In his third and final article on joint ventures, Paul Chases teams up with Alex White and André Pretorius to look at the impact of the EU Merger Regulation on corporate real estate JVs
It often comes as a surprise that a corporate real estate transaction/joint venture (JV) might need to be notified to the European Commission for competition law clearance under the EU Merger Regulation (EUMR). Notification does not turn on whether a transaction raises substantive competition issues (“reduces competition”), but whether it meets two procedural/jurisdictional requirements. Does it: (1) constitute a “concentration”; and (2) have an “EU dimension”? Or, put another way, is it a transaction of a particular type and does the parties’ turnover exceed certain thresholds?
Failure to notify when these requirements are met can have serious implications. It can delay completion of an otherwise successful transaction, as the notification process and formal clearance can take two to three months, even under the Commission’s “simplified” procedure. Notification is also mandatory, which means that if the parties either fail to notify a transaction that meets the requirements, or complete before receiving clearance, they can face fines of up to 10% of their worldwide group turnover.
Concentration
To constitute a “concentration” under the EUMR, a transaction must involve a change in control of a business on a lasting basis. A “business” is broadly defined for this purpose to include a company or asset, provided it has a market presence to which turnover can be attributed (for example, a shopping centre or office block generating rental income). “Control” is broadly defined too as the ability to exercise “decisive influence”, and can include the acquisition of a majority of the voting rights of a company, or where a party gains a veto over strategic commercial decisions (for example, budget, business plan and appointment of management).
The most straightforward example of a concentration is where a single purchaser acquires control of an existing business.
Less straightforward is where two or more parties wish to create a new JV entity over which they will have “joint” control (such as where each of the parties will have a veto over strategic commercial decisions). Creating a JV will only constitute a concentration within the scope of the EUMR if it can be said that the JV will be acting as an autonomous entity, with its own market presence separate from that of its parents on a lasting basis (the “full-functionality” requirement).
This position remains unchanged despite the Brexit vote; depending on the form of UK-EU relationship negotiated, the most significant impact of Brexit on these rules is that the “one-stop shop” rule (which dis-applies the national merger control rules of EU member states when a transaction meets the EUMR tests) would no longer apply to the UK, so that transactions that meet both the EUMR and UK merger control tests might require notification in both jurisdictions.
Full-functionality
Commission guidance provides a non-exhaustive list of factors to take into account in determining full-functionality, but in practice the assessment is fact-dependent and often finely balanced. In a recent case concerning a new JV to develop and let a shopping centre, the JV would, on the one hand, own substantial land assets, have a board of directors responsible for its operations (although the directors would continue to have management roles within the parents), and be able to raise finance (although it would initially be reliant on its parents for financing until the land is transferred to it).
On the other hand, the JV would not itself employ any staff and would instead engage a third party to manage the site, seek tenants and let properties. Ultimately the transaction was notified to the Commission, which accepted that full-functionality arose on the facts.
Less straightforward still are cases where an existing business goes from being under the sole control of a single parent to joint control by two or more parents, or where there is a change in the number or identity of the joint-controlling parents of an existing JV (such as where there are three parents to a JV and one parent wishes to sell its stake to one of the remaining parents). The problem with these cases is that it is unclear as a matter of law whether or not the entity must meet the full-functionality requirement for the case to constitute a concentration. Opinion among legal practitioners is divided, and the Commission’s decisional practice has so far failed to clarify the issue.
Given the difficulties in applying the full-functionality requirement, and further legal uncertainties concerning when the full-functionality requirement will actually apply, it is often important, irrespective of the substantive issues of a transaction, to get competition lawyers on board early.
Where a case does raise issues concerning full-functionality, one way of effectively seeking clarity is to informally approach the Commission on a confidential basis with a briefing paper covering the proposed deal and request it to consider whether a filing is necessary. Any response will be indicative, but the relevant parties can take comfort from the Commission’s position.
EU dimension
A transaction will only have an “EU dimension” if the parties, being the acquirers (and any joint controllers) and target, meet either of two turnover tests. Under the first test, the parties must have combined worldwide turnover exceeding €5bn, and at least two of the parties must have EU-wide turnover exceeding €250m. Under the second test, these thresholds are lower, at €2.5bn and €100m respectively, but there are two additional thresholds: in each of at least three member states, two of the parties must have turnover exceeding €25m and the parties must have combined turnover exceeding €100m.
When either of these tests is met, an EU dimension may still not arise, however, if each of the parties generate more than two-thirds of their EU-wide turnover in one and the same member state.
An important point to stress regarding these turnover tests is that the relevant turnover to be considered is the turnover of the “corporate group” to which each party belongs. Unfortunately, this can make it all too easy for transactions involving several large parties (for example, pension funds, private equity houses or sovereign wealth funds) to have an EU dimension.
National notification
If the above tests for EUMR notification are not met, parties must remember to consider whether a national filing needs to be made (or should be made in the case of the UK’s voluntary merger regime). However, as noted above, in a post-Brexit world, parties might need to consider a UK filing even when the EUMR filing tests are met.
Paul Chases is a senior associate and head of corporate real estate at Herbert Smith Freehills LLP. André Pretorius is a partner and Alex White an associate in the competition, regulation and trade department.
