Foreign Threats to Australian JVs: The Rise of the Asian Competition - - PDF document

Foreign Threats to Australian JVs: The Rise of the Asian Competition Regulators and Their Ability to Impact Australian Based Resources JVs

Nicolas J Taylor* and Jason A Beer** SUMMARY

Asian export sales underpin the majority of Australia’s major joint venture resource projects. The offshore jurisdiction of the ACCC to regulate competition is limited, and the competition laws of export target countries may apply, on an extraterritorial basis, to Australian resources joint ventures. Many of these laws are administered by regulators as powerful and interventionist as the ACCC. Within Asia and beyond, joint ventures are subject to many different regulatory regimes and inhouse counsel advising joint venturers need to be aware of the potential competition risks. This paper outlines the Australian position, and the positions in some of our key markets. There are common threads to be drawn that can be traced back to US and European consideration of similar issues in decades past.

INTRODUCTION

Asian export sales underpin the majority of Australia’s major joint venture resource projects. Resources lawyers are generally familiar with the necessity (and complications) of complying with Australian Competition and Consumer Commission (ACCC) administered competition laws, but today the competition laws of each export target country also commonly apply on an extraterritorial basis to Australian resources joint ventures.

32

*

Partner, Jones Day.

** Associate, Jones Day.

The authors gratefully acknowledge the contribution of their colleagues within Jones Day: Tony Wassaf (Sydney) who peer reviewed the paper, and Shinya Watanabe (Tokyo), Yizhe Zhang (Beijing) and John C Lin (Taipei) who peer reviewed the sections on their respective jurisdictions.

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The ACCC can be a powerful and interventionist regulator, but its passion, and in some cases jurisdiction, fades away as producers fix their sights on export markets and Australian consumers lose interest. Indeed, under Australian law it is even possible to gain immunity for an export cartel by registering its existence with the ACCC.1 However, no sooner than a rich commodity laden ship disappears into the setting sun, free from ACCC purview, the rising sun brings a rude awakening as the captain is met head on by equally powerful and interventionist regulators in China, Korea, Japan, Taiwan or India. However, the rules in those countries work very differently from in Australia – at least as far as joint venture producers are concerned. Within the Asian region and beyond, the competition law treatment of joint ventures varies substantially. In some countries the formation of the joint venture is treated as a merger requiring notification and approval, in other countries exemptions or clearances that are similar to ACCC authorisations are required for joint marketing, and in another set of countries there is a “self-assessment” system, with the risk of a competition regulator “second guessing” that assessment years later. With the increasingly aggressive positions being taken by Asian competition regulators, inhouse counsel advising on the formation of a new joint venture, or the sale or purchase of an interest in an existing one, must have regard to competition law risks in each jurisdiction to which the joint venture may export, even where the parties to the joint venture may have no business or assets in those jurisdictions.

WHY IS THIS AN IMPORTANT ISSUE?

Finding Markets for the Product

Both as a result of Australia’s geographic proximity and the growing role of Asia in driving global growth, Australia’s mining and resources industry is characterised by a clear focus on Asian customers. When considering Australia’s three largest natural resource exports, it is clear that within Asia five jurisdictions are of particular importance to Australian companies: China, Japan, Korea, India and Taiwan.

FOREIGN THREATS TO AUSTRALIAN JVS: ASIA 33

1

Competition and Consumer Act 2010 (Cth) s 1(2)(g).

Source: Data for the above graph sourced from DFAT, Australia’s Trade in Goods and Services 2013/14.

Structuring Projects Shareholders Want and Banks Tolerate

Economically efficient mines and oil and gas projects are often so substantial that even the world’s largest companies are not well placed to take all the risk inherent in “going it alone”. As a result, it is often necessary to collaborate with

• ther firms which can offer particular synergies, complementary skill sets or

additional scale. In other words, the economics of large-scale extraction industries are such that joint ventures are often the preferred structure.

Efficient Tax Structuring

Tax structuring often makes or breaks the economics of the project and the sums at stake are so large that it is tax that will dictate the type of vehicle through which a joint resources investment will be made. The advice usually entails two key elements: The joint venture should be unincorporated so that all the parties, minorities 1. included, can consolidate their interest in the venture with their other activities. While the joint venturers will necessarily be caught by the Australian tax net, 2. they should wherever possible avoid being caught by the tax net of the countries to which the product is exported. For this reason, jointly owned and operated resources projects will typically comprise:

34 AMPLA YEARBOOK 2015

an unincorporated production joint venture in which, from a legal viewpoint,

• the joint venturers are each entitled to mine/well output in proportion to their

interests; and/or a joint marketing agreement whereby the participants’ product remains

• separately owned but is jointly sold.

Competition Law

Competition laws around the world are structured according to three main controls: scrutiny of agreements between competitors with a strict prohibition of cartels;

• supervision of companies that are dominant or which have a substantial degree
• f market power; and

merger control that applies when market structures are changed.

• Joint ventures and joint marketing agreements sit uncomfortably at the apex

between the competitor agreements on the one hand and merger control on the

• ther. They are neither clandestine conspiracies against the customer (as a true

cartel), nor are they “simply” a merger transaction executed and closed within a few short months. They both change the structure of the market and involve

• ngoing agreements between the participants.

Writing on the issue of joint ventures in a competition context, Silva Morais identifies that: “[T]he intense acceleration and globalization of economic activities, which have acted as catalysts for profound changes in entrepreneurial activity, require to some extent the development of cooperation and concentration relations of growing complexity.”2 The rise of these types of business collaborations has posed unique challenges for advisers, competition regulators and judges around the world. The US, European and Australian regulators each took very different approaches to the treatment of joint ventures and joint marketing arrangements, well before Japan started vigorously enforcing its competition law and before other Asian countries enacted competition laws. This divergence among regulators arises because competition regimes mark out the boundary between the application of the prohibitions that seek to regulate the conduct of firms operating in a market, and prohibitions which seek to regulate the structure of markets. As joint ventures can range in scope and function from fully integrated corporate entities (e.g. incorporated production and marketing entities) through to narrowly defined joint endeavours between entities which are otherwise fiercely

FOREIGN THREATS TO AUSTRALIAN JVS: ASIA 35

2

LS Morais, Joint Ventures and EU Competition Law (Oxford, Hart Publishing, 2013) 1.

competing, even in any one jurisdiction joint ventures may need to be considered in light of both conduct and market structure based prohibitions. A relatively minor commercial change can switch how they are treated from a competition law

• viewpoint. This challenge has been framed in the following terms:

“One of the most striking features of joint ventures, which at the same time raises specific hurdles as regards the precise and stable definition of their framework under competition law, has to do with the fact that joint ventures combine behavioural and structural elements in a hybrid composition that does not easily allow an analytical distinction of such distinctive elements.”3 It is now well established that the competition issues raised by joint ventures present unique challenges and merit consideration independently of other competition topics: “Joint ventures are an important and distinct category for antitrust analysis because of their potential to bring about an efficiency-enhancing integration

• f economic activity. Many different forms of economic integration may be

effected by joint ventures, and each may enhance efficiency in more than one way.”4 This paper sets out the evolution of the treatment of joint ventures in developed jurisdictions, as a necessary precursor to considering their treatment by newer jurisdictions in Asia. While more established jurisdictions such as Japan, Korea and Taiwan have developed peculiar approaches to the consideration of competition issues associated with joint ventures, there are common threads to be drawn that can be traced back to US and European consideration of similar issues in decades past.

HOW HAVE WESTERN COMPETITION REGULATORS IN DEVELOPED ECONOMIES DEALT WITH JOINT VENTURES?

United States

In the US, both the conduct and market structure based prohibitions found in the Sherman Act 5 and the Clayton Act 6 can apply simultaneously to joint venture

• arrangements. However, in practice the theoretical risk of inconsistency has

largely been avoided.7 From a public enforcement perspective, guidance from the Federal Trade Commission (FTC) and the Department of Justice provides clarity as to when the regulators will assess joint ventures as mergers and when they will be assessed

36 AMPLA YEARBOOK 2015

3

Ibid 6.

4

GJ Werden, “Antitrust Analysis of Joint Ventures – An Overview” (1998) 66(3) Antitrust Law Journal 702.

5

15 USC §1 (1890).

6

15 USC §18 (1914).

7

BE Hawk, “Joint Ventures Under EEC Law” (1991) 15(2) Fordham International Law Journal 306.

against conduct prohibitions. Specifically, both state that joint ventures will only be assessed as mergers under the Horizontal Merger Guidelines where:8 the participants are competitors in the relevant market;

• the formation of the collaboration involves an efficiency-enhancing integration
• f economic activity in the relevant market;

the integration eliminates all competition among the participants in the relevant

• market; and

the collaboration does not terminate within a sufficiently limited period by its

• wn specific and express terms.

