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Merger Control. Ukraine
Overview of merger control activity during the last 12 months
Following the appointment of the new Chairman and reshuffle of the State Commissioners team in mid-2015, a new phase in the development of the Ukrainian merger control regime has begun. The renewed AMC management team has already taken a number of steps towards a better competition enforcement practice and cooperation with the business community, e.g. through the implementation of transparency to the AMC's activity, and better predictability in merger control.
Based on the AMC's statistics for 2015, the number of merger applications submitted in 2015 has not essentially changed from the previous year and amounts to 774 (as compared to 781 in 2014). (However, it should be mentioned that the AMC tends to issue separate clearances for different steps of a complex transaction, thus the actual number of cleared transactions may in fact be considerably smaller.) Similarly to previous years, most of the applications filed with the AMC have been foreign-to-foreign transactions with no or minimal nexus to Ukraine.
Out of these applications, 658 (85%) were cleared and 116 were rejected by the AMC or withdrawn by the parties. The vast majority of applications did not raise competition concerns and were cleared within Phase I; in-depth investigation (Phase II) has been initiated only in 72 cases (which is less than 10% of the overall number of applications submitted to the AMC). Remedies were applied only in 45 cases, in particular to companies active in chemical, pharmaceutical, and food production industries.
New developments in jurisdictional assessment or procedure
The key policy developments concern the following: Merger control
The new law reforming the merger control regime came into force on 18 May 2016. The most notable changes introduced by the new law include:
- Remodelling of notifiability thresholds. Under the new law, clearance is required if:
(i) the combined worldwide value of assets or turnover of the parties to the concentration exceeds €30m AND the value of Ukrainian assets or turnover in Ukraine of each of at least two parties exceeds €4m - both in the last financial year immediately preceding the year of the concentration; OR
(ii) Ukrainian value of assets or turnover in Ukraine of the target group (including the controlling seller), or of at least one of the founders of a new entity, exceeds €8m AND worldwide turnover of at least one other party exceeds €150m - both in the last financial year immediately preceding the year of the concentration.
(iii) The ineffective market share-based (35%) notifiability test was eliminated.
- Introduction of a simplified review procedure. The new law introduces a simplified 25-day review procedure for transactions where:
(i) only one party is active in Ukraine; or
(ii) parties' combined shares do not exceed 15% on overlapping markets, or 20% on vertically related markets.
- Clarification of rules applicable to remedies. Under the new law, in case the AMC sees any grounds for the merger to be prohibited, it must inform the parties about the substance of those grounds. The parties, in turn, can propose remedies to the AMC within a 30-day period (extendable upon the request of the parties).
Other notable amendments include the introduction of pre-filing consultations, clarification of consultations during the 15-day preview stage, and increase of the filing fees (from UAH 5,100 (approx. €180) to UAH 20,400 (approx. €710)).
On 3 March 2016, the law on ensuring transparency of the AMC's activity came into force. The law provides for the publication of non-confidential versions of the AMC's decisions and resolutions on/in: (i) merger and concerted practice applications and cases; (ii) violation of competition cases; and (iii) the initiation of merger Phase II reviews within 10 working days of the decision/resolution.
Limitation of Phase II review period
In July 2015 the AMC limited the Phase II review period to 135 calendar days, which starts on the day Phase II notice is sent to the parties. The parties, however, can request extension of the review period.
Review of filing policy
In September 2015 the AMC adopted Guidelines on the calculation of fines that were further revised in February 2016. The document sets basic amounts of fines for violation of competition laws, including for merger cases. The Guideline sets the below basic ines in merger cases, which can be increased or decreased up to 50% depending on aggravating/ mitigating circumstances:
- 30% of the turnover on the relevant (and adjacent) Ukrainian market - for failure to notify a concentration that results in monopolisation or substantial restriction of competition, or for failure to comply with the remedies in conditional merger clearance;
- between UAH 510,000 (approx. €17.5k) and 5% of the turnover on the relevant (and adjacent) Ukrainian market - for failure to notify a concentration that does not lead to monopolisation or signiicant restriction of competition and/or raise competition concerns; and
- between UAH 170,000 (approx. €5.8k) and UAH 510,000 (approx. €17.5k) for failure to notify a concentration in case the parties are active on non-overlapping and non-adjacent markets in Ukraine.
Although the Guidelines on ines have a recommendatory nature and are non-binding, the AMC is publicly committed to follow its rules on setting ines strictly. The statutory fine ceiling of 5% of the turnover in the year preceding the fining decision remains in force.
The Guidelines on fines also provide for quasi-amnesty for 'corrective' merger filings. The fine for failure to have a past merger cleared is limited to UAH 102,000 (approx. €3.5k) and applies only to 'corrective' filings made before 15 September 2016. The current version of the Guidelines on ines provides that any merger, irrespective of the closing date, can benefit from the amnesty; however, the AMC announced that it had no intention to apply the amnesty to deals closed after 15 September 2015, so further changes to the document may be expected.
Key industry sectors reviewed and approach adopted to market definition, barriers to entry, nature of international competition etc.
Because of the specifics of national competition regulation, the Ukrainian authority usually considers markets as Ukraine-wide or narrower. To date, international competition has been rarely taken into account as a decisive factor in merger cases, though the authority is constantly improving enforcement practice, and the competition environment outside Ukraine is likely to influence the authority's analysis in cases involving international companies active on global markets.
As regards market definition, the major problem is a lack of consistency and a sometimes formalistic approach. In non-problematic mergers the AMC often agrees with the suggested definitions, especially if they are supported by EU cases. However, when it comes to complex cases or companies with historically high market shares in Ukraine, the AMC may request to define markets more narrowly or, leaving aside the discussion regarding market definitions, use statistics on their segments and decide on such basis.
