Joint ventures: Competition NSI and Bribery

Question 1

Part I of the Competition Act 2998 (‘CA’) - specifically section 2 (sometimes referred to as the ‘Chapter I prohibition’)

· For the Chapter I prohibition to ‘bite’, each of the three criteria listed in section 2 must be met:

Answer 1

• There must be an agreement between undertakings, a decision by associations of undertakings or a concerted practice between undertakings;
• which may affect trade within the UK;
• and has as its object or effect the prevention, restriction or distortion of competition within the UK.

Question 2

What happens when the criteria for Chapter I prohibition are met?

Answer 2

· An agreement that meets these three criteria is prohibited (and therefore void) unless it comes within an exemption.

Question 3

• Exemptions from Chapter 1 prohibition
  · In assessing whether an agreement is void under s. 2 CA, the following decision tree should be followed:

Answer 3

• Is there an appreciable effect on competition?
• The Chapter I prohibition applies only where an agreement has an appreciable effect on trade within the UK – agreements between competitors with up to a 10% combined market share OR agreements between non-competitors with a maximum market share of 15% each may benefit from a‘de minimis’ threshold.
• Does a ‘block exemption’ apply?
• Each ‘block exemption’ exempts from the Chapter I prohibition a particular category of agreement that complies with the conditions set out in that block exemption. Each category of agreement will be a commercial arrangement that the competition authorities consider should be encouraged: examples include research and development agreements, technology transfer agreements and distribution agreements – see further below.
• Could the agreement be exempt under s. 9 CA?
• An agreement that does not come within a block exemption may still be exempt if it satisfies the conditions set out in section 9(1) CA, BY:
  o Contributing to improvements in production/distribution or promoting technical or economic progress – while allowing consumers a fair share of the resulting benefit BUT
  o Only imposing restrictions that are indispensable to the attainment of these objectives AND
  o Not affording the parties the possibility of eliminating competition

Question 4

Vertical agreements?

Answer 4

Agreements are classified as vertical if they operate at different levels of the supply chain

· Vertical effect: manufacturer>supplier>retailer

Question 5

Horizontal agreements?

Answer 5

Horizontal agreements, meanwhile, operate at the same level of the supply chain.

· Horizontal effect: manufacturer>manufacturer or supplier>supplier or retailer>retailer

Question 6

Chapter I prohibition affect on horizontal agreements?

Answer 6

· The Chapter I prohibition clearly controls the conditions under which competitors can co-operate under a horizontal agreement – remembering that, under normal market conditions, competitors can be expected to try to undercut one another’s prices or offer better non-financial conditions of sale.
· Examples of horizontal agreements include:
* joint purchasing agreements,
* information exchange agreements and
* research and development agreements made between competing enterprises.
· Depending on their terms, these agreements may fall under a ‘de minimis’ limit or a block exemption or the section 9 provisions discussed above – and in that case would not fall foul of the Chapter I prohibition.
· However, agreements between competitors are obviously more likely to have anti-competitive effects: the protections referred to above would not be available (for example)where the parties are aiming to fix prices or divide up customers or markets.
· These type of horizontal agreements could lead to the creation of a ‘cartel’: individuals involved in setting up a cartel will be guilty of a criminal offence. Where competitors cease to compete as a result of a cartel, consumers have no choice but to pay artificially high prices or to accept worse non-financial conditions.

Question 7

Chapter I prohibition affect on vertical agreements?

Answer 7

· The Chapter I prohibition also controls the conditions under which parties operating at different levels of the supply chain (such as manufacturers and retail outlets) can co-operate under a vertical agreement – taking into account the fact that, as they are not competitors, there is less likelihood that such arrangements may be anti-competitive.
· One of the most common forms of vertical agreement is the distribution agreement, between a supplier of products and a distributor who will buy the products and then sell them on to the end customers. Distribution agreements may fall under the 15% ‘de minimis’ limit referenced in the flowchart above, or be exempt under section 9 CA.
· However, they are most likely to be exempt from the Chapter I prohibition under the Competition Act 1998 (Vertical Agreements Block Exemption) Order 2022 (VABEO) - which should apply unless:
* Either party has a market share of over 30% in their market; or
* The agreement contains any of the so-called ‘hardcore restrictions’: which include price fixing and restrictions on passive selling – inclusion of any of these provisions would also mean that the parties could not rely on the de minimis limit.

Question 8

Abuse of a dominant position?

