Legislative Summary: The Proposed Joint Venture Guidelines Under the Competition Act No. 12 of 2010

The Competition Authority of Kenya (‘the Authority’) has published the Draft Joint Venture Guidelines (‘the Guidelines’). The Guidelines aim to provide clarity, transparency and predictability about joint venture arrangements and require the Authority’s approval.

o Object and purpose of the Guidelines
The Guidelines generally define a joint venture as an integration of operations between two or more separate firms where the following conditions are present:
a) the enterprise is under joint control of the parent firms;
b) each party makes a substantial resource contribution to the enterprise;
c) the enterprise exists as a business entity separate from its parents; and
d) the joint venture creates significant new enterprise with direct market access through
new productive capacity, new technology, new products or entry into a new market

o Preliminary
The Guidelines define a Full Function Joint Venture as a joint venture undertaking that performs all the
functions of an autonomous economic entity for ten (10) years or more including:

1. operating on a market and performing the functions normally carried on by undertakings operating in the same market; and
2. having a management dedicated to its day-to-day operations and access to sufficient resources including finance, staff and assets in order to conduct for a long duration its business activities within the area provided for in the joint-venture agreement.

Full Function Joint Ventures constitute a merger under the Competition Act and will require notification and filing with the CAK. However, it should be noted that a joint venture established for a purposefully finite period (e.g. a ten (10) year construction project) will not be viewed as having a long duration and will not qualify as a Full Function Joint Venture.

The Guidelines set out Greenfield Joint Ventures as joint venture undertakings in which local or foreign entities collaborate with other locally domiciled entities to develop a new product separate from the products and services provided by the parent entities. Typical distinguishing features of a Greenfield Joint Venture include: a new joint venture vehicle formed by the parties for the purpose of the transaction, undertakings in new areas for the parties in the joint venture, and the transaction entailing entry into a new business area or enhancement of an existing business.

The Guidelines recommend that parties potentially entering into a Greenfield Joint Venture should seek the advisory opinion of the CAK as Greenfield Joint Ventures are reviewed on a case-by-case basis.

o Filing Notifications for Joint Venture Transactions

While typical mergers and acquisition transactions clearly identify a target and the acquirer, joint venture agreements may at times lack this distinction. The Authority requires the parent entities to separately submit documents relating to the transaction by filling the Merger Notification Forms (MNF) as Joint Venture Parents, and if a joint venture vehicle exists as a part of the undertaking it will also be required to file the MNF. In situations where the joint venture parties have no separate joint venture vehicle, (e.g. a contractual relationship or have acquired existing shares in an existing undertaking that results in a joint venture) the parent entities will only need to separately submit documents by filling the MNF as Joint Venture Parents

o Determination of Impact on Competition

The Guidelines specify how the Authority determines the competition impact a Full Function Joint Venture transaction is likely to have in a market. The Authority considers the turnover and asset figures of all the parents to a joint venture, including the entities directly or indirectly in the control of the joint venture parents and the joint venture vehicle where applicable. In addition, the Authority looks at the terms of the joint venture agreement(s), public interest factors (e.g. the effect of the joint venture on the labour market) and whether the efficiency benefit of the joint venture brings more economic gains compared to the competition detriment. If the CAK makes a finding that a joint venture transaction has negative competition and public interest impacts, it may engage the joint venture parties to come up with remedies to mitigate against the harm. Additionally, the Authority will direct on which of the joint venture parties as well as the joint venture vehicle will be impacted by the mitigating factors.

o Elements of Joint Ventures and Review by the Authority

The Authority will consider anti-competitive effects of a joint venture transaction by examining terms such as the activities of the joint venture and its parent entities, the governance structure adopted, the duration of the joint venture, the nature and extent of assets transferred to the joint venture versus those retained by the parties to the transaction and the freedom the parent entities will retain to compete with each other and the joint venture entity.
Exclusivity clauses that introduce or increase restrictions to entry or expansion by third parties will trigger review by the Authority. Where competition already exists between parent entities, the Authority will widen its investigation to identify a formal market definition, estimate concentration levels and consider the significance of barriers to entry and/ or expansion.
The Authority’s review will also involve public interest factors including employment, entry and growth of small and medium-sized enterprises and expansion to international markets. In reviewing fullfunction joint ventures, the Authority will consider the technological benefits, real resource savings, compatibility with competition and economies of scale accompanying the transaction.

o General guidance on Joint Venture Transactions

The Authority has also provided guidance on its assessment of the digital economy as an emerging trend in the mergers and acquisitions regime with respect to joint venture transactions. As e-commerce has anchored its influence in most sectors, the Guidelines acknowledge the key role of data analysis and manipulation in entry and operations in most digital economies. The Authority will consider the dynamics of entry and access to data in joint venture transactions likely to involve big data even where data is not the primary component of the transaction. Parties may be required to submit data-specific information including custody of pre data and post-transaction, impact of the data to entry and competition in the relevant market sector and value of the data.
The Authority may engage parties to a transaction to establish remedies to mitigate against anticompetitive and negative public interest impact that is likely to arise from implementation of the joint venture. The Authority will also advise which of the parties to the joint venture would be impacted by such remedies.

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