However, where regulators assess a joint venture under the merger regulations, this does not preclude private litigants from pursuing the arrangement as a breach of the conduct prohibitions under US law. For example, in the case of Texaco Inc. v Dagher,9 23,000 Texaco and Shell gas station owners alleged that an incorporated joint venture, which had previously received merger approval from the FTC, constituted price fixing. The matter ultimately went to the Supreme Court before the arrangement was found not to be anti-competitive, but only after the plaintiffs were first successful in the Ninth Circuit court. In many instances, consideration of joint ventures has provided the basis through which key issues within US competition law have been re-examined.10 In particular, the issue of joint ventures has served to elicit consideration by the Supreme Court of the fundamental question in US competition law of what criteria should be used to determine when and in what circumstances conduct should be treated as “per se” unlawful and when such conduct should be subject to a “rule of reason” analysis. Where conduct is established to be per se unlawful, a presumption is established that the conduct will always be anti-competitive. In such instances, regulators and plaintiffs only need to establish that the conduct occurred – they do not need to establish that the effect of the conduct was anti-competitive. Price fixing between competitors is one type of conduct that has been held in the US to be per se unlawful. Alternatively, where the courts determine that the conduct is subject to a rule of reason analysis, regulators and plaintiffs must establish both that the conduct occurred and that the effect was anti-competitive. Exclusivity arrangements with a dominant firm provide an example of conduct which is subject to a rule of reason analysis in the US. The current position with respect to joint ventures is that such arrangements are not inherently suspicious from a competition law perspective and should thus be subject to a rule of reason analysis. For example, in the Broadcast Music case,11 the Supreme Court was asked to consider whether collective selling arrangements

FOREIGN THREATS TO AUSTRALIAN JVS: ASIA 37

8

Federal Trade Commission & US Department of Justice, Antitrust Guidelines for Collaborations Among Competitors (2000), section 1.3.

9

(2006) 547 US 1.

10 Morais, above n 2, 11. 11 Broadcast Music, Inc. v Columbia Broadcasting System, Inc. (1979) 441 US 1.

between the American Society of Composers, Authors and Publishers (ASCAP), Broadcast Music, Inc (BMI) and their members and affiliates constituted a joint selling arrangement of the type which should be considered per se illegal under the price fixing prohibition found in the Sherman Act. The Supreme Court found that such arrangements were not per se illegal, but instead should be subject to a full rule of reason consideration, noting that “joint ventures and other cooperative arrangements are also not usually unlawful, at least not as price-fixing schemes, where the agreement on price is necessary to market the product at all”.12 The approach taken by the Supreme Court in the Broadcast Music case was affirmed more recently when in the American Needle 13 case the Court was required to consider whether the joint licensing of intellectual property rights by the National Football League and its member teams violated US competition law. The Court found that regardless of the fact that the National Football League Properties (the entity created to develop, license and market the teams’ intellectual property) was formed as a legal entity and not just as an agreement between the NFL and its member teams, the assessment must be one of substance and not form. Consistent with previous decisions, the Court considered the arrangement in light

• f the conduct prohibition found in the Sherman Act, as opposed to the merger

regulation provision in the Clayton Act. Ultimately, it found that the arrangement was one which must be subject to a full rule of reason analysis. Accordingly, the position in the US provides the possibility of formal clearance for the most integrated types of joint ventures where the parties to the joint venture effectively exit the market, while requiring lesser forms of collaboration to self- assess against a standard rule of reason analysis.

Europe

In Europe, the merger law applies when there are structuring changes that alter the number or identity of the “undertakings” active in the market. Once a merger has been approved, a new undertaking has been formed and the internal governance agreements (or agreements with its shareholders) are not generally susceptible to the provisions that control agreements “between undertakings”. On the other hand, if a collaboration does not amount to the creation of a new “undertaking” (or a change to the composition of an undertaking), the competition law treats the collaboration as an agreement between the separate shareholder “undertakings” who each remain the only parties “active on the market”. The distinction requires that joint ventures be classified as either “concentrative” joint ventures or “cooperative” joint ventures.14

38 AMPLA YEARBOOK 2015

12 Ibid. 13 American Needle, Inc. v National Football League, et al (2010) 560 US 183. 14 Hawk, above n 7, 307.

Prior to 1990, there was no specific merger statute under European competition

• law. As a result, the classification of a joint venture as a “partial merger” or

concentrative joint venture would result in it escaping the purview of the European Commission, unless it could be challenged on the basis that it might result in an abuse of a dominant position. Joint ventures that were found to be cooperative were subject to the restrictive agreement/cartel rules that existed at the time. During this time, the Commission attempted to treat most joint ventures as cooperative rather than as partial mergers, requiring that a joint venture could only be considered a partial merger if it met the following stringent criteria:15 the parent entities must have irreversibly abandoned the joint venture’s market;

• and

competition must not have been reduced in other markets where the parents

• perated.

With the establishment of the Merger Regulation,16 the types of arrangements now classed as concentrative joint ventures have broadened (in that more joint ventures are no longer subject to the cartel rules), partially as a result of the Commission recognising that alternative mechanisms now exist to address the competition issues associated with these arrangements. The definition of concentration, which is determinative in whether the Merger Regulation applies, states that: “The creation of a joint venture performing on a lasting basis all the functions

• f an autonomous economic entity shall constitute a concentration.”17

As is clear from the legislation, the key issue in determining whether a joint venture is subject to the market structure prohibition is whether it is established as an ongoing concern likely to act in its own economic interests. In addition, the Merger Regulation also excludes joint venture agreements where the parties to the agreement continue to compete with each other independently of the joint venture: “4. To the extent that the creation of a joint venture constituting a concentration pursuant to Article 3 has as its object or effect the coordination of the competitive behaviour of undertakings that remain independent, such coordination shall be appraised in accordance with the criteria of Article 81(1) and (3) [now Article 101] of the Treaty, with a view to establishing whether or not the operation is compatible with the common market. 5. In making this appraisal, the Commission shall take into account in particular: – whether two or more parent companies retain, to a significant extent, activities in the same market as the joint venture or in a market which is downstream or upstream from that of the joint

FOREIGN THREATS TO AUSTRALIAN JVS: ASIA 39

15 Ibid 309. 16 Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of

concentrations between undertakings (the Merger Regulation).

17 Ibid, art 3(4).

venture or in a neighbouring market closely related to this market, – whether the coordination which is the direct consequence of the creation of the joint venture affords the undertakings concerned the possibility of eliminating competition in respect of a substantial part of the products or services in question.”18 Where a joint venture falls short of meeting these criteria, consideration must be given to whether the arrangement is at risk of breaching the conduct prohibition found in Article 101(1) of the Treaty on the Functioning of the European Union (TFEU). If there is such a risk, the parties must determine whether the arrangement benefits from the exemption found in the statute: “The provisions of paragraph 1 [being the relevant prohibition] may, however, be declared inapplicable in the case of: – any agreement or category of agreements between undertakings, – any decision or category of decisions by associations of undertakings, – any concerted practice or category of concerted practices, which contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not: (a) impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives; (b) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question.”19 Joint ventures subject to the Merger Regulation are subject to the merger notification thresholds and if those thresholds are crossed, it is mandatory to file and the deal cannot be closed until clearance is granted or the waiting period

• expires. Joint ventures that are not subject to the Merger Regulation are at risk of

being found to be in contravention of Article 101(1) of the TFEU that outlaws agreements by object (e.g. a cartel) or by effect (e.g. an agreement that actually is anti-competitive). Where there might otherwise be a contravention because an agreement is anti-competitive by object or effect, it must rely on an efficiency defence found in Article 101(3).

Australia

Australia’s competition law was originally a simplified codification by the Australian legislature of the prevailing case law in the most prominent US District Court Circuits. In particular, the Australian statute adopted the US courts’ distinction between “per se” prohibitions in relation to cartel conduct on the one hand and the “substantially lessen competition” (the “rule of reason”) standard for non-cartel agreements and mergers. The language of ss 45, 46, 47, 48, 49 (which has since been repealed) and s 50 of the original Australian Trade Practices Act

40 AMPLA YEARBOOK 2015

18 Ibid, art 2(4)-(5). 19 Treaty on the Functioning of the European Union, European Union, signed 25 March

1957, art 101(3).

