Out of Control?

A recent Opinion of the Advocate General focuses attention on the degree of control a public authority must have over a company jointly owned with other authorities in order to take advantage of the Teckal exemption, writes Richard Auton.

Whilst the draft Procurement Directive has focused attention on how the second limb of the Teckal test regarding the proportion of work done for outside bodies will be quantified, the first limb has also come under the spotlight.

In an opinion delivered on 19 July 2012, the Advocate General has focused attention on the degree of control a public authority must have over a company jointly owned with other authorities in order to be able to award a contract to it using the exemption recognised in the Teckal case[1]. The opinion relates to two related Italian cases[2] in which the lawfulness of a direct award of contracts by local authorities to a company owned by a number of authorities is challenged on the basis that they did not exert other than token control over the Company.

Contracts were awarded by the two authorities in respect of public urban hygiene services to a municipal company. The company had been formed by a different local authority but the two authorities concerned each took a share in the company and entered a shareholder agreement. In terms of shareholding the founding company held 173,467 shares while the remaining 318 shares were divided between 36 municipal councils. The shareholder agreement gave them the right to be consulted to appoint a member of the supervisory council and to appoint a member of the board in agreement with other municipal councils.

The Advocate General examined the arrangement against the Teckal test and other case law dealing with multiple ownership. His view was that these arrangements were unlikely to be sufficiently robust to enable the two authorities to demonstrate that they could exercise control over this company in the same way they could one of their own departments.  

He recognised that there is nothing to preclude the control requirement being fulfilled where the shares belong to a number of public entities; however it was important that the entity awarding the contract is able to participate in the effective control of the contractor company within the overall group of entities. This may be in proportion to matters such as budget volume, population or volume of services delivered to the authority by the company. In this case it is suggested that the minority authorities cannot have the right level of control. In reality the company appeared to be exclusively controlled by the public entity with a majority shareholding and accordingly the token stake for the minority shareholders would not enable the control test to be met for them.

Whilst shareholding is one route of control the Advocate General did recognise that there could be others. In particular a shareholder agreement could be drafted so as to give the right level of control. Again his opinion was that in this case it fell well short of what was required as it gave the minority shareholding authorities no real say in the governance of the company.

The opinion also focuses on two additional factors which may be taken into account in determining whether the relative level of control is exercised. The first is whether the company lacks independence. Attention is drawn to the Spanish case of Asemfo [3] which concerned a similarly jointly owned entity where a number of local authorities had a very small stake but, decisively there, the company was not free to fix the tariff for the service it provided and its relationships with those authorities was not strictly contractual. The second factor is whether the company is market orientated.

Although this is only the Advocate General's opinion, assuming it is adopted by the Court in due course, it will serve to emphasise the need for authorities to take care how they structure Teckal companies in order to enjoy the exemption. Courts will look at the substance as well as the form of the arrangement to ensure that the Company:

1. is subject to real control over significant and strategic matters and if a jointly owned company, one authority should not unduly dominate;
2. should not be independent of the authorities; and
3. should not be market oriented.

Richard Auton is a Director at Walker Morris. He can be contacted on 0113 283 2575 and by This email address is being protected from spambots. You need JavaScript enabled to view it.. Richard regularly contributes articles and updates to Reach, the free Walker Morris knowledge database and alerter service.