Corporate and M&A

Introduction

The Communique Concerning Merger and Acquisitions Calling for the Authorization of the Competition Board (“Communique”)[1] defined the concept of affected market, and regulated the information that parties are obliged to provide notification for.

Prior to the amendment of the Communique, with Communiqué No. 2012/3, published in the Official Gazette dated 29.12.2012, and numbered 28512, the significance of the concept of affected market was that the parties of the merger or acquisition were not obliged to obtain the Board’s authorization if there is no affected market.

It was accepted that such Regulation had been intended to decrease the number of unnecessary notifications. This implementation gave representatives, or authorized persons, of the undertakings the freedom to abandon the notification requirement in cases where the affected market was beyond question. This Regulation further provided an exception for joint ventures, and kept the joint ventures beyond its scope. The provision that reads,“except in cases of joint ventures, authorization of the Board shall not be required for transactions without any affected market, even if the thresholds listed in the paragraph 1 of this Article are exceeded,” is removed from Communiqué numbered 2012/3. With this amendment, the exception provided for the affected markets is lifted.

Definitions

Defining the relevant market has an important impact in competition law, and especially for the determination of abuse of dominant position and mergers and acquisitions. In order to understand and determine the affected market, and the obligations of the parties, accurately, it is crucial to determine geographic and relevant products markets correctly.

Affected Market

The Notification Form Concerning Mergers and Acquisitions annexed to the Communiqué (“Notification Form”) provides detailed regulations with regard to affected markets. Relevant markets that are affected by a merger or acquisition are considered to be affected markets. The Communiqué also determines two different criteria for horizontal and vertical relationships in terms of affected markets. Pursuant to Article 5, a horizontal relationship of an affected market is where two or more of the parties are commercially active in the same product market, and a vertical relationship is when at least one of the parties is commercially active in the downstream or upstream market of any product market in which another party operates.

Relevant Product Market

The Board defines the terms ‘relevant product’ and ‘geographic markets,’ and provided criteria to determine such markets in the Guidelines on the Definition of the Relevant Markets[2].

Article 4 of Communiqué No. 1997/1 on Mergers and Acquisitions that Require the Authorization of the Competition Board, defines relevant products and geographic markets. According to this definition, “In determining the relevant product market, the market comprising the goods or services that are the subject of a merger or an acquisition, and the goods or services that are deemed to be identical in the eye of consumers, in terms of their prices, intended use, and characteristics is taken into account; other factors that may affect the market determined shall also be assessed.”[3]

Three factors are considered in the determination of the relevant product market. These are demand substitution, supply substitution, and potential competition. Demand substitution means that the product can be replaced by the consumer with another product. The similarities with regard to product quality, usage, and price are important in substituting products.

In supply substitution, if the products can be switched to products that can be produced with minimum risk, cost, and have ease of marketability, such products are considered in the same relevant product market. In the Guidelines on the Definition of the Relevant Markets, paper production is shown as an example in terms of supply substitution, due to the ease in the production of different quality of papers.

Relevant Geographic Market

In terms of the Notification Form, and with regard to the affected markets, the relevant geographic markets should be defined with necessary justifications. As a result, this is also important to accurately define. In Communiqué No. 1997/1 on the Mergers and Acquisitions, relevant geographic markets are defined as the “[..] areas in which undertakings operate in the supply and demand of their goods and services, in which the conditions of competition are sufficiently homogenous, and which can easily be distinguished from neighboring areas, as the conditions of competition are appreciably different from these areas.”

Obligation of Notification

The Notification Form regulates in the context of affected markets, under different headings, detailed obligations under which to provide information. In terms of affected markets, parties shall define the affected market, provide information, and show justification. If parties to the transaction concluded mergers or acquisitions within three years in the affected market, such parties are obliged to provide the required information.

Pursuant to Article 5.3 with regard to Turkey, relevant geographic markets for every affected market with respect to last three years, overall size of the market, sales values, and numbers of parties involved in the transaction, titles and market shares of the competitors who have more than 5 percent share in the market, and their contact information, is to be provided.

In addition to such information for the affected markets, information regarding conditions of imports, amounts of imports for the last three years, the five largest suppliers who are active in the affected market, and the five largest clients of the parties in the affected markets shall be presented.

Information regarding supply substitution in the affected markets shall be provided, including distribution channels, total capacity with regard to the last three years, capacity of competitors, and whether any one of the undertakings concerned, or their competitors, have plans to expand or reduce their production or sales capacity in the near future.

Information in connection with growth rate of demand, consumer preferences, customer groups, and distribution agreements shall be provided in relation to demand substitution. Associations of undertakings are also regulated under Article 6, as part of the notification obligation.

Entry barriers, potential competition, and undertakings made in the market in the last five years, or undertakings that will possibly enter the market, are to be included in the Notification Form.

It is clear from the Communiqué that undertakings face serious and heavy obligations with regard to production of information. Undertakings can face challenges in providing such detailed information in a short period of time. Article 11 of the Communiqué regulates that in the event of missing information, the notification shall be deemed to have been made when such information is completed, points to the significance of obligations of the undertakings to provide complete information.

Notification Form Article 1(b) regulates that “for any affected market within Turkey, and in terms of geographical markets; if the sum of the market shares of the transaction parties are less than twenty per cent for horizontal relationships, and the market share of one of the transaction parties is less than twenty five per cent for vertical relationships, in relation to the affected markets in question,” information regarding imports, distribution, suppliers, entry barriers, potential competition, and efficiency gains regulated under Articles 6,7 and 8 are not required to be presented. This provision is an exception to the obligation to notify all information completely. However, it should be noted that the Board may decide to fully examine the competition conditions, and request the Notification Form to be fully completed.

EU Practice

A Mergers and Acquisitions Notification Form (“Form Co”)[4] within the context of merger control procedures and rules applicable to mergers provides an obligation to produce information in relation to affected markets. Sections 6 and 8 of the Form Co are in line with Turkey’s regulations.

The definition of an affected market is different for vertical and horizontal relationships. In horizontal relationships, the parties should, in total, have at least 15 percent of the market share; whereas, in vertical relationships, the combined market share of one of the undertakings or the parties should be greater than 25 percent. The notifying parties shall primarily determine and define the affected market. Following such determination, the information to be produced must contain the size of the market, the market share of the parties for the last three years, the distribution and supply structures, as well as the entry barriers.[5]

Conclusion

Defining affected markets accurately, which is regulated in the Communiqué, has an important impact on mergers and acquisitions. Parties to a transaction are under the obligation to determine the relevant product and geographic market, while defining the affected market, and must obtain the necessary approval from the Board. Following the general information provided in relation to the affected market, undertakings produce detailed information for various fields, including sales, competitors, distribution channels, import conditions, as well as supply and demand substitutions in relation to the customers. As a result of abolishing the exception provided for the affected markets with the amended text of the Communiqué, once the thresholds are exceeded, the aforementioned information shall be presented within the scope of the merger or acquisition.