to a parent company consist of
by-products, which are of minor importance to the joint venture, see Case IV/M.550 — Union
Carbide/Enichem of 13 March 1995.
62
Another scrutiny, as mentioned above, encompasses yield (turnover) levels comprised
in Article 1. These yields are drawn out to recognize the activities which influence the
community at large and is considered “community dimension”. Nevertheless, to solve
our objective, we need to comprehend the undertakings evaluated for determining
such levels/limits.
Acquiring joint control of a newly created joint venture- the concerned undertakings
are each of the enterprises securing control of the newly set up joint venture.9
Where one of the undertakings accords a pre-existing subsidiary or business (a former
solely owned company) to a newly formed joint venture. Each of the jointly
controlling undertaking is taken as an undertaking concerned whereas any of the
businesses or enterprises accorded to the joint venture is not an undertaking
concerned, and its yield or turnover would be considered to be a part of the initial
holding company.
Where one of the co-venturers entirely own the joint venture vehicle, and one or more
other co-venturers secure joint control alongside the initial sole controller. The
concerned enterprises are each of the joint controllers (comprising of the primary
shareholder), but the joint venture company itself as its yield (turnover) is included in
the turnover of the primary sole controller.
Where the companies acquire the joint control of a pre-existing undertaking afresh.
On one hand, the businesses in question are each of the enterprises taking over the
joint control, and on the other, the pre-existing acquired business.
APPRAISAL UNDER ECMR
Once the prior notification has been submitted, the EC assesses the joint venture in
order to decide its compatibility within the common market.10
The onus of proving
incompatibility this lies on the EC. The EC would analyse if the venture would cause
any appreciable effect on the market or on any allied or neighbouring markets. The
9Paragraph 139, Commission Consolidated Jurisdictional Notice under Council Regulation (EC) No
139/2004 on the control of concentrations between undertakings (2008/C 95/01). 10
Article 2 (1) of ECMR (Council Regulation (EC) No 139/2004).
63
decision would be construed from the analysis of the transaction, whether it would
cause any dominance in the market.11
“Guidelines on the assessment of horizontal mergers under the Council Regulation on
the control of concentrations between undertakings”12
offers direction regarding the
methods of examination applied by the EC for evaluating the consequence on
competition of combinations among actual or probable competitors. According to the
guidelines a combination would generally increase competitive apprehensions
provided it increases the influence of enterprises on the appropriate market in a
fashion prospective to have adverse effects upon consumers. The amplified market
control allows firms to incur profits by raising charges, limiting production,
substitutable options or quality of goods and services, reduce innovation and
adversely affect other spheres of competition.
“The Guidelines on the assessment of non-horizontal mergers under the Council
Regulation on the control of concentrations between undertakings”13
talk about the
analysis of non-horizontal mergers. As compared to horizontal mergers, non-
horizontal mergers have lower chances to cause an appreciable adverse effect on
competition. Although, the same cannot be said in cases where non-horizontal
mergers aid to the development of a dominant position. Non-coordinated effects and
co-ordinated effects are the means by which they may cause an adverse effect on
competition. Non-coordinated effects are noticed, as non-horizontal mergers provide
an increased access to market foreclosure, by which co-venturers find incentives to
incur profits by raising prices. Coordinated effects are seen in cases venture alters the
landscape of competition in such a way that co-venturers who formerly did not
engage in co-ordination would now considerably increase the likelihood to raise
charges and harm the overall competition in the market.
COMBINATION REGULATIONS OF INDIA AND JOINT VENTURES
11
Article 2(2) and 2(3) of ECMR (Council Regulation (EC) No 139/2004). 12
(2004/C 31/03). 13
(2008/C 265/07)
64
As and when the parties decide to enter into a combination joint venture, the CCI has
to be apprised of it.14
Combination involves any acquisition of stocks, control, assets
of a company, voting rights, or acquisition of dominance by a person over a company
who beforehand controls the other enterprise either directly or indirectly which is
engaged in production, distribution or trading of alike or interchangeable product or
service when the integrated parties cross pre-defined finance thresholds.15
A
combination is invalid if getting into possibly causes an AAEC within the relevant
market in India16
in India.17
The considerable test against which combinations are evaluated in India is if the
combination has or is possibly likely to cause an AAEC within the relevant market in
India and for such an evaluation, CCI takes into account all or any of the
characteristics stated in Section 20(4) of the Act.
The Government of India through revised notification18
has given the target exclusion
or exemption. The aim of this exemption is to give out a de minimis threshold/limit
and excuse the companies which probably are not likely to enjoy considerable market
power under the scope of the merger-control regime under the Act.
The jurisdictional limits based on the parties and group tests, stated under Section 5 of
the Act can be assessed, if the said company in question cannot use this target
exemption.
Now under the parties test, the bidder or acquirer and the target company will have to
communicate a notification if they either have assets or turnover which they hold
jointly surpassing a specific limit as stated under the Act.
