JOINT VENTURES NEW PERILS UNDER THE COMPETITION AND CONSUMER ACT

1. JOINT VENTURES – NEW PERILS UNDER THE COMPETITION AND CONSUMER ACT

2. SLIDE 2 18 March 2010 - 209262598_1 Outline How resources and energy JVs can be at risk under the TPA Exception for JVs - available in prescribed circumstances Scenarios involving common types of resources and energy JVs

3. SLIDE 3 18 March 2010 - 209262598_1 Why Do JVs Cause Issues? Good question – brief history JV arrangements are efficient – but so is unlawful collusion Evidentiary dilemma – per se solution JV arrangements generally involve cartel provisions (and/or exclusionary provisions) as: JV parties are often competitors (or potential competitors) JV parties often need to agree about price, capacity, customers, production, not competing

4. SLIDE 4 18 March 2010 - 209262598_1 Increased Risk Under New Cartel Regime? New cartel regime has broadened the range of absolutely prohibited conduct (after the 'perfect legislative storm') TPA now prohibits arrangements between competitors with purpose of preventing, limiting or restricting: Supply of goods or services Production of goods or services Capacity to produce goods or services Very relevant for JVs Real risk of prosecution (ACCC v Patrick, 2009) Common sense override?

5. SLIDE 5 18 March 2010 - 209262598_1 JV Defence Defence may be available for JVs from application of absolute prohibition on cartel provisions Prescribed elements must be met Scope of defence untested and uncertain Onus on JV party to establish defence And for exclusionary provisions (only) old exception for JVs still applies

6. SLIDE 6 18 March 2010 - 209262598_1 Elements of JV Defence Cartel provision must be in a contract (or an intended contract) Provision must be for purposes of the JV JV must be for the production and/or supply of goods or services AND must not have the purpose or effect of substantially lessening competition

7. SLIDE 7 18 March 2010 - 209262598_1 Elements – Provided for in a Contract To be exempted, the cartel provision must be provided for in a "contract" (written or otherwise). Raises practical issues in ongoing joint ventures – future operational decisions (involving "cartel provisions") may not be foreseen at the time the original JV contract is drafted. To try to address this: JV contract should set out process for future operational decisions – these decisions then likely to be seen to be made pursuant to, or as provided for in, the contract JV parties must monitor their conduct against the JV contract – amend to ensure compliance.

8. SLIDE 8 18 March 2010 - 209262598_1 Element – For the purposes of a JV Whether a cartel provision is "for the purposes of a JV" will depend on factors such as:- the scope of the JV's activities as set out in contract; whether the provision is necessary for, or facilitates, the JV's objectives and operation; express intention of the parties. To qualify, it is unlikely that the cartel provision must be necessary for the JV to operate. BUT the cartel provision should facilitate and be clearly directed towards the objectives and operation of JV.

9. SLIDE 9 18 March 2010 - 209262598_1 Element – Production/Supply of Goods/Services The JV must be for the production or supply of goods or services. However, the cartel provision in the JV contract does not, itself, have to be directly referable to the production/supply of goods/services. The means, for example: a JV which is for the production of goods may include a cartel provision relating to the procurement of inputs; an R&D JV may supply R&D services to the JV participants, or it may produce/supply prototypes – these objectives may suffice; a joint bid to procure assets only, may not qualify – but a JV to procure assets and then operate a business producing goods from those assets might; a JV which is for a preparatory activity, such as exploration, might not be covered.

10. SLIDE 10 18 March 2010 - 209262598_1 No Substantial Lessening of competition JV parties always need to be able to demonstrate that the provision, and the JV, do not have the purpose or will not have the effect of substantially lessening competition JV exception also not available for exclusionary provisions (such as non-compete clauses) where the provision has the purpose or effect of substantially lessening competition

11. SLIDE 11 18 March 2010 - 209262598_1 Authorisation Alternative to relying on JV exception Provides immunity for specified conduct from the application of relevant provisions of TPA for the period of the authorisation Public benefit must outweigh detriment to competition Certainty for JV parties (if successful) But, a very time consuming and public process

12. SLIDE 12 18 March 2010 - 209262598_1 Scenarios Involving Common Forms of JVs Issues arising from application of JV exception will vary depending on the nature of the JV arrangement Scenarios to illustrate the types of issues that may arise with common forms of JVs

13. SLIDE 13 18 March 2010 - 209262598_1 Full Function JVs JVs incorporating production and marketing All elements of JV may be capable of attracting JV exception if elements met  Some issues to consider: Does the JV contract provide a clear process for making future operational and marketing decisions? Are the relevant restrictions necessary having regard to scope of JV? Is there any risk of the JV arrangements having purpose or effect of substantially lessening competition?

14. SLIDE 14 18 March 2010 - 209262598_1 Production JV - Separate Joint Marketing Scope of many JVs is limited to production Very common in mining and resources JVs (for tax reasons). These JVs will commonly expressly require that each party take its share of the product (mineral, gas etc) at the "mine gate" or "exit flange", in kind. Marketing arrangements for the product therefore expressly fall outside of the scope/operations of the JV.

15. SLIDE 15 18 March 2010 - 209262598_1 Production JV – Separate Joint Marketing (Cont) Issues for production JVs: cartel provisions provided for in the JV contract, which are clearly "for the purposes of" production/supply activities by the JV should fall within the JV exception; cartel provisions entered into between the parties for activities outside the scope of the JV – eg joint arrangements for marketing product taken in kind – will be very unlikely to attract the JV exception (in relation to the production JV); a separate marketing JV might satisfy the requirement that the JV be "for the production or supply of goods" – if so, a separate marketing JV might be established and a cartel provision within it might be exempted; commonly though, joint marketing arrangements (containing cartel provisions) in this context may need authorisation.

16. SLIDE 16 18 March 2010 - 209262598_1 Joint Bids Joint bids (or responses to tenders) by competitors may give rise to cartel provisions – for example: agreements on bid price; agreements not to bid on certain terms; agreements not to compete against joint bid vehicle; agreements not to bid for the asset following joint bid. Joint bids may attract JV exception but: uncertain if the JV is "for the production or supply of goods or services" at bidding stage – so need to consider how to frame the JV to ensure this element is met – look to wider objectives post acquiring the assets; the restraint must be legitimately be "for the purposes of the JV" – so be careful with broad restraints on general commercial activities and the length of restraints (even if for purpose of protecting confidential information acquired during process)

17. SLIDE 17 18 March 2010 - 209262598_1 Toll Production Toll production arrangements may be set up as JVs – and may contain cartel provisions. The arrangements might be at greater risk with restrictions on production and capacity now being cartel provisions To attract JV exception, ensure that: a clear JV structure is established, for the production/supply of goods, and that all arrangements/restrictions are "for the purposes of the JV"; processes for making ongoing decisions about output and capacity are provided for in the contract; arrangements are limited to the toll production activities (eg, be careful in extending arrangements to marketing, if JV objectives/operations are limited to toll production).

18. SLIDE 18 18 March 2010 - 209262598_1 R&D Joint ventures Getting more common R&D JVs may not contemplate production or supply of goods or services Parties need to consider how to frame R&D JVs to meet this element of the JV exception – for example: JV contract may contemplate potential for future supply of goods or services JV may involve supply of R&D services to each other

19. JOINT VENTURES – NEW PERILS UNDER THE COMPETITION AND CONSUMER ACT