Competition Authority and Compliance in M&A Transactions
By Gülten Özalp
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The Turkish Competition Authority (TCA) is an independent supreme board with public legal personality, administrative and financial autonomy. It is subject to administrative law. However, quasi-judicial procedures are applied. This is due to the fact that it does not have a normal administrative procedure but a special procedure. The ministry with which it is associated is the Ministry of Trade. However, because it is an independent authority, the Ministry of Trade is not involved in the processes of the Competition Authority. This institution finds its legal basis within Article 167 of the Constitution. The institution prevents monopolization and cartelization that have occurred or may occur in the markets by taking measures to ensure and improve the healthy and regular functioning of the goods and services markets. The Law on the Protection of Competition is the relevant law, referred to as “Law No. 4054".
The Competition Authority has 3 basic prohibitions. These are:
- Agreements, practices and decisions limiting competition between undertakings;
- The abuse of the dominant position by the undertakings dominating the market;
- Mergers and acquisitions that would significantly reduce competition.
To define an undertaking, they are real and legal entities that produce, market and sell goods or services in the market, and units that can make independent decisions and constitute an economic whole. In addition to undertakings, associations of enterprises may also be actors of under competition law. In short, these are all kinds of associations with or without legal personality formed by undertakings to achieve certain objectives. It is not important whether they are established by law or have a public legal personality. While conducting an investigation, the relevant product market and the relevant geographical market are determined by the Competition Authority. The main purpose here is to determine the competitive conditions faced by the undertakings under investigation, to identify competitors that have the power to limit the behavior of the undertakings under investigation and to prevent them from acting independently of effective competitive pressure.
The relevant product market is defined by looking at whether they are interchangeable or substitutable in the eyes of the consumer in terms of their prices, intended use and characteristics, and the relevant geographical market is defined as the area in which enterprises are active in the supply and demand of their goods and services, where the conditions of competition are sufficiently homogeneous and easily distinguishable from other areas, in particular because the conditions of competition are noticeably different from neighboring areas. Demand substitution, supply substitution and potential competition are the 3 main elements to be considered in terms of the relevant product market.
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It is useful to take a closer look at the functioning of the 3 main prohibitions of the competition authority and the US and EU regulations on these prohibitions.
1. Agreements, concerted practices and decisions limiting competition:
Article 4 of the Law No. 4054 establishes the basic principles regulating horizontal and vertical relationships between businesses and forbids any agreement, decision, or practice that prevents, distorts, or restricts competition in the relevant markets. The objective here is to prevent the loss of social welfare that the entire society, both producers and consumers, have to bear due to the restriction of competition in a competitive market. Any agreement between the parties to regulate their future competitive behavior is considered an agreement in the sense of competition law. At least 2 companies can form a cartel by agreeing on price, agreeing on supply, restricting supply, limiting production, delaying quality, reducing quality. This would be an agreement that would violate the law of competition. Actions that make it difficult for competitors to operate and pushing competitors out of the market through these actions are also an example of a violation of competition.
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In the event that the existence of an agreement cannot be proved, if the price changes in the market or the balance of supply and demand or the regions of operation of the undertakings are similar to those in markets where competition is prevented, distorted or restricted, this will also constitute a presumption that the enterprises are engaged in concerted practices. The parties may avoid liability by proving that they have not engaged in concerted practices.
However, it should be noted that even though the agreement may be qualified as an agreement restricting competition, the undertakings may be granted an exemption if certain conditions are met. In the presence of the conditions specified in Article 5 of the Competition Law, agreements, concerted practices and decisions of associations of undertakings will be exempt from the application of Article 4. These conditions are new developments and improvements in the production or distribution of goods and the provision of services, as well as the benefit of the consumer, the elimination of competition in a significant part of the relevant market, and finally, competition is not restricted more than necessary to achieve these objectives. However, it should be noted that the Competition Authority may revoke the exemption granted in the event of a change of circumstances, failure to fulfill the conditions stipulated in the decision, and if the decision is based on incorrect or incomplete information about the agreement in question.
2. Abuse of dominance by undertakings:
Pursuant to Article 6 of the Law No. 4054 the mere existence of a dominant position is not sufficient to establish the existence of an infringement. The undertaking in a dominant position is also required to abuse this dominance. Abuse is the undertaking’s actions that reduce consumer welfare by taking advantage of its market power. While an action taken by an undertaking that is not in a dominant position in the market does not constitute abuse, if the same action is taken by an undertaking in a dominant position, this will be considered as abuse. There is a guideline on this issue. During the dominant position assessment, the extent to which the undertaking under examination is able to act independently from competitive pressures is investigated. In the case of a dominant position, the position of the undertaking and its competitors in the relevant market, the barriers to entry and growth in the market, and the bargaining power of the buyers are taken into consideration. In determining the position in the relevant market, the market share of the undertaking, the market share of its competitors, the difference between the market shares of the undertaking and its competitors, and the staticity/ dynamism of the market shares are examined. The higher and more stable the market share of the examined undertaking, the larger and more stable the difference between the market share of the examined undertaking and the market shares of its competitors, the less likely it is that existing competitors will exert competitive pressure on the examined undertaking.
