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The European Antitrust Review 2015. Ukraine
Regulatory framework and regulatory authority
The basic laws comprising the competition regulatory framework in Ukraine are:
• the Law on the Protection of Economic Competition of 2001 (the Competition Law), providing for the main principles, concepts, and procedures of the merger control, concerted practices, and dominance regulation regimes;
• the Commercial Code of Ukraine of 2003; and
• the Law on the Antimonopoly Committee of Ukraine of 1993.
The Antimonopoly Committee of Ukraine (AMC) is the primary state authority entrusted with assessing how transactions and practices may affect the local competition environment. In particular, it has powers to investigate and grant or refuse clearance for mergers and concerted practices, and to investigate and penalise violations of the merger control regime, abuse of dominant position, and so on. As far as mergers and concerted practices are concerned, the Cabinet of Ministers may overrule a prohibitive decision of the AMC.
By implementing the main competition laws, the AMC has issued a number of regulations detailing their provisions and elaborating on assessment. Such regulations include:
• the Methodology for Establishing Dominance of 2002;
• the Methodology for Assessment of Control Links of 2002;
• the Procedural Regulation for Filing Applications with the AMC for Obtaining its Prior Approval of the Concentration of Undertakings of 2002;
• the Procedural Regulation for Filing Applications with the AMC for Obtaining its Approval of the Concerted Practices of the Undertakings of 2002;
• the Regulation on the Standard Requirements Applicable to Concerted Practices for their General Exemption from the Requirement to Obtain Prior AMC Clearance of 2002;
• the Regulation on the Standard Requirements to Concerted Practices concerning Specialisation of Production of 2008;
• the Regulation on the Standard Requirements to Concerted Practices concerning R&D of 2012; and
• the Resolution on the Procedure for Release of Liability of 2012.
While concentration types provided for in the Competition Law are similar to developed merger control regimes, Ukrainian competition law has its own unique peculiarities.
Merger or consolidation
This type of transaction is notifiable only when two or more undertakings cease to exist as separate legal entities and a new entity emerges (a merger), or one or more undertakings are merged into another undertaking that survives (a consolidation).
Acquisition of control
In particular, control is deemed to exist if an undertaking:
• directly or indirectly holds or manages more than 50 per cent of shares, interest, votes or assets, or is entitled to receive at least 50 per cent of profit of another undertaking;
• has more than 50 per cent of the votes in the highest corporate bodies of another undertaking;
• is authorised to appoint the CEO, vice CEO or more than 50 per cent of members of the supervisory board (the board of directors), the management board or the audit committee (or if the same persons hold positions of CEO, vice CEO, the chairman, the vice chairman or more than 50 per cent of members of said boards or committee, etc, in two undertakings);
• grants financial support of the notified transaction and such support results or may result in acquisition of decisive influence over another undertaking (ie, recipient of such support); or
• otherwise controls another undertaking (eg, through contractual (management) arrangements, etc).
Notably, Ukrainian competition law does not differentiate between sole and joint control. In practice, however, the AMC has on several occasions considered changes from joint to sole control to be a concentration. However, examples to the contrary are also known -the AMC referred to the intra-group exemption from the clearance requirement saying that where a jointly controlling parent acquires sole control over the jointly controlled entity, the transaction is considered intra-group, as control relations already existed between such parent and the controlled entity.
Acquisition of control in the form of the acquisition of assets may require a merger clearance if such assets constitute the so-called 'integral property complex. This is a rather archaic notion and is often used in connection with privatisations. Traditional interpretation normally links it to a full production cycle facility (eg, a plant) or a going concern. However, other interpretations (eg, for tax purposes) allow the following understanding of the concept: integrity of the assets that allows independent business activity to be conducted on a lasting and regular basis, where the term of use of such assets exceeds 12 months. In practice, the AMC often refers to the latter definition of the term and this creates misunderstandings when assessing the notifiability requirement.
Establishment of an undertaking
The Competition Law sets several qualification requirements (cumulative) for the establishment of an undertaking to amount to a concentration.
Two or more parent undertakings that do not belong to the same group
In order to meet this criterion, the new undertaking should not necessarily be jointly controlled by its parents, unlike in many developed merger control systems. Furthermore, this type of concentration presupposes incorporation of a new entity, the triggering event being the registration of such new entity. Any other transactions that are usually regarded as the establishment of a joint venture would normally be considered an 'acquisition of control', as discussed above, or an 'acquisition of equity/shares.
Status of an undertaking and ability to pursue business activity independently
To be considered an undertaking, a new legal entity should engage in the production, sale or purchase of goods (this also covers services and works) or another business activity. While the Competition Law does not clarify which other business activities may be relevant for the said purpose, interpretations based on other applicable laws and regulations broaden the concept to include any activity aimed at receiving profit in any form (tangible or intangible).
To be considered an undertaking, it will suffice for the new entity (not being by itself engaged in any business activity) to exercise control over another legal entity, irrespective of whether the latter may be considered an undertaking. In practice, under adverse interpretation, incorporation by the parties of a shell company as a preparatory step with a view for such SPV to further acquire the target or otherwise participate in the main transaction may in itself be regarded by the AMC as a stand-alone concentration.
There is no clear legal or practical guidance as to the 'independence' criteria. In practice, the independency arguments supported by the sufficiency of the new entity's own management and staff, capital, assets (including IP, where relevant), customer base or contractual arrangements with third parties usually receive favourable feedback from the authority.
Ability to do so on a lasting basis
There is no clear legal guidance on this point. However, it may be assumed that this criterion is not met if the undertaking is established for a short finite duration in order to accomplish a specific project or achieve a certain result, such as the construction of a plant with subsequent termination of the undertaking's activity once the construction is completed.
Absence of coordination
Using the terminology of the EU law, the first two conditions would classify the entity as a fully functional undertaking. However, instead of the concept of full functionality, Ukrainian competition law differentiates between concentrative and coordinative undertakings, thus using a concept which applied in the EU before 2004. Therefore, even if the company is completely functional in these terms, should the slightest coordination element be involved, establishment of such an undertaking may qualify as concerted practices.
Acquisition of equity or shares
Acquisition of equity or shares of a company that confers 25 per cent or more in the highest governing body of an undertaking is considered to be a concentration. If in the future the equity stake (shares) reaches or exceeds 50 per cent of the votes, this constitutes a new concentration. Furthermore, acquisition of more than 50 per cent of the shares or equity in the share capital of a company irrespective of the number of votes attached is a presumed concentration in the form of acquisition of control over an undertaking.
A concentration is notifiable and requires prior approval of the AMC if all of the following thresholds are exceeded:
• the combined worldwide asset value or turnover of the parties to the concentration (for the purposes of this chapter, parties to the concentration are considered as part of their corporate group) in the financial year preceding the year of the transaction exceeded €12 million;
• each of the parties to the concentration had worldwide asset value or turnover in the financial year preceding the year of the transaction in excess of €1 million; and
• the value of assets located in Ukraine or the Ukrainian turnover of either of the parties to the concentration in the financial year preceding the year of the transaction exceeded €1 million.
Alternatively, there is a market share test, which applies independently. AMC clearance is required if either the individual or combined market share of the parties in the market concerned or the adjacent market exceeds 35 per cent. In practice, the market share threshold often applies to any market where the parties are active in Ukraine, not just the markets concerned by the concentration.
Unlike in EU law, under Ukrainian merger control rules for the purpose of calculation of financial thresholds, the target group's figures should include those of all entities in its respective group to which it belongs prior to merger (including the ultimate controlling parent and all entities controlled by such parent); while in case of the establishment of an undertaking minority, the non-controlling founders' figures should be taken account of.
Applicability of effects doctrine
As stems from the above, the third threshold in the assets/turnover-based notifiability test is rather tricky for foreign companies doing foreign-to-foreign transactions, as the threshold is set very low. Furthermore, it is often unreasonable if, for example, the local threshold is only met by the selling party (and not by the target), or by the non-controlling parties to a joint venture only where the joint venture is not planned to have any local activities.
However, the general provisions of the Competition Law stipulate that 'the law applies to relations that impact or may impact economic competition in Ukraine. This provision can be reasonably interpreted as containing a primary applicability test (based on the effects doctrine) for the merger control law in general and for the said notification thresholds in particular. On this basis, there is scope to argue that merger clearance is not required due to a transaction's insufficient local nexus if, for instance:
• the target has no sales or physical presence in Ukraine and the parties activities are not overlapping; or
• the joint venture is not expected to carry out any activities in Ukraine and only one of the controlling founding parties or even only one non-controlling founding party meets the local threshold.