1974 20 can all be traced to US case law. However, an inherent feature of a codification is that it is rigid and cannot adapt in the face of trends in analysis or unforeseen factual scenarios and this has led to a significant difference between Australia and the US. At the time, the US had a voluntary, informal merger clearance regime and Australia adopted that too. On the other hand, the legislators found one aspect of the European competition law appealing. The European law recognised that even if an agreement amounted to a cartel or an anti-competitive agreement, there might be mitigating circumstances that could justify permitting the practice. Article 85(3) of the Treaty of Rome provided that even if an agreement would otherwise breach the competition law, the European Commission could grant an exemption or approval. This idea led to the adoption of the authorisation provisions in s 88 of the Trade Practices Act. Consequently, an Australian resources joint venture will usually comprise an agreement to which s 45 applies or an acquisition of assets or shares to which s 50

• applies. Informal clearance is optional but recommended when there is a real

possibility of the ACCC or a private plaintiff taking enforcement action. Where the joint venture does not itself sell the output of the venture and instead the parents receive the product but sell it pursuant to a joint marketing agreement, the problem arises that they are (from a legal viewpoint at least) competitors fixing common selling prices for their separate entitlements, and competitors agreeing not to supply product outside the joint marketing arrangement. This joint marketing often necessitates authorisation (except in the case of an export cartel). Ironically, although Australia adopted and still retains substantive and procedural legal provisions from the US and Europe respectively, those jurisdictions no longer apply their laws in the way Australia still does. In the US, there is now a mandatory merger filing regime for transactions that cross the relevant size thresholds and years ago the European Commission abandoned its attempt to keep up with approval applications it received and instead turned the equivalent of Australia’s s 88 authorisation procedure into a “self-assessment” system where efficiency arguments are only raised if a prosecution is launched.

COMPETITION LAW TREATMENT OF AUSTRALIA’S KEY RESOURCES EXPORT MARKETS

As identified earlier in this paper, Australian mining and resource companies are increasingly faced with competition law risks in jurisdictions to which they ultimately export product, but where they may not actually have any operations. This paper now concentrates on the competition law treatment of Australian resources joint ventures under the laws of the five most important export markets for Australian resources projects: China, Japan, South Korea, India and Taiwan.

FOREIGN THREATS TO AUSTRALIAN JVS: ASIA 41

20 Trade Practices Act 1974 (Cth), renamed Competition and Consumer Act 2010 (Cth).

China (Mainland)

China’s Anti-monopoly Law applies on an extraterritorial basis where there are domestic effects. Article 2 of the Anti-Monopoly Law of the People’s Republic of China21 (AML) provides that the Law applies to conduct “within the territory of the PRC” and “outside the territory of the PRC that eliminate or restrict competition on the domestic market of China”. The AML’s mergers regime is administered by the Ministry of Commerce (MOFCOM) while the conduct prohibitions are enforced by the National Development and Reform Commission (NDRC) (when price is affected) or the State Administration For Industry & Commerce (all non-price effects). These three agencies can delegate aspects of their investigatory and decision-making powers to their “direct report” agencies at the provincial and municipal level, and the latter two have each done so. Merger control applied to joint ventures The merger control regime is set out in Chapter IV of the AML. The regime applies to all “concentrations” between “undertakings”. If MOFCOM concludes that the concentration leads, or may lead, to the elimination or restriction of competition, it must prohibit the concentration unless it is satisfied that there are benefits that clearly outweigh the costs or that the concentration is otherwise in the public interest.22 An “undertaking” is a legal or natural person or “other organization” engaged in the manufacturing or selling of goods or the provision of services.23 The AML defines a “concentration” in Article 20 as: “(1) a merger of undertakings; (2)

• btaining control over another undertaking by one undertaking

acquiring the equity or assets; and (3)

• btaining control over another undertaking, or the ability to exercise a

decisive influence on such an undertaking through signing contracts or

• ther means.”

Article 20(2) is similar to s 50 of the Competition and Consumer Act 2010 (Cth) in that it applies to mergers through the acquisition of shares or assets. Article 20(1) has no equivalent in Australia because, unlike some other jurisdictions, a true merger of two separate legal entities to form one is unknown to the general Australian law.

42 AMPLA YEARBOOK 2015

21 <<中华人民共和国反垄断法>> [Anti-monopoly Law of the People’s Republic of China]

(People’s Republic of China) National People’s Congress, Order No 68, 30 August 2007.

22 Ibid, art 27. 23 Both incorporated and unincorporated joint ventures can exist in China. However, note

that pursuant to Article 2 of the Law of the PRC on Chinese-Foreign Contractual Joint Ventures, a joint venture may be taken to be legal persons in certain circumstances, even if they are not incorporated in the way that an Australian joint venture company would be.

For the purposes of this paper, Article 20(3) is of most relevance. It captures both the formation of new joint ventures and the acquisition of an interest in an existing joint venture. Importantly, it can also apply to a commercial arrangement

• f a lesser nature than the concept of a joint venture under Australian law. For

example, it could potentially capture certain types of franchising arrangements or a distribution or technology licensing arrangement if one entity gains a “decisive influence” over another, although there is no precedent yet confirming this. Of the established competition law regimes in other countries, the provisions and administration of the Chinese AML most closely follow the standards of European competition law. However, there is an important difference between China and Europe in relation to joint ventures. In Europe, only “full-function” joint ventures (i.e. when the new entity has sufficient resources to become an economic actor in its

• wn right) are subject to merger regulations, whereas in China, all joint ventures are

subject to the AML whether they are “full-function” or not. In practical terms, this means that a joint venture may be caught by the AML even if it has no dedicated employees or assets. Unlike the Australian law, it is mandatory to file “concentrations” that surpass the relevant turnover thresholds and, where the thresholds are crossed, it is illegal to close the transaction until positive approval has been received or the required assessment time has expired. The thresholds are currently that any two or more parties to the transaction each have RMB 400 million of turnover within China and the combined turnover of all the parties to the joint venture is either: RMB$10bn worldwide; or

• RMB$2bn within China.24
• Turnover is taken to be “within China” if the customer is in China, even if the

transaction with the supplier is concluded outside China. When an existing business is being acquired or merged, it is the value of the turnover of that relevant business that is assessed against the above thresholds. Where a new joint venture is being formed, it is the turnover of the parents that is assessed. If a transaction was not filed when it should have been, MOFCOM can unwind transactions after the event or impose a fine. To date, in the case of non-filing MOFCOM has only imposed fines, but in these transactions the fines have been simply for failing to file because the transaction itself was ultimately thought not to be anti-competitive. It cannot be assumed that MOFCOM would restrict its

• rders to the imposition of fines if, on discovering the transaction, MOFCOM

concluded that it was actually anti-competitive. If a transaction was actually anti- competitive, MOFCOM would likely consider whether a divestiture order might also be an effective remedy. Unlike Europe, even if the transaction falls below the thresholds and filing is not required, MOFCOM may investigate the transaction of its own volition.

FOREIGN THREATS TO AUSTRALIAN JVS: ASIA 43

24 Note also that there are “creeping acquisition” provisions whereby transactions over a

two-year period are aggregated for the purposes of the thresholds.

It is self-evident from the discussion above concerning the broad extraterritorial purview of the AML that “carving out” the Chinese assets from the deal pending approval by MOFCOM will not necessarily be effective if combining the off-shore assets affects the domestic Chinese market. MOFCOM is notoriously slow at reaching final decisions, but an expedited process is available for two types of joint ventures: concentrations that involve the establishment of a joint venture outside China,

• where the joint venture does not conduct economic activities in China; and

concentrations that entail a change of control in respect of an existing joint

• venture where, post-transaction, the joint venture will be controlled by one or

more of the parties which jointly controlled the joint venture before the transaction. Consistent with international practice, MOFCOM approves most proposals for “concentrations” and only opposes a small number. Unlike most western agencies, however, MOFCOM is more willing to accept (and more often requires) “behavioural remedies”. In other words, MOFCOM more often accepts (and more often requires) that after the merger the merged firm continues to sell products, refrains from increasing prices or otherwise continues to operate as two separate competitors. In western countries, it is more common to require the divestiture of assets to solve competition problems, or to unconditionally approve the merger. It is rare that an agency accepts behavioural conditions, and in some cases the authority is legally precluded from entertaining behavioural conditions

• r there is an inflexible policy against behavioural remedies.

44 AMPLA YEARBOOK 2015

Therefore, MOFCOM’s jurisdiction is enlivened if: a mining or resources joint venture is formed within Australia by companies

• that already have sales to customers in China above the thresholds; or

an interest in a joint venture is acquired and the joint venture itself has sales to

• customers in China above the threshold.

