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Merger Control in Ukraine
Overview of merger control activity during the last 12 months
The Ukrainian state has seen the most drastic changes over the last decade - these changes have affected virtually every aspect of governmental activities, including those of the Antimonopoly Committee of Ukraine (AMC). However, the nature and direction of the changes has varied greatly from one governmental body to another, and the AMC seems to be one of those unlucky regulators that has benefited less: five Commissioners out of nine in post; appreciable staff reductions, awaiting a new Chairman, leadership, and clearly defined policy objectives; and suffering from extreme pressure and criticism from the Government and Parliament demanding better enforcement, over the past year the AMC has been more struggling to survive rather than aiming for reforms and policy achievements.
This has certainly been reflected in the AMC's merger control activity which, mainly in view of quite low notification thresholds, forms a significant part of the authority's overall workload. In particular, to manage the inflow of notifications in terms of timing and allocation of AMC's scarce resources, the authority has been seen to resort to declarations of incompleteness and Phase II review more frequently. For example, Phase II was triggered in 85 cases in 2014, most of which are still under review, and only in 25 cases were the clearances granted in 2014.
According to the AMC's official statistics in 2014 it reviewed 781 merger notifications, which is 23% less than in 2013. (Considering that the AMC tends to issue separate clearances for separate notifiable events that constitute a single but e.g. multi-stage transaction, the actual number of cleared transactions may in fact be considerably smaller.) Given that the vast majority of the notifications are historically made by either foreign companies or local ones with foreign shareholders (over 80% of all notifications), it is unsurprising that any complications and timing issues create less incentive for filing, especially against the background of low thresholds and underdeveloped effects-doctrine that sometimes makes foreign filers wonder why they are required to file in Ukraine at all.
Still, the experience of the past months shows that the AMC has already adapted to the new environment and begun to act more predictably. The appointment of the Chairman and deputies is also expected in the first half of 2015, as announced by the President and the Prime Minister. This makes the market believe that the turbulent times will soon be over, opening a new page in AMC's merger control activities.
Key policy developments
The currently effective merger control regime has remained substantively unchanged for more than a decade. However, the enforcement practices of the AMC have developed notably since then. Below is an outline of most recent developments.
Global outlook. The AMC has started looking into markets from a broader perspective when analysing the effects of a transaction. This is a positive trend, as only several years ago the authority seemed loath to accept a market definition larger than Ukraine, although the Competition Law does not exclude such scenario. Nowadays, the authority is more open to seeing into regional European markets, or even the worldwide market. However, at this point the AMC's approach seems to lack consistency, which is most likely due to the fact that the authority has not yet accumulated a sufficient level of expertise and technique as regards the analysis of such broader markets. Yet, as in other aspects where local practice remains underdeveloped, the AMC tends to look to the EU Commission's practice as useful guidance.
Remedies. The concept of remedies is outlined in the Competition Law 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, the authority does not publish its decisions (though there is a recent draft law to change that), so the full picture of the authority's practice in this regard is not available.
The law does not give instructions as to at which stage of the notification review the filing parties may start negotiations regarding remedies. Theoretically, 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.
The essence of the remedies is usually negotiable, the authority's utmost concern being that the offered measures must remove competition concerns. Nevertheless, it appears that the authority is more comfortable with behavioural rather than structural remedies. Also, it has become usual practice to impose on the parties a standard three-year reporting obligation regarding the implementation of remedies.
During 2014 - with a view to preventing monopolisation and mitigating negative effects on market competition - the AMC applied remedies only in a few cases, in particular, to companies active in natural gas, agricultural equipment, pharmaceuticals markets, etc. However, as transpires from the authority's enforcement practices, there is an evolving tendency to apply remedies in those industries where the authority regards the position of customers as most vulnerable (e.g., pharmaceuticals), 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.
Thresholds revision & Association Agreement. The Ukrainian merger control regime, in particular, its relatively low notifiability thresholds, as well as their interpretation and application by the AMC, have been heavily criticised by practitioners for years. These discussions resulted at some point in the AMC drafting amendments to the Competition Law, suggesting an increase of thresholds and generally rethinking the approach to notifiability requirements. However, that draft did not go through the parliament, as it was revoked due to the change in the composition of the legislator. No new draft with similar goals has been submitted to the new parliament yet.
