Merger Control Regime for Startup Investments

Examining Startup Investments within the Framework of the Concentration Regime

Turnover Threshold Specific to Technology Enterprises 

Law No. 4054 on the Protection of Competition (“Law No. 4054”) aims to protect competition in goods and services markets. Merger and acquisition transactions, known as concentrations, are subject to control under Law No. 4054. The Communiqué No. 2010/4 (“Communiqué No. 2010/4”) on Mergers and Acquisitions Calling for the Authorization of the Competition Board regulates concentrations requiring authorization. However, due to observed deficiencies in practice and evolving approaches, updates to relevant communiqués and guidelines have become necessary^[2]. To this end, the turnover thresholds for notification outlined in Communiqué No. 2010/4 have been revised^[3]. Additionally, the introduction of the "technology enterprises"^[4] definition has imposed a notification obligation for concentration transactions in which these enterprises are involved.

The new regulation aims to prevent transactions related to the acquisitions of technology enterprises, particularly by those with substantial market power, from evading competition scrutiny. The growth of the startup ecosystem has enabled enterprises to have market power to enhance the volume and quality of their products and services by acquiring potential rivals in the early stages of innovative projects. Alternatively, they may acquire or delay potential innovation by acquiring a rival (killer acquisitions). Thus, as of May 2022, an additional notification obligation specific to technology enterprises in acquisition transactions impacting the Turkish market has been implemented.

Given the areas of operation for startup companies, it can be asserted that a significant portion of them falls within the definition of technology enterprises outlined in Communiqué No. 2010/4. Therefore, the impacts of the regulations introduced by Communiqué No. 2010/4 on investment and acquisition transactions involving startups should be individually examined for each transaction.

Startup Investments Creating a Change in Control

As stipulated in Article 5 of Communiqué No. 2010/4, a transaction that leads to a permanent change in control falls under the following categories: (i) the merger of two or more enterprises, or (ii) the acquisition of direct or indirect control over all or part of one or more enterprises through the acquisition of shares or assets, by contract, or by any other means, by one or more enterprises or individuals already controlling it. Such transactions are considered mergers or acquisitions under Article 7 of Law No. 4054. Therefore, to determine whether a concentration transaction is subject to scrutiny under Law No. 4054, the transaction must result in a lasting change in control of the target company, followed by the requirement to exceed the turnover thresholds specified in Communiqué No. 2010/4.

The creation of lasting changes in control is crucial in evaluating whether startup investments will be subject to a concentration regime. As there are many different players investing in the startup ecosystem, some of them may want to play an active role in the strategic decisions of the target company they are investing in, while others may not wish to take on any responsibility for company management. Startup investors encompass successful entrepreneurs acting as individual investors (angel investors), as well as venture capital companies with substantial investment funds, institutional investors, banks, and financial institutions. The qualifications and financial capacity of these investors influence the magnitude of investments in startup companies. While certain individual investors contribute small amounts and provide strategic advice and experience to startups, well-funded investment funds support startups with substantial capital. Nonetheless, as emphasized earlier, the crucial factor determining whether startup investments fall within the merger control regime is the establishment of a permanent change in the control of the target company.

Investments made by individual or institutional investors in startups typically involve acquiring shares in exchange for capital investment. Control in startup investments may be obtained through share transfers or contractual agreements. A crucial consideration in this context is whether the investor has achieved control (either solely or jointly) over the target company. This determination is based on a shareholders’ agreement, investors’ right agreement, or clauses outlined in the company's articles of association, irrespective of the shareholding percentage in the invested target company. If an investor becomes able to determine the strategic commercial behaviors of the target company in exchange for their investment, or if the investor has the right to veto the strategic decisions of the target company, or if the company management cannot make a strategic decision without their approval, it is possible to discuss a change in control in this context.

As outlined in the Guideline on Circumstances Considered as Mergers or an Acquisition and the Concept of Control (“Guideline”) published by the Competition Authority, veto rights must encompass strategic decisions related to the company's business policy to exert a decisive influence^[5]. The Guideline specifies that budget-related rights (defining the company's activities, approving budgets, especially for investments), outlining operational plans to achieve company objectives, making significant investments, or appointing top management (jointly determining the structure of top management, such as Board of Directors members) are considered as rights conferring control. Additionally, veto rights with relevance to the market(s) in which the company operates, such as strategic decisions in markets characterized by high levels of technology, product differentiation, and innovation, can also be regarded as rights establishing control.

Hence, when it comes to creating changes in the control of startup companies that the investors prefer to invest in, this matter should be assessed within the framework of Regulation No. 2010/4. If the investor's attributable turnover surpasses the specified thresholds, the investment transaction must be notified to the Competition Authority. Failure to notify the Board of a transaction subject to approval may result in an administrative fine equivalent to one-thousandth of the undertaking’s annual gross revenue generated at the end of the financial year preceding the date of the decision, as stipulated by Article 16 of Law No. 4054. Notably, this administrative fine is imposed on the acquiring party in acquisition transactions.

Conclusion

The merger control regime in startup investments plays a pivotal role in protecting and fostering robust competition within the market. It is essential to recognize that acquisitions and investment transactions involving startups may fall under the concentration regime. A thorough evaluation is necessary to ascertain whether there is a change in control of the target company and whether specific turnover thresholds for technology companies are surpassed. Each transaction should be precisely analyzed on a case-by-case basis. While the merger control regime in startup investments may entail a more extended process than anticipated for startups requiring swift capital injection, scrutinizing investments from a competition law perspective establishes a legal foundation for the transaction, offering legal assurance to all parties involved. This not only ensures transparency in startup investments but also provides a reliable legal basis for both investors and entrepreneurs, aligning the transactions with competition rules.