The above transactions could be prohibited or be subject to conditions, as a matter of Chinese law, and even if the transaction is not anti-competitive, any failure to file could result in fines. MOFCOM’s treatment of joint ventures

Three examples illustrate MOFCOM assessments of joint ventures: General Electric and Shenhua (2011)25 Shenhua is the largest supplier in China of coal used for gasification and General Electric (GE) is the licensor of one of the three gasification technologies in use. The two formed a joint venture that was approved by MOFCOM but only subject to conditions that coal suitable for gasification would continue to be widely sold and that the customers would not be required to use the GE gasification technology. P3 Alliance (2014)26 The three largest international shipping operators servicing the Asia-Europe shipping routes (Møller-Maersk, MSC and CMA) proposed an alliance by which not only would capacity, ships and slots be shared (as in more traditional shipping conferences), but there would be joint daily management of the vessels, aggregated and shared costs of

• peration, and the sale of unused capacity.

MOFCOM blocked the proposal altogether without accepting proposed remedies. Curon/Toyota (2014)27 Five entities28 set up a joint venture for the supply of nickel metal-hydride (NiMH) batteries for the global general automotive battery market and the Chinese market for batteries used in hybrid vehicles. MOFCOM had concerns in both markets and imposed conditions that the joint venture sell its products to third parties on fair and reasonable terms. FOREIGN THREATS TO AUSTRALIAN JVS: ASIA 45

25 Ministry of Commerce Announcement [2011] No. 74 (GE/Shenhua Decision), 10

November 2011, available in Chinese at http://fldj.mofcom.gov.cn/article/ztxx/201111/ 20111107855595.shtml.

26 Ministry of Commerce Announcement [2014] No. 46 (P3 Alliance Decision), 17 June

2014, available in Chinese at http://fldj.mofcom.gov.cn/article/ztxx/201406/20140600 628586.shtml.

27 Ministry of Commerce Announcement [2014] No 49 (Curon/Toyota Decision), 2 July

2014, available in Chinese at http://fldj.mofcom.gov.cn/article/ztxx/201407/20140700 648291.shtml.

28 Corun, Toyota China, Primearth (that is itself a joint venture of Toyota and Panasonic),

Xinzhongyuan, and Toyota Tsusho.

Conduct provisions: the joint marketing of product Chapter II of the AML concerns “Monopoly Agreements” and Chapter III concerns the “Abuse of Dominant Market Position”. Monopoly agreements are defined as “including agreements, decisions and

• ther concerted practices to eliminate or restrict competition”. Article 1329

prohibits monopoly agreements between competing undertakings that provide for the fixing of prices, restriction of supply of product to the market or amount to a joint boycott. In other words, the language of the AML identifies four elements that must be satisfied for the prohibition to apply: there are two or more separately identifiable “undertakings”; 1. there is an agreement, decision or concerted practice between competing 2. undertakings; that agreement, decision or concerted practice eliminates or restricts 3. competition; and the agreement fixes price, restricts output, amounts to a joint boycott or falls 4. into another prohibited category. Article 14,30 which concerns vertical arrangements, is similarly structured whereby the same definition of monopoly agreement applies and certain categories of monopoly agreements are prohibited (most notably ones involving resale price maintenance). Until the Johnson & Johnson case,31 there was debate about whether conduct that fitted within one of the specifically prohibited categories (e.g. resale price maintenance) was conclusively presumed to be anti-competitive or whether it would be possible to admit that the conduct amounted to vertical or horizontal price fixing, but defend the allegation of illegality on the basis that the agreement did not in fact eliminate or restrict competition. Since the Johnson & Johnson case this has been clarified. Where the conduct is horizontal and is listed in Article 13, the courts will apply a strong presumption that the agreement would be anti-competitive and a heavy onus falls on the defendant to demonstrate that the conduct does not amount to an elimination or restriction of competition.32 No such presumption exists for vertical agreements,

46 AMPLA YEARBOOK 2015

29 This is the equivalent of s 45 and the cartel prohibitions of the Competition and

Consumer Act.

30 This is the equivalent of s 47 of the Competition and Consumer Act. 31 Beijing Ruibang Yonghe Science and Technology Trade Company v Johnson & Johnson

Medical (Shanghai) Ltd, and Johnson & Johnson Medical (China) Ltd (2013), Shanghai Higher Court decision per P Wang, S Evrard, Y Zhang and B Zhang, “Antitrust Alert: New Precedents Find Resale Price Maintenance Unacceptable Under Chinese Anti- Monopoly Law” (Jones Day Publications, August 2013).

32 Provisions of the Supreme People’s Court on Certain Issues Relating to the Application

• f Law in Hearing Cases Involving Civil Disputes Arising out of Monopolistic Acts, 5

March 2012, art 7.

where the regulator (or a private plaintiff) would have to prove that the arrangement had an anti-competitive effect covered by Article 14. Article 15 provides that Articles 13 and 14 are inapplicable in a number of circumstances, including if the parties to the agreement can prove that the agreement was for the purpose of improving product quality, reducing cost or enhancing efficiency. However, unlike s 88 of the Competition and Consumer Act, there is no explicit mechanism for the assessment to be undertaken prior to the agreement being entered into, and in this respect the Chinese provision is more similar to the self-assessment framework under Article 101(3) of the TFEU. In

• ther words, an Article 15 defence is raised after the authority commences an

investigation rather than before the event. Although the authors are not aware of a case in which the NDRC has applied Articles 13 and 15 to joint marketing of a joint venture product by the parties to a joint venture, there is a significant risk that the NDRC would enforce the prohibition, particularly where: the joint venture is reasonably loose and the individual venturers retain

• significant control in the governance structure such that the joint venture is at

risk of not comprising an “undertaking” for the purposes of the AML; the jointly marketed product commands a significant Chinese market share

• such that elimination or restriction of competition is reasonably possible; and

it appears that the joint venturers may not be able to prove that they are passing

• n the benefit of cost reductions.

In most western countries, the need to prove the existence of a contract, arrangement, understanding or concerted practice is the key evidentiary hurdle for the authority to establish when making out a contravention concerning high prices. However, as in Europe (but unlike the US and Australia), excessive pricing of itself can amount to an abuse of dominant market position under Chinese law and the law recognises that two or more companies may be “jointly dominant”. In China, a rebuttable presumption of dominance applies if: a single undertaking has at least a 50% market share;

• two undertakings together have a 66% market share; or
• three undertakings together have a 75% market share.
• In western Europe, competition authorities are very reticent to take excessive

pricing cases, particularly based on an allegation of joint dominance. That reluctance stems both from the notion that it is very difficult to prove what is an “excessive” price and from the notion that if supra-competitive pricing is prohibited, it would significantly compromise business incentives to strive to succeed through competition. By contrast, the NDRC33 is not reticent to take

FOREIGN THREATS TO AUSTRALIAN JVS: ASIA 47

33 In this respect, the NDRC is similar to bureaucracies in the former USSR countries that

were responsible for setting prices during the times of communist central planning. These entities often consider that they have the skills and information necessary to

enforcement action against excessive pricing, resulting in the levying of fines, and in the five years since the enactment of the AML the NDRC has levied a number of fines for excessive pricing. For example, in February 2015 it imposed a fine of almost US$1 billion against Qualcomm for a range of violations of the AML, including excessive pricing on the licensing of certain patents. There is no explicit law concerning what amounts to an excessive price. However, the NDRC has issued Rules on Monopolistic Pricing Conduct which identify several factors that should be considered in evaluating whether a price is excessive.34 This assessment is often done through a comparison of price with efficient cost and price charged by a dominant firm, with the prices charged in a comparable market (usually in another country) that is less concentrated and “workably competitive”. However, the courts have considered other measures. For example, in the Qualcomm case,35 the court looked at the fairness of the royalty setting procedure to determine whether prices for royalties were excessive. In that case, among other things, the court determined that the compulsory bundling of Standard Essential Patents (SEPs) with non SEPs (including expired patents in Qualcomm’s licensing portfolio) constituted excessive pricing. Again, if the jointly marketed product from a joint venture has a significant market share, it is at risk of NDRC scrutiny concerning whether its prices are excessive. Although individual employees of the companies concerned are not subject to fines for contravening the AML price fixing or abuse of dominance provisions, staff can be subject to significant sanctions for failing to cooperate with a State Administration For Industry & Commerce or NDRC investigation. Summary The Chinese AML can apply on an extraterritorial basis to Australian resources joint ventures at the time of formation, when an interest in a joint venture is sold or when the product is jointly marketed. There are, however, mechanisms to streamline the consideration by MOFCOM of such joint venture transactions and ways to reduce the risk that the NDRC or State Administration For Industry & Commerce might take action against the joint marketing of the output from such joint ventures.

