Practical Applications of the Competition Law

A. The Amendments to the Law

The Law on the Protection of Competition ("Law") has recently been amended (the "Amendment") in June 2006 and a temporary article, stipulating that "in cases where the number of Board members exceeds seven, the president of the Board shall decide on the member of the Board who will not attend the meeting", has been included.

The number of Board members, initially eleven, was decreased to seven but the quorum requirements remained as a problem as the Amendment did not foresee how the Board should convene in the transitory period since, at the time of the Amendment, the number of Board members was eight. Such status has become an issue regarding the acquisition, through the privatization process, of the steel incumbent, Erdemir. The Board decision in Erdemir was suspended by the Council of State on the grounds that the approval was granted in a Board meeting composed of eight members whereas the Law clearly stated that the Board must be composed of, and must convene with, seven members. Clearly, the Council of State decision casts doubt on the legality of all of the Board decisions adopted in the same fashion.

The Board has long been troubled with the Council of State decisions annulling the Board decisions, adopted with a quorum including the Board member who was responsible for the investigation and participated in the meetings. Yet, in certain cases, the Board, following the annulment decisions, has re-adopted the former decisions "as is"². While clarity has been anticipated regarding the approach of the Council of State regarding this matter, the Council of State has recently rejected certain suspension order requests of the relevant parties based on their allegations that re-adopting the annulled decisions constitutes a procedural irregularity.

Aside from this, what makes the Kenan Sönmez decision of the Board interesting is that the Board has, for the first time, deviated from its approach and, rather than adopting its former decision "as is", has withdrawn its former decision. As a further point, the Board has based its new decision on the facts and arguments submitted to the Council of State.

The decision is of importance for its possible consequences considering the number of decisions waiting to be re-adopted, among which there are several decisions where the Board has imposed substantial fines, but also from a pure legal point of view. As the Board decisions are final, even the Board itself may not adopt a different decision on the same allegation or overrule its own decision. Moreover, as underlined in the Mobisad³ decision of the Council of State, the Board may not even amend its former decisions.

Accordingly, it is not yet clear whether it may be possible for the Board to change its mind and adopt new decisions different than its former decisions, which were annulled by the Council of State, on the very same facts by taking into consideration the facts and arguments (i.e. written defenses) submitted by the parties during the Council State procedure.

The Cinemars decision deals with the transfer back of the equity shares in Cinemars, held by İş Girişim (a venture capital company), three years after the initial acquisition. The Cinemars deal is a typical example of a deal where the purpose of a venture capital company is not to "own" the company shares and control its management. The sole purpose of this and similar transactions is to invest in such companies for a certain period of time and then exit from the company through a variety of possible sale mechanisms.

However, as a result of the broad application of the "change of control" concept under Turkey’s competition law legislation, and considering also the lower thresholds, investment companies such as venture capitals companies are obliged to notify their transactions to the Board even though it is clear that their transactions should mostly not fall within the term "concentration" under competition laws and communiqués⁵.

This understanding is also stipulated by the Communiqué of the Capital Markets Law Board on Venture Capital Companies, which states that such companies should use at least 50% of their share capital in venture capital investments, and further indirectly provides that they shall transfer their equity shares in the invested companies within a maximum term of ten years.

Accordingly, considering that "decreasing the level of bureaucracy" is a priority of the Board, one may argue that the Board should have developed a mechanism taking into account the specific nature of investment companies such as venture capital companies. Further, it could be argued that the Board should also have considered the obligations of such companies under the Capital Markets Board communiqués, and should have exempted venture capital companies or similar investment companies from the notification obligations which, as is clear from the Cinemars deal, operates as an unnecessary burden and cost on such companies since the purpose of similar transactions is different from concentrations in the ordinary sense.

This would also be in line with the Board’s willingness to attract foreign investment in Turkey The costs of, but more importantly the delays associated with, the legal process of notification and obtaining approval are just examples of unnecessary blocking effect.

Liner shipping conferences have been subject to an exemption in the EU under the "Council Regulation (EEC) No 4056/86 Laying Down Detailed Rules For The Application Of Articles 85 and 86 of The Treaty to Maritime Transport" (the "Regulation"). As evident from the EMTA decisions, based on (i) the Customs Union which foresees alignment of the practices in Turkey regarding restrictive agreements; as well as (ii) EU-Turkey membership talks, the Board has been reluctant to initiate any investigation regarding the liner conferencing practices in Turkey even if a similar block exemption has not been adopted in Turkey.

However, the recent press release of the EU Commission dated 25 September 2006⁷ state that "[T]he European Commission has welcomed the unanimous adoption, at the 25th September Competitiveness Council, of the Commission’s proposal to repeal the exemption from the EC Treaty’s ban on restrictive business practices (Article 81) for liner conferences on routes to and from the EU. The current block exemption, established by Council Regulation 4056/86 allows carriers to fix prices and regulate capacity jointly. The repeal will enter into effect in October 2008. To ensure that the new regime fosters competitive markets, the Commission will issue Guidelines on the application of the competition rules to maritime transport before the end of the transitional period. The Council also empowered the Commission to apply EC Treaty competition rules to cabotage and tramp shipping, by extending the scope of the competition implementing rules (Regulation 1/2003)[.]". One would wonder how and when such approach will be adopted here in Turkey.

