Can joint venture agreements be ‘anti-competitive’, and thereby be hit by the prohibition under the Competition Legislation?
Yes, joint venture agreements can also be ‘anti-competitive’ if they have or are presumed in law to have an ‘appreciable adverse effect on competition’. An agreement, whether a joint venture agreement or otherwise, must be tested against the test of ‘causing or likely to cause an appreciable adverse effect on competition within India’. There is no blanket carve-out for ‘joint venture agreements’.
A joint venture agreement should set out the true purpose of the joint venture in clear and precise terms. It is not sufficient to merely state that the purpose of the joint venture is to increase the efficiency in production, supply, distribution, storage, acquisition, or control of goods or provision of services.
The following Do’s and Don’ts may help parties to the proposed joint venture:
DO’S
- Define the true purpose of the joint venture. Be precise about what it aims to achieve. It should be for the purposes of increasing the efficiency in production, supply, distribution, storage, acquisition, or control of goods or provision of services.
- Be clear, specific, and honest about your pro-competitive goals and the limits of your joint venture. For example, in terms of the products, services and the geography covered as well as how long the joint venture will last .
- Be clear on how the joint venture will directly benefit the customers.
- Be clear on how the joint venture will improve the production or distribution of goods or provision of services.
- Be clear that the benefit(s) proposed to be obtained by the joint venture could not be effectively achieved by the parent companies acting alone.
- Check whether the joint venture would reduce or get rid of existing competition between the parent companies. Make sure that any reduction in competition brought about by the joint
venture, if any, is no more than is absolutely necessary to achieve its goals. - Check if the joint venture is creating barriers for new entrants in the market.
- Check that the ‘non-compete’ provisions between the parent companies, if any, are directly related and necessary to the implementation of the joint venture, and that the necessity of a non-compete restraint meant that in the absence of such restrictions, the joint venture could not be implemented or could only be implemented under more uncertain conditions, at
substantially higher cost, over an appreciably longer period or with considerably higher difficulty. - The greater any reduction in competition, the higher the legal risk (and the greater the need for legal advice).
- Check if it is possible to achieve the same benefits in a way that involves a lesser reduction in competition, if any, between the parent companies.
- Regularly check your joint venture arrangements to ensure they are compliant with the law.
- Keep an eye on any changes to your arrangements, the marketplace and the law – be particularly alert to changes in circumstances at key moments for a business (for example, a merger).
- Think about setting up a competition law compliance programme.
DON’TS
- Don’t think that joint venture arrangements which try to mask what is otherwise price fixing, market sharing, output restriction or bid-rigging will escape detection and fines.
- Don’t think that using an intellectual property license as a framework for joint venture (or simply calling it a joint venture) will protect you from scrutiny.
- Avoid sales restrictions. Any sales restrictions agreed between competitors which may be likely to be seen as a market sharing arrangement and could attract significant fines.
- Don’t share sensitive information that relates to business matters not covered by the joint venture. For example, any discussions about pricing should only be those that are necessary for the joint venture, and limited to the specific scope of the relevant venture.