There is no official clarification of the applicability of the merger clearance requirement to transactions lacking a sufficient local nexus. However, the AMC has, on several occasions, expressed its unofficial position on the issue: it claimed that such transactions are subject to merger clearance since the AMC has exclusive authority to determine whether a particular transaction may or may not affect competition in Ukraine; and such verification of impact on domestic competitive environment is in fact conducted while reviewing a merger case and granting the merger clearance. Similarly, the AMC has accepted and reviewed applications for the clearance of transactions lacking a local nexus on the target's side, thus indirectly confirming its jurisdiction over such transactions.
In view of the above, although the insufficient nexus argument is not currently supported by the AMC and the AMC's precedent decisions typically indicate that it may not recognise it as valid and justifiable, it still is a strong argument that stands a reasonable chance of being accepted by the Ukrainian courts.
Pursuant to the Competition Law, the AMC clearance decision can be made conditional upon the parties' obligation to undertake certain actions (including refraining from certain actions) that will eliminate or at least mitigate the negative impact of the concentration on the competition. Such undertakings may be behavioural (eg, obligations to grant, not restrict, the access to necessary resources, non-discriminatory pricing or similar) or structural (eg, divestitures).
Ukrainian competition law does not provide for any fast-track or simplified procedures. The merger review includes the following stages:
Preview period (15 calendar days)
The AMC reviews the notification and decides whether it is complete and can be passed for the review on the substance. Te parties may request the AMC to limit the scope of the required information, but the AMC has full discretion as to whether to satisfy such requests.
Phase I review (up to 30 calendar days)
This stage involves assessment of the concentration on the substance resulting in the AMC's decision on whether to approve the concentration or initiate Phase II review if there are grounds to prohibit the concentration or an in-depth investigation is required.
Phase II review (up to three months)
Phase II review involves the close analysis of competition concerns raised by the concentration, examination of expert opinions, other additional information, and so on. Although the statutory review period is limited to three months, in practice an AMC investigation may take much longer, if additional documents, information or expert examination are required. Tis term may be suspended or even restarted, in which case a new three-month period would begin from the date on which these documents, information or expert opinion have been filed with the AMC.
Triggering events and notifiability thresholds The draft on Amendments to the Competition Law was prepared for a second reading by the Ukrainian parliament. In particular, the draft proposes to increase the merger notification thresholds and to set a higher standard for the local nexus requirement as follows: the merger control clearance will be required in cases when the combined worldwide turnover or combined worldwide assets of all the parties to the concentration exceeds €30 million and at least two of the parties have turnover or assets in Ukraine in excess of €2.5 million. Another test will be the combined worldwide turnover or combined worldwide assets of at least one party to the concentration exceeding €30 million and at least one other party having this turnover or asset value figure in Ukraine.
Collection of fines
Implementation of a notifiable transaction without (including prior to) clearance can lead to a fine in the amount of up to 5 per cent of the undertaking's turnover in the year immediately preceding the year when the fine is imposed. In view of the very low notifiability thresholds and limited acceptability of the effects doctrine arguments, a significant number of clearly non-problematic foreign-to-foreign transactions have been technically reportable in Ukraine. Although there is no public registry of AMC decisions, we have been witnessing a general trend of a gradual increase in the amounts of fines over the past years, from €10,000-€15,000 to €20,000-€60,000, including in foreign-to-foreign deals with reasonably insufficient local nexus. To increase the deterrent effect of its fines the AMC considers increasing their level up to €100,000.
Anti-competitive agreements and concerted practices
Te Competition Law prohibits all agreements (irrespective of their form and type), decisions of associations of undertakings, as well as any other coordinated practices which resulted or may result in prevention, elimination or restriction of competition (ie, anticompetitive concerted practices).
In particular, it is considered anti-competitive to:
• fix prices or other purchase or sale conditions;
• limit production, markets, technological development or investment, and assume control thereof;
• divide markets or sources of supply according to territory, type of goods, sale or purchase volumes, or classes of sellers, purchasers or consumers;
• distort the results of trading, auctions, competitions or tenders;
• oust other companies from the market or limit their market access;
• apply different conditions in equivalent agreements that put other companies in a disadvantageous position;
• subject execution of agreements to the other party's acceptance of additional obligations that are not related to the subject matter of the agreement; and
• substantially limit the competitiveness of other companies without justifiable reasons.
The Competition Law does not extend the general prohibition of anti-competitive concerted practices to the following types of concerted practices:
• certain vertical arrangements, which constitute concerted practices in relation to the supply and use of products that limit:
• the use of products supplied by the imposing undertaking or use of products of other suppliers;
• the purchase of other products from other suppliers or sale of such other products to other undertakings or consumers;
• the purchase of products that, due to their nature or trade custom and other fair business practices, are not related to the subject matter of the relevant agreement (tying); or
• the price formation or establishment of other contractual terms and conditions for selling products supplied by the imposing undertaking to other undertakings or consumers. However, this exemption does not apply if the restrictions result in substantial restriction of competition on the market, limit other undertakings' access to the market; or result in economically unjustified price increases or product shortages;
• certain intellectual property rights transfer agreements, that is, those containing certain allowed limitations; in particular, limitations on the:
• scope of transferred rights;
• period and territory of permitted use of the IP; or
• type of activity, application, and the minimal production volume; and
• concerted practices of SMEs concerning the joint acquisition of products which do not result in substantial limitation of competition.
Any concerted practices (except for establishment of a joint venture) are generally exempted if the participating undertakings' (including respective groups) combined market share in any product market concerned is below 5 per cent.
Furthermore, as regards vertical or conglomerate concerted practices, these are exempted if the participating undertakings' (including respective groups) combined market share is below 20 per cent. Similarly, horizontal and mixed concerted practices are exempted if the participating undertakings' (including respective groups) combined market share is below 15 per cent. Both cases are subject to all of the following conditions:
• neither of the participating undertakings holds a dominant (or monopolistic) position or has exclusive or privilege rights;
• the aggregate worldwide turnover or asset value of the participating undertakings (including their respective groups) did not exceed €12 million in the preceding financial year;
• the aggregate worldwide turnover or asset value of at least two undertakings that belong to the participating undertakings' groups did not exceed €1 million in the preceding financial year; and
• the aggregate turnover or asset value in Ukraine of at least one undertaking that belongs to either of participating undertakings' groups did not exceed €1 million in the preceding financial year.
Tis exemption will not apply to the following horizontal or mixed arrangements if the parties are at least potential competitors:
• price fixing;
• territorial, customer or supplier and other market sharing;
• testrictions on (including imposing an obligation to refrain from) production or distribution of products; and
• distortion of the results of trading, auctions, competitions or tenders.
Exemption of certain types of agreements and practices
Specialisation exemption Specialisation concerted practices - that is, horizontal arrangements contemplating concentration of the participating undertakings' efforts and resources in the production (distribution) of certain products that result in the improvement (rationalisation) of production, acquisition or distribution of the products - are exempted unless one of the following applies:
• either of the undertakings holds a dominant (monopolistic) position;
• the combined market share on any of the markets concerned exceeds 25 per cent; or
• the specialisation arrangement results in output limitation, market sharing or similar, or its term exceeds five years.
In particular, the following specialisation agreements may be implemented without specific permission:
• discontinuing production of identical or similar products;
• an agreement to produce or sell agreed products only jointly;
• refraining from supplying or acquiring the agreed products to or from competing undertakings; and
• keeping minimum stock of the agreed products.
Exemption for associations The Associations Regulation exempts the establishment of business associations from prior AMC clearance if certain conditions are met, including that:
• the association has a contractual basis;
• the association's participants do not gain profit from the association's activities;
• the association is financed solely from contributions made by its participants, donations and so on;
• the association can only coordinate some of its participants' activities (eg, organisational, informational aspects) without interference with their business activities;
• there are no limitations on entry and exit; and
• the association is not engaged in any entrepreneurial activity.
In late 2012, the AMC enacted a Regulation exempting joint R&D or development and engineering works from the requirement to obtain prior AMC clearance. Te exemption applies when the combined market share of the parties on the relevant market does not exceed 25 per cent and the parties meet a set of other criteria (such as equal access to the results of the R&D activity, etc).