Answer 8

· Abuse of a dominant position regulates business entities that are so powerful on the market that they are capable of operating independently of customers and competitors (and hence are ‘dominant’ within one or more of the markets on which they operate).
· Relevant legislation: Part II of the Competition Act 1998 (‘CA’) - specifically section 18 (sometimes referred to as the ‘Chapter II prohibition’).
· The Chapter II prohibition stops such companies from engaging in certain activities that would be perfectly legal for non-dominant undertakings. The conduct of powerful companies that are dominant in their markers come under close scrutiny from the competition authorities.

Question 9

Merger control?

Answer 9

· A corporate transaction will often involve the coming together or ‘merger’ of two businesses or companies: this is clearly the case with an acquisition by one company of another company or business. The CMA is responsible for assessing whether a relevant merger could lead to a substantial lessening of competition (SLC).
· Relevant legislation: Enterprise Act 2002

Question 10

When is a merger a relevant merger for the CMA to review?

Answer 10

· A merger will be a relevant merger for review by the CMA if it meets either a turnover test or a share of supply/acquisition test. If the CMA considers that the merger may lead to an SLC, then it has the power either to block the merger or to clear it subject to conditions.

Question 11

Subsidy control?

Answer 11

· A subsidy is a financial (or in-kind) contribution, such as a grant or a loan, paid by a public authority to a private entity that confers a benefit on the recipient, in the sense of an economic advantage that is not available to others on market terms.
· This area is regulated because such payments could potentially create distortions and unfairness between:
* (1) those receiving the subsidy; and (
* 2) those within the same industry who are not receiving such subsidy.

Question 12

• Competition law: Penalties?

Answer 12

· Breach of competition law can have significant consequences:
* The CMA can, for example, impose significant fines (amounting to up to 10% of worldwide turnover for each infringement) if the Chapter I or Chapter II prohibitions are breached.
* Directors might individually face:
- fines;
- imprisonment and/or
- disqualification from acting as a director.
* There might also be civil liability, with those affected bringing civil claims for damages.
* Reputational damage might be significant (for both companies and their directors).

Question 13

When does a merger control?

Answer 13

· A merger occurs where two enterprises cease to be distinct. It therefore occurs if they are brought under common ownership or control.

Question 14

· Common control can be acquired through:

Answer 14

• a legal, controlling interest (for example, a majority share stake); or
• an ability to control policy (for example, a lower share stake if not all shareholders usually exercise their vote); or
• An ability to exercise ‘material influence’ (for example, a 25% share stake or lower, depending on circumstances)
  · Acquisition of 100% of a company or a business would clearly fall within this definition – but acquisitions of a smaller proportion of a company’s shares could also count as a merger.

Question 15

· A merger may be reviewed by the CMA only if:

Answer 15

• The value of the turnover in the UK of the target enterprise exceeds £70 million; and/or
• The combined enterprise will supply or acquire 25% or more of any goods or services in the UK (or a substantial part of the UK) and the transaction increases the overall share (i.e. will lead to an ‘increment’)- so if one party had an existing share of supply of 25%+, the merger will still be caught if this share would be enlarged by the transaction.

Question 16

• CMA Notification Process?

Answer 16

· Notification is voluntary but, if the parties do not notify, the CMA can take its own action to refer a completed merger to a Phase 2 investigation (see below) within four months of the later of completion and the transaction becoming public/coming to the notice of the CMA.
· Phase 1 (including pre-notification)
* Submission of a draft Merger Notice, on which the CMA will then raise queries in order to ensure it is complete (a process which may take some weeks). Once the CMA accepts the Merger Notice as complete, it has 40 working days to decide whether to:
- refer the merger for Phase 2 investigation (because it reasonably believes that there is a realistic prospect that the merger would result in a substantial lessening of competition (SLC)); or
- clear it unconditionally; or
- clear it on the basis of ‘undertakings in lieu’ (UILs).
· Phase 2
* Investigation in depth, while the merger is suspended, giving the CMA’s Inquiry Group a period of 24 to 32 weeks to decide on whether it may be expected to result in an SLC. This could lead either to:
- clearance (with or without remedies); or
- blocking/unwinding of the merger
* The parties may instead decide to submit an informal briefing paper to the CMA, explaining why there are no competition issues – the CMA may then indicate that it has no further queries on the merger BUT it could still choose to take action later in the process.

Question 17

• Acceptable UILs/Remedies?

Answer 17

· Where a relevant merger is cleared by the CMA on the basis of undertakings or agreed remedies, these should be clearly able to address the identified competition issue (particularly where the CMA is accepting the approach in lieu of a reference to Phase 2)

Question 18

• Consequences of Breach

Answer 18

· The CMA can impose ‘interim measures’ at any time during its investigation:
* These require the two merging businesses to be held separate during the investigation.The CMA can impose penalties of up to 5% of global group turnover for any breach of such measures.
* Failure to comply with agreed undertakings / remedies on clearance can lead to enforcement by:
- Application by the CMA for injunctions or ‘interdicts’; and/or
- Claims for damages by any party affected by the contravention.

