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15 January 2007

Competition law in Ukraine - recent developments and prospective regulation

Author: Oleksandr Padalka and Igor Svechkar
Source: The European Antitrust Review 2007, Law Business Research Limited

The key piece of Ukrainian competition legislation, the Law of Ukraine on Protection of Economic Competition (the Competition Law), became effective on 2 March 2002 and remained substantially unchanged until summer 2005, when amendments to the law took effect, changing the legal framework for competition in a number of material respects. Another set of changes to the Competition Law emerged in March 2006, though in essentially targeting the expert examination routine associated in case reviews, they are not expected to have an appreciable effect on the regulatory framework.

This article primarily focuses on some of the 2005 Amendments, assesses the outcome of the first year of their application and enforcement by the Anti-monopoly Committee of Ukraine (Committee), as well as critically reviewing the existing and prospective pattern of competition regulation in Ukraine.

The 2005 amendments

Apart from bringing clarity and internal consistency to certain provisions of the Competition Law, the 2005 Amendments also had a considerable substantive impact. Although the review was not exhaustive, the amendments noticeably changed the rules for competition regulation, made compliance a more challenging task for business, and, more importantly, increased the the Committee's discretion in the application and enforcement of the law. Through the introduction of largely open-ended provisions, the 2005 Amendments ultimately aimed at removing legal uncertainties as to whether the Committee may intervene in certain transactions or with respect to the behaviour of undertakings in the market: many of those uncertainties are owed to the (allegedly) implied exhaustiveness of the definitions and lists in the Competition Law. In particular, in the 2005 Amendments, the definition of 'control' was supplemented with the notion of affiliated individuals (relatives), whereas the definitions of 'concerted practices' and 'abuse of a dominant position' were broadened.

As a practical matter, the above-mentioned novelties have neither drastically changed the Committee's policy of coming down hard on infringers, nor were their effects felt by the market participants. Most probably this is because the authority still possesses too few resources to launch a large-scale campaign against small or medium-sized infringers (except, perhaps, in some regional markets); instead, it usually prefers to concentrate on high-profile cases which remain outside the impact of the 2005 Amendments - apparently, these cases did and do have sufficient identifiers to qualify as anti-competitive offences. Though, in the long run, the authority expects these changes to enable the use of indirect evidence without such evidence being successfully challenged in the court.

Probably the most significant change offered by the 2005 Amendments was the restoration of a market share-based threshold (35 per cent) triggering a merger clearance requirement - a threshold that had applied long before the Competition Law's enactment. The lack of clarity in the term 'market where concentration occurs or a neighbouring market' (as opposed to the definition commonly used in the EU of 'overlapping markets'), makes this threshold particularly dangerous for undertakings contemplating merger transactions. The complications with market definition that merging parties frequently face, enhanced by authority's ineradicable bias towards the narrowing of the market, often force diligent parties to apply for merger clearance because they risk technically meeting the threshold, even where no competition concerns could reasonably arise. On the positive side of merger control-related changes, the 2005 Amendments slightly reclassified the types of concentration, ensuring more consistency and comprehensiveness.

Regarding subordinate legislation, the Committee went well beyond the amendments to the Committee's Regulation on Concentrations No. 33-r and on Concerted Practices No. 26-r, effective from early 2006 and reflecting changes to the Competition Law, and provided, inter alia, for the possibility to consult with the commissioner in charge or another relevant officer (where authorised by the commissioner) during the 15-day 'preview' period to eliminate deficiencies in applications for merger clearance or authorisation of concerted practices. This provision was intended to facilitate parties' or their legal counsel's interaction with the authority to ensure that applications were complete and the parties could be protected against the Committee's discretional rejection of the application, provided that they had exerted due efforts to supplement the application with the required data within the preview period. Indeed, experience shows that this has greatly contributed to the efficiency of the exchange of information between applicants and the authority at the preview and review stages. Previously, such exchanges did not work well as the Committee's officer was charged with getting in touch with the parties or their legal counsel. Apparently, it was much easier for the officer to reject the application because of technical non-compliance or on similar formal grounds.

Another important feature of the amended regulations deals with the Committee's disclosure of notified transactions: the regulation permits the Committee to publish (including on the authority's website) certain information on the transaction and the parties. Such disclosure is expected to provide third parties that may be adversely affected by the contemplated transaction with an opportunity to submit their relevant objections to the authority to illustrate the potential impact of such a transaction on the market. Admittedly, however, although the relevant procedure was not previously in place, in practice the Committee was normally inclined to accept well-grounded third-party objections (at least as far as mergers were concerned) and took them into consideration when adopting a final decision.

Evidently, the Committee's right to disclose is a double-edged sword: 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), but on the other it may well give the authority an unbiased outlook on the case and the parties' market standing, which is frequently unachievable when relying on the information supplied exclusively by the parties. Furthermore, given that the criteria for a particular notified transaction to be disclosed to the public have not been established, it is unclear what considerations would bring the authority to a conclusion on whether the transaction should be published, and where and within what time frame such publication should be made (not to mention that the Committee's website, the regulator's quickest form of communica

tion, appears to currently have two competing versions updated almost in parallel at http://amcu.gov.ua and http://amc.gov.ua).

