Hope at Last for Some Flexibility in Review of Ancillary Restraints

Unlike EU competition law practice, where the issue of ancillary restraints is considered only at the request of a notifying party, the precedents set by the Turkish Competition Authority have long established that it must evaluate and render an opinion on the existence or non-existence of the ancillary status of any non-compete obligation in the transaction documents of all notifications.

In addition to the fact that it is not possible to select 'not applicable' for this question on the notification form, thereby leaving room for self-evaluation, the authority is increasingly robust and rigid on the evaluation of ancillary restraints. The Competition Board has adopted rules stemming from the EU competition law principles applicable to ancillary restraints; however, recently the board has frequently demonstrated that its rules of thumb are becoming constant, inflexible principles. The board has also taken the same approach to the ancillary restraint aspects of all transactions, regardless of the circumstances, leaving little room to mould precedents into tools suitable for the resolution of specific cases.

Furthermore, in cases where the board believes that the restriction exceeds what is necessary to protect the legitimate interests of the parties in entering into the notified transaction in terms of duration, geographic scope or subject matter, the board provides a conditional clearance, leaving room for doubt as to whether the parties are (i) free to close the transaction after signing a protocol amending, for example, the duration of the non-compete clause, or (ii) expected to close only after obtaining a second decision regarding whether the protocol meets the requirements of the condition. In practice, especially for parties that are about to close a global transaction, the conditional clearance means that they must sign a protocol amending the relevant aspect of the non-compete clause and close the transaction immediately thereafter. The fact that this sits well with the authority's expectations has been consistently confirmed by the relaxed timing the authority has adopted in ruling that the protocol meets the requirements of the decision.

There were also other key issues to be discussed and resolved. One key theoretical question was whether the protocol amending the non-compete clause would meet the requirements of the ambiguously written 'condition' of the authority if it were to alter the non-compete clause only insofar as it affects Turkish markets. Enterprises that were required to take this approach in their protocols were pleased to find that the authority later decided that such protocols did meet the requirements of the conditional clearance. That said, this controversial peculiarity of the merger control review procedure can still lead to the result that matters related purely to concentration effects become intertwined with collateral issues of the notified transaction (eg, ancillary status).

In contrast to this traditional position, in two recent decisions the Competition Authority has shown a certain degree of flexibility. In order to evaluate the impact of these decisions, it is necessary to consider the existing review standards in Turkey.

To date, the authority's approach to the issue of ancillary restraints has been very rigid. This has resulted in a system where, if the concentration under review involves a transfer of goodwill only, non-compete clauses with a duration of up to two years are permitted. Alternatively, if the transaction involves a transfer of both goodwill and know-how, such clauses can last up to three years. Until recently no transaction-specific reason could extend these periods. In addition, despite its early precedents to the contrary, the board has taken the view that non-compete clauses are justified only for as long as joint control over the joint venture exists, and that the duration of the non-compete clause cannot exceed the point where joint control ceases, regardless of how compelling the transaction-specific arguments may be. Finally, the board has been reluctant to allow reverse non-compete arrangements.

In two recent cases, however, the authority and the board have demonstrated that they are able to take into account the specifics of a transaction - beyond the question of whether a know-how transfer exists - in evaluating the admissibility of a non-compete clause.

In the Do-Car decision (06-36/458-120, May 26 2006) the authority accepted that, in transactions between a new entrant to the market and an incumbent undertaking with a substantial amount of know-how or a well-established client portfolio, non-compete restrictions are often included in order to let the acquiring party obtain fair shares in return for its investment. Furthermore, in view of the specific circumstances of that case, the authority decided that several non-compete obligations lasting four years were justified and ancillary in order to protect the client portfolio against any potential competition from the seller. The authority considered that the seller was already party to agreements with certain clients, and that such agreements would terminate in three, or in some cases four, years' time. Therefore, the authority took into account the circumstances surrounding the business of the buyer and the seller, and went beyond its well-established formalistic approach towards the admissible duration of non-compete clauses.

Another key case in which the authority deviated from its usual approach concerning ancillary restraints was the EQT IV decision (06-16/188-48, March 2 2006). In that case the authority examined the reverse non-compete obligation imposed upon the buyer and the target business, which provided that until the end of 2007 the buyer and the target companies would not compete with the diesel motors for highway applications owned by the seller. The authority admitted that the transferred diesel motors for off-highway applications business and the non-transferred diesel motors for highway applications business are closely related and dependent on similar know-how and technology. Thus, the authority concluded that supply-side substitution is possible, and that the buyer had the appropriate resources to switch, if it wished, to the production of the highway business. Hence, the reverse non-compete obligation was deemed to be directly related and necessary for the implementation of the transaction.

The new trends concerning the issue of ancillary restraints in the merger control review procedure are a positive sign that the Competition Authority is becoming increasingly concerned with the business impact of its ancillary restraints analysis. Therefore, it is reasonable to expect the authority to move towards a case-by-case analysis of ancillary restraints, rather than applying the same formula to every case.

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