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Ukraine: Merger Control
Following the declaration by the Antimonopoly Committee of Ukraine (AMC) in late 2012 of its revised approach to the fines determination policy for failure to notify the AMC on transactions requiring prior approval, the number of 2013 notified transactions rose to 27 per cent compared with 2011, and was almost on the same level as in 2012. According to the applicable laws, failure to notify the AMC (when it is applicable) may be subject to penalties of up to 5 per cent of the company’s (or group of companies’) worldwide turnover. Continuous AMC declarations on the prevention of prejudicial economic concentrations and the identification of breaches of merger control regulations by market operators have further contributed to the amount of 2013 notified transactions that has almost reached the pre-crisis level.
Unlike many jurisdictions where the obligation is to notify rather than apply for approval, Ukraine requires market players to refrain from any actions that are aimed at closing the transaction until they have obtained merger clearance (where required) from the antitrust authority. Given the above, a well-developed conduct is required from the parties in order to avoid negative consequences resulting from non-compliance with Ukrainian merger control regulations. Generally, it is a rather technical issue when dealing with the transactions on a local level; however, the completion of global transactions (considering the number of jurisdictions involved, timing issues and often the technical requirement of obtaining clearance in Ukraine) raises a lot of specific issues to be considered.
A number of global market players, especially those involved in foreign-to-foreign notifiable transactions, often base their decision on whether to clear a transaction with the respective Ukrainian competition authority on the following key factors:
- the likelihood of a potential inquiry of the AMC regarding the transaction;
- the potential liability of the party and enforcement mechanism;
- the possibility of a carve-out arrangement;
- the observance of EU practice;
- the scope of information to be disclosed and confidentiality issues; and
- assessment techniques and others.
Likelihood of a potential inquiry
In respect of the first factor, as mentioned above, there were a number of cases where the AMC inquired for certain transactions based on the previous monitoring of publicly available sources of information (eg, press releases, internet sites, statements in the media, etc) for the purpose of identifying potential violations.
Moreover, since 2011, the AMC applies an electronic database on concentrations and concerted actions. The application of this software has, among other things, increased the AMC’s control over historical transactions and the revealing of breaches of competition legislation. Changes in the control of a particular company or group of companies are available in a few mouse clicks. Therefore, if the group of companies already has a certain filing history in Ukraine and its group structure is available in the AMC’s database, detection risk – be it immediate or during any future substantive or unavoidable Ukrainian filing involving such group – is high.
The risk of detection of foreign-to-foreign mergers and acquisitions also depends on the sensitivity of the relevant market. Such markets include food products, fuel, pharmacy, agriculture, housing and communal services, as well as concrete and bricks.
If the parties to a transaction fail to receive Ukrainian merger clearance (when required), the following negative consequences are to be considered:
- a fine of up to 5 per cent of the total worldwide turnover of the parties in the year preceding the imposition of the fine (the limitation period for such fines in Ukraine is five years). Applying a fine is a common AMC practice;
- recovery of double damages (if any) incurred by any third party as a result of the unauthorised transaction;
- invalidation of the transaction by the court based on the AMC or third party’s request; and
- publication of the information on the defaulting parties on the AMC official website (a common AMC practice).
Only a few maximum fines have been imposed on violators of competition rules by the AMC in its history. However, in 2013, the AMC fined a state-owned railway enterprises €13 million for an abuse of monopoly position, and two market operators of petrochemicals €19 million for bid rigging. No large fines have been imposed for failure to notify a foreign-to-foreign transaction that has a minimal effect on Ukraine – however, the above-mentioned facts regarding other competition violations and constantly rising fines for failure to notify confirm that the AMC has revised its approach to the fine determination policy and is a clear example of its intention to increase total amount of fines collection.
Based on the applicable merger control regulations, both parties (ie, buyer and seller or target) are responsible for merger clearance. Therefore, the risk of fine imposition applies to the seller as well. However, the AMC will usually only fine the seller when it is more convenient for the authority to do so (eg, when only the seller has assets in Ukraine).
Regarding the consequences for the transaction itself, the applicable law presumes that a transaction that is closed without a Ukrainian merger clearance is still legally binding and fully enforceable against the parties. However, the AMC, as well as other interested parties whose rights may potentially be infringed by such transaction, may apply to the court to invalidate the transaction due to the parties’ failure to receive a prior AMC approval. Based on publicly available sources, no pure foreign-to-foreign transactions have been invalidated so far by any Ukrainian court at the request of the AMC on this basis.
