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Exposures in the Agricultural Sector
The recent trends in the agricultural sector on vertical integration and consolidation of agricultural enterprises have led to an appreciable concentration in this field. Small and medium sized enterprises merge into large agricultural holdings with significant market power and, thus, are subject to increased control by the Antimonopoly Committee of Ukraine (the "AMC").
Restructuring of agricultural holdings traditionally involves analysis of compliance with competition law requirements as an integral part of the group's due diligence. These issues gain particular importance when large agricultural groups prepare for IPOs. First, it is necessary to verify whether an agricultural group was formed pursuant to competition law requirements, in particular, whether all the required AMC concentration clearances were obtained in the course of the group's formation. In case of noncompliance, the respective competition risks should be detected and optimally fixed, including via restructuring or obtaining AMC clearances ex post.
However, agricultural holdings should mind competition law not only in regards to such events as restructuring or new acquisitions. Indeed, the agricultural sector traditionally enjoys particular attention from the AMC due to the social significance of some of its product markets.
Furthermore, there are some peculiarities in the AMC's practice regarding the agro sector that should be considered by agricultural holdings even in the course of everyday operations. In particular, when analyzing certain agricultural markets the AMC tends to find dominance on the buyer/customer end, which is not typical for the AMC, turning its typical approach upside down. In particular, the AMC defines agricultural enterprises that lease agricultural land plots from individuals as a "supplier on rental services of land plots (allotments)." When calculating the respective market shares of such leaseholders, the AMC limits the relevant geographic market to the territory of village councils of a district (rayon) where the land is leased by the leaseholder. Given such narrow geographical limits, many agricultural enterprises are considered dominant by the AMC since they lease more than 35% of agricultural land plots within a given part of a district (rayon).
What does it mean for such leaseholders in practice? While dominance itself is not prohibited in Ukraine, abuse of dominance constitutes a serious competition law violation and is prohibited irrespective of its object, reasons or effect. It means that dominant leaseholders should refrain from any actions that may amount to abuse of this dominance. The Law of Ukraine on Protection of Economic Competition (the "Competition Law") provides for a non-exhaustive list of different forms of abuse, such as illegitimate pricing, price discrimination, refusal to deal, etc. The AMC is particularly concerned about illegitimate pricing, which involves a dominant entity settingprices that would be impossible on a competitive market.
For example, in December 2011 the AMC imposed a UAH 68,000 fine on agricultural enterprise "Molniya-1" for abuse of dominance in the rental market of agricultural land. In particular, the entity did not adjust the existing lease rates up to 3% of the monetary value of the land plots, pursuant to amendments in the legislation in 2008. However, compliance with state regulation of minimum lease rates does not release the dominant leaseholders from obligation to establish economically justified prices in their lease land contracts. When setting the price a dominant leaseholder should duly consider the quality of land and should not apply similar lease rates to land plots of different quality and value. In case of any changes to the lease rate, especially, its decrease, a leaseholder should be ready to provide the respective justification for such a change on request of the AMC. Otherwise, in the absence of justifiable reasons this may also be qualified by the AMC as abuse of dominance.
In addition to the above, holding a dominant position in any rental market of agricultural land imposes an additional merger clearance burden on agricultural companies in case of any mergers, acquisitions or other concentrations. Under the Competition Law, exceeding a 35% market share by parties to the concentration (individually or jointly) in the market concerned or the neighbouring market constitutes a separate ground for the obligation to obtain an AMC merger clearance for concentration. The Competition Law allows for quite a wide interpretation of "concerned or neighbouring market" by the AMC. Thus, dominant leaseholders, even within one regional market, should not ignore the risk of liability for implementation of concentration without the AMC clearance irrespectively of the value of their assets and sales.
Furthermore, the AMC has defined a rental market of agricultural land within three markets of prioritized control in 2013, which means increased monitoring by the AMC in this sector. Therefore, it is recommended for agricultural holdings, especially those holding significant land banks, to take due care of compliance with competition law requirements not only in cases of mergers or acquisitions, but also in the course of everyday operations.