Clearly, the center of interest in this procedure will be that "[I]n the liner shipping sector, as in others sectors, competition rules are not applied in the same way worldwide. Noting that liner conferences will continue to be tolerated in other jurisdictions, the Commission will take appropriate initiatives to advance the removal of price fixing liner conferences and thus promote further competitive reform of the liner shipping sector[.]", as has been put forth by the EU Commission.

We may expect the Board to initiate working groups to address the change in the approach regarding liner shipping conferences in the EU. From a practitioner point of view, we note that the process should be tailored carefully together with the involvement of sector representatives and any change in the approach should be coupled with appropriate guidelines. For example, following the repeal of the old Communiqué No: 1998/3 and adoption of the Communiqué No: 2005/4 regarding distribution agreements in the motor vehicles sector, lack of guidelines has created significant difficulty both by the sector and practitioners.

The long awaited new Corporate Tax Law No. 5520 ("New Law") has been enacted in June 2006. The New Law, among others, aims to bring administrable standards particularly with respect to transfer pricing issues in light of the OECD transfer pricing guidelines. While transfer pricing was also prohibited under the former corporate tax law, the inconsistent decisions by courts and the lack of guiding principles had diminished its enforceability and importance. Apparently, following the enactment of the New Law, transfer pricing constitutes a top priority in the corporate world since it is expected that the tax authorities will be tougher on this issue than ever following the introduction of clarity with the New Law.

In this context, it is not clear how the tax authorities may interpret the Board’s decisions on discriminatory behavior under Article 6 of the Law, in cases where "applying dissimilar conditions to equivalent transactions" are prohibited. It may be argued that any Board decision under Article 6 of the Law regarding discrimination between 3rd parties and affiliate companies (i.e. in downstream markets) may be construed as evidence in tax proceedings regarding transfer pricing, since under the existing practice of the Board, it needs to be established that the intra-group transaction is not justified in market terms and, in particular, the prices applied to affiliates are substantively different from the examples (i.e. those applied to other customers and those on an arm’s length basis). In this context, considering that under the New Law, non-arm’s length transactions regarding the sale of goods and services to related companies or affiliates may be classified as a distribution of disguised profit, such companies will need to be prepared for a subsequent tax investigation following a Board decision on discrimination.

One may also argue that any decision by the tax authorities regarding dominant entities, although subject to the "competitive disadvantage test"⁸, on transfer pricing may also constitute evidence in Board proceedings. Apparently, triggering investigations may be expected, both under tax and competition laws in particular in the regulated industries (i.e. telecommunications) where substantial discrimination allegations are made against the incumbent regarding discriminatory acts. As a further point, it is not clear how the interplay between the Board’s rights "to request any information it deems necessary from entities including the public administrations" and the "tax confidentiality/privacy principles" stipulated under the Tax Procedural Law will work in future proceedings.

^{1. Competition Board Decision dated 29 June 2006 and numbered 06-46/604-174.}

2. With the exception that the Board has not re-imposed procedural fines on the undertakings for failure to notify their agreements due to the abolishment of the notification obligation under the Law.

3. Council of State, Mobisad decision numbered E. 2000/1111; K. 2002/4362.

4. Competition Board decision Cinemars dated 28 April 2006 and numbered 06-31/373-95. See also TÜYAP Decision dated 1 December 2005 and numbered 05-80/1107-318.

5. For a similar functional analysis when assessing the nature of transactions under the EU law, please see Article 3/5(b) of the Council Regulation No: 139/2004 where the acquisitions carried out by certain organizations defined as "financial holding companies" are exempted from notification obligations under competition law provided, however, that "the voting rights in respect of the holding are exercised, in particular in relation to the appointment of members of the management and supervisory bodies of the undertakings in which they have holdings, only to maintain the full value of those investments and not to determine directly or indirectly the competitive conduct of those undertakings." Please also see Article 5 (3) of the Fourth Council Directive 78/660/EEC of 25 July 1978 "3. For the purposes of this Directive, ‘financial holding companies’ shall mean only those companies the sole object of which is to acquire holdings in other undertakings, and to manage such holdings and turn them to profit, without involving themselves directly or indirectly in the management of those undertakings, the foregoing without prejudice to their rights as shareholders. The limitations imposed on the activities of these companies must be such that compliance with them can be supervised by an administrative or judicial authority."

6. Competition Board decisions EMTA I numbered 03-40/437 (the decision has not been published) and EMTA II dated 24 March 2005 and numbered 05-18/201-65.

7. http://europa.eu/rapid/pressReleasesAction.do?reference=IP/06/1249&format=HTML&aged=0&language=EN&guiLanguage=en.

8. Even if not explicitly stated under the Law unlike the EU law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.