Abuses can be divided into exclusionary abuse, discriminatory abuse and exploitative abuse.
a. Exploitative Abuse
As an example of exploitative abuses; setting prices higher than the expected price level under competitive conditions would lead to a direct reduction in consumer welfare. Therefore, it is prohibited.
If we look at the US and EU:
In the US Trinko decision, it was stated that “Having monopoly power and charging monopoly prices is not illegal; on the contrary, it is an important element of the free market system. The opportunity to charge monopoly prices, even for a short period of time, is attractive to entrepreneurs, which leads to innovation and economic growth. In order to secure innovation, market power will not be considered illegal unless it is an anti-competitive act, indicating that intervention in excessive pricing is not the job of the courts or competition authorities, but of the legislature in terms of making sector-specific regulations.
In EU decisions, there are very few decisions in which excessive prices are deemed to be an infringement, which indicates that the EU Commission recognizes the negative impact of price intervention on innovation and investment. The EU has outlined the framework of the practice with the United Brands decision and ruled that an infringement will occur if the prices charged are not reasonably related to the “economic value of the product”. And it subjected it to a 2-stage test. First, it is determined whether the difference between the selling price of the product and the actual production costs is excessive, and then, if the difference is excessive, whether the price is unfair in itself or in relation to the prices of competing products.
The current practices of the Competition Authority in Turkey and the relevant Law No. 4054 indicate that the Competition Authority adopts the approach that excessive pricing may be considered as a violation. And the determination of excessive pricing is based on the concept of “economic value”, similar to the EU practice.
b. Discriminatory Abuse
Examples of discriminatory abuses include price discrimination, refusal to deal with other undertakings, and discriminatory contract terms. The discrimination must be directed against the undertaking’s buyers or consumers. It should be noted that discrimination may occur when the dominant undertaking treats its buyers differently. However, since equal treatment is between equals, different treatment of unequal buyers is not prohibited.
c. Exclusionary Abuse
Exclusionary abuses can be in the form of pushing competitors out of the market and weakening them. Types include predatory pricing, tying, rebates, refusal to deal, Long Term Exclusive Contracts and Price Squeezing.
Predatory pricing: pushing competitors out of the market by charging unusually low prices in the short term in order to make profits in the medium/long term.
Price squeeze: when an undertaking sets the margin between the price of an upper market product and the price of a lower market product in such a way that even an equally efficient competitor in the lower market is unable to trade profitably.
Tying: When the dominant undertaking requires its product to be purchased together with the product in another market, thereby reducing the number of customers of its competitors.
Rebates: an example of this is the fact that it gives high discounts after a certain number of products. With its discounts, it actually makes it compulsory to buy from it constantly.
However, undertakings may avoid sanctions by justifiably claiming that their infringing conduct is an objective necessity, e.g., for security reasons, or an efficiency defense, e.g. that they refused to enter into a contract because they could not obtain sufficient returns to cover their investments if they entered into a contract.
3. Mergers and acquisitions control:
Article 7 of the Competition Law states that mergers and acquisitions by more than one undertaking that would result in the lessening of effective competition in any goods or services market by creating a dominant position or strengthening an existing dominant position are unlawful and prohibited.
First, we will explain the types of mergers and acquisitions and then we will discuss control.
Types of mergers and acquisitions:
- Horizontal: undertakings operating in the same relevant product market,
- Vertical: undertakings operating at different stages of the production and distribution chain,
- Conglomerate: refers to undertakings operating in different product markets.
After an amendment to Article 7 of the Competition Law to align with EU legislation, the Turkish competition law system adopted the substantial impediment to effective competition (SIEC) test, which replaced the ‘dominant position’ test for mergers or acquisitions.
The SIEC test is used by competition authorities to determine whether a proposed mergers or acquisitions would result in a significant impediment to effective competition in the relevant market, taking into account factors such as market share, entry barriers, buyer power, and the likelihood of coordinated effects. This test is designed to examine a proposed transaction’s potential competitive damage and decide if it is likely to result in a significant reduction in competition.