14
Section 6(2) of the Competition Act, 2002 (Act 12 of 2003). 15
Section 5 of the Competition Act, 2002 (Act 12 of 2003). 16
(r) "relevant market" means the market which may be determined by the Commission with reference
to the relevant product market or the relevant geographic market or with reference to both the markets;
(s) "relevant geographic market" means a market comprising the area in which the conditions of
competition for supply of goods or provision of services or demand of goods or services are distinctly
homogenous and can be distinguished from the conditions prevailing in the neighbouring areas; (t)
"relevant product market" means a market comprising all those products or services which are regarded
as interchangeable or substitutable by the consumer, by reason of characteristics of the products or
services, their prices and intended use; 17
Section 6(1) of the Competition Act, 2002 (Act 12 of 2003). 18
SO 675 dated March 6, 2016.
65
Under the group test, the revised notification is required if the category to which the
target group will cater to post-acquisition has either the yield/turnover or the assets
surpassing a defined limit.19
CCI ratified the Combination Regulations which became functional on June 1, 2011
along with other important provisions of the Act pertaining to combinations. Schedule
I of the Combination Regulation states the classification of combinations which
usually does not affect an AAEC in India and hence, an intimation generally need not
be filed for such classifications of combination.
Contrary to ECMR, Section 5 and Section 6 of the Act and the Combination
Regulation do not talk about or preclude any of the joint ventures.
Thus, incertitude over the concern if joint ventures come under the generality of the
combination provisions of the Act subsists. No clear-cut information from the CCI is
there pertaining to the treatment of joint ventures or the aspects it would take into
account in ascertaining if a transaction is Greenfield or Brownfield or, if it would treat
full function joint ventures differently to non-full-function joint ventures20
.
Nevertheless, CCI has been getting the filings regarding joint ventures which
distinctly states that the Combination Provisions of the Act includes joint ventures.
The meaning of “Acquisition” and “Control” under the Act clarifies the concern to a
certain extent on when joint ventures comprise a combination under the Act. Joint
ventures are said to be a Combination if they are in the format of acquisition enclosed
by the conditions of Section 5. The word acquisition has been explained under the Act
as directly or indirectly, acquiring or agreeing to acquire (i) shares, voting rights or
assets of any enterprise; or (ii) control over management or control over assets of any
enterprise. Control includes controlling the affairs or management by (i) one or more
19
SO 675 dated March 6, 2016. 20
Naval Satarawala Chopra, John Handoll, India: Merger Control, The Asia-Pacific Antitrust Review
(2014).
66
enterprises, either jointly or singly, over another enterprise or group; (ii) one or more
groups, either jointly or singly, over another group or enterprise.21
These provisions of the Act state that the formation of a joint venture, which includes
acquisition of joint control, would amount to a combination if it ratifies the threshold
requisites of Section 5 and the notification on exclusion or exception to target
company.22
Meanwhile, unlike ECMR, the act of the Combination Regulations does not give out
any information as to what decides the joint control over a joint venture entity.
Additionally, no direction has been provided on application of the jurisdictional limits
in case of joint ventures.
For these arguable domains, CCI can take directions from ECMR which distinctly
envelopes such situations in case of joint ventures. Nevertheless, taking into account
the crucial frameworks of joint ventures can aid in studying the joint ventures under
the Act and the Combination Regulations. Significantly, there perhaps can be two
situations with varied structures:
In the first situation, as two or more co-venturers form a joint venture as a new entity,
it can give rise to the following structures:
a. In cases where two or more co-venturers incorporate a new joint venture while
holding certain percentages in it and there is no transfer of assets or interests by the
co-venturers. This joint venture would not be categorized as a combination under
Section 5 of the Act as the wording of the definition of the term “Enterprise”23
shows
it to be as a going concern24
that is or will be in operation. This interprets to be a pure
“greenfield” venture that is improbable to be categorized as a combination under
section 5 of the Act.
21
Explanation (a) to Section 5 of the Competition Act, 2002 (Act 12 of 2003). 22
Definition of transaction for the purpose of merger control review, OECD Competition Policy
Roundtables (2013). Available at: http://www.oecd.org/daf/competition/Merger-control-review-
2013.pdf 23
Section 2(h) of the Competition Act, 2002 (Act 12 of 2003). 24
A going concern is a business that functions without the threat of liquidation for the foreseeable
future. (Accounting: Tools for Business Decision Making, 5th
ed. Cram101 Textbook Reviews, 2013).
67
b. Any co-venturer may incorporate a new entity as a wholly owned subsidiary and
transfer some of their assets or interests into it. Soon after the transfers, another co-
venturer acquires the new entity which results in the formation of a joint venture
company.
c. Co-venturers incorporate a new entity as a special purpose vehicle25
and allocate some
of their corresponding division or businesses to it. The co-venturers conclude to run
their autonomous trades in regard to the relocated divisions and run the same via
newly incorporated Vehicle.
After the amendment of the Combination Regulations, through which Regulation
5(9)26
, it is now clear if a joint venture such as structure (b) attracts the notification
requirements under the Act and the Combination Regulations. According to
Regulation 5(9), the assets and turnover of any or both the co-venturers who have
transferred the same would be considered to be same in value to the value of assets
and turnover of the new joint venture, and the same shall be examined against the
thresholds under the Section 5 of the Act. Therefore, structures (b) and (c), could be
viewed as combinations under Section 5 of the Act provided, the thresholds are met.
