Companies beware: the turnover of a joint venture buying a target is not necessarily decisive for determining whether the EU merger thresholds are met.
The General Court fully upheld the Commission’s 2017 decision prohibiting the joint acquisition of Cemex’s Hungarian and Croatian subsidiaries by cement companies HeidelbergCement and Schwen Zement through their full-function joint venture (JV).
In its ruling, the Court confirmed that not the JV itself, but its parents are the “undertakings concerned” when determining whether the turnover thresholds are met, if they are the “real players” behind the transaction. Key to this assessment is the level of involvement of the parents in the acquisition steps, including preparing the offer, structuring due diligence and negotiating the transaction structure.
In April 2017, the Commission prohibited the joint acquisition by HeidelbergCement and Schwen Zement through their 50/50 full-function JV Duna Dráva Cement (DDC) of two Cemex subsidiaries in Hungary and Croatia. The EU regulator found that the transaction raised significant concerns in relation to the Croatian markets for grey cement, which could lead to a rise in prices.
The parties appealed the Commission’s decision and argued that the Commission had wrongly claimed jurisdiction by considering the parents as the “undertakings concerned” instead of DDC itself. If DDC had been considered as the buyer (instead of the parents), the Commission would not have jurisdiction over the deal as the turnover thresholds would not have been met due to DCC’s low revenues.
General Court ruling
The Court found that the Commission had jurisdiction to assess the merger and was right to consider the parent companies as the “real players behind the transaction”. The Court considered that the fact that the JV is fully functioning from an operational point of view does not mean that it enjoys autonomy as regards to the adoption of its strategic decisions. According to the judgment, the Commission can assess the economic reality of a transaction and identify the undertakings concerned by looking in particular at how the acquisition process was initiated, organised and financed.
The Court also rejected the cement companies’ arguments that the Commission had erred i) in its assessment of the transaction by wrongly defining the relevant geographic market, ii) in finding that the transaction would affect a “substantial part” of the market, and iii) in its assessment of the competitive impact of the transaction. The Court further confirmed that the remedies offered by the parties, which consisted of granting a competitor access to a cement terminal in southern Croatia, were insufficient to address the competition concerns.
The General Court judgment provides useful guidance in cases involving a JV acting as a buyer. The Court confirms that the parents to a JV are the relevant undertakings when determining whether the turnover thresholds are met if the parents, rather than the JV, are the “real players” behind the transaction. Key to this assessment is the level of involvement of the parents in the acquisition steps, including the preparation of the offer, the structure of due diligence and the negotiation of the transaction structure.
In deal scenarios where JVs act as the purchasers, companies should therefore carefully consider the parent companies’ involvement in the acquisition process before deciding on whether or not the transaction needs to be notified to the Commission. The Commission can impose hefty fines on companies implementing a notifiable concentration before notification to and clearance by the Commission.
This article was published in the Competition Newsletter of November 2020. Other articles in this newsletter: