European Union: Joint Venture Agreements And Notification To Turkish Competition Authority: Brief Analysis Of Full Functionality

Last Updated: 19 September 2017
Article by Faruk Aktay

Joint ventures ("JVs") are one of the most frequently used legal vehicles in the business world especially for cross-border operations. JVs can be defined as partnerships whereby two or more real persons or legal entities combine their services and assets with a view to achieving a common purpose. Given its flexibility, the parties forming a JV most of the time enters into a highly detailed JV agreement wherein the rules of such partnership are laid down.

However, competition rules and regulations treat the formation of JVs differently. From the competition practitioners' perspective, JVs have potential anticompetitive aspects and may be used as a vehicle creating or strengthening a dominant position and significantly lessening competition in the markets. Therefore, formation of a JV is treated very similar to a merger or an acquisition of a corporation thus made subject to notifications to the competition authorities.

The EU Court of Justice ("ECJ"), in its recent ruling on 7 September 2017 concerning the Austria Asphalt v. Bundeskartellanwalt case, clarified that EU merger rules only catch the creation of joint ventures which perform on a lasting basis all the functions of an autonomous economic activity i.e. full-function joint ventures.1 Unlike Turkish Competition Authority ("TCA"), the European Commission practice has been inconsistent. The ECJ in this decision ruled that whether newly created or not, whether there is a change from sole to joint control over an existing entity, full-functionality of JVs is prerequisite for a transaction to fall under EU Merger Regulation, because only such operations bring change in the market structure thus should be brought under the scrutiny of competition authorities. That being said, it is worthy of delving into the Turkish rules in relation to the notification requirement of JV agreements and take a brief look at the arguments that TCA has relied on in these cases.

Joint Ventures and Turkish Competition Law: When to Notify the Competition Board?

Article 7 of the Law No. 4054 on Protection of Competition ("Competition Law") governs mergers and acquisitions and authorizes the Turkish Competition Authority ("TCA") to regulate which type of merger or acquisition transactions should be notified to the Board and for which permission has to be obtained to become legally valid. The Communiqué No. 2010/4 on Mergers and Acquisitions Requiring the Approval of the Competition Board ("Communique No. 2010/4") provides details in relation to the types of mergers and acquisitions that are subject to the Competition Board's review and approval.

Per Article 5(3) of the Communiqué No. 2010/4, joint ventures ("JVs") like mergers and acquisitions may also be subject to notification to and approval of the Competition Board. The Article reads that formation of a JV which would "permanently fulfil" all of the functions of an "independent economic entity" shall constitute an acquisition transaction falling within the scope of the Communiqué. The Competition Board in its decisions related to the JV notifications, checks out the satisfaction of the two following criteria:

  • There must be an undertaking which is jointly controlled by the transaction parties; and
  • The JV must constitute a full-function (tam işlevsel) independent/ autonomous economic entity.

For deeper analysis of the full-functionality nature of the JV, the TCA uses the four criteria set out in Paragraph 81 of the Guideline on Cases Considered as Mergers and Acquisitions and the Concept of Control. The criteria adopted here are similar to the one previously determined by the European Commission in its Consolidated Jurisdictional Notice under EU Merger Regulation (OJ C 95/1 (2008)). These four criteria –adopted to ensure that a JV has sufficient autonomy towards its parent companies- are as follows:

  • The JV must have sufficient resources to operate independently on a market;
  • The JV must carry out activities beyond one specific function for the parents;
  • The JV must have limited sale/purchase relations with the parents; and
  • The JV must operate in a lasting basis.

So, for a JV to present full-functionality nature, it should perform (on a lasting basis) all the functions of an autonomous economic entity (for example, because it has its own dedicated day-to-day management team, and access to resources such as finance, staff and assets). Therefore, the full-functionality depends on the JV's degree of autonomy.

