Applicability of the Combination Regulations to Joint-ventures

Section 5 and 6 of the Competition Act, 2002 (the Act), defines and regulate combinations, it provides various thresholds, crossing which an enterprise or a person entering into a combination shall report of the Competition Commission of India (the Commission) in the prescribed forms/notification.

Under section 6(1) of the Act, “No person or enterprise shall enter into a combination which causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India and such a combination shall be void.”  The word “or” in section 6(1) shall be read as disjunctive; so any person (i.e., any legal entity-that could be LLP, company, individual, association of persons, partnership etc) or any enterprise (as referred to in section 2(h) of the Act), if they enter into a combination referred to in section 5- they need to notify the Commission about it.

In light of the above, all joint ventures (JV), in whatever form, which take place in India or outside India with an effect in India, clearly fall within the ambit of the Act. The question would therefore be whether such joint ventures constitute combination in a manner contemplated in the Act.

Joint-ventures under various jurisdictions

JV is not defined under the Act or the Companies Act, 1956.  However, for the limited purposes of foreign direct investment, Consolidated FDI policy (circular 1 of 2011), at paragraph 2.1.23 defines JV as ‘Joint Venture’ (JV) means an Indian entity incorporated in accordance with the laws and regulations in India in whose capital a non-resident entity makes an investment. 

Further, honourable Supreme Court of India, in the case of Fakir Chand Gulati v. Uppal Agencies Pvt. Ltd, (2008)10SCC345, while referring the case of New Horizons Ltd v. Union of India (1995)1SCC478 has held:

“The expression "joint venture" is more frequently used in the United States. It connotes a legal entity in the nature of a partnership engaged in the joint undertaking of a particular transaction for mutual profit or an association of persons or companies jointly undertaking some commercial enterprise wherein all contribute assets and share risks. It requires a community of interest in the performance of the subject matter, a right to direct and govern the policy in connection therewith, and duty, which may be altered by agreement, to share both in profit and losses. [Black's Law Dictionary; Sixth Edition, p. 839]. According to Words and Phrases, Permanent Edition, a joint venture is an association of two or more persons to carry out a single business enterprise for profit [P.117, Vol. 23].

The following definition of 'joint venture' occurring in American Jurisprudence [2nd Edition, Vol.46 pages 19, 22 and 23] is relevant:

A joint venture is frequently defined as an association of two or more persons formed to carry out a single business enterprise for profit. More specifically, it is in association of persons with intent, by way of contract, express or implied, to engage in and carry out a single business venture for joint profit, for which purpose such persons combine their property, money, effects, skill, and knowledge, without creating a partnership, a corporation or other business entity, pursuant to an agreement that there shall be a community of interest among the parties as to the purpose of the undertaking, and that each joint venturer must stand in the relation of principal, as well as agent, as to each of the other coventurers within the general scope of the enterprise.

Joint ventures are, in general, governed by the same rules as partnerships. The relations of the parties to a joint venture and the nature of their association are so similar and closely akin to a partnership that their rights, duties, and liabilities are generally tested by rules which are closely analogous to and substantially the same, if not exactly the same as those which govern partnerships. Since the legal consequences of a joint venture are equivalent to those of a partnership, the courts freely apply partnership law to joint ventures when appropriate. In fact, it has been said that the trend in the law has been to blur the distinctions between a partnership and a joint venture, very little law being found applicable to one that does not apply to the other. Thus, the liability for torts of parties to a joint venture agreement is governed by the law applicable to partnerships.

A joint venture is to be distinguished from a relationship of independent contractor, the latter being one who, exercising an independent employment, contracts to do work according to his own methods and without being subject to the control of his employer except as to the result of the work, while a joint venture is a special combination of two or more persons where, in some specific venture, a profit is jointly sought without any actual partnership or corporate designation.

To the same effect is the definition in Corpus Juris Secundum (Vol. 48A pages 314-315):

"Joint venture," a term used interchangeably and synonymous with 'joint adventure', or coventure, has been defined as a special combination of two or more persons wherein some specific venture for profit is jointly sought without any actual partnership or corporate designation, or as an association of two or more persons to carry out a single business enterprise for profit or a special combination of persons undertaking jointly some specific adventure for profit, for which purpose they combine their property, money, effects, skill, and knowledge.... Among the acts or conduct which are indicative of a joint venture, no single one of which is controlling in determining whether a joint venture exists, are: (1) joint ownership and control of property; (2) sharing of expenses, profits and losses, and having and exercising some voice in determining division of net earnings; (3) community of control over, and active participation in, management and direction of business enterprise; (4) intention of parties, express or implied; and (5) fixing of salaries by joint agreement.

Black's Law Dictionary (7th Edition, page 843) defines `joint venture' thus:

Joint Venture: A business undertaking by two or more persons engaged in a single defined project. The necessary elements are : (1) an express or implied agreement; (2) a common purpose that the group intends to carry out; (3) shared profits and losses; and (4) each member's equal voice in controlling the project.”

