Yazının Türkçesine ulaşmak için tıklayınız: Birleşme / devralmalar için Rekabet Kurumu’na verilen taahhütlere uymamanın yaptırımı ve denetleyici uzman standardı (Essilor/Luxxotica)
Commitments in merger & acquisitions
The Turkish Competition Authority’s (“TCA”) activity regarding antitrust investigations and merger control is increasing every year. Mergers & acquisitions (“M&A”) above a certain threshold require the authorisation of the TCA, and to obtain this authorisation, the parties to the transaction need to make more commitments than in the past. Thanks to these commitments, the competition concerns raised by the TCA will be addressed by preventing the TCA from prohibiting the transaction, and the competition in the market will be protected together with the possible efficiencies to be obtained from the merger.[i] The remedies -or commitments- that the parties may propose to address competitive concerns are generally analysed in two different contexts: Structural remedies usually refer to the divestiture of a specific business unit, while behavioural remedies refer to the regulation of the parties’ future market behaviour.[ii]
Sanctions for non-compliance with commitments
There are different sanctions for failing to fulfil different elements of the commitments to obtain authorisation for the M&A. The Remedy Guidelines distinguish between “condition” and “obligation” in this regard: “For example, the divestment of a business unit is a condition, while the implementation stages of the divestment, such as the appointment of a divestiture expert and submission of the necessary reports to the TCA, should be understood as an obligation. In the event of a breach of the condition, since the breach of Article 7 of Law No. 4054 on the Protection of Competition (“Law”) will not be remedied, the authorisation granted will automatically become invalid, and the authorisation decision will be null and void. In such a case, the Competition Board reserves the right to apply the provisions of Article 16 of the Law. On the other hand, in case of breach of the obligations, the parties concerned may be subject to administrative fines stipulated under Article 17 of the Law.”[iii]
Therefore, failure to comply with the commitments made in order to obtain authorisation for an M&A has various sanctions ranging from invalidation of the authorisation to daily fines. According to Article 17(a) of the Law, which is referred to in the Guidelines, in case of non-compliance with the obligations imposed or commitments given by the final decision or provisional injunction of the TCA, an administrative fine of five per ten thousand of the annual turnover of the undertakings in the previous financial year shall be imposed for each day. Pursuant to the second paragraph of Article 17, these administrative fines may be imposed as of the day following the notification of this decision if no time period is specified in the decision imposing an obligation.
The largest fine imposed for non-compliance with commitments given in an M&A transaction: Essilor/Luxxotica decision
On 17 August 2023, the TCA imposed the largest administrative fine ever imposed in relation to non-compliance with commitments made in a merger transaction.[iv] The parties involved in the merger had given certain commitments, including divesting MERVE OPTIK at the retail level and a three-year prohibition on affiliated sales of sunglasses, optical frames, and ophthalmic lenses. Additionally, they were not allowed to impose contractual or de facto exclusivity on opticians, which would limit competitors from purchasing their products. The TCA approved these commitments, and the Essilor/Luxottica merger was authorised only after that.[v]
On October 21st, 2021, the TCA initiated an investigation to determine if the commitments were upheld. As a result of the investigation, a decision was made:
- EssilorLuxottica S.A. has acted contrary to the commitments made binding by the decision dated 01.10.2018 and numbered 18-36/585-286,
- Therefore, to impose an administrative fine of TRY 492,191,132– in accordance with subparagraph (a) of the first paragraph of Article 17 of the Law,
- That EssilorLuxottica S.A.’s contracts and other actions in the market where ophthalmic lens and ophthalmic machine are offered together create de facto exclusivity and exclude competitors, and that these actions violate Article 6 of Law No. 4054,
- Therefore, it was ruled that an administrative fine should be imposed pursuant to the third paragraph of Article 16 of Law No. 4054, however, since administrative fines were imposed under subparagraphs (a) and (b) of this decision, it was not necessary to impose a new administrative fine under subparagraph (c) within the framework of the general principle of “ne bis in idem”.
