Focus on: Merger control regime in Turkish competition law
ELIG Gürkaynak Attorneys-at-LawView firm profile
Turkey is a jurisdiction that receives quite significant numbers of merger control notifications due to its relatively low turnover thresholds and wide coverage that does not exclude any foreign-to-foreign transactions. The most crucial aspects of the merger control regime in Turkey are examined below.
1. Transactions that must be notified to the Turkish Competition Authority
In Turkey, the Law no. 4054 on the Protection of Competition (Law No. 4054) adopts a mandatory pre-notification regime whereby the validity of merger and acquisition transactions that lead to a permanent change in control (i.e., concentration transactions) are subject to the approval of the Turkish Competition Board (Board) if the turnover-based thresholds laid down in the Communiqué No. 2010/4 Concerning the Mergers and Acquisitions Calling for the Authorization of the Board (Communiqué No. 2010/4) are exceeded.
When determining whether a particular transaction is notifiable or not, the first step is to assess whether the transaction leads to a permanent change in control. In case the answer to this question is in the affirmative, the next step is to see if the turnover thresholds are exceeded.
1.1. Concept of control
Under the Turkish merger control regime, the concept of control means the right to exercise decisive influence on strategic business decisions of an undertaking. Control may be exercised de jure or de facto and it may take the form of sole or joint control over an undertaking.
While the most common means for acquisition of control is the acquisition of shares or assets, control may also be acquired via long-term contracts that create similar effects with acquisition of shares or assets (Amylin/Bristol/AstraZeneca, 20.02.2013, 13-11/163-85; Migros/Hamamoğlu, 14.08.2008, 08-50/721-281) and other means, depending on the nature of economic relations. For example, the Guidelines on the Concept of Control stipulates that long-term supply agreements concerning an essential component for an undertaking’s business, or loans provided by suppliers or customers may be sources of economic dependence that confer control over an undertaking, especially when coupled with structural links such as cross shareholdings and/or cross directorship.
An undertaking may either be under the sole control of another undertaking, or more than one undertaking may exercise joint control over it.
Sole control is said to exist when a single undertaking enjoys the exclusive right to define the strategic commercial decisions of another undertaking. In general, acquiring the majority of the voting rights would grant sole control to the relevant party. However, owning the majority of the voting rights is neither a necessary nor a sufficient condition for the existence of sole control. It is not a necessary condition because a minority shareholder may also have “negative sole control” over an undertaking, in case it is the only party that is able to veto strategic decisions of an undertaking without having to cooperate with any other shareholders (Mavi Giyim, 08.03.2018, 18-07/121-65). It is not a sufficient condition because certain minority shareholders may have veto rights over strategic decisions of the undertaking which would allow them to prevent the owner of the majority of the voting rights from unilaterally determining the outcome of strategic commercial decisions.
Joint control is said to exist if more than one undertaking or person has the possibility of exercising decisive influence over another undertaking. The Guidelines on the Concept of Control note that the main feature of joint control materialises when two or more parent companies have the right to reject strategic decisions and to create a deadlock situation in the decision-making process. It is important to note that the veto rights of minority shareholders that protect the financial interests of the investors (i.e., regarding changes to the master agreement of the joint venture, an increase or decrease in the capital, or liquidation) do not confer joint control to minority shareholders. Only veto rights that concern strategic decisions and business policies may constitute basis for joint control and the most common examples of such veto rights are those that relate to; (i) the appointment of senior management and determination of budget, (ii) business plan, (ii) important investments, and (iii) rights that are particularly important in specific markets.
All transactions that lead to a change in the control structure of an undertaking (eg change of sole control, transition from sole to joint or joint to sole control etc.) constitute concentrations. The only exemption relates to transactions that lead to a reduction in the number of parties that exercise joint control over an undertaking, without conferring joint control to any new undertaking or person.
