South African Competition Authorities on Joint Ventures – Shipping Liners in the limelight once again
The recent investigation into the shipping cartel brought to the fore an important issue as far as competition regulation and commercial practice is concerned, namely joint ventures. (AAT previously reported on the container-shipping cartel updates here, here and here).
On 12 August 2015, the South African Competition Tribunal (the “Tribunal”) was asked to make a consent agreement, an order of the Tribunal. The relevant parties involved were Nison Yupen Kaisha Shipping Logistics and BLG Logistics (the “Parties”), who both signed consent agreements with the South African Competition Commission (the “Commission”) in relation to having contravened Section 4(1)(b) of the South African Competition Act, 89 of 1998 (the “Competition Act”). The Parties had entered into a joint venture agreement (“JV”) which contained a number of clauses which the Commission found would essentially prohibit the Parties from competing with one another. The Parties were the only two shareholders whose shareholding was 49% and 51% respectively.
The administrative penalties which the parties agreed to pay were less than US$100 000, which seems nominal compared to the approximate US$8 750 000 administrative penalty which NYK had agreed to pay in respect of the shipping cartel investigation (previously reported on by African antitrust).
Regardless of the quantum of the penalty imposed on the parties, the authorities provided some useful points to consider when deciding to embark on a joint venture.
John Oxenham, with Nortons and Africa consultancy Pr1merio, observes that, “[e]ssentially, the Commission confirmed that joint ventures will be scrutinised and evaluated against the competition regulatory environment with the same degree of scepticism as any other agreement/conduct between competitors. In this regard, it is evident that despite the well-recognised advantages and efficiencies that often flow from joint ventures, the questions and considerations essentially remain the same as far as the competition authorities are concerned.”
In other words, if a joint venture is concluded between competitors that leads to a fixing of the price (or any other restrictive cartel practice), then the parties will be liable to an administrative penalty and there are no ‘rule of reason’ defences available to the parties.
Andreas Stargard, an attorney advising clients on competition law and African legal issues, notes:
“Enforcement agencies must be sure to be careful in their analysis of the JV (including its structure, the degree of integration and actual sharing of manufacturing resources, IP portfolio, and the like) in order not to arrive at a ‘false-positive’ result. Conversely, companies that do decide to form a JV should consult antitrust counsel in order to ensure compliance with the authorities’ requirements for what constitutes an antitrust-immune joint venture, and which conduct falls outside the scope of protection.”
For in-house counsel advising their corporate clients on JV formation and/or conduct with their joint partners, Pr1merio‘s Stargard suggests some of the following relevant questions to ask outside antitrust experts:
- What matters most to the legal risk analysis? (Hint: function matters more than form. You can call your cooperation with your competitor a “joint venture” on letterhead, corporate registers, and web sites, but it still may not be immune to conspiracy allegations. The U.S. Supreme Court has held in American Needle v. National Football League that it “eschewed such formalistic distinctions in favor of a functional consideration of how the parties involved in the alleged anticompetitive conduct actually operate.”)
- Is it advantageous for our business model to withdraw from an existing JV, based on an antitrust audit and/or risk assessment of the JV’s functions, its actual level of integration, and the benefits derived from the joint nature of the business?
- Should we re-evaluate our information-sharing practices with our JV partners? (Probably yes)
- Does our business constitute a “full-function joint venture,” as the EU calls those highly-integrated types of JVs that become wholly independent of their original JV partners as separate economic undertakings (and therefore could in theory be found to conspire with their shareholders, as they are independent economic actors on the market, and also fall under full merger-notification scrutiny).
- How else could we recognise the significant efficiencies we currently derive from joint conduct with our manufacturing/research & development/or other partner? Are there other options?
An interesting point to note from the South African Shipping case is that the authorities were not only concerned with the JV itself, but analysed whether the JV itself could be used as a mechanism or a vehicle which would enable the Parties to share information with one another. The authorities concluded that that is exactly what the current JV allowed.
In this regard, the Commission stated that they found it “difficult to divorce the conduct of the Parties outside the Joint Venture, with their conduct within the Joint Venture”. Accordingly, the Parties were able to share information within the JV which would lead to a distortion of competition outside the JV.
In other words, the Commission found that the Parties were competitors outside the JV, but through the JV, they became ‘one’.
Ultimately the Parties’ fines were calculated at 3.5% of the JV’s annual turnover in the preceding financial year. Interestingly, however, the penalty was not imposed on the JV itself, but imposed on the Parties, in proportion to their respective shareholding.
The Joint Venture itself, however, was not penalised as the Commission held that this would amount to double-jeopardy considering that the only two parties to the JV were already fined.