Question 19

· Structural Undertakings?

Answer 19

• Note: This is the CMA’s preferred route – generally to be completed within a time frame (for example, 12 months)
• Example 1: Sale of a part of the business to an approved purchaser
• Example 2: Licensing of know-how or intellectual property rights

Question 20

· Behavioural Undertakings?

Answer 20

• Note: These are less likely to be acceptable, as they require ongoing monitoring.
• Example 1: Change to sale practices / a cap on pricing
• Example 2: Provision of access for third parties to essential facilities

Question 21

• UK Merger Clearance: Condition Precedent?

Answer 21

· The risk of completing an acquisition that may raise competition concerns with the CMA is primarily with the buyer.
· This is because the CMA could direct the buyer to unwind the transaction OR accept remedies that could undermine the business case for the acquisition – even after completion of the transaction.
· The buyer is therefore likely to require the inclusion of a condition precedent in the acquisition agreement – making completion conditional on the transaction being cleared at Phase 1 (or possibly at Phase 2), on terms that are satisfactory to the buyer.

Question 22

European merger control?

Answer 22

· If a transaction satisfies the jurisdictional criteria set out in the European Union Merger Regulation, the European Commission has the power to scrutinise cross-border mergers and acquisitions and to prohibit them if incompatible with the EU Merger Regulation.
· The EU Merger Regulation applies to concentrations which have a ‘EU Dimension’.
· Concentrations can include any situation where there is a change of control. ‘EU Dimension’ is calculated by reference to turnover
· A concentration will be prohibited if it “significantly impedes effective competition in particular as a result of the creation or strengthening of dominance”.
· Concentrations MUST be notified “prior to their implementation and following the conclusion of the agreement” but the concentration cannot be put into effect unless approved by the Commission. The acquisition agreement MUST therefore contain a condition precedent that the agreement will not come into force until the Commission has approved the transaction. Once signed (after exchange) the transaction must be notified for investigation and approval.
· The Commission has 25 working days to make its initial report after which it must give clearance or move to Phase II. The Commission has 90 working days to reach a conclusion in Phase II.

Question 23

Why should national security implications be considered?

Answer 23

· It is important that, at a very early stage in a transaction involving such a transaction within the UK, both parties’ solicitors consider whether the proposed acquisition is likely to have national security implications.
· This may either be as a result of the sector in which the target operates or as a result of other factors that could give rise to a risk to national security.
· In either case, the transaction could be blocked or be made subject to conditions.

Question 24

• National Security: Primary Legislation?

Answer 24

· Primary legislation: National Security and Investment Act 2021 (NSI Act)
· Regulatory powers: The Secretary of State for Business Energy and Industrial Strategy
· Responsibility for managing the regime: The Investment Security Unit (ISU) – an operational unit of The Department for Business, Energy and Industrial Strategy (BEIS)

Question 25

• Application of the NSI Act?

Answer 25

· The regime introduced by the NSI Act applies to specified categories of transaction or investment that involve the acquisition of control over qualifying entities or qualifying assets.
· Both qualifying entities and qualifying assets must either be formed or situated in the UK or have a specified connection to the UK (for example, an entity that carries on activities in the UK).

Question 26

Qualifying entities?

Answer 26

include any type of entity, whether or not a legal person – so could include a company or a partnership.

Question 27

· Qualifying assets?

Answer 27

comprise land, tangible moveable property (for example, machinery) and IP-type assets

Question 28

· IP-type assets for NSI?

Answer 28

for these purposes include ideas, information or techniques which have industrial, commercial or other economic value

Question 29

NSI Act “Trigger Events”?

Answer 29

· The acquisition of control “trigger events” comprise:-
- the acquisition of votes or shares in a qualifying entity exceeding a threshold of 25% or 50%, or meeting or exceeding a threshold of 75%;
- the acquisition of voting rights that enable or prevent the passage of any class of resolution governing the affairs of the qualifying entity;
- the acquisition of material influence over a qualifying entity’s policy; and
- the acquisition of a right or interest in, or in relation to, a qualifying asset providing the ability to
* use the asset, or use it to a greater extent than prior to the acquisition; or
* direct or control how the asset is used, or direct or control how the asset is used to a greater extent than prior to the acquisition.

Question 30

• Trigger Event – Mandatory Clearance?

