Turkey: The Turkish Competition Board Authorizes A Joint Control Acquisition In The Sector Of Manufacturing And Sale Of Components And Systems For Automotive And Motor Vehicles (Mahle/Behr)

The Competition Board ("Board") authorized the acquisition of joint control over Behr GmbH & Co ("Behr") by the main shareholders of Mahle GmbH ("Mahle") and Behr, under Act for the Protection of Competition numbered 4054 ("Competition Act") and the Communiqué No: 2010/4 Concerning the Mergers and Acquisitions Calling for the Authorization of the Competition Board ("Merger Communiqué").

Multiphase Transfer of Control

Mahle envisages taking control of Behr in the year 2013. The mentioned acquisition of control will be implemented in several phases. The first phase consists of Mahle acquiring a 19.9 % interest of Behr's share capital by way of capital increase and participation of Mahle within Behr as a limited liability partner. This first phase was completed on 18.10.2010.

In the second phase, which was completed on 17 January 2011, the total participation in the share capital of Mahle in Behr was increased to % 36.85.

The third phase, which is voluntary, provides Mahle with an acquisition option, which accredits Mahle to additional shares that would enable owning the majority shares in the amount of 50.1% in Behr. It is stated in the Notification Form that this option may be used after the date of 01.01.2013.

A mid–phase is planned before proceeding with the abovementioned third phase that provides Mahle to preserve 36.85% of its share percentage and to acquire additional rights, which enable joint control over Behr.

Parties to the Transaction

Mahle is active world-wide in the development, manufacturing and sale of components and systems for automotive and motor vehicles. Mahle ranks among the top systems suppliers worldwide for piston systems, cylinder components, as well as valve train, air management, and liquid management systems.

Mahle is active in Turkey through its subsidiaries Mahle Farpias Filtre Sistemleri A.Ş., Mahle Mopisan Konya A.Ş. and Mahle Mopisan Izmir A.Ş.

Behr manufactures and supplies original equipment for passenger and commercial vehicles, in particular components and complete systems of motor cooling and air-conditioning in automotive industry. Behr is currently owned and controlled by the Behr family, who is the main shareholder. Mahle has a minority shareholding in Behr.

Behr has been operating its business activities in Turkey through Kale Behr Otomotiv Sanayi ve Tic. A.Ş.

Relevant Market

Affected Market. Taking into consideration the activities of transaction parties, the Board determined that there are two different affected markets: The horizontal affected market and the vertical affected market. The Board defined the horizontal affected market as "the oil heat exchangers market developed, produced or sold for high way vehicles". The Board evaluated the supply relations between the transaction parties as a vertical relation and concluded that vertical affected market is "the oil filters, heat exchangers, thermostats, and cabin air filters market". Indeed, thermostats and oil-water heat exchangers produced by Behr are inputs of oil filter modules produced by Mahle.

Relevant Geographical Market. The Board determined the relevant geographical market as "Turkey" by taking into account the homogenous nature of the sales conditions of the products in affected markets.

Evaluations within the Scope of Merger Communiqué.

The Board stated that pursuant to Article 5/1 (b) of the Merger Communiqué, "the acquisition of direct or indirect control over all or part of one or more undertakings by one or more undertakings or by one or more persons, who currently control at least one undertaking, through the purchase of shares or assets, through a contract or through any other means" shall be considered a merger or acquisition transaction within the scope Article 7 of the Competition Act.

The subject matter of the notification is the acquisition of rights envisaged within the mid-phase, which provide Mahle to have joint control over Behr. In this stage, the joint control shall be established without any transfer of shares but through amendments to the agreements and by the employment of executives of Mahle for two key positions in Behr.

First Two Phases. The Board initially evaluated the first two phases before making any further evaluations as regards to the mid-phase in subject of the notification and asked for explanation on why the first two phases were not notified. In response, it is alleged that these phases do not shift the control and thereby they are not subject to notification.

However, in the first stage Mahle had acquired the right to appoint two members to the supervisory board of Behr. Behr, is managed by one or more executive directors nominated by the supervisory board. These executive directors only for the approval of the Supervisory Board in a few very important decisions, which are not deemed as decisions regarding the ordinary course of the business and which are specifically determined as important.

Under these conditions the Board decided that the first two phases must be evaluated to find out if any change of control occurs at that stage.

The Supervisory Board consists of six (6) members and takes decisions with simple majority. There are three exceptions, which require qualified majority as affirmative votes of five members; which are (i) commencing activities in new fields, ceasing current commercial activities, making essential changes in the production and sales program, (ii) comprehensive cooperation between Mahle and Behr and (iii) making amendments to the list of activities requiring the Supervisory Board's approval.

The Board stated that control over an undertaking may be established as absolute control by a single control group or as joint control by several groups. The absolute control can be defined as "the ability of a single control group to solely determine the strategic commercial decisions or create deadlocks by their unilateral veto rights, without prejudice to the rights granted to the minority shareholders for protecting their investment".

