On 27 September 2019, the Antimonopoly Committee of Ukraine (AMC) published Guideline clarifying applicability of merger control rules to joint ventures (Guideline).
Under the Guideline, formation of a JV constitutes a concentration and may require merger clearance if it satisfies the below criteria:
Newly Created Entity
Creation of the JV should be structured as a genuine joint formation (from scratch) of a new entity by two (or more) parties. Parents should contribute assets (financial, production, R&D, etc.) to such JV and jointly control it (although the relevant provisions of the law still suggest that joint control over JV is not required).
If creation of the JV is structured through the acquisition of joint control in an existing entity, then such transaction should qualify as an "acquisition of shares", which is a different type of concentration subject to different notifiability assessment rules. Further, if one of the parents ceases to exist after formation of the JV, then such transaction may qualify as an acquisition of the assets of the ceasing parent by the remaining parent, rather than creation of a JV.
Cooperation of the parties based on contracts (i.e. R&D) should not qualify as a concentration.
Full-Functionality
The Guideline introduces the full-functionality criterion. The AMC’s concept of full-functionality is largely built on the one from the Commission Consolidated Jurisdictional Notice and refers to the ability of the JV to perform all functions of an autonomous economic entity.
Essentially this means that the JV must operate on a market, performing the functions normally carried out by undertakings operating on the same market. In order to do so the JV 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 its business activities.
The JV 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 the JVs limited to R&D or production. Such joint ventures are auxiliary to their parent companies’ business activities. In this respect, the AMC paraphrases the Commission Consolidated Jurisdictional Notice discussing in detail facts and circumstances relevant for the assessment of the full-functionality criterion, including the sale/purchase relations of the JV with its parents.
Operation on a Lasting Basis
The JV must be intended to operate on a lasting basis. In this respect, the Guideline says that normally the period under three years should not be viewed as sufficiently long.
At the same time, it is specified that the assessment of the lasting basis criterion should place more weight to the purpose of the JV rather than a particular period. For example, a JV will not be considered as operating on a lasting basis if it is established for a specific project, such as e.g., construction of a plant, but it will not be involved in the operation of the project once its construction has been completed.
Again, in this context, the Guideline mainly paraphrases the relevant provisions of the Commission Consolidated Jurisdictional Notice.
No Coordination of Competitive Behaviour
Formation of a JV will not be considered a concentration if it gives rise to coordination of competitive behaviour by the parents in relation to each other or to the JV.
To this end, the Guideline clarifies that formation of a JV does not normally result in such coordination and will qualify as a concentration if:
- the founders of the JV are not active on the same, neighbouring or upstream or downstream markets;
- the JV takes over the pre-existing activities of the parents which withdraw from the relevant market;
- the JV acquires control over its founders (i.e. de facto merger).
The Guideline, however, leaves much discretion to the AMC by adding that, in view of the variety of forms and methods of cooperation, the coordination criterion should be assessed on a case-by-case basis.
The JV that gives rise to coordination may be assessed as concerted practices and require a separate antitrust (as opposed to merger) clearance. However, when formation of the JV has the characteristic of both, concentration and concerted practices, the JV will require either merger or antitrust clearance (wherever the JV gravitates to).
Conclusion
Overall, the Guideline is mostly based on the relevant provisions of the Commission Consolidated Jurisdictional Notice and fills a great gap in the Ukrainian merger control regime. The Guideline clearly suggests that certain types of transactions (such as creation of purely technical SPV) are no longer subject to merger control in Ukraine.
Introduction of the full-functionality criterion and excluding non-full function JVs from the Merger Regulation is also a major development, as in the past the AMC often took a view that if a JV transaction met merger control thresholds it could not escape merger filing requirement by simply claiming that the JV is a non-full function one and there are no effects for Ukraine.
Still, the Guideline does not provide sufficient guidance on the assessment of non-full function JVs that may require antitrust clearance.
For further information please contact Igor Svechkar, Alexey Pustovit, Sergiy Glushchenko or Pavlo Verbolyuk.