The thresholds revision appears to be key to reforming the existing merger control regime, as parties to multi-national transactions often need to file deals that lack any reasonable local nexus (currently it suffices for one party to the transaction to have at least €1m in Ukrainian assets/turnover to formally trigger the thresholds). However, recently discussions in this area have become more complex. An increase in thresholds alone may be insufficient to effectively improve the regime. It is also important to bring their implementation practices up-to-date. Furthermore, Ukraine signed the Association Agreement with the EU (the Association Agreement) that will inter alia impose an obligation on Ukraine to align its merger control rules with the EU regime. That also makes discussions on revision of the notifiability thresholds a vital topic.
Besides that, reform will be required as regards the following issues, in particular:
1. definition of the target group composition (currently, the target is required to disclose in the notification rather detailed information on the sellers, although 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 control link to such sellers may be lost after closing; thus, notification requirements are often met only formalistically: by the sellers that 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); implementation of other guidelines may be required to achieve uniform application of merger control rules, e.g., on definition of control, effects on competition, calculation of thresholds, etc.;
5. introduction of an accelerated and simplified review procedure; and
6. 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.
Publication of decisions. A new draft law securing transparency of the AMC adds some procedural details to the rules applicable to submission of confidential information to the AMC and handling of such data: sensitive information shall be specifically marked as such at submission; and the filing entities will also be asked to provide the AMC with a nonconfidential version of such data.
Further, the AMC will be required to publish on its website: basic information on its resolutions to initiate in-depth review in merger and concerted practices cases (analogue of Phase II); as well as full versions of its decisions made on merger and concerted practices notifications, in cases of violation of competition, and unfair competition cases.
Apart from increasing transparency and predictability of the authority's enforcement practices, the draft - in the part requiring the authority to publish notices on initiation of Phase II - provides both the market and the authority with an important information tool. On the one hand, publication of such notices will increase awareness of the market players (in particular, of third parties whose interests may be affected by a transaction under review) of the deals that potentially are problematic from the authority's viewpoint. This will attract more interested parties to the discussion on competition concerns and give them better chances to be heard and to have their interests protected in a more effective manner. On the other hand, the authority will eventually receive from such interested third parties a more comprehensive picture of how a given transaction may influence the market and competition thereon.
In practice, there have been instances where the in-depth review procedure of Phase II was invoked only to allow the authority more time to dig into the enormous amounts of data provided by the notifying parties (this is especially the case with multi-stage, multinational transactions involving huge global market players, e.g., pharmaceutical giants), while the transaction itself did not show any threat whatsoever to the competition environment. So, overall, the suggested amendment may be seen as an effective step towards the reform of Phase II.
Calculation of fines. Another recent draft law requires the AMC to draft a methodology on calculation of fines to be imposed in cases of violation of competition. The draft aims at the establishment of transparent and predictable policy on the issue.
Failure to clear a notifiable transaction prior to closing may trigger fines in the amount of up to 5%. Given the authority's absolute discretion in establishing the actual amount of the fine to be imposed, fining enforcement practices remain fairly unpredictable. Currently, the law lacks any guidelines or formulae as to which criteria should be taken into account. Furthermore, such criteria are also not derivable from the AMC practice, as its decisions are not published (and even if they were, such decisions normally do not show calculations, but only the final amount). The methodology itself is not yet drafted; thus, it may take some time for the document to be brought to life. This amendment is also in line with the Association Agreement implementation provisions requiring the AMC to "adopt and publish a document explaining the principles to be used in the setting of any pecuniary sanctions imposed for infringements of the competition laws".
The above legislative changes were under discussion in professional circles for years until finally crystallised as draft laws. If adopted, they are expected to make the AMC review processes, as well as enforcement practices and policies, generally more visible and predictable to the market. Considering the general reform spree, the prospects of modernisation of the merger control regime in Ukraine appear quite optimistic, although revision of the whole system may require time.