Formation of a joint venture is also deemed as concentration, given the said joint venture satisfies the conditions of full-functionality laid down in the Guidelines on the Concept of Control. According to the Guidelines, the following conditions are required to establish full-functionality in a joint venture:
- having sufficient resources to operate independently,
- engaging in activities beyond one specific function for the parents,
- being independent from the parent companies in sale and purchase activities, and
- operating on a lasting basis.
Joint ventures that do not fulfil the criteria for full-functionality may be deemed as anti-competitive agreements between the parents and assessed by the Board accordingly.
1.2. Turnover-based thresholds
Article 7 of the Communiqué No. 2010/4 holds that a transaction would be notifiable in case one of the following turnover thresholds are triggered1:
- The aggregate Turkish turnover of the transaction parties exceeding TRY ₺100m (approx. €12.4m; or approx. USD $14.2m) and the Turkish turnover of at least two of the transaction parties each exceeding TRY ₺30m (approx. €3.7m; or approx. USD $4.2 million) (Article 7/1(a)),
- The Turkish turnover of the transferred assets or businesses in acquisitions exceeding TRY ₺30m (approx. €3.7m; or approx. USD $4.2m) and the worldwide turnover of at least one of the other parties to the transaction exceeds TRY ₺500m (approx. €62.4m; or approx. USD $71.3m) (Article 7/1(b)(i)),
- The Turkish turnover of any of the parties in mergers exceeding TRY ₺30m (approx. €3.7m; approx. USD $4.2m) and the worldwide turnover of at least one of the other parties to the transaction exceeds TRY ₺500m (approx. €62.4m; approx. USD $71.3m) (Article 7/1(b)(ii)).
As seen above, Article 7/1(b) actually provides two separate tests; Article 7/1(b)(i) is applicable only in cases of acquisition transactions (as well as joint ventures) while Article 7/1(b)(ii) is applicable only in cases of merger transactions.
It is important to note that, as per Article 8/2 of the Communiqué No. 2010/4, the Board evaluates the transactions realised within a period of three years by the same undertaking and concerning the same relevant product market as a single transaction; and the same for two transactions within a three year period carried out between the same persons or parties.
As to the subjects whose turnovers would be calculated, Article 8 of Communiqué No. 2010/4 states that the turnover of the entire economic group (ie all undertakings under the same control structure) that the relevant party belongs to, should be taken into consideration. However, in acquisition transactions, only the turnover of the transferred parts (ie the target) should be considered rather than the entire economic group of the seller.
As a final remark, the relevant thresholds in transactions that concern the formation of green-field full-function joint ventures are only those of the parents, as the joint venture to be established (ie the target) does not generate any turnover. This means that in such cases, only the threshold stipulated in Article 7/1(a) of the Communiqué No. 2010/4 should be taken into consideration.
1.3. Notifiability of foreign-to-foreign transactions
Under the current merger control regime, the lack of an affected market in Turkey is not sufficient to eliminate the notification requirement, although it is quite relevant for the substantive assessment.
The Board rendered multiple decisions on the matter, detailing several different aspects of foreign-to-foreign transactions. In Eksim-Rönesans/Acıbadem (16.05.2012, 12-26/759-213), the Board stated that a joint venture established outside of Turkey could have indirect effects over Turkish markets even if it would not have any operations in Turkey. This approach of the Board indicates that a JV transaction that will not have any effect in Turkey in the near future is still deemed to fall within the scope of the Law No. 4054.
The Board’s other precedents (e.g. Sumitomo/Toyota, 20-10/101-59, 13.02.2020; Galenica Ltd./ Fresenius Medical Care AG&Co. KGaA, 11-59/1515-540, 24.11.2011; Blackstone Group, 11-57/1468-525, 17.11.2011; Ocean 11-45/1106-382, 17.08.2011; Angola LNG Limited, 12-22/564-162, 25.04.2012) clearly indicate that even though the JV is not/will not be in active in Turkey and will not have any effects on the Turkish markets in the near future, the transaction is still subject to notification.