As a result of a mergers or acquisitions, an undertaking may become dominant in the relevant market. We have already explained that it is not prohibited for an undertaking to become dominant, but it is not desirable for undertakings to come together or to increase their power in the market through cartelization and become dominant. Due to the decrease in the number of players in the market as a result of mergers and acquisitions, the possibility of agreement between competitors may increase. The market structure may turn into an oligopolistic structure. The market with 5 players may decrease to 3 players. Mergers and acquisitions should be controlled by the Competition Authority as it is undesirable to increase anti-competitive practices in this market as the number of players in the market decreases. And here, while ex-post control is carried out in Article 4 and Article 6 of the Competition Law, ex-ante control is carried out in mergers and acquisitions, that is, before the transaction takes place. This means that before the mergers and acquisitions take place, undertakings must notify the competition authority and obtain its approval before the transaction. However, it should be noted that not all mergers and acquisitions are brought before the Competition Authority. Here, threshold systems consisting of factors such as a market share threshold, a turnover threshold, the size of the transaction and the parties have been introduced. To explain; if the Turkish turnover of the parties is greater than TRY 750,000,000 and the Turkish turnover of at least two of the parties is greater than TRY 250,000,000, or if the global turnover of one of the parties to the transaction is greater than TRY 3,000,000,000 and the Turkish turnover of at least one of the other parties (from the transferred part) is greater than TRY 250,000,000, this transaction is considered as a transaction subject to the authorization of the Competition Authority. Nevertheless, the 250.000.000 TL turnover criterion is not necessary for the acquisition of technology undertakings. The goal here is to avoid “killing mergers.” *The turnover thresholds given in the example are taken from the latest notification dated March 4, 2022.
If we compare Turkey’s M&A control systems with the US and EU systems:
In the Clayton Law in the US, the main issue in mergers and acquisitions is whether there is a significant lessening of competition or not, In the EU system, as in Turkey, the Mergers Regulation prohibits the prevention of effective competition in any market, in particular the creation or strengthening of a dominant position.
What is CCP?
The TCA publishes a document called Competition Law Compliance Program (CCP) on its website to ensure that undertaking managers and employees are informed about competition rules in order to prevent competition violations before they occur. This document is largely inspired by EU competition law. It is crucial for businesses doing business in Turkey to comply with competition laws to prevent anti-competitive behavior and avoid Competition Authority fines. Businesses should develop and implement comprehensive compliance strategies, as well as familiarize themselves with and comply with merger control regulations.
Turkey’s compliance process with the EU:
To bring Turkey’s competition laws and regulations into line with those of the EU, the Turkish Competition Authority is working to harmonize with the EU. Turkey is required to adopt and enforce EU competition laws and regulations as part of the customs union agreement between the EU and Turkey. Turkey has been cooperating closely with the European Commission and the European Competition Network (ECN), a network of national competition agencies within the EU, in order to achieve harmonization. Since 2003, the Turkish Competition Authority (TCA) has taken part in ECN activities. The alignment of Turkey’s competition rules and regulations with EU standards has advanced significantly. As an illustration, Turkey changed its competition law in 2010 to include EU-like rules on merger control. In accordance with EU state assistance legislation, Turkey has likewise enacted state aid regulations. Turkish and EU competition legislation still diverges in a few ways, although Turkey is still working to better harmonize it. The TCA is dedicated to fostering competition and safeguarding Turkish consumers while aiming to be in compliance with EU competition rules and laws.
UK competition law compared to Turkey:
In the United Kingdom, as in Turkey, anti-competitive activities of undertakings are prohibited, but competition is encouraged and it is aimed to protect the interests of consumers and other undertakings by investigating and sanctioning anti-competitive practices. Therefore, as in Turkey, the Competition and Markets Authority (CMA) was established in the United Kingdom to ensure the protection of competition. The CMA is authorized to conduct investigations into suspected breaches of competition legislation and to penalize offenders. Like the TCA, the CMA prohibits anti-competitive practices such as price fixing, market sharing and abuse of dominant position.
The main competition legislation in the UK is the Competition Act 1998, which prohibits anti-competitive agreements and the abuse of a dominant market position. However, in addition to the Competition Act 1998, there are other laws and regulations affecting competition. The Enterprise Act 2002 and the UK merger control framework, which requires companies to notify the CMA of certain mergers and acquisitions, are two examples. The Enterprise Act of 2002 empowers the UK government to interfere in mergers and acquisitions based on four public interest considerations: national security, media pluralism, financial stability, and, most recently, combating a public health emergency.
In both TCA an CMA, mergers and acquisitions that reduce the competition of undertakings in the market are prevented and a Merger Control is envisaged that requires notification of mergers and acquisitions to the relevant competition authority. Both systems also provide for leniency programmes that allow undertakings to receive lower fines or exemption from prosecution as a result of an investigation. It should be noted that although there are important similarities between the CMA and the TCA, there are also important differences in terms of scope, procedure and penalties.
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In conclusion, the Turkish competition legislation, which is based on EU competition law, must be followed by businesses doing business in Turkey. The TCA has the authority to look into and penalize businesses that break the law governing competition, including by levying penalties and mandating divestitures. Companies should create and implement efficient compliance processes that involve training, monitoring, and auditing to ensure competition compliance in Turkey. All personnel, including management, should be covered by these programs, which should also include the particular risks and difficulties the business faces in its sector. Companies should also be aware of and abide by Turkey’s merger control laws, which call for some mergers and acquisitions to be reported to the TCA and approved before completion. Fines and other penalties may apply if merger control regulations are not followed.