Japan

Japan’s competition law is contained in the Act Concerning Prohibition of Private Monopoly and Maintenance of Fair Trade (AMA) and enforced by the Japanese Fair Trade Commission (JFTC). While there is no explicit provision in

48 AMPLA YEARBOOK 2015 determine what is a “fair” price and are also more likely to regard it as unacceptable when prices exceed that benchmark.

34 Provisions on Anti-Price Monopoly, art 11. 35 National Development and Reform Commission v Qualcomm (2015).

the AMA which provides for extraterritorial application, the AMA has been interpreted to apply to transactions and arrangements outside of Japan which have an effect in Japan. Merger control applied to joint ventures The AMA prohibits mergers which “may substantially restrain competition” and which fall within one of the following statutory criteria: an acquisition of stock (Article 10);

• the creation of an interlocking directorate (Article 13);
• a merger between two or more companies (Article 15);
• an acquisition of the entire or an important part of a business (Article 16);
• a joint incorporation-type company split (Article 15-2);
• a joint stock transfer involving a business combination (Article 15-3).
• Based on the above criteria, it is clear that integrated joint ventures would in

many cases be subject to the merger regulation. If a transaction reaches the notification thresholds, filing is mandatory in Japan. The thresholds are based on domestic turnover in Japan, irrespective of whether the companies compete in the same market. Details of the proposed transaction must be notified to the JFTC 30 days prior to the transaction. For example, in the case of an acquisition of stock, if the group of combined companies to which:

• ne of the parties to the transaction belongs has sales in Japan of more than ¥20
• billion; and

any other party to the transaction belongs has sales in Japan of more than ¥5

• billion.

A failure to file a notification is subject to a criminal fine of up to ¥2 million (~US$17,000) and where the transaction is found to substantially restrain competition, the JFTC may seek orders to provide for a voiding of the merger, a company split, a joint stock transfer or any other remedies to remove substantial restraint on competition.36

FOREIGN THREATS TO AUSTRALIAN JVS: ASIA 49

36 <<私的独占の禁止及び公正取引の確保に関する法律>> [Act Concerning Prohibition

• f Private Monopoly and Maintenance of Fair Trade], (Japan) Act No 54, 14 April 1947.

Conduct provisions: the joint marketing of product Where a joint venture has received merger clearance, the AMA does not stipulate that those arrangements are free from liability under the conduct-based prohibitions under the statute. As a result, parties are required to consider whether a proposed joint venture may also constitute an “unreasonable restraint of trade”. JFTC’s treatment of joint ventures under the combination (merger) law

The following examples illustrate the approach taken by the JFTC to joint ventures: BHP/Rio Tinto JV (2010) After BHP Billiton’s proposed acquisition of Rio Tinto was abandoned, the two entities proposed an iron ore joint venture. Although the JFTC did not reach a final view, BHP and Rio Tinto have stated publicly that the JFTC was one of the regulators which would either have opposed the joint venture outright or imposed unacceptable conditions.37 Tokuyama/Central Glass Co. (2013)38 Tokuyama Corporation and Central Glass Co., Ltd. both manufactured and sold soda ash, calcium chloride and other associated products. They proposed to establish a joint venture which would integrate their respective sales businesses. The JFTC provided clearance for the joint venture on the basis that the joint venture would be subject to import competition in a number of markets and the threat of new entry in those markets where import competition wasn’t viable. Toshiba/Mitsubishi Electric Corporation JV (1999)39 Toshiba Corporation and Mitsubishi Electric Corporation proposed to establish a joint investment company into which the research and development, design and manufacturing aspects of their respective large-scale motor operations would be consolidated. Both companies intended to continue to market independently of each other. The JFTC assessed the joint venture under the merger regulation and ultimately provided clearance

• n the basis that there was increasing import competition, existing domestic competition

and customers possessed significant bargaining power. Sumitomo/Mitsubishi JV (1999)40 Sumitomo Metal Industries, Ltd, Mitsubishi Material Corporation and Mitsubishi Material Silicon Corporation proposed to establish a joint venture with the aim of developing the technology of mass-producing next-generation, 300mm silicon wafers, which required a huge amount of capital investment and advanced technology. The JFTC provided merger clearance to the joint venture on the basis that there were a number of competing firms seeking to develop similar technology. 50 AMPLA YEARBOOK 2015

37 AAP Reuters, “Rio, BHP Scrap $117b Joint Venture”, The Sydney Morning Herald

(online), 18 October 2010, www.smh.com.au/business/rio-bhp-scrap-117b-joint- venture-20101017-16pde.html.

38 Major Business Combination Cases in Fiscal Year 2013, 11 June 2014 [Japan Fair Trade

Commission trans, www.jftc.go.jp/en/pressreleases/yearly-2014/June/140611.files/ 140611.pdf] 4.

39 OECD Competition Committee, Policy Roundtables: Competition Issues in Joint

Ventures (9 February 2001), Organisation for Economic Co-operation and Development, www.oecd.org/competition/abuse/2379097.pdf, 84.

40 Ibid 85.

Unreasonable restraints of trade are prohibited under Article 3 of the AMA and are defined as: “such business activities, by which any enterprise, by contract, agreement or any other means irrespective of its name, in concert with other enterprises, mutually restrict or conduct their business activities in such a manner as to fix, maintain or increase prices, or to limit production, technology, products, facilities or counterparties, thereby causing, contrary to the public interest, a substantial restraint of competition in any particular field of trade.”41 Article 7-2 of the AMA then provides for tougher penalties for those unreasonable restraints of trade that fall into one of the following categories: “(i) those related to the price of goods or services; (ii) those that substantially restrain any of the following with respect to goods or services and thereby affecting price: (a) supply or purchase volume (b) market share (c) transaction counterparties.” In addition, the JFTC’s prosecution policy stipulates that it will seek criminal penalties for unreasonable restraints of trade which constitute hard core cartels (e.g. price fixing, bid rigging, market allocations, supply restraints), which are serious violations and which affect the life of people in Japan broadly.42 Except for merger cases, the JFTC provides for a Prior Consultation System whereby businesses can seek some comfort regarding whether certain arrangements would be considered to be in breach of the AMA.43 However, this is not an authorisation process whereby net public benefits are weighed up against possible competitive detriments as is available in jurisdictions such as Australia. There are two types of the Prior Consultation System, a formal one and an informal one. The formal System requires that the parties must agree that details

• f the proposed arrangement can be published on the JFTC’s website (with

confidential information able to be withheld). While there is no statutory basis for the System and hence no statutory immunity from prosecution if a positive response is provided, the JFTC’s stated policy is that it will not pursue parties for conduct where it has previously provided a positive response under the System as far as conditions remain the same.

FOREIGN THREATS TO AUSTRALIAN JVS: ASIA 51

41 <<私的独占の禁止及び公正取引の確保に関する法律>> [Act Concerning Prohibition

• f Private Monopoly and Maintenance of Fair Trade], (Japan) Act No 54, 14 April 1947,

art 2(6).

42 <<独占禁止法違反に対する刑事告発及び犯則事件の調査に関する公正取引委員会の

方針>> [The Fair Trade Commission’s Policy on Criminal Accusation and Compulsory Investigation of Criminal Cases Regarding Antimonopoly Violations], (Japan) Fair Trade Commission, Section 1, revised 23 October 2009.

43 <<事業者等の活動に係る事前相談制度>> [Prior Consultation System for Activities of

Business], (Japan) Fair Trade Commission, 1 October 2001.

Summary In summary, the formation of a joint venture by companies which export to Japan, or the transfer of a stake in an Australian joint venture that exports to Japan, is subject to the Japanese competition regime. Where a joint venture is integrated sufficiently to be subject to the merger regulation, even if merger clearance is provided, consideration is still required of whether there may be a breach of the conduct prohibitions. In such cases, it is often prudent to engage with the JFTC through the Prior Consultation System.