Against this background it may be reasonable to assume that the approval of the Board is required for all foreign-to-foreign transactions where relevant turnover thresholds are met. As a matter of fact, in the 2020 Merger and Acquisition Outlook Report published by the Authority on 5 March 2021, it is stipulated that 132 transactions out of a total of 220 that had been examined by the Authority in 2020 were foreign-to-foreign transactions2.
2. Consequences of closing a notifiable transaction without the Board’s approval
It should first be emphasised that both failing to notify a notifiable transaction (ie failure to notify) and closing a notifiable transaction without waiting for the Board’s approval after making a notification (ie violation of the suspension requirement) constitute violations of the Law No. 4054. While any of these conducts would lead to the imposition of an administrative monetary fine, only a single administrative fine may be imposed per the Law No. 4054. In other words, it is not possible for the Board to impose separate fines both for the failure to notify and the violation of the suspension requirement.
2.1. Failure to notify
Article 11 of the Law No. 4054 sets forth that in case of failure to notify, the Board shall examine the relevant transaction on its own initiative when it is made aware of the transaction in any way and decide whether the relevant transaction is in compliance or not with Article 7 of the Law No. 4054 (ie whether it leads to a significant impediment of effective competition (SIEC)).
In case the Board decides that the relevant transaction is in compliance with Article 7 of the Law No. 4054, it clears the transaction and only imposes a fine due to failure to notify. The undertakings concerned are imposed an automatic monetary fine of 0.1% of the turnover generated in the financial year preceding the date of the decision in Turkey for failure to notify. These undertakings are both of the merging parties in case of a merger, or, the acquiring parties in case of an acquisition. In joint ventures, as the acquiring parties will be ultimately controlling the newly formed joint venture, the acquiring parties will be liable for the fine. The Board is not obliged to determine and prove any effect within a relevant market in Turkey to impose such a fine. It is important to remember that there is an abundance of Board precedents concerning the imposition of monetary fines due to failure to notify. Most recent decisions of the Board in that respect are BMW/Daimler/Ford/Porsche/Ionity (20-36/483-211, 28.07.2020) and Brookfield/JCI (20-21/278-132, 30.04.2020).
Besides the monetary fine, the main consequence of a failure to notify shall be the invalidity of the transaction with all its legal consequences, unless and until it is approved by the Board. Hence, the parties shall be unable to enforce their rights under the transaction agreement(s) before Turkish courts and build on this transaction in Turkey prior to the clearance of the transaction by the Board.
If the parties were to engage in any official business with Turkish administration, this violation matter shall be raised, and in any case, if the parties were to have a transaction in the future which has to be filed with the Turkish Competition Authority (Authority), the Authority would halt the entire notification process at that time, ask for a notification on the earlier transaction, review that, impose the administrative monetary fine and issue the decision for that particular matter, and only then engage in working on the actually notified transaction as seen in cases such as the BMW/Daimler/Ford/Porsche/Ionity (20-36/483-211, 28.07.2020) and Ersoy/Sesli (14-22/422-186, 25.06.2014).
If, on the other hand, the Board considers that the relevant transaction significantly restricts competition in any relevant product market especially by way of creating or strengthening a dominant position, Article 11(b) of the Law No. 4054 entitles the Board to launch an investigation ex officio and impose an additional monetary fine of up to 10% of the annual Turkish turnover of the undertakings concerned for violating Article 7 of the Law No. 4054. Furthermore, pursuant to Article 9/1 of the Law No. 4054, the Board is entitled to order remedies to take the necessary actions to restore the environment of competition before the closing of the transaction (restitutio in integrum).
2.2. Violation of the suspension requirement
The suspension requirement dictates that the parties shall not close a notifiable transaction before obtaining the approval of the Board. The parties will be in violation if they close the said transaction while the assessment of the Board is not finalised and a clearance decision rendered.
