Introduction
Mergers and acquisitions
Changes in control
Joint ventures


Introduction

On July 16 2013 the Competition Board published its Guidelines on the Conditions Accepted as Mergers and Acquisitions and the Concept of Control, through Decision 13-45 / RM (9).

The guidelines discuss a variety of important topics with respect to mergers and acquisitions and the circumstances under which concentrations must be notified under Article 7 of the Law on the Protection of Competition (4054). These topics include negative control, conditions of full functionality and related transactions. The guidelines bring together elements that were discussed in a variety of past decisions, some of which are referenced in the guidelines as exemplary cases.

The guidelines are in line with the EU merger control rules, in particular the Commission Consolidated Jurisdictional Notice on the Control of Concentrations Between Undertakings. This demonstrates the Competition Authority's continued interest in developments in EU competition law.

Mergers and acquisitions

Mergers
The guidelines provide that a 'merger' occurs when:

  • two or more independent undertakings terminate their legal personality and combine to form a new undertaking or one undertaking terminates its legal personality and is absorbed into the legal personality of another; or
  • even though the relevant undertakings maintain their legal personality, their economic activities are pooled together within a single economic unit under a single economic management.

Acquisitions
An 'acquisition', on the other hand, occurs when one or more undertakings (or one or more people already controlling at least one undertaking) obtain direct or indirect control over the whole or part of one or more undertakings. The acquisition of direct or indirect control can occur via a share or asset purchase, an agreement or other document. It is imperative that a change of control occur in order for a transaction to constitute an acquisition. The guidelines provide that such change of control should be permanent. However, agreements that result in a change of control may be deemed within this category if:

  • the term of the agreement is sufficiently long (in past cases, the Competition Board has deemed five-year(1) and seven-year(2) agreements to be sufficiently long); or
  • the agreement is renewable.

Changes in control

For the purposes of notification under the law, a change in control need not imply a change in ownership of the shares or assets of an undertaking; sufficiently long-term agreements (eg, lease agreements) that provide such rights may also create a change in control.

The guidelines state that the object of control may be one or more undertakings (or parts thereof), their subsidiaries or the assets of such entities. However, a change in control over assets is considered to be a concentration only if turnover may be attributed to the relevant assets. The transfer of assets composed only of intellectual property (eg, brands, patents or copyrights) may also fall under Article 7 of Law 4054, provided that such assets constitute a business to which turnover may be attributed.

The guidelines discuss two types of control: sole control and joint control. For both, such control may be de jure or de facto. Cases where the acquired legal rights directly permit the exercise of control (eg, acquisition of enough voting rights to appoint a sufficient majority in the board of directors to control strategic commercial decisions) are de jure cases. On the other hand, even if de jure control is absent, an undertaking may be deemed to possess de facto control based on the totality of circumstances. For example, a minority shareholder that has consistently been able to influence the votes of a majority of shareholders in past shareholders' meetings may be deemed to possess de facto control.

Both sole and joint control can also be wielded in a negative manner. 'Negative control' refers to the ability of an undertaking to create a determinative effect on the commercial conduct of an undertaking by possessing veto rights with respect to its strategic commercial decisions. Where only one shareholder can veto such decisions (even though it cannot take such decisions by itself), that shareholder has negative sole control. However, such negative control is more commonly observed for cases of joint control that are defined by two or more parents possessing the capacity to create deadlock. In conformity with the Competition Board's past practice, the guidelines distinguish veto rights that provide negative control from those aimed merely at the financial interests of minority shareholders. Typical examples of veto rights that provide joint control are those with respect to the acceptance of a budget, business plan, significant investments or the appointment of senior executives. These can be contrasted with veto rights with respect to changes to the articles of association, increasing or decreasing the share capital of the company and liquidation or sale of the company, which do not provide joint control.

The guidelines also discuss other instances of joint control, such as equality in voting rights or decision-making organs or minority shareholders acting together with respect to the exercise of voting rights. Furthermore, where no consistent majority exists and a majority of votes is obtained by differing groups of shareholders in different cases (ie, a case of shifting alliances), none of the shareholders has joint control.

The guidelines also detail different cases of changes in the nature of control of an undertaking. Where one or more new controlling shareholders joins the shareholding structure and this leads to a change in control (ie, from sole control to joint control), such transaction will be subject to notification, even if the new controlling shareholders replace the current shareholders instead of being added. Second, where current controlling shareholders leave the structure and this leads to a change in control (ie, from joint control to sole control), such transaction will also be subject to notification. Transactions that do not lead to a change in control, such as mere changes in the share proportion and/or from negative control to positive control, are not subject to notification.

Joint ventures

Another important topic in the guidelines is the concept of full functionality of a joint venture. This concept is examined under four aspects – namely, whether:

  • the joint venture has sufficient resources to operate independently on the market (ie, the joint venture must have a management dedicated to its day-to-day operations and access to sufficient resources, including finance, staff and assets);
  • the joint venture's activities are beyond one specific function for the parent companies (ie, the joint venture will not be deemed fully functional in cases where it takes over one specific function solely within the parent companies' business activities without its own access to, or presence on, the market);
  • the joint venture's sale and purchase relations are limited to its parent companies (ie, if the joint venture achieves more than 50% of its turnover with third parties, this is an indication of full functionality; however, if it can be demonstrated that the joint venture deals with its parent companies on an arm's-length basis, then the generation of as low as 20% of its turnover through third parties may suffice); and
  • the joint venture can operate on a lasting basis.

Within the meaning of Article 5(3) of the Communiqué on the Mergers and Acquisitions Subject to the Permission of the Competition Board (2010/4), a 'concentration' will arise in cases where a change in the activity of an existing non-fully functioning joint venture occurs, such that a fully functioning joint venture is created.

For further information on this topic please contact Gonenc Gürkaynak at ELIG by telephone (+90 212 327 17 24), fax (+90 212 327 17 25) or email (gonenc.gurkaynak@elig.com). The ELIG website can be accessed at www.eliglegal.com.

Endnotes

(1) Competition Board Decision 12-43/1323-436, dated September 10 2012; Competition Board Decision 08-61/998-390, dated October 30 2008.

(2) Competition Board Decision 08-50/721-281, dated August 14 2008.