South Korea

South Korea’s Monopoly Regulation and Fair Trade Act (MRFTA) applies on an extraterritorial basis where there are domestic effects. Article 2-2 of the MRFTA provides that “the Act shall apply even to activities carried out overseas when they are deemed to have influence on the domestic market”. Merger control applied to joint ventures The merger control regime is set out in Chapter 3 of the MRFTA. The regime is defined to apply to the following types of transactions: “1. Acquisition or ownership of stocks of other companies Practice of a company’s officers or employees (referring to those other 2. than the officers and who have continued to work in the company; the same shall apply hereinafter) serving on the boards of multiple corporations (referred to as ‘interlocking directorate’ hereinafter) Mergers with other companies 3. Acquisition through transfer, lease, or acceptance of the whole or a main 4. part of the business operations of another company, or acquisition through the transfer of the whole or a main part of the fixed operational assets of another company (hereinafter referred to as ‘transfer of

• perations’)

Participation in the establishment of a new company.”44 5. It is clear that integrated joint ventures where one entity takes an equity position in another, or where a new corporate entity is created, would fall within the ambit

• f the merger control regime. Additionally, joint venture arrangements short of an

acquisition of stock, but involving some contractual right to appoint board members, may also be subject to the merger control regime.

52 AMPLA YEARBOOK 2015

44 <<독점규제및공정거래에관한법률>> [Monopoly Regulation and Fair Trade Act],

(Republic of Korea) Ministry of Government Legislation, Act No 9554, 25 March 2009, art 7(1).

Where the Korean Fair Trade Commission (KFTC) is of the view that a transaction may substantially restrain competition, the parties may still proceed if they are able to prove that the efficiencies achievable as a result of the transaction

• utweigh the detriment to competition, or if the parties can demonstrate that the

target entity is a non-viable company meeting the requirements set out by Presidential Decree.45 Unlike Australia, South Korea has a mandatory filing regime46 with the threshold being set by Presidential Decree.47 For South Korean domestic enterprises, if one of the parties has worldwide assets or revenue in excess of ₩200 billion (~US$166 million) and the other party has worldwide assets or revenue of at least ₩20 billion (~US$16.6 million) the transaction must be notified. For foreign parties (i.e. those with their main office outside of South Korea or which were established under foreign law), in addition to the worldwide assets and revenue threshold each of the parties must have at least ₩20 billion (~US$16.6 million) of local revenue before notification is required. If a transaction which meets the notification threshold is not filed, the KFTC can impose an administrative fine of up to ₩100 million (~AUD$83,000).

FOREIGN THREATS TO AUSTRALIAN JVS: ASIA 53

45 Ibid, art 7(2). 46 Ibid, art 12. 47 Enforcement Decree of the Monopoly Regulation and Fair Trade Act (Korea), Presidential

Decree No 23475, 1 January 2012, art 18.

Conduct provisions: the joint marketing of product Even where a joint venture is subject to the merger control regime, it may also be subject to the conduct-based prohibitions on improper concerted practices. Where this is the case, it may be necessary to seek authorisation from the KFTC. Article 19 of the MRFTA sets out the relevant conduct prohibition in South Korea: KFTC’s treatment of joint ventures

The following examples illustrate the approach taken by the KFTC to joint ventures: Korea Construction Materials case (2000)48 Ten asphalt concrete manufacturers in the northern part of Kyonggi Province in South Korea established a joint venture called Korea Construction Materials to jointly sell their

• product. The joint venture agreement included provisions which stipulated penalties for

any manufacturer which sold asphalt in competition with the joint venture. The KFTC found that the agreement constituted a contravention of the conduct prohibitions under the MRFTA and issued penalties to each of the companies involved. mozaiq (2015)49 ABB, Bosch and Cisco filed for and obtained Korean merger approval for the formation

• f their global joint venture, mozaiq. Through mozaiq the parties sought to facilitate

cooperation in relation to an inter-operable platform for automating household electrical appliances. P3 Alliance (2014)50 The three largest international shipping operators servicing the Asia-Europe shipping routes (Møller-Maersk, MSC and CMA) proposed an alliance by which not only would capacity, ships and slots be shared (as in more traditional shipping conferences) but that there would be joint daily management of the vessels, aggregated and shared costs of

• peration, and the sale of unused capacity.

The KFTC announced that it would open an indepth review of the alliance but the proponents pulled the deal when it was blocked by MOFCOM under Chinese law. BHP/Rio (2010)51 After BHP Billiton’s proposed acquisition of Rio Tinto was abandoned, the two entities proposed an iron ore joint venture. Although the KFTC did not reach a final view, Rio has stated publicly that the KFTC was one of the regulators which would either have

• pposed the joint venture outright or imposed unacceptable conditions.

54 AMPLA YEARBOOK 2015

48 OECD Competition Committee, Policy Roundtables: Competition Issues in Joint

Ventures (9 February 2001), Organisation for Economic Co-operation and Development, www.oecd.org/competition/abuse/2379097.pdf, 90.

49 ABB, “ABB, Bosch and Cisco Establish Open-Software Venture to Unify Smart Home

Technology” (Press Release, 30 March 2015).

50 Drawn from the full text of MOFCOM’s decision translated by JOC.COM. 51 AAP Reuters, “Rio, BHP Scrap $117b Joint Venture”, The Sydney Morning Herald

(online), 18 October 2010, www.smh.com.au/business/rio-bhp-scrap-117b-joint-venture- 20101017-16pde.html.

“No enterpriser shall agree with other enterprisers by contract, agreement, resolution, or any other means to engage jointly in any of the following acts

• r let others engage in such kinds of activities that unfairly restrict

competition (hereinafter referred to as ‘improper concerted practice’): Act of fixing, maintaining, or changing prices 1. Act of determining the terms of trade or conditions of payment of goods 2.

• r services

Act of restricting production, delivery, transportation, or transaction of 3. goods, or transaction of services Act of limiting the territory of trade or counterparties to trade 4. Act of preventing or restricting the establishment or extension of 5. facilities or installation of equipment required for the production of goods or rendering of services Act of restricting the types or specifications of goods or services in 6. producing or transacting goods or services Act of jointly carrying out and managing the main parts of a business or 7. establishing a company, and such, to carry out and manage the main parts of a business jointly Act of deciding the successful bidder or real estate bidder, bidding price, 8. auctioned price or auctioned real estate price, and other matters that should be prescribed by the Presidential Decree Any practice that practices substantially suppressing competition in a 9. particular business area by means other than those under Subparagraphs 1 to 8 that interfere with or restrict the activities or contents of the business of another enterpriser (including the enterpriser performing such act).”52 While not stipulated in the legislation, the KFTC has stated that it intends to treat some types of arrangements as presumptively unlawful without first conducting a full assessment of whether they “unfairly restrict competition”. In line with common international practice, these arrangements are limited to agreements between competitors in relation to price, output restrictions, market sharing and bid rigging. For other types of arrangements determined to be concerted practices but which do not relate to these four “hard core” cartel areas, the KFTC will engage in an assessment of the arrangement to determine whether it unfairly restricts competition. The KFTC has also provided an informal safe harbour for arrangements which constitute concerted practices, but fall short of the hard core cartel threshold. In cases where the businesses participating in the arrangement have an aggregate market share below 20% in the relevant market,53 the KFTC will not investigate.

FOREIGN THREATS TO AUSTRALIAN JVS: ASIA 55

52 <<독점규제및공정거래에관한법률>> [Monopoly Regulation and Fair Trade Act],

(Republic of Korea) [Ministry of Government Legislation trans, www.moleg.go.kr/ english/korLawEng?pstSeq=54772], Act No 9554, 25 March 2009, art 7(1).

53 Guidelines for Concerted Practice Review, 12 August 2009, [Korean Fair Trade

Commission trans, http://eng.ftc.go.kr/files/static/Legal_Authority/Guidelines%20for %20concerted%20practice%20Review_mar%2014%202012.pdf], 14.

Where arrangements do constitute concerted practices, authorisation is available where the arrangements are entered into for the following purposes:54 industrial rationalisation

• research and technology development
• vercoming economic depression
• industrial restructuring
• rationalisation of trade terms and conditions
• enhancement of competitiveness of small and medium enterprises.
• Summary

In summary, the formation of a joint venture by companies which export to South Korea, or the transfer of a stake in an Australian joint venture that exports to South Korea, is subject to the South Korean competition regime. Where a joint venture is integrated sufficiently to be subject to the merger regulation, and it meets the relevant notification thresholds, it must be filed with the KFTC. In such circumstances, there is also the possibility that the conduct-based prohibitions may apply and authorisation could be necessary. Where a joint venture is not sufficiently integrated to be subject to the merger regulation, consideration must still be given to whether authorisation is necessary.

India

India’s competition law is contained in the Competition Act 2002,55 s 32 of which explicitly grants extraterritorial power to the Competition Commission of India (CCI) in relation to both merger matters and conduct cases. Merger control applied to joint ventures In India, s 6 of the Competition Act prohibits all “combinations” that cause an appreciable adverse effect on competition in an Indian market, whether or not the transactions are large enough to trigger the mandatory filing requirements. Section 5 provides that combinations that cross the thresholds (discussed below) must be filed with the CCI for approval and it is illegal to close a transaction before the approval process is complete. The CCI has fined a number

• f entities for failing to lodge merger notifications (even when the mergers, once

investigated, were found not to be anti-competitive). Consequently, parties are now generally taking a conservative approach and filing in India even where it is arguable whether the obligation to file has been triggered.