Anti-competitive arrangements may nevertheless be individually exempted by the AMC from the prohibition if such arrangements:
• contribute to various efficiencies, such as
• improvement and rationalisation of manufacturing, product purchase or sale processes;
• technical, technological and economic development;
• development of SMEs;
• optimisation of export and import processes; and
• development and use of uniform product standards; and
• do not result in significant restriction of the competition on the market or a substantial part thereof.
Transactions eligible to benefit from an individual exemption should be suspended until the AMC clearance is granted. In order to obtain clearance the participating undertakings should file a notification to the AMC which is similar in all material aspects to a merger notification, and additionally provide a well-grounded justification for the concerted practices arguing its efficiencies and overall positive effect on the market. The notifications review procedure is similar to the review in merger cases, except Phase I in concerted practices cases lasts for up to three months.
If the AMC refuses to grant an individual exemption, the Cabinet of Ministers may nevertheless grant permission for implementation of certain concerted practices if the parties prove that the positive effects of such practices for the public interests outweigh the negative consequences of the restriction of competition. Te AMC prohibition decision cannot be overruled if the restrictions pertaining to the concerted practices are not required for the implementation of such practices; and if such practices pose a threat to the market economy of Ukraine.
Participants to an anti-competitive arrangement implemented without clearance that is not covered by an exemption can be fined up to 10 per cent of their global group turnover in the year immediately preceding the year when the fine is imposed. The largest fine in AMC's history (€41.5 million) was imposed on the manufacturers of wood-based panels, members of a bid rotation cartel. Te following sanctions may also apply:
• ban on the companies' cross-border activities with Ukraine;
• third-party damages claims; and
• invalidation of the transaction.
A leniency programme has been in place since 2002. However, the absence of clear and adequate procedural rules hindered its effective implementation. In October 2012, the Leniency Regulation came into force detailing rules and procedures for leniency applications in anti-competitive concerted practices cases. Te Leniency Regulation clarifies the requirements of leniency applicants, and the types of information and evidence an undertaking should provide for its application to be successful, review procedure, for examples. The document is an important step towards the better prevention, detection and controlling of anti-competitive concerted practices.
The Regulation does not provide for a reduction in fines for the second and subsequent applicants. However, the AMC has made public statements that it would reduce fines for the second and subsequent applicants should they cooperate with the AMC during its investigation, providing evidence of the infringement and admitting their participation in the infringement.
Competition law does not provide for the term 'cartel'. However, all basic types of cartels are per se prohibited as anti-competitive concerted practices, in particular, regarding the following:
• fixing prices or other conditions of purchase or sale;
• limiting or controlling the production, purchase or sale of goods;
• sharing markets or sources of supply by territory, type of goods, sale or purchase volumes, or classes of sellers, purchasers or consumers or otherwise; and
• distorting the results of trading, auctions, competitions or tenders.
To benefit from immunity, the leniency applicant should meet the following criteria (cumulative):
• be the first one to inform the AMC about the anti-competitive concerted actions;
• inform the AMC about the anti-competitive concerted actions voluntarily;
• provide the AMC with information of essential importance for finding an infringement;
• provide the AMC with all evidence or information on the anticompetitive concerted actions made available to it or that could have been made available to it by means of reasonable efforts (a detailed description of the alleged cartel arrangement; contents of agreements, notes, and correspondence; minutes of the meetings as well as the information required for securing marker);
• take measures to cease its participation in the anti-competitive actions, at least after filing the leniency application; and
• not be the initiator or leader in anti-competitive actions.
The Regulation introduces detailed procedural rules:
• an application can be made only in written form - the moment of handling in the application should be reflected in the minutes, a copy of which shall be provided to the applicant;
• the identity of the applicant and the fact that an application has been filed will be kept confidential;
• the application shall include information concerning:
• the details of the applicant;
• information regarding all participants of the alleged anticompetitive concerted practice;
• detailed descriptions of the activities of the alleged violation (ie, the type of the cartel, the product and geographical markets involved, the duration of the violation, the role of each participant, etc);
• all available evidence; and
• the applicant's role in the alleged violation;
• types of admissible evidence (listed);
• a marker system is introduced (ie, an undertaking can apply based on limited information for a marker-letter securing its first place on the list of immunity applicants, provided it is in a position to obtain and submit sufficient information later on); and
• the applicant is informed whether the immunity was granted or not when the AMC issues a final decision in the case.
