A highlight of the Joint Venture guidelines

February 5, 2021 - 5 minutes read

Background

A joint venture (JV) enables companies to join forces in order to achieve goals such as expanding markets and lowering the costs of production. However, JVs or collaborations among competitors raises potential competition law issues. Competitors may join forces in order to accomplish procompetitive objectives such as create efficiencies and economies of scale and consequently lead to better-quality products that could not be achieved alone. They can however have anticompetitive effects such as fixing prices and exchange of improper information with JV members among other practices. 

The Guidelines

The Competition Authority of Kenya (CAK) has published draft Joint Venture Guidelines. The Guidelines are to increase the predictability of the merger review process as well as improve the business environment in Kenya. The CAK is established under Section 7 of the Competition Act, No. 12 of 2010. It is mandated to promote and enforce compliance with the Act. It is thus required to bring competition law, policy and practice in line with best international practices. The Guidelines define what a Joint Venture is and gives clarity on what qualifies as full function JVs, Green JVs and how notifications can be carried out among other things.

Definition of a Joint Venture

The Guidelines define a Joint Venture as the “integration of operations between two or more separate firms.” It notes that for a JV to occur, the following conditions have to be met:

  • the enterprise is under joint control of the parent firms;
  • each party makes a substantial resource contribution to the joint enterprise;
  • the enterprise exists as a business entity separate from its parents; and
  • the joint venture creates significant new enterprise with a direct market access, in terms of new productive capacity, new technology, new products, or entry into a new market. 

‘Full Function’ Joint Ventures

The Consolidated Guidelines on the Substantive Assessment of Mergers provide that a JV constitutes a merger within the meaning of the Competition Act, if it is a ‘full-function’ joint venture. This means that it must be implemented for a duration of 10 years or more, and carry out all the functions of an autonomous economic entity, including operating on a market and having a management dedicated to its day-to-day operations.  The Draft Guidelines however note that JVs that are established for a purposefully fixed period (For instance large construction projects) will not be viewed as having a long duration.

A JV is not ‘Full Function’ if it only takes over one specific function within the parent companies’ business activities without access to the market. For instance, JVs limited to research and development or production and a JV limited to the distribution or sales of its parent companies’ products or services therefore acting principally as a sales agency.

It is however notable that the fact that a JV will make use of a distribution network of its parent companies will not disqualify it as full-function.  The presence of the parent companies in upstream or downstream markets is considered in assessing the full-function of a joint venture where the presence leads to substantial sales or purchases between the parent companies and the joint venture. However, the fact that the joint venture relies almost entirely on sales to its parent companies or purchases from them only for an initial start-up period – about three years or less – does not normally affect the full-function character of the joint venture.

Greenfield Joint Venture

The Draft Guidelines Greenfield JVs as “arrangements aimed at engaging a new business venture separate from and unrelated to the activities undertaken by the parties.” It is a form of market entry commonly used when a company wants to achieve the highest level of control over its foreign activities. The arrangements mainly occur where local/foreign entities join forces with other local entities to develop a new product separate from the products and services provided by the parent entities.

They are mostly manifested by undertakings in the country, in ‘new’ areas uninhabited by any of the parties existing in the country. Usually, a new JV vehicle is formed for purposes of the transaction. Businesses are advised to seek advisory from CAK before implementation of a Greenfield JV if uncertain. The Green JVs will be reviewed on a case by case basis.

Notification and Filing of JVs

Identifying the target and acquirer in a JV may be hard compared to identifying them in a mergers and acquisition transaction. This is due to the fact that in a JV, parties come together to set up an independent entity separate from the parent entity. According to the Draft Guidelines, CAK will require the following to submit documents relating to the transaction by duly filling the Merger Notification Forms:

  • The parent entities
  • The Joint Venture Vehicle 
  • Where two or more entities have entered into a contractual relationship without any existing Joint Venture Vehicle
  • In cases involving parties acquiring shares in an existing undertaking, that inherently result in a joint venture arrangement
  • The CAK requires the following documents to be submitted for JV filings:
  • The Covering letter
  • Duly filled and stamped/sealed Merger Notification Forms;
  • Business plans and business model;
  • Board resolutions;
  • Duly signed Joint Venture Agreement;
  • The Joint Venture terms of operations (where applicable);
  • Three (3) year most recent Audited Financial statements for the Joint Venture parents. This also includes the group structure (where applicable), its subsidiaries and the JV Vehicle (where applicable);
  • Filing fees where applicable;
  • Justification of efficiency gains from the transaction; and
  • Failing firm defense report and documentation where necessary.

Assets and Turnover Thresholds

The Draft Guidelines indicate that the main aim of determining assets and revenue is to inform CAK on the impact that a JV transaction is likely to have on the competition. Parties to a JV are required to issue CAK with the complete financial information when filing. This also includes entities who may not be deriving their turnover from the country prior to the Joint Venture. CAK will consider the sum of the assets or turnover figures attributable to the parent entities as well as the JV entity. The filing fees will be based on the sum of the assets or turnover, whichever is higher.

Anti-competitive effects

In assessing the anti-competitive effects of a JV, CAK will examine the terms of the JV’s agreement. This also includes the:

  • Activities of the joint venture and its parent undertakings;
  • Governance structure adopted;
  • Joint venture’s duration;
  • Exclusivity clause;
  • Nature and extent of assets transferred to the joint venture versus those retained by the participants;
  • Freedom the parent entities retain to compete with each other and with the JV;
  • Public interest. This will seek to identify the positive synergies such as employment, entry and growth of SMEs among others.

For a Full function JV, CAK will consider the likely technological benefit, real resource savings, compatibility with competition and economies of scale accompanying the transaction.

Importantly, in regards to the digital economy and e-commerce JV transactions, CAK will consider aspects of big data and digital economy dynamics of entry and access to data in transactions likely to involve big data even where data is not the main component of the transaction.

In conclusion, competition law is intended to foster competition, which is thought to improve the quality of products while lowering the price. CAK has invited comments on the Draft Guidelines to be submitted through the E-mail address guidelines@cak.go.ke by COB Friday, March 5th, 2021.

Spread the love