Establishing expert standards to oversee commitments
There is actually a mechanism defined in the Guidelines for the supervision of behavioural commitments for transactions such as the one mentioned above. I have already written a detailed article on the subject of monitoring trustee. In order to guarantee the proper functioning of this mechanism, the TCA took the initiative after the sanction decision.
Pursuant to the TCA Decision No. 23-46/883-M dated 28.09.2023, the Public Oversight, Accounting and Auditing Standards Authority (“POA”) set an auditor standard on the qualifications of auditing experts on 12.10.2023. According to this standard, an expert to be appointed to perform audit services regarding whether the undertakings fulfil the commitments and conditions given in the decisions of the TCA must have the following qualifications:
- To have at least 10 or more auditors in its staff and
- To be an independent audit firm that has audited at least 10 different companies in the last 5 years, at least 5 of which are companies listed on BIST.
The attached list to the POA decision contains the names of 32 companies that comply with the standard. The standard requires qualifications in financial auditing experience, and the companies listed are financial audit firms. Considering the forms that structural commitments take, it can be said that choosing a financial audit firm for tasks such as separating and disposing of some assets as a “viable and competitive business unit” and finding potential buyers by conducting a suitability assessment is appropriate.
The “divestiture expert” specified in the Guidelines, who must have the qualifications set forth in the Standard, will perform the primary responsibilities under the supervision of the TCA. The expert should possess the following key powers: [vi]
- To supervise the interim preservation and operation of the business unit to be disposed of,
- Oversee the allocation of assets where separation is required, the allocation of relevant personnel between the separated and retained businesses, and the procurement of elements of the business unit to be divested that need to be reacquired,
- Monitor the divestment process, the potential buyers involved in the process and their due diligence on the business unit to be divested, and monitor the parties’ efforts to find a suitable buyer and divest the business unit,
- In the event that a buyer is proposed by the parties, to submit its reasoned opinion to the TCA on whether the proposed buyer meets the conditions of an eligible buyer,
- Preparing and submitting a report on each stage of the divestment process to the TCA to determine whether the divestment process is carried out in accordance with the commitments (The TCA may request the divestment expert to prepare a new or additional report on a specific issue),
- At the end of the divestment process, monitoring the legal and actual transfer of the business unit to be divested and submitting a notification letter to the Competition Board confirming the closure,
- To keep confidential all kinds of private and trade secrets of the parties and third parties.
The divestiture expert, whose appointment will be proposed by the parties, should also have another essential qualification specified in the Guidelines: To be able to fulfil their duties independently of the parties and not to be exposed to any conflict of interest. “Within this framework, the Competition Board will not accept the parties’ requests to appoint their auditors, investment bankers, or legal representatives/lawyers as divestiture experts.”[vii]
Ensuring compliance with behavioural agreements
It is clear that the expert, referred to as “divestiture expert” in the Guidelines, is in charge of supervising the fulfilment of the structural remedies on behalf of the TCA. However, according to the Guidelines, the above-mentioned implementation procedure for divestment remedies will also be considered for other remedies, as appropriate. The TCA may request the appointment of an expert to oversee the implementation of the behavioural commitments.[viii] Therefore, the issues mentioned above concerning the divestiture expert will also apply to the expert assigned to oversee the behavioural commitments.