If the JV is full-function, provided the applicable turnover thresholds are met, the creation and change of control over "full-function" JVs are caught by the TCA.2 In the first step, the TCA checks if the JV and its parent companies have any horizontal or vertical overlaps in the relevant product or service market. If the TCA finds no such overlap and concludes that the formation of JV would not create or strengthen a dominant position and significantly lessen competition in any relevant product market, then it grants an approval to the formation of the JV concerned.3 If there is an overlap in any of the activities of the parent companies forming the JV, then the TCA in the second step checks the market shares of the parent companies, to find out as to whether the parent company are in a dominant position in the overlapping horizontal or vertical market.4 If the answer is negative, then the TCA again approves the transaction.

If the JV is not full-function and takes the form of a partnership formalized by legal structure to a large extent dependent on its parents, such as strategic alliances and cooperative joint ventures, then such JVs will not be notified. However, the TCA may review such JVs ex post, in light of Article 4 of the Competition Law which prohibits anti-competitive agreements between undertakings. In this context, the parties to the transaction should determine whether the restrictive provisions introduced by the JV agreement are in compliance with applicable competition rules.

Restrictive Provisions in Joint Venture Agreements

However, TCA may review the JV agreement ex officio or upon the request of the parties and determines whether the restraints are in compliance with competition law rules. The Competition Board, in the merger or acquisition notification filings, typically review all agreements related to the transaction and all restrictive covenants such as non-compete, non-solicitation and confidentiality covenants contained therein. These restrictive provisions are analysed by the competition authorities to check whether they can be categorized as ancillary restrains (yan sınırlamalar). Pursuant to Paragraph 45-46 of the Guideline on Undertakings Concerned, Turnover and Ancillary Restrictions in Mergers and Acquisitions, the ancillary restraints are those which are "directly related" to the concentration and which are "necessary" to the implementation of the transaction and to fully achieving the efficiencies expected from the concentration.

Therefore, TCA will apply the criteria of "direct relation" and "necessity" objectively in accordance with the specifics of the case. Any limitation that does not carry the characteristics of an ancillary restraint may be assessed within the framework of Articles 4, 5 and 6 of the Competition Law. TCA in its decision granting approval to Alkeg-Tegopi joint venture determined that the JV in question satisfies full functionality conditions, and non-compete clauses are found limited to the scope of JV activities and directly related to and necessary to achieve the efficiencies expected.5

Formation of Joint Ventures Outside Turkey: Should We Still Notify TCA?

It is important to remember that in order for a full-function JV to be caught by the TCA, it does not have to operate in Turkey. If the undertakings forming the JV are incorporated outside Turkey but have operations in the Turkish market and their turnovers exceed the applicable thresholds, then the undertakings creating the JV will be considered as acquirers and the JV will constitute an acquisition transaction subject to TCA approval. Every year, TCA receives several JV notifications of such nature.6

Footnotes

1 Case C-248/16 Austria Asphalt GmbH & Co OG v. Bundeskartellanwalt, 7 September 2017, EU:C:2017:322

2 The thresholds are set out in the Communiqué, as amended by Communiqué No. 2012/3. According to Article 7 of the Communiqué, a transaction may be subject to the Competition Board's approval if either:

  1. Total turnovers of the transaction parties in the Turkish market exceed TRY100 million and turnovers of at least two of transaction parties separately exceed TRY 30 million in Turkey.
  2. The assets or businesses subject to acquisition or turnovers of any of the transaction parties exceeds TRY30 million, and the global turnover of at least one of the other parties to the transaction exceeds TRY500 million.

3 TCA decision dated 30/03/2016 numbered 16-12/192-86 re Pacific Mezz Investco JV notification

4 TCA decision dated 30/03/2016 numbered 16-12/190-85 re. Bunzl Holding – Bursa Pazari JV notification

 

5 TCA decision dated 19/02/2015 numbered 15-08/99-38, re Alkeg-Tegopi JV notification

6 TCA decision dated 10/02/2016 numbered 16-04/93-42 re Donguan-Gonvarri JV to be formed in China

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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