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18 December 2006

Competition and Antitrust Law in Ukraine


Author: Oleksandr Padalka and Igor Svechkar
Source: AmCham Membership Directory, Country Profile Ukraine - December 2006 - p. 132

OVERVIEW

Recent years saw increasing importance of competition laws in Ukraine in general and the role of the regulator - the Antimonopoly Committee of Ukraine (AMC) - in particular. Indeed, competition compliance is becoming a more and more challenging task for the business, and, what is even more important, the level of authority's discretion in application and enforcement of the competition laws is further increasing.

Ukraine's competition laws primarily address concentrations (merg­er control), concerted practices, abuses of a dominant position, anti-competitive actions of state and local government authorities, and unfair competition. The three principal laws governing these ar­eas are the laws On the Protection of Economic Competition 2001 (the Competition Law), On Protection against Unfair Competition 1996, and On the Antimonopoly Committee of Ukraine 1993.

The provisions of these laws are elaborated in regulations and rules approved by the Cabinet of Ministers of Ukraine and the AMC, the most important being AMC's Merger Control Regulation, Concerted Practices Regulation, Model Requirements (Block Exemptions) Regulation, and Antimonopoly Proceedings Regulation.

The Competition Law became effective on 2 March 2002 and did not suffer substantial changes until 2005. In May 2005 it was amended in a number of material respects. In particular, the definition of 'con­trol ' was supplemented with the notion of affiliated individuals (family members), the definitions of 'concerted practices' and 'abuse of a dominant position' were slightly broadened, additional guarantees for 'whistle-blowers' applying for leniency were introduced, and the types of concentrations were slightly reclassified to ensure better in­ternal consistency. The amendment also introduced a market share-wise threshold triggering merger clearance requirement, established a 2-month term for payment of fines imposed by the AMC, etc.

RECENT LEGISLATIVE DEVELOPMENTS

Apart from bringing clarity and internal consistency to certain provi­sions of the Competition Law, the 2005 Amendments had a consid­erable substantive impact.

Probably, the most significant change offered by the 2005 Amendments was the restoration of a market share-wise threshold (35%) triggering merger clearance requirement, which threshold had been applicable long before enactment of the Competition Law. In the absence of clarity with the notion of 'market where concentra­tion occurs or a neighboring market' (as opposed to the commonly used in EU 'overlapping markets' of the parties) this threshold is becoming particularly dangerous for undertakings contemplating merger transactions. Complications with market definition that the merging parties are frequently facing, enhanced by authority's ine­radicable bias towards narrowing of the market, often force the dili­gent parties to apply for merger clearance threatened by technical meeting the said threshold even where no competition concerns may reasonably be in place.

On a positive side of merger control-related changes, the 2005 Amendments slightly reclassified the types of concentrations en­suring better consistency and comprehensiveness, brought clarity to certain definitions, etc. On a sub-legislative level, the implemen­tation of the 2005 Amendments resulted in increased efficiency of applicant-authority information exchange, enhanced transparency of AMC review, etc.

MERGER CONTROL

Concentrations. notifiability thresholds

The AMC merger clearance is required where a transaction quali­fies as notifiable concentration. The following actions are regarded to be concentrations:

• merger of two undertakings, or the annexation of one undertak­ing to another;

• acquisition of direct or indirect control over an undertaking (including, through acquisition of significant portion of assets of an undertaking and appointment of its managers);

• establishment of a full-function entity by two or more undertakings;

• direct or indirect purchases, acquisitions or acquisitions of control over equity interests whereby certain thresholds (25% or

50% of the votes in the highest governing body of the respective company) are reached or exceeded.

The concentration would be notifiable, thus requiring prior clear­ance from the AMC where:

• in the previous financial year (i) the aggregate worldwide assets value or turnover of the parties exceeded EUR12 million, and (ii) at least two parties had a worldwide assets value or turnover of over EUR1 million each, andw (iii) the assets value or turnover in Ukraine of at least one party exceeded EUR1 million; or

• either individual or aggregate market share of the parties in the market concerned or the neighboring market exceeds 35%.

For the purpose of calculation of the thresholds the assets value/ turnover/market share of the entire group of the relevant undertak­ing is taken into consideration.

Local Nexus

Unfortunately, where notification threshold is calculated with refer­ence to local assets value/turnover (threshold (iii) above) the law does not differentiate between domestic and foreign-to-foreign transactions, where the target or one of the merging parties has no assets or sales in Ukraine. Thus, for the merger clearance re­quirement to be triggered it is sufficient that the Ukrainian material­ity nexus be exceeded by either party to concentration. Moreover, when calculating targets' assets value/turnover, these figures should also include those of the entire group the target belongs to before the concentration.

Virtually ignoring a clear message by International Competition Network (ICN) set out in its Recommended Practices for Merger Notification and Review Procedures and requiring that jurisdiction over a merger should be asserted proceeding from the availability of the appropriate nexus between the transaction and the jurisdic­tion, Ukrainian merger control rules still view local activity of any of the merging party as sufficient local nexus. This approach have been heavily criticized by both market players and legal community that appealed to the ICN Recommended Practices claiming that at least two parties to the transaction and/or the acquired business should carry out local activities for the transaction to be reasonably screened out as the one likely to result in appreciable competitive effects in Ukraine. Though, not only is the AMC reluctant to bring up this problem to the lawmaking level, but it does also turn down any initiative aimed at introduction of simplified procedure for mergers that technically satisfy the existing local nexus test but apparently do not raise any competition concerns.

It is also worth mentioning in this context that unlike in EU and al­most everywhere in the world, for the purposes of calculation of notifiability thresholds the assets/turnover of the entire group of undertakings the target belongs to prior to concentration are at­tributable to target's assets/turnover even where the seller loses any links with such target as a result of concentration.

No doubt that by pursuing this policy Ukraine strays far from the standards introduced by Council Regulation (EC) No. 139/2004. Hopefully, in combination with ridiculously low materiality thresh­olds that currently apply, these issues would catch attention of the regulator and urge it to take curative measures.

Joint Ventures

As a general rule, the formation of a business entity is considered to be a concentration. Any such establishment will be treated as concentration unless (i) the newly established company would not independently and autonomously carry out business activities for a long period of time or (ii) the establishment would result in coordi­nation of competitive behavior between the founders or among the founders and the newly established company. Otherwise, it may be regarded as concerted practices.

However, as a matter of practice, in order to determine whether the establishment of a joint venture by two undertakings falls under definition of concentration or concerted practices the AMC broadly construes the above provision and proceeds from the market in which such joint venture will be active. If the joint venture is intended to enter the same, upstream, downstream or neighboring with its parents market (in Ukraine), such transaction will most probably be considered concerted practices rather than concentration.

Given that the procedure for obtaining authorization for concerted practices is much more burdensome and lengthy, joint venture partners most commonly use a very elegant way to circumvent the authorization and qualify for merger clearance instead - they first establish a wholly-owned subsidiary of either partner followed by acquisition by another partner or partners of certain equity in such subsidiary. The first stage requires no AMC approval as it is essen­tially an intra-group transaction, while the second stage will always be subject to merger clearance only.

Joint vs. Sole Control

It appears that the AMC has not yet elaborated a uniform approach to joint/sole control issue. In some cases it claims that a 50/50 held undertaking should be deemed to be controlled by both shareholders, which seems to be supported, albeit indirectly, by the Merger Control Regulation language. In the absence of 'joint control' and 'sole control' notions, the AMC believes that 'control' is vested with each of the said shareholders. For the purposes of assessment of notifiability of say acquisition by one partner of other's equity, this implies that such transaction is purely intra-group. However, it clearly contradicts with the provisions of the Competition Law which, if fairly interpreted, view 'reaching' of 50% of votes and 'exceeding' of 50% of votes as two separate notifiable transactions.

Moreover, while going up the control chain to identify the ultimate controlling parent of a particular group, one must reasonably stop where sole control ceases to exist. In case we would go beyond 50/50 owned company and step over to its parents' groups, the group so determined will clearly contravene with the idea of the Competition Law. Thus, it is expected that the AMC will express its position in this regard by issuance of the relevant clarification.

Relatives

By 2005 Amendments the definition of 'control' was supplemented with the notion of affiliated individuals (relatives). In the Merger Control Regulation the AMC has further provided for the rather ex­tensive forms which should be filled out with respect to the relatives of parties' controlling shareholders and top management.

Being originally designed as catch-all, the definition of control originally did not specifically mention control through relatives. Though, it should have reasonably implied that. Thus, it remains unclear whether for the purposes of determining group's com­position these ties should be counted and from which moment. Moreover, the applicants are often unhappy with disclosing rela­tives' holdings (especially with respect to management of an undertaking) where no control may possibly be in place via such individuals.

Applying for Clearance. AMC Review

To obtain consent, the parties should submit to the AMC an ap­plication accompanied by a rather extensive set of documents, and must pay a processing fee of approximately EUR830.

An application is deemed to have been accepted for the AMC's review on the 15th day after the date of filing, unless it is rejected due to non-compliance with the formal requirements (a kind of 'preview' period). Should there be no grounds on which to bar the concentration, the application will be processed within 30 days of the date on which it was accepted for review. If grounds which may prevent the concentration from being cleared or require an in-depth investigation or examination are identified, the AMC will issue an order initiating a case investigation (anti-monopoly proceedings). If the investigation is not initiated within 30 days, the clearance is deemed to be granted.

The duration of the case investigation is limited to three months. It should thus take four and a half months at most to obtain the AMC's decision. In practice, however, if additional documents or information must be provided to the AMC for the proper review of the competition issues arising from the transaction, a new three-month term will begin from the date on which these documents are filed with the AMC. This essentially means that the AMC may extend the review period for as long as it deems appropriate.

The AMC would normally clear a transaction if it does not lead to monopolization or substantial restriction of competition in the markets concerned. There are no further legislative guidance on the considerations on which the AMC's substantive review should base, thus giving AMC a considerable leeway in assessment of an­ticompetitive impact of a particular transaction.

If the AMC refuses to grant the clearance, the Cabinet of Ministers may overrule this decision provided that the concentration's ben­efits for the public interest outweigh the negative impact of the restriction of competition. However, this restriction of competition must be indispensable for achieving the purpose of the concentra­tion and must not jeopardize the market economy system.

Abuse of Dominance

An undertaking is considered to enjoy a dominant market position if it holds (i) a market share of 35% or more (unless it can prove that significant competition exists), or (ii) a market share of less than 35%, where no significant competition exists due to the comparatively small market shares held by its competitors. Several undertakings may also be deemed to enjoy a dominant position on the market where (i) the total market share of up to three undertakings exceeds 50%, or (ii) the total market share of up to five undertakings exceeds 70%.

Abuse of dominance is defined as actions/inactions of undertaking holding dominant position which may entail prevention, elimination, restriction of competition or infringement of interests of other un­dertakings, which would have been impossible if sufficient level of competition would exist in the market concerned. In particular, the following practices may be treated as abuses of dominance: set­ting prices or conditions that could not be established under sub­stantially competitive market conditions, applying different prices or conditions to identical agreements without justifiable grounds, ty­ing, hindering market access or ousting them from the market, etc.

Concerted Practices

Concerted actions which have led or may lead to the prevention, elimination or restriction of competition are considered to be anti­competitive and are thus prohibited. Anti-competitive concerted practices include price fixing, limiting of production, dividing mar­kets or sources of supply (including zonified distribution), single-branding, ousting competitors from the market or hindering their access, tying, etc.

Under the Competition Law, the AMC has the right to permit cer­tain concerted practices if (i) the participants can prove that these practices encourage manufacturing, technological or economic development, or the development of small or medium-sized enter­prises, and (ii) they do not lead to a substantial restriction of com­petition on the market.

Concerted practices will not be treated as anti-competitive if one entity sets restrictions on another entity regarding (i) the subsequent sale or use of products supplied by the first entity, (ii) the sale of products to other entities, purchase of products from other entities and use of such products, (iii) the formation of prices or other terms of agree­ments with customers, unless such actions lead to a significant re­striction of competition, restrict the other companies' access to the market, or lead to economically unjustified price increases or deficits.