However, the issue of monitoring behavioural commitments raises some other concerns. The sanction decision mentioned above was also taken in relation to non-compliance with a behavioural commitment. First of all, in principle, the auditor should understand in what way the TCA expects the behaviour subject to the commitment to affect competition in the market. The following statement in the Guidelines is meaningful in this respect: “However, behavioural remedies are accepted only in exceptional cases due to some of their negative characteristics, such as the difficulty of monitoring undertaking behaviour, the possibility of acting contrary to the spirit of the remedy in a way that does not violate the written commitments, and the possibility of preventing behaviour that may actually be competitive. In all cases, however, it is a prerequisite for the admissibility of behavioural remedies that the operability of the remedy is fully ensured through the establishment of an effective enforcement and monitoring system.” [ix]
In order for these conditions to be met and for the auditor, whose expertise is essentially financial auditing, to be able to perform their duties properly, the matters to be audited and the audit procedure should be explicitly stated in the decision of the Competition Board. A more recent authorisation decision concerning another merger, also involving Essilor Luxxotica, provides a good example. [x]
- “EssilorLuxottica undertakes not to engage in the affiliated sale of such products, including not refusing to supply branded sunglasses, branded optical frames, ophthalmic lenses and ophthalmic equipment products (together with related consumables) separately to existing or potential customers in Turkey.
- EssilorLuxottica undertakes not to apply discriminatory terms and, in any event, to offer reasonable terms for the sale of branded sunglasses, branded optical frames, ophthalmic lenses and ophthalmic equipment (together with related consumables) to customers on equal terms.
- EssilorLuxottica undertakes to apply the same terms and conditions of sale to all its customers in respect of branded sunglasses, branded optical frames, ophthalmic lenses and ophthalmic equipment products (together with the related consumables) as EssilorLuxottica applies to its retailer affiliates (including Atasun).
- EssilorLuxottica undertakes that the total share of Atasun’s purchases from third-party suppliers in terms of value in terms of branded sunglasses, branded optical frames, and RX lenses will be at least the same as its purchases in 2019.
- As regards the monitoring and reporting of the implementation of commitments 1, 2, 3 and 4 above, EssilorLuxottica undertakes to establish the following monitoring and reporting systematic in the process of commitments following the Transaction:
a. EssilorLuxottica will engage an independent third-party firm (“Audit Expert”) within 45 days of the notification of the Competition Board’s short decision.
b. The Audit Expert shall submit an annual report containing his/her opinion on EssilorLuxottica’s compliance with commitments 1, 2 and 3 to the TCA and simultaneously to EssilorLuxottica by the end of each year during the commitment period specified below. The Audit Expert may submit interim reports other than the aforementioned annual report upon the request of the TCA or ex officio if deemed necessary.
c. EssilorLuxottica shall submit to the TCA, within 30 days of the notification of the Competition Board’s summary decision, a specification of the general conditions of the agreement with the Audit Expert.
d. EssilorLuxottica shall provide the Audit Expert with any information and support necessary for the realisation of the relevant reporting, provided that any confidentiality undertaking is obtained from the Audit Expert in good faith…”
Similar to the example above, it should be noted at this point that the task of establishing the principles of supervision belongs to the parties in the commitment process, rather than to the TCA.
Conclusion
The TCA intensively operates the commitment mechanism within the framework of the legislation in order to address competitive concerns without prohibiting mergers and acquisitions. With the EssilorLuxxotica decision, the TCA gave a clear and strong message to the undertakings that the commitments made by the parties in these processes should not remain in words. The merger parties should not close the matter after obtaining the authorisation decision and should follow up whether they comply with their behavioural commitments in practice.
[i] Guidelines on Remedies Acceptable to the Competition Authority in Merger & Acquisitions Transactions (“Remedy Guidelines”), paragraph 2.
[ii] Remedy Guidelines, paragraph 18.
[iii] Remedy Guidelines, paragraph 92.
[iv] TCA decision No. 23-39/749-259 of 17.08.2023. At the time of the publication of this article, the reasoned decision had not yet been published. The announcement of the decision can be accessed here.
[vi] Remedy Guidelines, paragraph 65.
[v] TCA decision No. 18-36/585-286 of 01.10.2018.
[vii] Remedy Guidelines, paragraph 67.
[viii] Remedy Guidelines, paragraph 82.
[ix] Remedy Guidelines, paragraph 19. Emphasis mine.
[x] TCA decision No. 21-30/395-199 of 10.06.2021, paragraph 222.
