Joint Venture Business Assessment Answer

Introduction

A joint venture[1] is a business arrangement whereby two natural entities seek to develop a single enterprise for profit by pooling together resources and also sharing the profits as well as the losses associated with the said enterprise. For example, a tech company forms a partnership with a marketing company to introduce an innovative product to the market. An autonomous economic entity on the other hand is an independent institution established by law with the intention that its authority and other responsibilities e.g. finance and management are to be exercised freely from direction or supervision by the management of the department. A full-function joint venture constitutes a merger where one directly or indirectly own or create direct or indirect authority over the resources of the business. Thus, what are the qualifications that must be achieved by a joint venture for it to be a “full-function joint venture”? It all falls upon the commission consolidated Jurisdictional Notice under council Regulations on control of concentrations in accordance with the EU Merger.

In the Consolidated Jurisdictional Notice under the merger Regulation (OJ C95/1 (2008)), the EC put across 4 criteria mainly to make sure that joint ventures have autonomy towards parent companies which are:

The joint venture should have resources which are sufficient to independently operate in the market i.e. financial resources, assets (tangible and intangible) and staff for day to day operational basis which is also long-lasting and dependent on the area of its expertise. However, in the startup period whereby the joint venture depends mainly on parent companies, joint venture will be a full-function joint venture. This is proved in Mannesmann/Hoesch (case No. IV / M.222, 12 Nov 1992) the court held that a joint venture during its startup period was still expanding its operating market. The full-function joint venture does not necessarily own the resources for its operation as long as they are “accessible” to the joint venture (case no. COMP /JV.19,11 AUGUST 1999). This should be simultaneous to the ability of the holding company to retain intellectual property rights to carry out separate market activities from those of the joint venture (case no. IV/M. 1332, 21 December 1998).

A joint venture must implement its undertaking beyond a specific justification to the parent companies; shall have its access in the market and carry out other functions whose root is not from the parent companies which is all to say that its objectives as a business should not revolve around its parent companies. For illustration, a joint venture mainly in production or one restricted to sales or distribution of products of the parent company therefore acting as a sales agency solely. This type of joint venture will, therefore, be disqualified from being a full-function joint venture as it is an auxiliary venture to the parent companies’ business activities. However, if it uses the distribution channels of its parent companies, it will not disbar it as the parent companies act as agents to the joint venture[2].

Does not rely on sales to or buying from its parent companies. This is with regard to its autonomy in the startup period whereby the dependence of the joint venture on the parent company may not disqualify it but this only runs for three years and it is dependant on specific market environment[3] at that time. In this case, where transactions run from the joint venture to the companies on a lasting basis, the concern will now be whether the joint venture will still retain its active role in the market regardless of the sales from the parent companies[4]. Full-functionality of the joint venture is therefore controversial whereby there is little value adjoined to the commodities concerned, if the value added is less than the joint venture is more of a sales agency for the parent companies than its own independent entity and it therefore cannot attain full functionality. This is however, not the same case whereby a joint venture performs the functions of a trading company and is also active in the market, which makes it a full-function a joint venture and not an auxiliary sales agency since it is able to multitask its objectives as an independent entity as well as render benefits to its parent companies. To attain full functionality, joint venture must therefore come into possession of a substantial proportion of supplies from other competing sources[5] rather than the parent companies. This is so as to achieve the characteristics of a company in trade markets which include having investors in various sectors such as stockholding, warehousing, outlets, depots, sales and transport.

The joint venture can run on a long-lasting basis in accordance to the agreement set out between the parent companies and the joint venture. The commission of the previously listed resources by the parent companies to the joint venture clearly projects its full-functionality. The same is true whereby an agreement in place specifies the timeline of operation for the joint venture which is sufficiently long to bring out an enduring change in the structural pledges concerned[6] with the joint venture or provides substantial evidence to come to an informed decision to continue the joint venture beyond the stipulated period of three years. However, some joint venture agreements[7] have eventualities which may lead to non-functionality for example the failure to create an agreement between the holding companies and joint venture which may lead to eventual dissolution of the joint venture as ever being in full function. This means that the joint venture[8] will not be in operation at all as it has no startup capital and therefore no resources to support its full-functionality whatsoever.