To understand whether a violation of the suspension requirement is in question, it is imperative to define what constitutes closing of a transaction. While the transfer of the legal ownership of the subjects of control (eg shares or assets) is the most obvious example of closing; exchanging commercially and competitively sensitive information, taking administrative actions and/or making recommendations, establishing joint marketing or working teams and initiating the integration process between the undertakings may also be deemed as equivalent to closing (Ajans Press, 10-66/1402-523, 21.10.2010 and A-Tex/Labelon, 16-42/693-311, 06.12.2016). To be more specific, any de facto indication showing that the transaction is implemented before the approval of the Board is indicative of violation of the suspension requirement.
Whether the Board approves the transaction and whether an effect within a relevant market occurs do not affect the assessment on the violation of the suspension requirement. Once it is determined that the parties did commit this violation, a turnover-based fine is automatically imposed on the relevant parties, calculated as 0.1% of the turnover generated in Turkey, for the financial year preceding the date of the decision.
The legal consequences that would arise in case the Board does not approve the transaction and considers that it violates Article 7 of the Law No. 4054 would be the same with those explained above with respect to failure to notify.
3. The review process
The Board may decide either to approve a transaction during the course of a Phase I Review, or to investigate it further within the scope of a Phase II Review, within 30 days.
3.1. Phase I review
The procedure surrounding a merger control filing is regulated under Article 10 of the Law No. 4054. When all of the required information is provided with the application filed by the parties, Phase I review begins. If the information provided in the notification form is deemed to be incomplete, the Authority may send requests for further information and the review period only begins on the date when all the requested information is completed and submitted by the parties.
Moreover, the Board may send written requests to the parties themselves, any other party in connection with the transaction, or third parties such as competitors, customers or suppliers during either phase, to scrutinise and possibly eliminate any competitive issues regarding the transaction.
The Board may also ask for another public authority’s opinion in reviewing a transaction. The timing works similarly with an information request from the parties during Phase I, so that the review period restarts on the date the relevant public authority submits its opinion. The Phase I review pertains to the Board’s preliminary review of the filing.
Pursuant to Article 10 of the Law No. 4054, if the Board takes no action or decision during this 30-day period, this is understood as a tacit approval and the transaction becomes legally valid. To clarify, if the Board makes an information request to better assess the transaction during Phase I, this 30-day period gets reset and starts again after the responses to the information request are provided.
3.2. Phase II review
If the Board decides to take a transaction into Phase II to conduct a thorough competitive assessment, it opens a full-fledged investigation. Pursuant to Article 43 of the Law No. 4054, Phase II Review shall be completed within six months from the date of the Board’s decision. If deemed necessary by the Board, an additional period of up to six months may be granted to extend this period. Said extension may only be applied once.
The Board may decide to approve the transaction after the Phase II review is over. If not, the report shall be provided to the parties and the procedure continues as per the Law No. 4054 provisions with regards to investigations. Said procedure consists of the parties’ second written defences, the additional written opinion of the Authority, the parties’ third written defences and the oral hearing.
Per the 2020 Merger and Acquisition Outlook Report of the Authority, out of a total of 220 transactions examined by the Authority in 2020, only three of them were taken into a Phase II Review. The Board decided to block one of these transactions (Marport/TILS, 20-37/523-231, 13.08.2020), conditionally cleared another one based on the remedies offered by the parties (PSA/FCA, 20-57/794-354, 30.12.2020) and unconditionally cleared the third one (Gülçiçek/Fragar, 20-31/388-174, 25.06.2020).
4. Carve-out and hold-separate arrangements
While it is possible to have carve-out and hold-separate arrangements to prevent an effect within the relevant market before obtaining the approval decision of the relevant authority, such practice is rarely seen in Turkey. It should be stated that there is no normative regulation allowing or disallowing carve-out arrangements, however, the decisional practice of the Competition Board shows that there is a tendency to dismiss carve-out and hold-separate mechanisms under the Turkish merger control regime.
