Seven deadly sins of joint ventures under competition law

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Publication February 18, 2019

This article identifies seven competition law pitfalls in joint ventures in energy and resources sectors.

It is very common for businesses to seek to coordinate or collaborate for the purposes of exploration, study, bidding, development, production or supply in the energy and resources sectors. Often that collaboration comprises one or more of the following:

  • arrangements between entities with similar interests in the exploration, development or acquisition of a resource or product;
  • arrangements between entities with similar capabilities to:
  • jointly develop, produce, supply and market;
  • jointly develop  and produce, and then separately supply and market;
  • team to respond to a tender or opportunity; or
  • arrangements between entities with complementary capabilities but with some overlap in competencies or potential competencies or overlap in upstream or downstream markets.

In the absence of an available exception, these arrangements could constitute cartel conduct. No formal contract is required to trigger the cartel laws - an informal understanding as to how the collaborating parties will behave is sufficient.

Since 6 November 2017, the defence for joint ventures under the Competition and Consumer Act (2010) Cth (Act) is satisfied where: 

  • any cartel provision is for the purposes of the joint venture and reasonably necessary for undertaking the joint venture;
  • the joint venture is for the production, supply or acquisition of goods or services; and 
  • the joint venture does not have the purpose of substantially lessening competition.

It is possible for parties to structure their proposed arrangement accordingly. However, the joint venture exception does not excuse the parties from engaging in conduct if it has the effect of substantially lessening competition.

Sin 1: Sham joint ventures

Joint ventures cannot be used as a screen for collusion.  The defence is available only for true joint ventures in that any coordination between joint venture participants must be for the purposes of, and reasonably necessary for, the joint venture. While there may be many purposes in forming a joint venture, it is also critical that it would not be said to be for a substantial purpose of achieving an anti-competitive outcome.

Sin 2: Not documenting the joint venture

Given the introduction of the offence of “attempt”, negotiations about a proposed joint venture can carry some risk. Before such negotiations are commenced, it can be advisable to document as precisely as possible, the intention to enter into a formal joint venture contract and set strict guidelines on how discussions about commercially sensitive topics are to proceed.

Sin 3: Gun-jumping

Entities that are looking to engage in a joint venture must be careful not to coordinate prior to its consummation.  Parties must not be tempted to engage in premature coordination pre-completion.

To learn more, read our legal update on a recent gun-jumping case here.

Sin 4: Implementation mismanagement

Once a joint venture has commenced, venture parties may have visibility of pricing and other competitively strategic behaviour of other parties to the venture.  If so, protocols should be implemented to ring-fence competitively sensitive information. Otherwise a platform for tacit collusion between the parties could be created. If the parties rely on such information in making strategic decisions (such as with regard to pricing output or customers), this could cause a substantial lessening of competition.

Sin 5: Ancillary coordination, unprotected by the joint venture defence

Care should be taken to ensure that the joint venture does not create an environment that fosters other collusive behaviour that would fall outside the scope of the joint venture.  Such conduct will not be protected by the joint venture exception.

Sin 6: Failing to seek authorisation for a potentially anti-competitive venture

It is possible to obtain immunity for both cartel conduct and conduct that has the purpose or effect of substantially lessening competition by seeking authorisation from the Australian Competition and Consumer Commission (ACCC). The ACCC may grant authorisation for a joint venture if it is satisfied that the public benefits of the conduct outweigh any anti-competitive detriment of the conduct.

Authorisation is a public process. Accordingly, by seeking authorisation, the parties would be revealing the terms of their proposed arrangements. Often this is not desirable for proponents. Although the ACCC will generally exclude commercially sensitive information on the request of a party, much of the information and the existence of the venture itself will be available to the public at large.

The process also involves close scrutiny by the ACCC of the parties’ current operations and may cause them to seek additional information and documents from the parties to inform their decision-making. Authorisation usually takes around 6 months. 

Sin 7: Ignoring the global context

As ventures become global in reach, it is also important to be cognisant of the competition law regimes in other jurisdictions and to ensure that the arrangement is lawful in all jurisdictions it touches.  For example, what qualifies as joint venture in Australia may constitute a merger in other jurisdictions and require notification.

Conclusion

Competitor collaborations in resources projects are common and can often be managed through the proper application of an exception to the cartel laws. Venture parties should start early and establish a structure and framework for negotiations at the outset to navigate the competition law risks and apply for authorisation if required.1

 

Footnotes

1 Many thanks to Daniel Law for his assistance in preparing this article.


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