Joint ventures in the clean energy sector: Competition law and Foreign Direct Investment considerations

In the previous article in our series on joint ventures (JVs) in the clean energy sector, we discussed merger control requirements in both a UK and EU context. Over and above these requirements, a JV must also comply with general competition law.

In doing so, the parties in the JV should consider the prohibition on anti-competitive agreements, compliance with the National Security and Investment Act and restrictive covenants, and more general matters such as information sharing. This article looks at each of these considerations in more detail.

Anti-competitive agreements – UK law

In the UK, the principal risk is violating the prohibition on anti-competitive agreements under the Competition Act 1998 (the so-called Chapter I Prohibition). Depending on the market position of the parties, the Chapter II Prohibition (abuse of dominance) may also be engaged. This now includes overseas agreements, and conduct which is likely to have direct, substantial and foreseeable effects within the UK.

As a general rule, competitors should not co-operate with each other. However, in a joint venture, they may come together to do exactly that. Accordingly, the members of a JV must be aware of the competition law risks and ensure that the arrangements don’t facilitate anti-competitive conduct.

One key consideration is that many JV arrangements will not come under the Chapter I Prohibition at all. Where a JV restricts the commercial autonomy of the parties, but the restriction is ‘objectively necessary’ to implement the joint venture and proportionate to its objectives, and that co-operation has neutral or positive effects on competition, this may be classed as an ‘ancillary restraint’.

Where a JV agreement goes further than ‘ancillary restraint’, potentially restricting competition between the parties in a way that does fall within the scope of Chapter I, it may still be possible to justify this under the exemption at Section 9 of the Competition Act. To benefit from this, the arrangement must meet four conditions. It should contribute to improving production or promote technical or economic progress; allow consumers to receive a fair share of the benefits; be indispensable to the co-operation; and not allow the parties to eliminate competition in a substantial part of the market.

This exemption is self-assessed, rather than being available through an application to the Competition and Markets Authority. For certain JV agreements related to sustainability, it may be possible to obtain informal comfort from the CMA under the Green Agreements Guidance. For all ‘horizontal’ collaborations, parties should consult the CMA’s Horizontal Guidance.

For JVs involving parties at different levels of the supply chain (‘vertical agreements’), the participants should also consider whether they could benefit from the provisions in the Vertical Agreements Block Exemption Order. The CMA has published a short Dos and Don’ts guide for businesses in relation to a JV’s compliance with competition law.

The National Security and Investment Act 2021

JV parties should consider the requirements of the UK’s investment screening regime under the NSIA. It applies to UK entities and also to some overseas entities that carry out business here, and allows the UK government to intervene in acquisitions if it believes that the transaction could pose a risk to national security. The UK government’s ‘call in’ power is broad, and can cover virtually any acquisition of property, knowhow or other assets.

Further, certain transactions in corporate entities in defined economic sectors, and where change of control thresholds apply, must be pre-notified to the UK government and cleared before proceeding. Failing to do this can result in significant penalties.

Parties can voluntarily notify a transaction in cases where the mandatory requirement doesn’t apply, which can be an attractive option if they want to be more certain about their position.

For JVs, it is important to carry out a risk analysis around the application of the NSIA regime once the details of the potential arrangements are understood. For instance, is anything being transferred? Will there be a change of control in an existing corporate entity?

This will enable the parties to decide whether or not pre-notification is required and, if it is not, whether to voluntarily notify anyway.

The UK government has published guidance to help parties assess potential acquisitions. Parties engaging in JV activities should consider this and, if necessary, seek specialist advice.

Restrictive Covenants

There may also be restrictive covenants in the JV agreement that could lead to a breach of competition laws, such as agreements not to compete with similar undertakings to the JV or its parent companies. To be enforceable, these must be reasonable in duration and scope and be subject to regular review. Parties should always carry out a legal assessment of any non-compete clauses before entering into them.

Information Sharing

Collaboration between parties can increase the risk of commercially sensitive information being shared, which is often a serious contravention of competition law. In some cases, however, this can be justified in the context of the collaboration. Any JV arrangement should therefore be risk-assessed accordingly, and any appropriate control measures should be implemented. When deciding what information will be shared, the parties should proceed with caution and obtain appropriate legal advice.

If you require further information on this or another related matter, please get in touch with our regulatory and competition team or our corporate finance team.

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