56 AMPLA YEARBOOK 2015

54 Above n 52, art 19(2). 55 The Competition Act 2002, No 12 of 2003, [Competition Commission of India trans,

www.cci.gov.in/index.php?option=com_content&task=view&id=18].

Because enterprise is defined in s 2 of the Competition Act as a business that “is

• r has engaged in” a range of business practices, the conventional wisdom was that

it does not apply to the formation of a “greenfields” joint venture. However, since the CCI started fining companies for not filing mergers, merging parties have taken a more conservative approach and the CCI has accepted merger filings for the formation of new joint ventures with minimal existing operations. By contrast, there is no doubt that the acquisition of equity in an existing company or business so as to form a joint venture out of a business that had previously been wholly owned, and the transfer of an interest in a joint venture, are each caught by the provisions that control “combinations”. Unlike the European system (on which the Indian system is loosely based), the distinction between a “full function” joint venture and one that is not “full function” is not applied. Consequently, the acquisition of an interest in an existing business resulting in a joint venture must be filed, even if the joint venture does not have the staff and resources to “stand on its own two feet” as a separate business from its parents. There are eight different triggers for the mandatory filing regime. The reason there are eight different tests is that the tests are on the basis of: 1,500 crore or more rupees of Indian assets held by the merging entities

• themselves;

4,500 crore or more rupees of Indian turnover by the merging entities themselves;

• 6,000 crore or more rupees of Indian group-wide assets held by the acquirer’s
• corporate group;

4,500 crore or more rupees of Indian turnover by the acquirer’s corporate group;

• US$750 million of worldwide assets held by the merging entities themselves of
• which 750 crore rupees of assets are held in India;

US$2,250 million of worldwide sales by the merging entities themselves of

• which 2,250 crore rupees of sales occur in India;

US$3,000 million of assets worldwide held by the acquirer’s corporate group of

• which 750 crore rupees are in India; or

US$9,000 million of turnover worldwide held by the acquirer’s corporate group

• f which 2,250 crore rupees are in India.

FOREIGN THREATS TO AUSTRALIAN JVS: ASIA 57

Therefore, the CCI’s jurisdiction is enlivened when: a mining or resources joint venture is formed within Australia that rolls in any

• existing productive assets of the parent companies that already have sales to

customers in India above the thresholds; or an interest in a joint venture is acquired and the joint venture itself has sales to

• customers in India above the thresholds.

The above transactions could be prohibited, or be subject to conditions, as a matter of Indian law, and even if the transaction is not anti-competitive, any failure to file could result in fines. Conduct provisions: the joint marketing of product Section 3(1) of the Competition Act provides that: “No enterprise or association of enterprises or person or association of persons shall enter into any agreement in respect of the production, supply, distribution, storage, acquisition or control of goods or provision of services which causes or is likely to cause an appreciable adverse effect on competition within India.” CCI’s treatment of joint ventures under the combination (i.e. merger) law

Cargill and Copersucar Two multinational corporations based outside India (but with significant participation in the sugar supply chain within India) obtained merger approval from the CCI to form a joint venture which would merge their existing sugar operations. There was no horizontal or vertical overlap, but the joint venture triggered the filing thresholds and CCI approval was therefore required. Mumbai Aviation Fuel Farm Facility Mumbai International Airport, Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum proposed to create a joint venture (Mumbai Aviation Fuel Farm Facility Limited) and filed for CCI approval. The new joint venture would construct and manage an integrated fuel facility at Chhatrapati Shivaji International Airport in Mumbai. The joint venture had the backing of senior government officials. The CCI initially expressed concerns but these were addressed by facilitating the participation of non-oil companies as equity participants in the joint venture (thus enabling customers themselves or other parties to buy-in and gain access to the facility). The CCI approved the joint venture on condition that amendments were made to facilitate access. Johnson & Johnson Innovation/Ethicon/Google JV (2015) Johnson and Johnson Innovation, Ethicon and Google Inc. proposed to establish a joint venture called Warren Robotics Inc. which would conduct research and development in respect of robotic systems for surgical innovation. The CCI approved the joint venture primarily on the basis that there were no horizontal overlaps or vertical relationships between the parties in India. 58 AMPLA YEARBOOK 2015

Section 3(3) provides that price fixing and market sharing agreements are “presumed” to have an appreciable adverse effect on competition except that the presumption of illegality does not apply to “any agreement entered into by way of joint ventures if such agreement increases efficiency in production, supply, distribution, storage, acquisition or control of goods or provision of services”. There is a potential problem when the parents of a joint venture have taken in kind from the joint venture and then under a separate agreement determined to market the products jointly, because that would arguably not be “by way of joint venture”. To the authors’ knowledge this issue has not been vented in any of the cases that have been decided in the 10 years since the CCI has been actively enforcing the Competition Act, but they consider that there is a significant risk that such joint marketing may not benefit from the exclusion of efficiency enhancing joint ventures from the presumption that price fixing or market sharing causes an appreciable adverse effect on competition in India. On the other hand, s 3(3) only creates a presumption and it would still be possible to present evidence to rebut the presumption that a joint marketing agreement appreciably lessens competition. The important point here is that appropriate records should be retained to demonstrate that the joint marketing arrangements are pro-competitive vis-à-vis the counterfactual. Section 4 of the Competition Act prohibits the abuse of dominance and this can arise if the dominant firm charges unfair (i.e. excessive) prices. There is no explicit law concerning what amounts to an excessive price. In practice this is determined by a comparison of price with efficient cost and price charged by a dominant firm with the prices charged in a comparable market (usually in another country) that is less concentrated and “workably competitive”. The decision to enter into a joint venture, or the basis on which the joint venturers agree to manage the joint venture, are susceptible to scrutiny under ss 3 and 4 of the Competition Act. Given the “U-turns” that the CCI has made in other cases, when considering whether the ongoing arrangements for the management of a joint venture are compliant with competition law, little comfort could be obtained simply from the fact that the formation of the joint venture had been approved as a combination. Even after such an approval, care should be taken not to contravene ss 3 and 4.

FOREIGN THREATS TO AUSTRALIAN JVS: ASIA 59

Summary The Indian Competition Act can apply on an extraterritorial basis to Australian resources joint ventures at the time of formation (particularly if any operational assets are contributed to the joint venture), when an interest in a joint venture is sold or when the product is jointly marketed. While a merger clearance process exists, there is no pre-approval process available for a joint marketing arrangement which must be analysed on a self-assessment basis.

Taiwan

The competition law of Taiwan is contained in the Fair Trade Act of 201556 which has extraterritorial application to transactions. In the mergers arena, there is explicit guidance that the following considerations apply in deciding whether the Taiwan Fair Trade Commission (TFTC) will assert jurisdiction:57 “1. the relative weight of the merger’s effects on the relevant domestic and foreign markets; the nationalities, residence, and main business places of the combining 2. enterprises; the explicitness of the intent to affect market competition in the Republic 3.

• f China and the foreseeability of effects on market competition;

the likelihood of creating conflicts with the laws or policies of the home 4. countries of the combining enterprises; the feasibility of enforcing administrative dispositions; 5. the effect of enforcement on the foreign enterprises; 6. rules of international conventions and treaties, or, regulations of 7. international organizations;

• ther factors deemed important by the Fair Trade Commission.

8. If none of the combining enterprises in an extraterritorial merger case has production or service facilities, distributors, agents, or other substantive CCI’s treatment of joint ventures under the conduct rules

General Insurers’ (Public Sector) Association (GIPSA) Third Party Administrator Four government insurance companies issued an expression of interest to set up their

• wn joint venture third party claims administrator. Initially the CCI made a decision that

there was no case to answer at the time of the expression of interest because the proposal was too nascent. Later, when the joint venture had been formed, the CCI re-examined the case and determined that there was a case for the insurance companies to answer pursuant to the conduct provisions of the Competition Act. 60 AMPLA YEARBOOK 2015

56 Fair Trade Act of 2015, 24 June 2015 [Taiwan Fair Trade Commission trans, www.ftc.gov.tw/

internet/english/doc/docDetail.aspx?uid=1295&docid=13970].