The Cabinet of Ministers can authorize concerted practices (unless the attendant restriction of competition poses a threat to the mar­ket economy system) that have not been approved by the AMC if the participants can show that the positive social effects of these practices outweigh the negative consequences of the restriction of competition. However, the Competition Law does not set out criteria for measuring the positive effects and defining the public interest.

Certain exemptions from obtaining authorization for concerted prac­tices are laid down in the Model Requirements developed by the AMC. According to the Model Requirements, the parties may be exempted from the authorization provided that their aggregate market share is below 5% of the respective market. The parties may also be entitled for the exemption if their aggregate market share is below 15 or 20%, provided they meet some other qualification requirements (combined assets/turnover, inter-relation of markets concerned, etc).

The law also provides an exception for concerted practices of small or medium-sized enterprises: the joint purchase of goods by such enterprises is not considered to be anti-competitive if it promotes the competitiveness of these companies and does not substantially limit competition.

Discrimination by state and Local Authorities

State and local government authorities can engage in anti-com­petitive practices by passing legislative or regulatory acts, issuing written or oral instructions, entering into agreements or perform­ing other actions that have led or may lead to the prevention, elimi­nation or restriction of competition. These include prohibiting or hindering the establishment of new companies, imposing restric­tions on specific activities, forcing to join associations, compelling to enter into preferential contracts, granting exemptions or other privileges, etc.

State or local government authorities are also prohibited from del­egating certain powers to other entities if this leads to the preven­tion, elimination or restriction of competition.

Unfair Competition

Unfair competition is defined as any competitive act which is con­trary to the rules of trade and other good-faith customs of business

activity. The Unfair Competition Law contains an exhaustive list of market practices that may qualify as unfair competition. Basically, these practices can be divided into the following main categories: unauthorized use of a third party's business reputation, hindering competition or attaining an undue competitive advantage, and col­lection, use and disclosure of commercial secrets.

The law imposes on the infringers rather severe sanctions and liability.

Confidentiality.

Protection of Sensitive Information

The information and documents may be filed with the AMC under a special procedure that ensures their treatment as confidential. All such materials should be properly marked when submitted to the authority and filed through a special department.

The AMC is required to effectively limit access to these materials and take the measures necessary to prevent the disclosure.

The applicants for concerted practices authorization and merger clearance usually tend to ask such treatment with respect to all infor­mation in, and documents accompanying, the relevant application.

However, the latest amendments to the Merger Control Regulation equip the AMC with the possibility to publish (including on authori­ty's website) certain information on the transaction and the parties concerned. Such disclosure is expected to provide those third par­ties who may be adversely affected by the contemplated transac­tion to submit their relevant objections to the authority so that the latter has a full picture of the potential impact of such transaction on the market. It should be admitted, however, that although such possibility and the relevant procedure were not previously in place, in practice, the AMC was normally inclined to accept well-grounded third party objections (at least as far as mergers were concerned) and took them into consideration while adopting final decision. Evidently, AMC's right to the said disclosure is a double-edged weapon: on the one hand it may be detrimental to the notified trans­action (especially where a public bid or other disclosure-sensitive arrangement is at stake), while on the other hand it may well give the authority the unbiased outlook on the case and parties' market standings, which is frequently unachievable based on the informa­tion supplied exclusively by the parties. Furthermore, given that cri­teria for a particular notified transaction to be disclosed to the public are not established, it is unclear what considerations should bring the authority to a conclusion on whether the transaction should be published, and where and within which timeframe such publication should be made. Finally, the Regulation also mentions parties' abil­ity to negotiate the scope of disclosure and the language of the pub­lication with AMC's officers or unilaterally submit such language for authority's further publication. What remains unclear in this regard is whether the AMC is entitled to insist on its own understanding of the transaction and the way of its description and communicating to the public at large where the AMC's believes the press-release proposed by the parties to be incomplete or inaccurate.