Answer 30

· The consequences of a trigger event vary depending on whether the transaction involves an entity that undertakes a specified activity in the UK within certain sensitive sectors of the economy. These specified activities are set out in secondary legislation and cover 17 high risk sectors - including data infrastructure, synthetic biology, transport, communications and computing hardware.
· Where the trigger event
* falls within the first two control categories on the previous slide (so not including any business sale); and
* involves a qualifying entity operating in one of the 17 sectors,
· then the acquirer of the shares or voting rights is required to seek authorisation and obtain approval from the ISU before completing their acquisition.
· If they do not, then the transaction will be void and of no legal effect and the acquirer (and its directors) may be subject to additional criminal or civil penalties.
· Any transaction that falls into this category would therefore require a condition precedent to completion.

Question 31

‘Call in’ Notice?

Answer 31

· The ISU may “call in” for review any transaction that is subject to mandatory clearance, and also any other transaction involving a trigger event where there is a reasonable suspicion that it could give rise to a risk to national security. These transactions could include business as well as share acquisitions.
· A call-in notice may be issued at any time while a transaction is in progress or contemplation, or within six months of the ISU becoming aware of a completed transaction, provided this occurs within five years of its completion.
· The call-in power can also operate retroactively to capture transactions raising national security concerns which were completed between 12 November 2020 and commencement of the full regime.
· The term ‘risk to national security’ involves consideration of key risk factors: (1) whether the target is or could be used in a manner that poses a risk to national security; (2) whether the buyer has characteristics that suggest a risk to national security; and (3) the level of control being acquired.

Question 32

• Voluntary Notification to ISU?

Answer 32

· Many transactions that are not within a high-risk sector but are theoretically subject to the call-in power will clearly pose no risk to national security.
· However, if the parties to a transaction are concerned that the power could be exercised and do not wish to complete their transaction with this risk hanging over them, they may use a voluntary notification regime to obtain a decision from the ISU.
· As in cases where there may be a competition issue, the parties may then choose include a condition precedent in the transaction agreement, requiring that a positive decision is received following voluntary notification to the ISU.

Question 33

• Powers of the Secretary of State with regards to NSI trigger events?

Answer 33

· If a notifiable transaction subject to mandatory clearance is completed without prior approval:
* The transaction is automatically void;
* The directors of the acquirer commit a criminal offence, punishable with a prison sentence of up to five years, as well as potentially being subject to civil fines;
* Civil sanctions for the acquirer may include a penalty up to a maximum of the higher of (1) 5% of the company’s worldwide group turnover; and (2) £10 million (and the acquirer may also have committed a criminal offence).
· The NSI Act also gives powers to the Secretary of State to impose remedies to address risks to national security including the imposition of conditions (see below), or prohibiting or unwinding the relevant transaction.

Question 34

• Example conditions that may be imposed for clearance:

Answer 34

· Minimum number of target directors to be UK citizens
· Maintenance of specific operations in the UK
· Right for Government officials to enter/inspect premises

Question 35

Joint Ventures - UK Merger Control?

Answer 35

· The establishment of a joint venture company can constitute a ‘relevant merger’ for UK merger control purposes.
· The sources for this area of law are the same as considered for the general introduction to merger control -
· Primary legislation: Enterprise Act 2002 (EA 2002)
· Main UK Competition Body: The Competition and Markets Authority (CMA)

Question 36

Application of ‘relevant merger’ test – merger element?

Answer 36

· Requirement for a merger: two or more enterprises cease to be distinct (s. 23 EA 2002) because of coming under **common ownership or control **
· Enterprise = The activities or part of the activities of a business (s. 129 EA 2002)
· Note: An enterprise needs to be more than bare assets – it should have some economic continuity – but it does not have to be profit-generating.
· Common ownership or control = Material influence OR De facto control OR Actual control (s. 26 EA 2002)
· Note: Moving from one level of control to a higher level can also trigger a merger situation.

Question 37

Application of 50/50 Deadlock Joint Venture?

Answer 37

• In a 50/50 joint venture, each shareholder is likely to have ‘material influence’ over the joint venture company.
• Therefore, assuming that the activities transferred to the joint venture company are sufficient to constitute an enterprise, each shareholder will separately ‘merge’ with the joint venture company.
• Party A will merge with JV Co, because JV Co will be under common control with Party A - through Party A’s material influence. Party B will also separately merge with JV Co on the same analysis. However, Party A and Party B will not be under common control.

Question 38

Joint Venture with Minority Shareholders?