57 Fair Trade Commission Disposal Directions (Guidelines) on Extraterritorial Mergers,

13 February 2015, art 3.

sales channels within the territorial domain of the R.O.C, jurisdiction shall not be exercised.” In practice this means that jurisdiction will be asserted when there is “conduct that [has] a reasonably foreseeable direct and significant impact on the Taiwanese market”. The Fair Trade Act contains both merger provisions and cartel prohibitions, each of which can be relevant to the collaboration between enterprises in the resources industry. As explained below, both mergers and lesser contractual collaborations require regulatory approval. There are distinct advantages of a merger approval over an approval for a lesser

• collaboration. Although there is no express provision to the effect that a merger

approval obviates the need for an approval for a lesser contractual collaboration, in practice the TFTC takes the approach that a merger approval takes the merged entity outside the purview of the conduct rules. Merger control applied to joint ventures Article 10 of the Fair Trade Act defines the term “merger” for the purposes of Taiwan’s competition law: “1. where an enterprise and another enterprise are merged into one; where an enterprise holds or acquires the shares or capital contributions 2.

• f another enterprise to an extent of more than one-third of the total

voting shares or total capital of such other enterprise; where an enterprise is assigned by or leases from another enterprise the 3. whole or the major part of the business or properties of such other enterprise; where an enterprise operates jointly with another enterprise on a regular 4. basis or is entrusted by another enterprise to operate the latter’s business; or where an enterprise directly or indirectly controls the business operation 5.

• r the appointment or discharge of personnel of another enterprise.”

The above definition does not explicitly include or exclude joint ventures, and the TFTC has provided that detail in its publicised guidance. Between 1992 and 2002 it took the view that the formation of a joint venture was not subject to the merger provisions, but the transfer of an interest in an existing joint venture did fall within the merger control regime. However, since 2002 the TFTC has undertaken a detailed re-appraisal and adopted the view that the merger regime applies to both: the formation of a new joint venture; and

• the transfer of an interest in an existing joint venture.
• Unlike the European law (on which Taiwan’s competition law is based), there is

no distinction between a “full function” joint venture and a lesser form of joint venture – both must be notified.

FOREIGN THREATS TO AUSTRALIAN JVS: ASIA 61

Most countries with a mandatory filing requirement apply turnover thresholds, not market share thresholds. The reason for this is that market share thresholds require a market to be identified and the proper definition of the market is the first key issue to be addressed on a substantive competition analysis. By contrast with general international practice, Taiwan is one of the very few countries in the world that has dual filing thresholds that can be triggered on the basis of either turnover

• r market shares.58

The thresholds are: as a result of the merger the enterprise(s) will have one-third of the market share;

• ne of the enterprises in the merger has one-fourth of the market share; or
• ne of the enterprises has sales into Taiwan of at least NT$15 billion and the
• ther has sales into Taiwan of at least NT$2 billion.

The thresholds above apply based on sales to customers in Taiwan, regardless

• f whether the transaction occurred in, or was governed by the law of, another
• country. Unlike the approval regime for concerted practices (discussed below), a

merger approval is a once-off permanent approval. Conduct provisions: the joint marketing of product A “concerted practice” is defined as follows: “competing enterprises at the same production and/or marketing stage, by means

• f contract, agreement or any other form of mutual understanding, jointly

determine the price, technology, products, facilities, trading counterparts, or trading territory with respect to goods or services, or any other behavior that restricts each other’s business activities, resulting in an impact on the market TFTC’s treatment of joint ventures under the combination (i.e. merger) law

Merger approval for EasyCard-telco TSM joint venture The country’s transportation card company (EasyCard) and the country’s five mobile telecommunications operators established a joint venture to facilitate payments and ticketing services. Despite stringent public opposition to the joint venture from the

• pposition political party, the TFTC approved it but with eleven conditions. The

conditions included requirements that the joint venture permit access to parties who might want to buy in, and potentially sell back out, of the joint venture and requirements

• f equal treatment in commercial dealings.

Shipping conference approval for concerted action Zhong Yi Shipping Company, Fei Ma Shipping Company, Dong Xin Shipping Company, Jing Qiang Shipping Company and Guan Guang Shipping Company previously obtained approval for joint scheduling, ticket sales and joint ticket issuance operations. On expiry

• f the previous approval, they needed to apply in 2015 for an extension. The TFTC

permitted a further five-year extension, attaching conditions. 62 AMPLA YEARBOOK 2015

58 Indeed, the authors of this paper are aware that some government officials in Taiwan regard

the market share thresholds as one of the weaknesses of the law that warrants reform.

function with respect to production, trade in goods or supply and demand of services.”59 The TFTC staff have provided informal guidance that conduct is not thought to be capable of affecting a Taiwanese market if the parties’ combined market share is below 5%. In effect, the regulator treats such arrangements as not being capable of constituting a concerted practice. If the combined market share exceeds 10%, it is assumed that the conduct would be capable of having an effect on a Taiwanese market and as such, TFTC approval must be sought. Between a 5% and 10% market share, discretionary factors contribute to whether the TFTC would consider that the conduct would be capable of having an effect on a Taiwanese market. In principle, the joint marketing of a commodity produced by a joint venture (including an Australian joint venture exporting to Taiwan) would fall within the definition of a concerted practice under Taiwanese competition law. Article 15 prohibits such practices unless the action is “beneficial to the economy as a whole”, one of the specifically enumerated criteria apply and the practice has been approved by the TFTC. The specific criteria relevant to a resources joint venture are: “5. Joint acts in regards the importation of foreign goods for the purpose of strengthening trade; or … Joint acts for the purpose of improving operational efficiency or 7. strengthening the competitiveness of small business. Other joint acts necessarily required for the purposes of improving 8. industrial development, technological innovation, or operational efficiency.” This mechanism is similar to the s 88 approval that the ACCC can grant for joint marketing arrangements affecting the domestic Australian market. However, unlike the ACCC, the maximum duration of an approval able to be granted by the TFTC is five years, after which a new application is required to renew the approval for further five-year terms. While it is permissible to enter into a supply contract that lasts longer than five years, if a renewed TFTC approval is not obtained, the contract would need to be

• terminated. The inability of the TFTC to provide firm approval for more than five

years presents challenges in the context of resources joint ventures where “foundation” contracts in excess of 10 to 15 years are often required to make a resources project bankable. Although the TFTC is cognisant of this fact and that the limitation could prevent some beneficial ventures from being pursued, it takes the view that it is powerless to provide additional comfort, and reform to this aspect of the law must come from the legislature. Clearly there are resources joint ventures that have not complied with this aspect of Taiwanese competition law, but the lack of

FOREIGN THREATS TO AUSTRALIAN JVS: ASIA 63

59 Fair Trade Act of 2015, 24 June 2015 [Taiwan Fair Trade Commission trans,

www.ftc.gov.tw/internet/english/doc/docDetail.aspx?uid=1295&docid=13970], art 14.

enforcement is generally due to the absence of these companies having any Taiwanese presence. However, choosing not to comply is not a risk that companies with an actual or potential future Taiwanese presence should take. Summary In summary, the formation of a joint venture by companies that export to Taiwan or the transfer of a stake in an Australian joint venture that exports to Taiwan is captured by the Taiwanese merger regime if it crosses the relevant market share or value thresholds. Obtaining TFTC approval is not materially different from obtaining such an approval in a western country. By contrast, in principle joint marketing of the product from an Australian resources joint venture requires TFTC approval which can only be provided on a firm basis for five years, beyond which re-approval must be sought. Importantly, there may be a significant advantage in seeking to ensure that a resources joint venture is caught by the merger assessment regime because in practice the TFTC accepts that a joint venture that has been cleared does not require authorisation for any intra-agreement to market jointly.

CONCLUSION

There are commercial and tax imperatives why resources projects are structured as joint ventures in which the joint venturers take product in kind and under a separate legal agreement market the product jointly. Generally, it is the export countries’ laws that will be applied to the venture rather than Australia’s competition law. From a competition law viewpoint, a joint venture with joint marketing can trigger both merger and ongoing competition law exposure or the structure can fall either side of an arbitrary divide between merger control and the control of competitor

• collaborations. As each country’s laws are different on whether or which aspect of

competition law (the mergers prohibition or competitor collaboration prohibition) applies, when forming, selling or buying a stake in a joint venture, businesses must consider the potential competition law risks that may exist in each country to which the joint venture exports. Where a single joint venture has customers located in a range of countries, the same legal documents can be analysed as a merger, a competitor collaboration or both, depending on the countries concerned. In some countries there are advantages to having a joint venture treated as a merger and in others it is preferable that it be treated as a competitor collaboration.

64 AMPLA YEARBOOK 2015

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