Finally, the regulations also mention the parties' ability to negotiate the scope of disclosure and the text of the publication with the Committee's officers or to unilaterally submit the text to the authority for publication. What remains unclear is whether the Committee may insist on its own understanding of the transaction and its description and manner of communicating to the public in cases where it believes the press-release proposed by the parties to be incomplete or inaccurate.

Similarly, the 2005 Amendments also necessitated certain adjustments to the Committee's Regulation on Model Requirements (Block Exemptions) to Concerted Practices No. 27-r, which adjustments mainly concern handling non-full-function joint ventures.

Among the less significant changes brought about by the 2005 Amendments, the stipulation of a two-month term for payment of fines imposed by the Committee, additional guarantees for 'whistle-blowers' applying for leniency, etc, should also be noted. It appears, however, that none of these may be of particular interest for a practising competition lawyer.

Blast from the past

Despite the widely proclaimed approximation to the EU's acquis communautaire, the existing Ukrainian legal framework for competition is rather obsolete. Still, it should be admitted that competition law in Ukraine is much closer to EU standards than many of its peers' competition laws.

Perhaps the most controversial piece of Ukrainian competition law is found in chapter 3 and, to some extent, chapter 28 of the Commercial Code, which restore provisions of the obsolete Law of Ukraine on Restriction of Monopolism and Prevention of Unfair Competition in Business Activity. Not only does this revisit the mid-90s and largely stultify EU harmonisation efforts, but it also brings tremendous disorder to the entire framework for the regulation of competition. The good news about the Code is that the Committee seems to be unanimous and consistent in neglecting its provisions. Moreover, from time to time, the Committee comes up with an initiative to make the Code consistent with the Competition Law (including Draft Law No. 4445 submitted to Parliament in late 2003). Nonetheless, so far it does not prevent the bad news about the Code from showing through - by failing to resolve the conflict between the two doctrines of lex posterior derogat priori and lex specialis derogat generali, Ukrainian courts of various instances and jurisdictions often apply and enforce the Code, prioritising its provisions over those of the Competition Law.

More hurdles to overcome

Among all the deficiencies of Ukrainian competition law, a practising lawyer would most probably name materiality thresholds triggering merger clearance as the worst. Virtually ignoring a clear message from the 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 based on the appropriate nexus between the transaction and the jurisdiction, Ukrainian merger control rules still view the local activity of any of the merging parties as a sufficient local nexus. This approach has been heavily criticised by both market participants and the legal community, who referred to the ICN Recommended Practices, claiming that at least two parties to the transaction 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. Unfortunately, not only is the Committee reluctant to raise this problem to legislative level, it also turns down any initiative aimed at the introduction of a 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 the EU and almost everywhere else in the world, for the purposes of calculating notifiability thresholds, the assets or turnover of the entire group of undertakings to which the target belongs prior to concentration are attributable to target's assets or turnover, even where the seller severs any links with the target as a result of the concentration.

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

Against the background of numerous other ambiguous provisions of competition law and regulation, a series of rather controversial decisions taken by the Committee within the last year and legal uncertainties about the procedural rules for judicial review of competition cases, it is entirely conceivable that major legislative, regulatory and enforcement policy adjustments are still ahead.

Prospective regulation

Probably the most actively discussed and long-awaited piece of Ukraine's competition legislation that is scheduled to emerge this year is the Competition Procedural Code of Ukraine (Procedural Code). The draft Procedural Code is now being presented by the Committee as prima facie evidence of the authority's immense legislative and streamlining efforts. Indeed, the almost hundred-page document impresses by its solidity and comprehensiveness. Nevertheless, on the downside it clearly transpires that the Procedural Code is a well-turned compilation of existing procedural rules established by other laws and regulations in this area, watered down with some features inherent to judicial review under the Code of Administrative Justice. Basically, the Procedural Code does not go beyond the current regulation of procedural issues, leaving the rationale for its development and enactment quite unclear. Moreover, it appears that nowadays, the Committee's review is appropriate on the procedural side, wheras within the newly-introduced Procedural Code, a highly explosive mixture, there may well be some pitfalls lurking, unidentifiable at the drafting stage.

Two major legislative initiatives targeting the extension of the Committee's authority and influence, ie, draft laws No. 960 and No. 3640, (the first a complex amendment addressing administrative liability, IP-related unfair competition, etc; the second dealing with procuring of evidence in competition investigations), were both defeated by Parliament in February 2006. This defeat was not surprising as it actually produced the line of draconian draft law No. 4578, whose less aggressive successor (No. 4578-1) finally got through to become the 2005 Amendments.

Draft law No. 8087, submitted to Parliament in September 2005 and proposing criminal liability for certain concerted practices, did not progress further and now appears to have been defeated by the dissolution of that Parliament.

As far as subordinate legislation is concerned, the Committee is sparking immense interest in the regulation of public procurement, in which area it has developed numerous draft regulations and even contributed to the elaboration of legislative changes. Another hot topic that the Committee has recently offered for open discussion with the legal community is block exemptions available to business associations and unions at the establishment stage. Relevant regulations with so-called 'model requirements' applicable to associations and unions are undergoing a final review and are about to be adopted by the authority.

In view of the existing legislative and enforcement drawbacks, one would probably agree that there is enough room for manoeuvre to perfect the legal framework for competition. Probably, it is high time for the Ukrainian business and legal community, especially competition lawyers, to make themselves heard in striving for better regulation.

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