Joint ventures that are created with the sole intent to for example either supply or distribute goods for the parent companies and without staff and an independent management structure, cannot be considered to be fully functioning joint ventures. Similarly, a joint venture that is entirely dependent on the parent company or a large proportion of its resources are generated from the parent company may also not be considered to have met the full function assessment criteria.

Joint ventures that may start off as non-full-functioning may nevertheless reach the eventuality of being fully functioning therefore triggering a notification obligation, for example a joint venture that started out by distributing[9] only to its parent companies and later starts to sell to other companies in the market.

There is also the concept of joint control whereby a joint venture falls within the merger regulation scope where there is joint control ownership by two or more undertakings (Article 3(1) (b)) and Article 3(3). The prospect of exercising impact especially in decision-making over an undertaking forms a basis for control and is determined by both factual and legal consideration presented in the agreements between the joint venture and the parent companies.

In accordance to recital 23 of Council Regulation (ECC) no. 4064/89, the idea of concentration is to be appropriately interpreted in such a way so as to represent the operations that bring about a long-lasting difference in the structure of any undertakings concerned with the joint venture. These systematic changes that results from concentrations reflex continuously become a problem restructuring activities in the concerned merchandise. They receive authority from the Merger Regulation only if the consequences result to a grivious structural change in the management of the joint venture by either forming or strengthening positional dominance of the parent companies.

In reliance to Article 3(2) of the EU Merger on Commission Notice regarding restrictions on concentrations, the joint venture ought to discharge a lasting basis and all the duties of a free economic platform. The said requirements describe a long-lasting structural change on the concerned undertakings of the joint venture. Formation of a full-function joint venture may be allowed as an immediate result coordinate competitive behavior of independent undertakings. Under provision of Article 2(4) of the merger regulation, cooperative effects shall be gauged within same procedural analysis as concentration[10]; this is in accordance with Article 85(1) and (3) criteria of the Treaty with the aim of establishment of its affinity with the free trade zone. It is also worth to note that if the joint venture is not full-function and takes the form of a coalition that is a legally formalized structure and to a large extent dependent on the parent company then the joint venture creation will not have to alerted but the EC may operate a control ex post in regards to Article 101(1) of the Treaty which proscribe the anticompetititveness of agreements between undertakings[11]. The joint venture falls within the scope of the EU Merger Regulation when the turnover thresholds are assumed completely in accordance to the set out requirements in the Regulation. The European Commission will thus evaluate the consequence of the joint venture on competition on an ex ante basis and decide on its full-functionality in accordance to the set out criteria.

Bibliography

Luo, Yadong (2007) . "Are joint venture partners more opportunistic in a more volatile environment?". Strategic Management Journal . 28 (1): 39–60

 Barden, Jeffrey Q; Steensma, H Kevin; Lyles, Marjorie A (2005). "The influence of parent control structure on parent conflict in Vietnamese international joint ventures: an organizational justice-based contingency approach". Journal of International Business Studies . 36 (2): 156–174.

Baynham, Gerard (October 6, 2017). 

[1] Joint ventures in Lebanese and European law

[2] Case IV/M.102 –TNT (Canada Post of 2 Dec 1991 (paragraph14)

[3] Case IV/M.560 – EDS / Lufthansa of 11 may 1995 (paragraph 11)

[4] Barden Jeffrey Q; Stemma H. Kevin (2005) the influence of parent control structure on parent conflict in Vietnamese international joint venture: an organizational justice-based contingency approach- journal of international business studies

[5] Case IV / M.788- AgrEVO/Marubeni of 3 Sept 1996 (paragraph 9 and 10)

[6] Case IV/M.791-British Gas Trading LTD / Group 4 utility services ltd of 7 October 1996 (paragraph 10)

[7] Shareholders agreement (pdf) airportsindia.org archived from original

[8] Baynham, Gerard (October 6, 2017). 

[9] Luo, Yadong (2007)

[10] See Commission Notice regarding restrictions ancillary to concentrations OJ No C 203, 14.8.1990, Paragraph 5

[11] Barden, Jeffrey Q; Steensma, H Kevin; Lyles, Marjorie A (2005).

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