Types of joint ventures
A joint venture (JV) is a commercial enterprise that is undertaken jointly by two or more undertakings which otherwise retain their distinct identities. It covers a range of collaborative activity and can take many forms. Joint ventures can often involve collaboration between competitors.
The types of JVs that require careful review under the Ordinance include those involving joint production, buying or selling arrangements, research and development JVs as well as distribution and marketing JVs.
When will the Rules in the Ordinance apply?
JVs are subject to different treatment under the Ordinance depending on whether the JV is "full-function" or "non-full-function".
The Merger Rule
The Merger Rule will apply where the JV is full-function. That is, the JV alters the market structure and is created to perform, on a lasting basis, all the functions of an autonomous economic entity. Since the Merger Rule currently only applies to the telecommunications sector, the creation of a genuinely full-function JV that amounts to a merger in other industries will be outside the scope of the First and Second Conduct Rules. All other conduct by the JV and its parent companies will continue to be subject to the Ordinance's conduct rules.
The First Conduct Rule
A JV between competitors that falls short of full – function will be treated as a horizontal agreement between competitors and will be subject to the First Conduct Rule (FCR). The test applied is whether the JV has the object or effect of harming competition in Hong Kong.
The FCR recognises that some types of JV agreements between competitors, although they might contain restrictive or cartel-type provisions, can be pro-competitive.
The Ordinance acknowledges the legitimacy of such agreements. A JV is unlikely to breach the FCR rule if there is no object to harm competition and there is no harmful effect on competition.
JV agreements that enhance overall economic efficiency will be excluded from the FCR - but parent companies must be able to demonstrate that the JV generates the economic efficiencies claimed. The 'agreements of lesser significance' exclusion may also apply depending on the combined turnover of the JV parent entities and where the conduct does not involve cartel conduct.
Lastly, if the main purpose of the non-full-function JV is not harmful to competition, the ancillary restrictions – ie those that are directly related to and necessary for the implementation of the JV agreement – will also fall outside the scope of the FCR. For example, this includes a non-compete between the JV parent entities that is objectively necessary (and proportionate) for the JV to proceed.
Factors important to distinguishing full-function and non-full-function JVs
Whether a JV is full-function or non-full function is a matter of substance having regard to all relevant circumstances. The question is, does it perform all the functions of an autonomous entity? Factors important to determining whether a JV is full-function include whether the JV:
- has a management dedicated to its day-to-day operations;
- has access to sufficient resources to be able to conduct business activities on a lasting basis – this includes finance, staff and assets;
- takes over more than just a specific, limited function within the parent companies' business activities and has access to and presence in the market;
- has significant dealings with its parents or transacts on an arms-length basis;
- is created for a meaningful period of time so that it brings about a lasting change in the structure of the parent companies and the market.
Collaboration agreements that fall short of a full-function JV include joint production, buying or selling arrangements. Similarly, JVs limited to research and development will not normally be a full-function JV as these type of JVs are typically auxiliary to their parents' business activities. While a JV that takes advantage of its parent companies' distribution networks will not prevent it from being a full-function JV, a JV limited to distribution and marketing will fall short of a full-function JV where it is principally acting as sales agent for the parent companies.
Appropriately managing competition law risks
Companies should satisfy themselves that a JV agreement:
- does not have the purpose or effect of harming competition
- if it does have the object or effect of harming competition, the JV enhances overall economic efficiency
- the JV agreement is structured in a way that is least restrictive of competition so that any ancillary restrictions are excluded from the application of the FCR
- safeguards are in place to ensure that post implementation and operation of the JV agreements, the undertakings do not act in a manner that is outside the scope of legitimate collaboration between competitors – this includes ensuring that proper information sharing protocols are put in place.
What are the consequences of breaching the Ordinance?
There are a number of enforcement approaches the Competition Commission can take where it has reasonable cause to believe a joint venture breaches one of the conduct rules:
- issue a draft infringement notice, providing the JV parties with an opportunity to respond;
- after considering the response it may decide not to press the issue or issue a final infringement notice, providing the JV parties with an opportunity to refrain from the conduct and /or to take specified action; or
- institute proceedings in the Competition Tribunal.
If the Competition Tribunal finds the JV parties have breached either the FCR or SCR, and no exclusion applies, it can issue a fine up to 10 per cent of the firm's group turnover in Hong Kong for the duration of the infringement (with a three-year cap) for each offence.