Answer 38

· Any shareholder with over 50% of the shares will have actual control of the joint venture company. The other shareholders may also have de-facto control or material influence over the joint venture company, depending on the facts. Smaller shareholders with no board or veto rights may not have any relevant level of control.
· Note: If the joint venture agreement provides for a buy-out of 100% of the joint venture by a single shareholder on some future trigger event, this may cause the shareholder to move from material influence to actual control of the joint venture company – creating a further merger that would require investigation at that time.

Question 39

• Tests for relevant merger - Target Turnover Test?

Answer 39

· Tests for relevant merger: If two enterprises are ceasing to be distinct as a result of coming under common ownership or control, the next question is whether one or both of the additional tests for a relevant merger are satisfied – the target turnover test and the share of supply (market) test.

Question 40

• Target Turnover Test?

Answer 40

· If: the joint venture parties themselves remain under the same ownership and control after the creation of the joint venture (which will generally be the case)
· Then: the target turnover for this test is the turnover of the combined ‘enterprise’ that the parties contribute to the joint venture – the question is whether this amounts to over £70 million.
· Note: If the parties contribute ALL of their assets to the joint venture company, then the largest UK turnover of the parties is subtracted from the total for the purposes of establishing the ‘target’ turnover. Unless you are informed otherwise, you can assume for the purposes of the course that this is NOT the case.

Question 41

· Market Share (Share of Supply) Test?

Answer 41

• To calculate the combined share of supply…
• Consider the combined activities of the joint venture company AND the relevant joint venture party if it remains active in the same market as the joint venture (Example: if the joint venture manufactures boxes and the joint venture shareholder also continues to manufacture boxes, the activities of both would be aggregated for this test)…
• Calculate the share of the supply market for goods/services represented by the combined business activities…(Example: if the aggregated businesses sell a particular type of box, what percentage of the relevant supply market for those type of boxes do they represent?)…
• Is the resultant aggregate share of supply in the UK market (or a substantial part of the UK market) 25% or more?
• AND
• Has the aggregate market share increased (an ‘increment’) as a result of the creation of the joint venture?

Question 42

• Relevant merger – simplified decision tree?

Answer 42

· Are there two or more enterprises involved in the transaction?
· No – no merger
· Yes…
· Are the enterprises coming under common ownership or control?
· No – no merger
· Yes…
· MERGER
· Is the UK ‘target turnover’ over £70 million?
· Yes – relevant merger
· No…
· Is the combined share of supply 25% or above and has it increased as a result of the merger?
· Yes – relevant merger
· No – no relevant merger
· Note: A merger that meets both tests would also be a relevant merger.

Question 43

• CMA Notification Process?

Answer 43

· The CMA process for dealing with the creation of a joint venture that is a relevant merger for review will be the same as for an acquisition:
· Notification is voluntary, but the CMA could choose to investigate within a four month period.
· If there is any risk that the CMA might refer the creation of the joint venture for a Phase 2 review (because it might cause a ‘substantial lessening of competition’), the parties should include a pre-condition to the creation of the joint venture - it could otherwise end up being unwound.

Question 44

• Joint Ventures – Anti-competitive Agreements?

Answer 44

· Agreements relating to the creation of a joint venture could contravene the Chapter I prohibition on anti-competitive agreements.
· The sources for this area of law are the same as considered for the general introduction to competition covering anti-competitive agreements -
· Primary legislation: Competition Act 1998 (CA 1998)
· BUT
· Mergers covered by the EA 2002 are not subject to the Chapter 1 prohibition (Schedule 1, CA 1998) – and this also shelters any ‘ancillary restrictions’ in the joint venture agreements if the joint venture is a merger

Question 45

• Ancillary Restrictions?

Answer 45

· The exclusion for ancillary restrictions applies to any provision which is “directly related and necessary” to the implementation of the merger agreement: in this case, to the creation of the joint venture.

Question 46

Restrictive covenants?

Answer 46

· In particular, the parties to a joint venture will often agree that they will not carry on the same business as the joint venture independently: in other words, they will not compete with the joint venture.

Question 47

• Other agreements?

Answer 47

· The parties may also agree to provide goods or services to the joint venture on preferential terms – for example, licenses of intellectual property or raw material supply agreements: the parties should consider whether this is “directly related and necessary”. (Note: exclusivity in supply agreements is not generally seen as necessary)

Question 48

• Loss of Protection?