Lastly, the information on the AMC's decisions may be published in the official media.

Antimonopoly Proceedings and Investigation

Generally, there are no clear and detailed legislative guidelines for the AMC proceedings and a significant degree of discretion is vested with the authority. Particularly, there are no time restrictions as to the period the proceeding must be accomplished within, AMC may numerously request documents and information and repeti­tively reconsider the evidence collected.

The procedure includes three main stages: (i) collection of evi­dence, its analysis and preparation of the preliminary conclusion whether certain actions qualify as violation, consideration of the preliminary conclusion and, as the case may be, relevant infringer s objections, followed by either (a) adoption of the final decision or (b) referring the case to repetitive stage (i), and (ii) internal appeal of the decision to the AMC (where applicable).

The proceeding may be administered and the decision adopted (i) solely by the State Commissioner, (ii) by ad hoc Temporary Administrative Board, or (iii) by the AMC itself, being the board of State Commissioners.

Sanctions

The AMC may impose fines on an undertaking of (i) up to 5% of its sales proceeds in the previous fiscal year for an unauthorized con­centration, (ii) up to 10% of its sales proceeds for abuse of a domi­nant position or anticompetitive concerted practices, and (iii) up to 3% for unfair competition. Some other sanctions, eg, for furnishing the AMC with inauthentic information or failure to timely provide in­formation or documents, may also be imposed.

The AMC is also empowered to take actions to restore the ini­tial status of the parties (eg, order dissolution of a monopolistic company), initiate invalidation of illegal transactions through the court, request that the Ministry of Economy temporarily prohibit the offending entities from carrying out cross-border transactions (import/export bar), and otherwise eliminate the negative conse­quences of the violation.

Moreover, individuals and companies that have suffered damages may file a claim seeking compensation for pecuniary and moral damages. For some violations, courts may award damages of twice the amount of the losses sustained.

Finally, Ukrainian law provides for administrative and even criminal liability for violations of competition laws.

Enforcement

The AMC possesses rather strong instruments to enforce its deci­sions, the only problematic issue probably being collection of fines in foreign-to-foreign transactions, where the infringers are located out of Ukraine and are not reachable for the authority.

Under the law, any infringer's group's member that benefited or might have benefited from the infringement may be subject to fines at par with the principal infringer. This allows the AMC to impose fine immediately on parties' local subsidiaries. In this case the au­thority stands very good chances of forcible collection of the fines imposed.

In the absence of such local subsidiaries the fine may only be col­lected from foreign entities directly. It appears that such collection is possible only if the infringers agree to voluntarily pay it. Forcible collection of fines appears hardly achievable since neither the AMC nor Ukrainian commercial courts (through which fines are forcibly collected) has extraterritorial jurisdiction. Though, there is some litigation technique allowing to file a lawsuit against foreign com­pany in Ukraine. Nevertheless, even having obtained a favorable judgment of a Ukrainian court, the AMC will have to either (i) try to attach infringers' assets located in Ukraine (if any at that time), or

(ii) seek enforcement of such judgment in accordance with interna­tional agreements on recognition and enforcement of judgments in civil matters in jurisdictions where infringer's assets are located. Option (ii) appears hardly practicable to implement.

Importantly, once imposed, the fine may survive until the infringer es­tablishes local subsidiary and then be collected from such subsidiary.

Appeal and Judicial Review of AMC Decisions

AMC decision may be appealed to the commercial court within two months following its receipt.

The court may suspend the decision until the final award is ren­dered. However, in order to protect public interests or prevent neg­ative impact the violation may have, the AMC is permitted to declare a decision nonsuspendable upon its issuance. Thus, the AMC may discretionary hinder suspension of the decision by the court.

The judge must appoint the hearing and inform the parties there­of within 5 days after the claim has been accepted by the court. The matter should be resolved within 2 months following such acceptance. Though, the said timeframe is rarely observed in practice.

Furthermore, the recent practice of the Supreme Court shows that only AMC can define markets and declare dominance, while the commercial courts cannot do this independently. Thus, it may be hard to appeal the substantive assessment that served a ground for AMC's decision in some cases.



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