Further, in Inter-City Tire and Auto Center, Inc. v. Uniroyal, Inc (701 F. Supp. 1120, 1989-2 Trade Cases P 68, 839), the following were outlined as the basic element of a joint venture under the New Jersey or New York law:

•         an agreement between the parties manifesting some intent to be associated as joint  ventures;
•         each party contribute money, property, effort, knowledge or some other asset to a common undertaking;
•         a joint property interest in the subject matter of the joint venture;
•         a right of mutual control or management of the enterprise; and
•        an agreement to share in the profits or losses of the venture.

Under the European competition law, a joint venture has been defined as an undertaking which is jointly controlled by two or more other undertakings (Commission Notice (98/C 66/01) p.101 para. 3 of the Introduction). A distinction has been drawn between “concentrative” joint ventures and “cooperative” joint ventures. Concentrative joint ventures are described as those that bring about a lasting change in the structure of the undertakings concerned, while cooperative joint ventures are conceived for specific purpose, for instance, research and development, marketing, distribution, networking, and production.

Application of combination provisions to JV

While JVs are seen as enhancing efficiencies, depending on how they are structured, they may create a fertile ground for collusion between competitors and eliminate or lessen competition in the market. A JV that results in a combination may not only result in lessening or elimination of competition but more importantly, may result in elimination of an effective competitor and therefore reduction in the number of market players.

For including a JV into the purview of the Act and the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (Combinations Regulations), it would be helpful to consider, how a JV is structured.  There could possibly be two situations:

•          Where two or more firms jointly form a new entity; and
•          Where two or more firms acquire joint control over an existing firm or business thereof.

Where two or more firms jointly form a new entity

Under this head, there could be following structures:

•     Where two or more persons/ entities combine to form a new enterprise- under which, the parties to the JV holds certain percentage in the new enterprise, none of the parties holds any shareholding in the other enterprise.
•     Where the parties to the JV transfer assets or interests into the newly created entity. For e.g., Company A and Company B, who are competitors in manufacturing and distribution of certain products, decide to create a JV company, and transfer their respective distribution businesses into the said venture. In that case the assets that are transferred by the creating companies will constitute an acquisition by the joint venture, which is a separate entity, of control over the business, or a part thereof, of the creating companies.
•      Where, a special purpose vehicle company is created, which then acquires certain divisions or businesses of the said creating companies. The creating companies therefore cease to operate their independent businesses in respect of the transferred divisions and operate them through the newly created entity. This technically and factually results in the creating companies merging their divisions or businesses into one operation.

If we analyze, the first situation above- this would typically not fall under the definition of combination under section 5 of the Act.  Whereas, in the next two situations, if the threshold is crossed, then a possible case made be made out of bringing the JV into the purview of combination under section of the Act.


Of course,by virtue of MCA notifications (dated 4 March, 2011 and 27 May, 2011) as discussed in my earlier blog-since, there would be no turnover for a new JV entity (although there can be asset more than Rs. 250 crore), the parties to JV would not be required to file any notification for next five years. 

Where two or more firms acquire an existing firm or business thereof

Under this head, there could be following structures:

•     Where two or more companies acquire an existing entity or any part of the business thereof-this would constitute merger under the provisions of the Act and consequently, if the threshold are met, such combination may be treated as combination under section 5 of the Act.  This recently happed in the recent acquisition of Camlin Limited (Camlin) by Kokuyo S&T Co. (Kokuyo) of Japan, where under a JV agreement was signed between Camlin and Kokuyo, under which 14,044,850 shares of Camlin was acquired by Kokuyo. 
•     In certain instances, the transaction may involve the issue of shares by the acquiring companies in consideration for the acquisition. Therefore, depending on the amount of shares issued, the share issue may result in a further notifiable combination. That may be the case if, for instance, the acquiring companies issue shares that confer control over their businesses or a part thereof to the seller.  An example of this is where Company A and Company B jointly acquire control over Company C in order to use it as a vehicle for a joint venture through a sale agreement. Instead of cash, the two companies each issue 50% shares to Company C in their respective businesses. Therefore, the shares issued may result in Company C acquiring control over the businesses of Company A and B respectively. This subsequent issue of shares by Company A and B may therefore constitute notifiable mergers if they meet the threshold. Therefore, one transaction may result in multiple mergers that may require notification. 

Conclusion

From a transactional point of view, there could be various structures possible, above mentioned structures were only indicative of what might be construed as combination by the regulatory authority i.e, the Commission in India.  A transactional lawyer, while structuring a JV may take note of above observations, so as to help the enterprises (parties to JV) to surpass the provisions of filing a notification to the Commission without violating the provisions of the Act and Combination Regulations.