Answer 48

· Where a merger does not involve any party taking actual control of the target AND it has not been specifically reviewed by the CMA, it is possible for the CMA to revoke protection of ancillary restrictions related to that merger
· Where the merger is a joint venture, provisions in the joint venture agreements could then be found to breach the Chapter I prohibition unless they were found not to affect trade in the UK or to come within an exemption
· The parties could analyse whether there was any protection under a block exemption - or under s. 9 CA 1998 if they could show that the joint venture promoted technical or economic progress and that the joint venture agreements did not (1) impose restrictions that were not indispensable to attaining those objectives or (2) afford the joint venture the possibility of eliminating competition in the relevant products (see introduction to competition law materials) NOTE: this also requires restrictions to be necessary to protect the JV
· Note: To be enforceable, a restrictive covenant must also be found to be reasonable, otherwise it may be unenforceable as a restraint on trade under the common law rules: this would also require the scope and extent of the restrictions to reflect what is necessary to protect the JV.

Question 49

• Guidance on restrictive covenants?

Answer 49

· For all the reasons above, the parties must ensure that the scope and extent of non-compete restrictions placed on the joint venture parties are reasonable in terms of (1) the products and territories covered; and (2) their duration
· The CMA’s approach to ancillary restrictions follows the same approach as adopted by the European Commission:
* Non-compete provisions should correspond to the products, services and territories covered by the joint venture agreement
* If the joint venture is set up to enter a new market, reference will be made to the products, services and territories in which it is to operate in future under the joint venture agreement
* The length of a non-compete must generally not be beyond the life of the joint venture – and may be shorter in the case of minority shareholders
* Restrictions on shareholders whose level of control falls below material influence are not generally regarded as necessary restrictions

Question 50

• Joint Ventures – NSI Act?

Answer 50

· The national security aspects of a UK joint venture company also need to be considered, as establishment may involve the acquisition of control over a qualifying entity and over qualifying assets.
· The sources are the same as considered for the general introduction to this area of law -
· Primary legislation: National Security and Investment Act 2021 (NSI Act)
· Regulatory powers: The Secretary of State for Business Energy and Industrial Strategy
· Responsibility for managing the regime: The Investment Security Unit (ISU) – an operational unit of The Department for Business, Energy and Industrial Strategy (BEIS)
· The structure of how the NSI Act applies to the establishment of a joint venture will also be as set out in the general introduction.

Question 51

• NSI Act – Trigger Events - joint ventures?

Answer 51

· Acquisition of votes or shares in a qualifying entity exceeding a threshold of 25% or 50%, or meeting or exceeding a threshold of 75%
- Mandatory pre-clearance required if entity operates in a sensitive sector
- May be “called in” for review if there is a risk to national security, whatever the sector – potential to be blocked or unwound
· Acquisition of voting rights that enable or prevent the passage of any class of resolution governing the affairs of the qualifying entity
- Mandatory pre-clearance required if entity operates in a sensitive sector
- May be “called in” for review if there is a risk to national security, whatever the sector – potential to be blocked or unwound
· Acquisition of material influence over a qualifying entity’s policy
- Mandatory pre-clearance required if entity operates in a sensitive sector
· Acquisition of a right or interest in, or in relation to, a qualifying asset providing the ability to use the asset; or direct or control how the asset is used (or use or direct to a greater extent than prior to the acquisition)
- Mandatory pre-clearance required if entity operates in a sensitive sector

Question 52

• Application to Joint Ventures – contribution of assets/shares?

Answer 52

· The contribution of assets by the parties to the joint venture company could be a trigger event, if it involves qualifying assets (such as land or IP rights). If there might be a national security issue, the parties may use the voluntary notification regime to obtain a view from the ISU – and include a condition precedent in the joint venture agreement.
· If the parties contribute shares in a qualifying entity to the joint venture company (for example, if they contribute a subsidiary), this is likely to meet at least one of the threshold levels under the NSI Act - (exceeding 25% or 50%, or meeting or exceeding 75%). If the subsidiary is operating in a high-risk sector, this would be a notifiable transaction requiring prior authorisation and approval by the Secretary of State. This would require a condition precedent to be included in the joint venture agreement. If it is not in a high-risk sector but there might still be a national security issue, the parties may use the voluntary notification regime to obtain a view from the ISU – and include a condition precedent in the joint venture agreement.

Question 53

• Application to Joint Ventures – issue of shares to joint venture parties?

Answer 53

· In return for the contribution of assets/shares to a joint venture company (JV Co), the parties will receive an issue of shares in the JV Co.
· BUT
· The JV Co will already be set up as an empty “shell” company, ready to receive the assets/shares - with a small number of its own shares already in issue.
· AND
· The parties holding those shares will generally be the joint venture parties, who will hold them in the ‘right’ percentage – e.g. a deadlock JV Co might issue one share to Party A and one share to Party B, giving them each a 50% interest.
· SO
· The issue of additional shares when assets are contributed will not change the percentage owned by the parties in the JV Co – so would not be a trigger event.
· Note: If a party buys in to an existing JV Co, the acquisition of shares would be a trigger event if it meets or exceeds a relevant percentage – so this could require mandatory clearance or risk being called in for review.

