Overview

In the complex landscape of Egyptian business law, the concept of fully functional joint ventures (“JV”) plays a crucial role in determining the application of merger control regimes. This article explores the essential criteria for assessing fully functional JVs and their implications for businesses operating in Egypt.

Understanding Fully Functional JVs

A fully functional JV is an entity that operates autonomously on a lasting basis, performing all the functions typically associated with independent businesses in its market. The Egyptian Competition Authority (the “ECA”) and the European Commission (the “EC”) provide guidance on assessing these JVs, which is particularly relevant in the context of Egypt’s evolving business environment.

Key Assessment Criteria

Joint Control

For a JV to be considered fully functional, it must be jointly controlled by 2 (two) or more entities. This control can result from either the establishment of a new entity or the acquisition of an existing one.

Operational Independence

A crucial aspect of fully functional JVs is their ability to operate independently in the market. This requires:

• dedicated management for day-to-day operations;
• access to sufficient resources, including finance, staff, and assets; and
• the ability to make autonomous decisions.

Interestingly, the EC allows for some flexibility in staffing arrangements. Personnel may be procured from third parties or seconded from parent companies, provided this aligns with industry standards or is limited to a start-up period.

Beyond Auxiliary Functions

To be considered fully functional, a JV must perform activities beyond mere auxiliary functions for its parent companies. It should have its own presence and purpose in the market, rather than simply supporting its parents’ operations.

Commercial Relationships with Parents

The JV’s relationship with its parent companies is a critical factor in assessing its functionality. While some level of interaction is expected, the JV should maintain a degree of independence:

• Sales to parents: If more than 50% (fifty per cent) of turnover comes from third parties, this generally indicates full functionality. Below this threshold, a case-by-case analysis is required.
• Purchases from parents: The JV should add significant value to products or services acquired from parents to be considered fully functional.

Lasting Operations

The ECA presumes that a JV operates on a lasting basis if its duration is not predetermined. However, if a specific duration is set, it must be sufficient given the nature of the market. Additionally, the EC notes that JVs established for short-term, specific projects may not meet this criterion.

Implications for Businesses

Understanding these criteria is crucial for businesses considering JVs in Egypt. Fully functional JVs may trigger merger control notifications, while changes in a JV’s activities could be considered a new concentration requiring fresh assessment. As Egypt continues to attract foreign investment and local businesses expand, the proper structuring of JVs becomes increasingly important. Companies must carefully consider these factors to ensure compliance with competition law and to maximise the strategic benefits of their JV.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of ADSERO. This article is for general information purposes only and is not intended to be and should not be taken as legal advice. Readers should consult with a qualified attorney for specific legal guidance. ADSERO does not guarantee or warrant the accuracy, completeness, or adequacy of the information presented and assumes no liability or responsibility for any errors or omissions in the content.