Real estate investments are increasingly being channelled through joint ventures. Although this can be a helpful investment structure, joint venture arrangements may require competition authorities’ prior approval. The question then arises: have you paid due regard to the competition law requirements?
Why does it matter ?
European and Belgian merger control rules require that certain transactions (“concentrations”) exceeding certain turnover thresholds be notified to the European Commission or the Belgian Competition Authority for prior approval. While seemingly straightforward, merger control can lead to surprising results because of the sometimes counterintuitive definition of a “concentration” and the relatively low (Belgian) turnover thresholds. As a result, apparently neutral or small transactions may nonetheless require a notification.
Prior notification of concentrations exceeding the relevant turnover thresholds is compulsory, even if they have little or no negative impact on competition.
Notifications can significantly impact on the timing of a transaction. To minimise delays and to prevent sanctions, it is important to seek competition law advice at an early stage.
In the following sections, we will briefly summarise the competition law concepts and requirements that are the most relevant to joint ventures investments.
A “concentration” covers operations where a change of control in the undertaking concerned occurs on a lasting basis. An intra-group transaction does not usually constitute a concentration.
In general, there are three different types of concentrations:
- Acquisitions of sole or joint control; or
- The creation of a joint venture which performs, on a lasting basis, all the functions of an autonomous economic entity (a so-called “full-function joint venture”).
An investment by means of a joint venture may constitute a concentration if, as a result of the transaction, two or more undertakings can exercise decisive influence over the joint venture, meaning they each individually can block decisions regarding the joint venture’s strategic or commercial conduct. Such influence is not necessarily synonymous with a majority shareholding and may entail very specific rights which could allow minority shareholders to nevertheless exercise control over the joint venture.
A few examples of concentrations:
- Equal voting rights – the straightforward case: In this scenario A and B both have equal voting rights, allowing them to block certain decisions of the joint venture.
- Right to equal representation in management bodies: If A and B have different shareholdings (e.g. 40 – 60) but are allowed to appoint an equal number of directors, they usually have joint control over the joint venture.
- Veto rights – the less straightforward case: If a minority shareholder has certain veto rights, he may have decisive influence over the joint venture. Joint control does not require veto powers over day-to-day management but only over strategic commercial decisions, such as budget, business plan or appointment of the management. Normal minority shareholder protection (e.g. blocking rights for amendments to the articles of association, capital increases or the decision to wind up the company) does not, as a rule, connote joint control.
- Joint exercise of voting rights – the even less straightforward case: If minority shareholders agree to jointly exercise their voting rights (e.g. in a shareholder agreement), they may exercise joint control through their combined voting power.
A concentration may also arise when two undertakings create a new full-function joint venture. This would require the new joint venture to have a “market presence” in the form of separate management, finance, assets and/or staff.
All concentrations with an EU dimension must be notified to the European Commission. In such case the Commission has, in principle, exclusive jurisdiction within the European Union: national competition authorities do not have jurisdiction to review the transaction under their national competition rules. This is called the “one-stop-shop” rule.
A concentration has an EU dimension when one of the following (alternative) sets of European turnover thresholds is exceeded:
First alternative set
- The combined worldwide turnover of all undertakings concerned exceeds 5 billion euros;and
- The turnover in the EU of each of at least two undertakings concerned exceeds 250 million euros;
Unless each of the undertakings concerned achievesmore than two thirds of its EU-wide turnover in one and the same Member State.
Second alternative set
- The combined worldwide turnover of all undertakings concerned exceeds 2.5 billion euros; and
- The total turnover of all undertakings concerned in at least three Member States exceeds 100 million euros; and
- The turnover of at least two undertakings concerned in each of those three Member States exceeds 25 million euros; and
- The turnover in the EU of each of at least two undertakings concerned exceeds 100 million euros;
Unless each of the undertakings concerned achieves more than two thirds of its EU-wide turnover in one and the same Member State.
If the European turnover thresholds are not exceeded, a notification may still be required at the national level. In Belgium, a notification will be obligatory if:
(i) each of at least two of the undertakings concerned has more than 40 million euros turnover in Belgium ; and
(ii) the turnover in Belgium of all undertakings concerned, taken together, exceeds 100 million euros; and
(iii) the European turnover thresholds are not exceeded.
The turnover to be taken into account is the consolidated net turnover for all products and services, in the most recent financial year, at the level of the ultimate controlling shareholder. Special rules apply to the turnover calculation for insurance companies, credit or other financial institutions.
Timing of the transaction – standstill obligation
The notification procedure can significantly impact on the timing of a transaction. The entire process can take a few weeks (in case of a simplified procedure) or up to a year (for complex cases). Prior to its approval, parties are prohibited from implementing the proposed transaction, subject to strict sanctions, ranging from prohibition or unwinding of the transaction to fines up to 10% of the consolidated turnover for all products and services.
Notification forms are extensive and require detailed information on the transaction, the relevant market(s) involved and the activities of the parties involved and their affiliates.
As the number of investments through joint ventures increases, merger control is becoming increasingly relevant for the real estate sector. It is important to keep in mind that seemingly neutral transactions can constitute “concentrations” for competition law purposes. As the (Belgian) thresholds are relatively low, smaller transactions may also need to be notified before they can go ahead.
The sanctions for errors are severe. Making a correct competition law analysis is therefore of paramount importance. In some cases it is possible to structure a transaction so that it is not a “concentration” or does not need notifying (e.g. by designing veto rights to avoid joint control). This, however, requires competition law advice at an early stage.