There are precedents of the Competition Board in which it clearly dismissed carve-out arrangements (Total/CEPSA, 06-92/1186-355, 20.12.2006 and CVR Inc/Inco Limited, 07-11/71-23, 01.02.2007). On the other hand, there are three cases which may serve as exceptions to the Competition Board’s outlook on carve-out and hold-separate arrangements. These cases, namely; Prysmian S.p.A/Draka (11-15/259-87, 10.03.2011), Bekaert/Pirelli (15-04/52-25, 22.01.2015) and APM Terminals B.V./Grup Maritim TCB, S.L. (16-16/267-118, 11.05.2016) had especially unique characteristics with regards to their market and business activities where the models envisaged allow the prohibition of any effect in the relevant market in Turkey, or the transaction is necessitated by foreign laws and regulations to be closed before obtaining the Competition Board’s decision.
5. Procedures concerning remedies
Article 14 of the Communiqué No. 2010/4 allows Parties to propose remedies to the Authority during either phase of the review. Remedies aim to negate competition law concerns and to ensure that the transaction would be in compliance with Article 7 of the Law No. 4054.
While remedies may be submitted during either phase of the review, it should be noted that, for a remedy to be deemed sufficient during Phase I, the competitive concern needs to be clearly and easily identifiable and the remedy in question needs to be equally clear.
During Phase II, remedies may be submitted before or after the completion of the Phase II Report, which substantiates all the competitive concerns raised by the case handlers.
If remedies proposed by the parties before the completion of the Phase II Report are found sufficient by the case handlers, the remedies are submitted to the agenda of the Board to be discussed along with the report, without waiting for the expiry of the statutory time periods. If, on the other hand, the remedies are found to be insufficient by the case handlers, they remedies are submitted to the Board’s agenda together with the Phase II Report, completed in the statutory time period.
In case the Board decides that these remedies are sufficient, it renders a conditional clearance decision. If they are deemed insufficient however, the Board sends the Phase II Report to the parties and requests their written defences.
The parties would be allowed to submit a new set of remedies after receiving the Phase II Report should they so desire.
Parties may propose new remedies or expand on their previous proposals up until the submission of their second written pleas. Any commitments submitted after the period for the second written plea is expired, shall be ignored. The final decision as to whether the remedy proposals of the parties would be accepted or not rests with the Board. Yet, it should be noted that the Board may not conditionally clear a transaction based on requirements that were not proposed by the parties as remedies.
If the Board conditionally approves the transaction, the Board shall reference the proposed commitments in its decision and clarify whether they constitute obligations or requirements. Obligations and requirements have different legal consequences in a case of non-compliance since compliance with requirements is a prerequisite for the validity of the transaction, whereas compliance with obligations is not.
In case of non-compliance with obligations, the parties may be subject to administrative fines provided for in Article 17 of Law No. 4054, which is a monetary fine based on the turnover generated in the financial year preceding the date of the fining decision, at a rate of 0.05%.
Whereas in case of non-compliance with a requirement, the decision granting approval to the transaction will automatically be invalid and the transaction will be void as the violation of Article 7 of the Law No. 4054 is deemed not resolved.
1 Pursuant to Article 8/6 of Communiqué No 2010/4 and Paragraph 24 of the Guidelines on Undertakings Concerned, Turnover and Ancillary Restraints, for the purpose of calculating the turnovers, the amounts in foreign currencies will be converted to TRY based on the applicable Turkish Central Bank average buying rate for the relevant year. As such, for the purposes of this summary, the amounts in EUR and USD were converted using the respective exchange rates of EUR 1 = TRY 8.01 and USD 1 = TRY 7.01 in accordance with the applicable Turkish Central Bank average buying rate for the 2020 financial year (i.e., 01.01.2020 – 31.12.2020).