Entry barriers have been rarely used in recent cases as grounds for prohibition of transactions, but mainly because most of the deals reviewed were non-Ukrainian, or production facilities concerned by them were located outside of Ukraine. The authority often pays attention to barriers in other competition cases; hence, where the merger concerns Ukrainian business, such arguments are very likely to be used as well. Among the barriers, the AMC sees various administrative restrictions (e.g. licensing, incl. the cost of licence, import/export requirements), custom duties, taxes and quotas.
Key economic appraisal techniques applied e.g. as regards unilateral effects and coordinated effects, and the assessment of vertical and conglomerate mergers
The Ukrainian legislation does not have detailed guidelines for assessing merger effects. The general principle is that the transaction can be approved unless it (i) substantially restricts competition in the Ukrainian market or a significant part of it, or (ii) leads to monopolisation of the market. In most Phase II cases the authority mechanistically referred only to market shares as a ground to challenge a merger (i.e. limiting the analysis to (ii) only) when assessing whether a particular concentration was problematic or not. However, market shares alone may be further argued as insufficient to conclude that a concentration results in monopolisation or substantial restriction of competition, especially when parties face significant competition on the respective markets. As for vertical effects - generally, they can be taken into account in transactions involving establishment of a joint venture. In certain cases, concentrations have been assessed as non-problematic, particularly in view of lack of unilateral and/or coordinated effects. However, the appraisal techniques remain unspecified and can hardly be predicted.
Nevertheless, details of effects are usually used by the filers themselves to persuade the authority in complex cases; absent sufficient national precedents and cases, they usually refer to EU cases.
The AMC also tends to look to the European Commission's practice as useful guidance. Furthermore, under the Ukraine - European Union Association Agreement, Ukraine is under the obligation to introduce guidelines on the assessment of horizontal mergers similar to those introduced by the European Commission.
Approach to remedies (i) to avoid second stage investigation and (ii) following second stage investigation
The current Ukrainian merger control regime outlines the concept of remedies in very general terms. Basically, the law says that: (i) remedies are possible; and (ii) remedies may be structural or behavioural. There are no comprehensive guidelines regarding the requirements to remedies or applicable procedures, thus remedies are usually negotiated with the AMC on a case-by-case basis. Furthermore, since not all of the AMC's decisions are publicly available (the authority has started publishing its decisions only since mid-July 2015), the AMC's practices in this regard cannot be comprehensively reviewed.
Currently the law does not give instructions as to the stage of the notification review at which the filing parties may start negotiations remedies, so in theory remedies may be offered at any time after submission of the relevant merger clearance application. In practice, they are usually offered and discussed during the in-depth investigation (Phase II), i.e., when the authority has already concluded that there are competition concerns and that further assessment is required. Offering remedies at Phase I is not prohibited, but it will most probably automatically bring the case to Phase II, as Phase I review implies the absence of any substantive competition concerns. Therefore, initiation of discussions on remedies with the authority is very unlikely to help avoid Phase II investigation.
During 2015 - with a view to preventing monopolisation and mitigating negative effects on market competition - the AMC applied remedies to companies active in chemical, pharmaceutical, and food production. As transpires from the authority's enforcement practices during the recent years, there is an evolving tendency to apply remedies in those industries where the authority regards the position of customers as most vulnerable (e.g. pharmaceutical industry), and where at least one party has an appreciable market share. There were several instances where the authority applied behavioural remedies (e.g., to refrain from anticompetitive practices) only as a precaution in situations where only one of the parties had a strong position on the market, while the transaction had no foreseeable effect in Ukraine. When imposing remedies, the AMC often sets three years' reporting obligation to monitor the situation on the markets.
More clarity as to remedies is expected starting from May 2016, when the merger control reform comes into force.
Key policy developments and reform proposals
Threshold revision appears to be key to reforming the merger control regime. However, discussions in this area have recently become more complex. In particular, it is expected that the AMC and the Ukrainian Parliament will further streamline and simplify the merger review procedures to align its merger control rules with the EU regime.
The key proposed changes include:
Limitation of the disclosure requirements
The AMC is now working on the updated version of the Concentrations Regulation. The draft Concentrations Regulation recently shared by the AMC for discussion shortens the extensive list of documents and information which filing parties are now required to submit, and introduces short-form application for approval of concentrations which do not raise competition concerns.
Calculation of fines in merger cases
In addition to the Guidelines on ines calculation introduced by the AMC, on 26 January 2016 the draft law reforming regulation of imposition by the AMC of fines for violation of legislation in the sphere of protection of economic competition was sent by the Parliament for second reading. The draft law aims to make the Guidelines on fines calculation binding upon the AMC, and empower courts to annul the AMC's decisions as regards fines and/or obligations imposed on the parties, and to order the AMC to reconsider cases in this regard.
Besides that, reform will be required as regards the following issues:
1. definition of the target group composition (currently, the target is required to disclose in the notification rather detailed information on the sellers, although a control link to such sellers may be lost post-closing; such an approach often places an enormous unjustified burden on the notifying parties);
2. approach to calculation of the target assets/turnover (similarly to the above, currently the assets/turnover of the controlling sellers need to be counted, although a control link to such sellers may be lost after closing; thus, notification requirements are often met only formalistically: by sellers who will cease to control the target post-closing rather than by the target);
3. clarity on sole/joint control issues (current merger control regime does not differentiate clearly between sole and joint control, which often causes uncertainty as regards turnover allocation and qualification in 'change of control' cases);
4. treatment of horizontal mergers (the Association Agreement directly requires that the document explaining the principles used in the assessment of horizontal mergers shall be adopted); and
5. ancillary restraints (currently, ancillary restraints such as non-compete obligations accompanying a merger are often formalistically regarded as anticompetitive concerted practices requiring a separate clearance), etc.