Abuse of market power
Parties to the exempted concerted practices (either as an individual exemption, or due exemption of certain types of arrangements) are prohibited to impose restrictions on third parties that normally do not apply to other undertakings. It is also prohibited to apply different conditions without justifying reasons. In particular, it is prohibited to impose such restrictions on dependent - due to the absence of alternative sources of purchase or supply or otherwise - SMEs.
Abuse of dominance
Te acquisition and maintenance of a dominant position on the market is not prohibited as such, although acquisition of dominance through mergers is subject to the AMC's prior review and approval. However, pursuant to the Competition Law, certain practices of dominant companies may have harmful effects on the market and are thus prohibited.
Prohibited practices include:
• setting prices or conditions that could not have been established in a considerably competitive market environment;
• applying different prices or conditions to identical agreements without justifiable grounds;
• imposing contractual conditions that have no connection to the subject of the agreement;
• limiting production, markets or technological development in a manner that may cause harm to other companies or customers;
• refusing to purchase or sell goods in the absence of other sources or distribution channels;
• substantial limitation on competitiveness of other companies without justifiable reasons; and
• hindering market access for other companies or ousting them from the market.
The above list is indicative. In practice, the authority will see into the nature of the dominant undertaking's behaviour and analyse whether such behaviour resulted or may result in the prevention, elimination or restriction of competition or infringe upon other undertakings' or consumers' interests that would have been impossible should effective competition exist in a given market.
There is no notification or prior approval procedure applicable to undertakings with significant market power. However, the Competition Law provides for a possibility to obtain the AMC's conclusion in the form of a non-binding recommendation regarding certain actions or behaviour that may potentially qualify as abuse of a dominant position.
Definition of dominance
The Competition Law defines an undertaking as dominant, if:
• it has no competitors in the market; or
• it does not face significant competition due to, inter alia, the other market players' limited access to raw materials and distribution channels, existence of entry barriers, certain privileges, or due to other circumstances.
An undertaking is presumed to be dominant if its market share is higher than 35 per cent. However, this presumption may be rebutted if the undertaking proves that it faces significant competition from other market participants. Furthermore, an undertaking with a smaller market share may also be considered dominant if there is no significant competition, in particular, because its competitors' market shares are comparatively small.
Ukrainian competition law recognises the concept of collective dominance whereby several undertakings may be considered to collectively hold a dominant position on the market if the following criteria are met:
• a combined market share of not more than three undertakings with highest individual market shares exceeds 50 per cent; or
• a combined market share of not more than five undertakings with highest individual market shares exceeds 70 per cent.
For the above purposes, the AMC will refer to the AMC Methodology for Establishing Dominance, which sets detailed procedures regarding the definition of the relevant market, taking into account the product, geographical and time dimensions of the particular market, the existence of regulatory and other market entry barriers, actual and potential competitors, and so on, as well as regarding the calculation of the undertakings' market shares.
Once the AMC has established the violation, the infringing undertaking can be subject to a fine in the amount of up to 10 per cent of its global group-wide turnover in the year immediately preceding the year in which the fine is imposed.
In dominance cases, the AMC can also make a decision requesting that a dominant undertaking is divested. Such divestment should be implemented within the time limit established by the AMC, which should not be less than six months. The dominant undertaking's divestment is implemented at its discretion, provided that it will no longer hold a dominant position once the division has been finalised. The divestment cannot be requested if:
• from an organisational or territorial standpoint it is impossible to separate several enterprises or structural units; or
• there are strong technological ties among several enterprises or structural units.
According to the AMC statistics, abuse of a dominant position is the most common violation (44 per cent of cases in 2012) of competition laws. In 2012, the AMC has investigated 2,540 cases regarding abuse of dominance, having prevented the violations both by imposing fines and by issuing recommendations to the market players. In 2012, the highest fine for the abuse of a dominant position on the market for ethyl alcohol reached approximately €19 million. The highest ratio of violations in the form of abuse of a dominance position was recorded in the following industries: housing and communal services, energy, public health, medicines and medical equipment, and agriculture.