On the other hand, the Board noted that the joint control arises when more than one group of shareholders have equal impact on the strategic commercial decisions and such decisions can only be concluded by consensus and /or any of the parties may create deadlocks on their own discretion. The Board also emphasized that the joint control may be established through (i) equality in voting rights and in appointments to decision making positions, (ii) the use of privileged shares having veto rights, (iii) having decisive impact on strategic decisions by the parties sharing the control through different means.

When evaluating the item (i) herein above, the Board drew attention to the point that in cases where the relation between the parties are stipulated through agreements, the equal representation of each party in the management bodies of the undertaking should be included in the provisions of the agreement and there should not be any decisive voting practice.

Notwithstanding, in cases where the joint control is established through privileged shares having veto rights, these veto rights should go beyond protecting the rights of minority shareholders1. Moreover, CB did not evaluate the following decisions as strategic commercial decisions but rather evaluated them as elements required for the protection of shareholders' investment: (i) amendments in the subject matter of the undertaking, (ii) capital increases or decreases, (iii) sales of assets, and (iv) transfer or liquidation of the undertaking.

The Board examined the first two phases of the transaction from the above explained view and concluded that Mahle's right to appoint two Supervisory Board members and its indirect veto right on commencing activities in new fields, ceasing current commercial activities, making essential changes in the sales program cannot be considered as strategic decisions. Thereby, the Board stated that no change of control occurred in the first two phases.

The Mid-phase. The transaction parties agreed to amend the duties, which are subject to the approval of the Supervisory Board. Thus, in addition to previous veto rights, Mahle shall have a provisional veto right on the appointment of executive directors. This provisional veto right shall cease when Mahle's share percentage in Behr exceeds 50%, or, in any event, latest by 31 January 2013. The Board concluded that this new provisional veto right provides Mahle a joint control over the day to day management of the undertaking.

In addition, this mid-phase also covers the appointment of two employees previously employed by Mahle as the Behr's CFO and Human Resources Manager.

The CFO's responsibilities shall cover budget planning, financial and liquid management Moreover, the CFO shall be responsible for the approval of most expenditures. The decision making body in relation to legal department and purchasing department shall also be the CFO.

Participation Agreement provides that the main management matters, including the determination of the investment, finance, turnover, expenditure and employment plans shall be decided by the unanimity of the all Executive Directors.

Another issue that would provide joint control to Mahle shall be the appointment of the Human Resources Manager, who will be responsible for the development of Behr's global employment policies.

In the light of the above determinations, as a result of mid-phase following the first two phases Mahle and Behr shall have joint control and this would change the absolute control of Behr.

Compulsory Notification/Turnover. The global turnovers of the both transaction parties exceed five hundred million TL, and their turnovers in Turkey also exceed five million TL. Thereby, this transaction is subject to the authorization of the Board in order to be legally valid.

Creation or Strengthening of a Dominant Position

Article 7/I of the Competition Act prohibits acquisitions creating or strengthening dominant positions and which, as a result, significantly restrict the effective competition in the relevant market2.

The only horizontally overlapping market is the oil heat exchangers developed, produced or sold for high way application. Moreover, there is no vertical overlap in the Turkish geographical market.

Thus, taking into consideration the number of undertakings active in the relevant market and their market shares, the Board concluded that the transaction in subject does not create or strengthen a dominant position.

Conclusion

The Board unanimously decided to authorize the acquisition of joint control over Behr GmbH & Co ("Behr") by the main shareholders of Mahle GmbH ("Mahle") and Behr, which would not impede effective competition by strengthening of a dominant position.

This decision is significant from several aspects. First of all, this decision thoroughly discusses the concept of "joint control" and its application by also referring to EU Legislation. Moreover, the Board deals with the notions of "absolute control" and "joint control" in a comparative way and distinguishes between the two concepts.

Furthermore, the detailed examinations on the structure of the rights granted to Mahle in the scope of the mid–phase displays a good and concrete example of "change of control by other means" stipulated under Article 5/1(b) of the Merger Communiqué.

If we are to criticize the decision, we should state that the provisional nature of the veto right on appointment of executive directors granted to Mahle in the Mid-phase is not argued in the existence of the requirement of a "permanent change of control" under Article 5/1 of the Merger Communiqué. It is stated that this provisional veto right shall end either upon the acquisition of majority shares or in any event, latest by 31.01.2013. Thus, the Boards should have discussed whether such a provisional right constitutes a permanent change of control under the Merger Communiqué or not.

Footnotes

1. Board's decision dated 25.11.2009 and numbered 09-57/1392-361.

2. Article 7/I of Competition Act No. 4054 is as follows:

"The merger by one or more undertakings or acquisition by any undertaking or person from another undertaking – except by way of inheritance – of its assets or all or a part of its partnership shares, or of means which confer thereon the power to hold a managerial right, with a view to creating a dominant position or strengthening its / their dominant position which would result in significant lessening of competition in a market for goods or services within the whole or a part of the country, is illegal and prohibited." To review the Act, see the following link:

http://www.rekabet.gov.tr/default.aspx?nsw=j6VYScQKgFG/oIWFwqUaBQ==-SgKWD+pQItw= (accessed on: 18.01.2013).

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