Question 54

· The core offences under the Bribery Act 2010 are:

Answer 54

• Offering or giving a bribe to induce a person to act improperly – ‘active bribery’ (s. 1); and Requesting or receiving a bribe to act improperly - ‘passive bribery’ (s. 2).
• A bribe includes a financial or other advantage.
• The activity that the bribe is intended to affect must be a public function, or an activity connected with a business or employment, or an activity performed on behalf of a body of persons.
• There must be an expectation that a person performing that activity would perform it in good faith, impartially or from a position of trust.
• The bribe must effectively be intended to induce an improper performance of that activity, or its offer or acceptance must itself constitute an improper performance.

Question 55

· In addition to the core offences, s. 6 of the Bribery Act 2010 also creates an offence of bribing a foreign public official:
· The elements that are required are:

Answer 55

• An individual who holds an official position or exercises a public function for a country/territory outside the UK (the foreign official)
• The provision of a financial or other advantage - provided that the official concerned is not permitted under applicable law to be influenced by such advantages
• An intention on the part of the person providing the bribe to obtain or retain business or a business advantage
  · Key difference – no requirement for any ‘improper’ performance SO bribing a foreign public official to perform their duties correctly and in good time could be an offence.

Question 56

• Failure to prevent bribery?

Answer 56

· It is clearly important to ensure that a UK company’s actions do not contravene ss. 1, 2 and 6 – Note: acts or omissions that take place outside the UK can still breach the Bribery Act if undertaken by a UK company, so care is particularly important when carrying on business in certain overseas territories. However, for a UK company, the provision that can cause the most concern is:
- a failure of a commercial organisation to prevent bribery (s. 7)
o This is because it does not require any positive action on behalf of the commercial organisation in order for it to commit the offence – an unusual position for a criminal offence.

Question 57

• Key elements of failure to prevent?

Answer 57

· The key elements of the offence under s. 7 are:
* It can only be committed by a UK corporate entity, such as a company or LLP, or by a UK partnership.
* There must be a bribe from a person ‘associated’ with the entity. The definition of ‘associated with’ is someone who performs services for or on behalf of the entity (s. 8). Specifically, this could include an employee, agent or subsidiary (s. 8(3)).
* The bribe must be intended to obtain or retain business or a business advantage for the entity – and it must be a bribe within the meaning of ss. 1 or 6.
* SO even if a UK company has no knowledge of the actions of its associate, it may be liable for a criminal offence if the associate pays a bribe in circumstances intended to benefit the UK company.

Question 58

• Defence against failure to prevent?

Answer 58

· There is a defence against the ‘failure to prevent’ offence:
- it applies where the UK corporate had in place ‘adequate procedures’ designed to prevent associates from undertaking such conduct (s. 7(3))
· Statutory guidance issued by the Ministry of Justice (under s. 9) suggests that organisations should take six principles into account when structuring their anti-corruption procedures:
· Principle 1 – proportionate procedures
· Principle 2 – top-level commitment
· Principle 3 – risk assessment
· Principle 4 – due diligence
· Principle 5 – communication (including training)
· Principle 6 – monitoring and review
* The principles are not prescriptive – they are flexible and outcome focused, intended to be proportionate to risk.
* The guidance also sets out case studies based on hypothetical scenarios.

Question 59

· An individual guilty of an offence under the Bribery Act is liable to:

Answer 59

• Imprisonment of up to 10 years;
• A fine.
• A corporate entity guilty of an offence is liable to a fine.
• This is also an area where deferred prosecution agreements are common (these involve suspension of a prosecution for a period in return for payments).

Question 60

Your client (‘Company A’) is proposing to enter into a 50/50 owned joint venture company (the ‘JV Co’) with one other party (‘Company B’). The JV Co will carry on a garage business, providing repair works to cars and lorries in the South of England: it will acquire garages in that territory from both Company A and Company B (which will be a relevant merger for review by the CMA). The parties want to include a restrictive covenant in the joint venture agreement that would prevent each of them from competing with the business of the JV Co.

What is the best advice to give to your client in relation to the restrictive covenant (including in relation to the Competition Act 1998 (the ‘CA 1998’))?

If the restrictive covenant lasts only for the life of the JV Co and only covers the South of England, it has a good chance of being an ancillary restriction for the purposes of the CA 1998: in this case, the parties would not have to take account of the general rules on restraint of trade.