Some joint ventures analysed by the CCI which have similar structures like the last
two examples were Sumitomo Corporation, Sumitomo Corporation Asia Pte Limited,
Mukand Limited and Technosys Metal Processing Limited27
, SunCoke Europe
Holding B.V. and VISA Coke Limited.28
INEOS Group Investments and Solvay
S.A./N.V. (SPVC).29
All were held to be combinations. However, the filing
prerequisite for joint ventures must be analysed on a case to case basis in reference to
Regulation 5(9) of the Combination Regulations.
25
The Special purpose vehicle is usually a subsidiary company with an asset/liability structure and
legal status that makes its obligations secure even if the parent company goes bankrupt. 26
Regulation 5(9) (No.3 of 2011) - Where, in a series of steps or individual transactions that are related
to each other, assets are being transferred to an enterprise for the purpose of such enterprise entering
into an agreement relating to an acquisition or merger or amalgamation with another person or
enterprise, for the purpose of section 5 of the Act, the value of assets and turnover of the enterprise
whose assets are being transferred shall also be attributed to the value of assets and turnover of the
enterprise to which the assets are being transferred. 27
Combination No. C- 2012/11/93. 28
Combination No.C-2012/12/101. 29
Combination No. C-2013/12/147.
68
The second situation comes into play as two or more co-venturers acquire the shares,
voting rights, control of an existing entity together. These joint ventures would be
considered as combination under Section 5 of the Act provided, the thresholds are
satisfied. Although the exemptions listed under Schedule I of Combination
Regulations must be measured on a case to case basis. A similar case came before
CCI when it received a notice under Section 6(2) of the Act, by Mitsui Sumitomo
Insurance Company Limited, Max India Limited and Max New York Life Insurance
Company Limited.30
The CCI held it to be a combination. The examples provided are
in no manner explicit, as there can be a wide variety of joint ventures, and the same
must me individually analysed by the CCI.
CONCLUSION
India needs a lot of catching up to do with its western counterparts in relation to the
Combination Regulations. It creates a rather unsettling predicament fraught with
uncertainty over the treatment of joint ventures under Section 5 of the Act as the
genesis of a joint venture can contort the competitive framework of the relevant
market considerably. The CCI needs to come up with new framework and directions
in this regard as soon as possible to fix this regulatory loophole. Although CCI has
tried to address the issue by placing Regulation 5(9) of the Combination Regulations,
nonetheless, this directive may still leave a lot of aspects unaddressed.
However, western countries have a rather extensive framework which addresses
almost all the important concerns. The European Union, in their combination
regulation, has given out comprehensive and meticulous rules pertaining to the
treatment of joint ventures. India too needs to replicate these regulations or come up
with them itself suiting and adjusting to its own business and economic environment
as well as dynamics, yet aligning itself with globally prevalent practices and
principles.
30
Combination No. C-2012/05/56.
69
70
FINAL COMMENT
Indian competition laws are not as comprehensive as its European counterparts, this
becomes a hurdle for legal advisors and the government to advise various
stakeholders, who want to understand the application of laws and regulations. Until an
extent the law on joint ventures continues to be variably vague. There is a dire need to
provide the public with a clear understanding of the guidelines regarding joint
ventures. Laws in EU and US that govern joint ventures explicitly provide for crystal
clear understanding of the prevalent provisions. India must strive to build its own
jurisprudence that enables a working framework in harmony with our own economy
and business dynamics. Joint ventures may be a key factor in contributing to India’s
economic development as foreign investors eye Indian markets and throng in with
FDI. There lie massive possibilities that would aid in attaining real and qualitative
efficiencies. Improvements in quality and innovation, saddled with technological
know-how and manufacturing capabilities, would ensure that India could go a long
way in the coming decades. To ensure that the economy keeps on thriving,
competition authorities must work to improve the competition regime. Even though
the Competition Act is not designed for consumer protection, it still must look out for
the consumers by way of promoting consumer benefits such as cheaper goods and
better alternatives to choose from. This task would be possible by the way of joint
ventures.
The CCI owes the nation a duty to draft a detailed provision for guidance on joint
ventures. This would empower various stakeholders as well as the market players,
help them comprehend the guidelines better and have the benefit of choices they can
make while undertaking suitable business decisions in compliance with the law of the
land. The CCI must refrain from forming a conclusive definition for the term ‘joint
venture’ as this would limit the interpretation of the term in future cases. As
globalization makes its roots stronger and wider, we are bound to witness complex
business structures in the form of joint ventures. The definition must be kept open-
ended so as to envelop the future. Meanwhile, the CCI must take a cue at from foreign
jurisdictions to strengthen its jurisprudence, and simultaneously work on research and
development of its joint venture laws, so as to become unconstrained and self-reliant.
71
Yet, it may adopt best practices from all over the world, especially from other
developing jurisdictions.
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