If the restrictive covenant lasts only for the life of the JV Co and only covers the South of England, it has a good chance of being an ancillary restriction for the purposes of the CA 1998: the parties would also have to take account of the general rules on restraint of trade.

As long as the restrictive covenant relates specifically to the JV Co’s garage business in the South of England, it should be an ancillary restriction for the purposes of the CA 1998 even if it extends for a substantial period beyond the life of the JV Co.

As long as the restrictive covenant only lasts for the life of the JV Co, it should be an ancillary restriction for the purposes of the CA 1998 even if it covers the whole of the United Kingdom.

Answer 60

If the restrictive covenant lasts only for the life of the JV Co and only covers the South of England, it has a good chance of being an ancillary restriction for the purposes of the CA 1998: the parties would also have to take account of the general rules on restraint of trade.

This answer is correct. It is important that both the period and the extent of a restrictive covenant are reasonable when considering whether it is an ancillary restriction (which is also why Answers A and B are incorrect), and restraint of trade principles will also be relevant (which is why Answer D is incorrect). See Competition Law: Introduction and Competition Law and NSI Act: Application to Joint Ventures.

Question 61

Your client (‘Company A’) is proposing to enter into a joint venture with two other parties (‘Company B’ and ‘Company C’). The joint venture would be set up as a limited company (the ‘JV Co’). Company A will hold 20% of the shares in the JV Co (the ‘Shares’) and will have no other voting or control rights in the JV Co. The JV Co will carry on a laser technology business and will acquire laser technology from Company C (the ‘Technology’). This technology could be used for military purposes, so it falls within the ‘Military and dual use’ sector.

What is the best advice to give to your client in relation to the application of the National Security and Investment Act 2021 (the ‘NSI Act’) to the creation of the JV Co?

The acquisition of the Technology by the JV Co will be a trigger event that will require mandatory clearance under the NSI Act.

The acquisition of the Technology by the JV Co will be a trigger event that could be ‘called in’ for review under the NSI Act.

Neither the acquisition of the Shares or the Technology will amount to a trigger event under the NSI Act.

The acquisition of the Shares by Company A will be a trigger event that will require mandatory clearance under the NSI Act.

Answer 61

The acquisition of the Technology by the JV Co will be a trigger event that could be ‘called in’ for review under the NSI Act.

Correct
This answer is correct. The acquisition of the Technology would be a trigger event, but an acquisition of assets does not require a mandatory clearance (this is also why Answers B and D are incorrect). Answer A is incorrect because the acquisition of a 20% shareholding is below the level for a trigger event, and Company A does not appear to be acquiring any other form of control over the JV Co. See NSI Act: Introduction and Competition Law and NSI Act: Application to Joint Ventures.

Question 62

Your client (‘Company A’) is proposing to set up a 50/50 joint venture company (the ‘JV Co’) with one other party (‘Company B’). The JV Co will carry on a garage business, providing repair works to cars and lorries in the South of England: it will acquire garages in that territory from both Company A and Company B. Company A will continue to own and operate some of its own, smaller garages, also in the South of England.

What is the best advice to give to your client in relation to the application of the Enterprise Act 2002 (the ‘EA 2002’)?

There will be a merger between Company A, Company B and the JV Co that may require review by the CMA.

The creation of the JV Co will not amount to a merger requiring review by the CMA, as neither Company A nor Company B will acquire over 50% of the voting rights in the JV Co.

There will be a merger between Company A and the JV Co that will be subject to review by the CMA if the aggregate UK turnover from the garages transferred to the JV Co and the garages retained by Company A amounts to over £70 million.

There will be a merger between Company A and the JV Co that will be subject to review by the CMA if the aggregate share of supply of the garages transferred to the JV Co and the garages retained by Company A is 25% or above and that share of supply has increased from the share of supply of Company A prior to the creation of the JV Co.

Answer 62

There will be a merger between Company A and the JV Co that will be subject to review by the CMA if the aggregate share of supply of the garages transferred to the JV Co and the garages retained by Company A is 25% or above and that share of supply has increased from the share of supply of Company A prior to the creation of the JV Co.

This answer is correct. The share of supply test applies to the combined business of both the JV Co and Company A (unlike the turnover test, which is why Answer C is incorrect). Answer A is incorrect because Company A and Company B will not be under common control, so there will not be a three way merger. However, Company A and Company B are each likely to be in a position to exercise material influence over the JV Co, even though they only own 50% of the shares – so there will be two reviewable mergers: between Company A and the JV Co and also between Company B and the JV Co (and this is why Answer B is incorrect). See Mergers: Competition Law and Competition Law and NSI Act: Application to Joint Ventures.