No criminal liability is provided for by Ukrainian law. Some years ago, the AMC introduced a draft law providing for criminal liability for officers of companies involved in competition violations; however, such draft did not receive enough support and is currently dormant.
Possibility of carve-out arrangements
The Ukrainian merger control rules are applicable to any transactions that affect or could affect economic competition in Ukraine. At the same time, there is no specific legal doctrine or rules of law demonstrating how the effect test shall be applied by the national competition authorities in Ukraine. In fact, according to the existing practice and recent approach adopted by AMC officials, if the parties technically meet the thresholds provided for by law, then prior approval by the AMC is required even in cases of a pure foreign-to-foreign transaction that has minimal effect on Ukrainian competition. As a result, the Ukrainian merger control rules often capture transactions with no reasonable likelihood of an anti-competitive effect on Ukrainian markets (eg, a transaction with relatively small revenue generated in Ukraine by the acquirer group only).
A number of global transactions that require Ukrainian merger clearance raise the issue of global closing before Ukrainian approval (ie, in order to proceed with the scheduled global closing and avoid contractual sanctions for the delay, the parties consider the possibility of carve-out arrangements regarding Ukraine).
According to the applicable legislation, the parties are not prevented from asking the AMC for an earlier clearance. In this case, the parties may apply to the authority with a motion justifying the need for an earlier closing (eg, the global nature of the transaction, received clearances in other jurisdictions, absence of any competition concern in Ukraine, potential financial losses, etc). Notwithstanding that such option is not a common practice for the authority and there is no officially established procedure for submission and consideration of such kind of parties’ requests by the AMC, a well-grounded justification may still influence the terms of approval.
Regarding carve-out arrangements, it is worth noting that, based on applicable rules, no completion of the transaction before the AMC approval is allowed (on either a global or local Ukrainian level). Therefore, formally, no carve-out arrangements are provided for by law. This means that if the Ukrainian antitrust authority discovers that a global closing of the transaction requires Ukrainian merger clearance, it is very likely that such closing will be treated by the Ukrainian competition authority as a violation even in case of some sort of contractual guarantee regarding Ukraine. In other words, carving out the Ukrainian part of the transaction will not influence the AMC decision to impose a fine, though it may influence the amount of the potential fine to be imposed by the authority.
At the same time, the scenario involving the closing of the global transaction before Ukrainian clearance, to avoid delaying global completion and obtaining post-closing approval shortly after the closing (providing the AMC with a reasonable justification of failure to pre-clear), is applicable in practice. Given a failure to receive merger clearance before closing, the AMC will usually impose the fine as provided for by law. However, in such case, the parties will be considered by the AMC as acting in ‘good faith’ and, respectively, such actions will contribute to the amount of the fine applied by the AMC in terms of its mitigation.
No de minimis rule is applicable in Ukraine, therefore there is no exclusion if there is no substantive overlap. The applicable merger control rules require substantive amounts of information to be included in the AMC filing forms. In particular, the notification should include detailed information on the transaction parties, taking into account their control relationships, including registration data, contact details, officers, the amount of shareholdings or votes, and the Ukrainian turnover of each entity of the entire target and acquirer groups.
Despite the broad definition of ‘target group’ (extended to the sellers), the AMC, considering the international practice, has adopted a position allowing the parties to limit the definition of, and respectively the information on, a target group to companies being subject to direct or indirect acquisition. Such limitation is only applicable if the seller loses any control over the target as of the date of closing, and the parties provide sufficient information and documents confirming the termination of such control. However, such position is not applicable when calculating triggering thresholds; in other words, in order to find out whether the transaction requires Ukrainian merger clearance or not (whether the thresholds provided for by law are met), the entire seller group must be considered.
Furthermore, the notification shall necessarily include the definition of the relevant product and geographical markets, contact information of Ukrainian competitors, customers and suppliers, and the volume of sales and gains in respect of each customer and supplier. Notably, such information shall be filed with the AMC in respect of each company of the target or acquirer group generating Ukrainian turnover, regardless of the markets concerned. In other words, even in the absence of the overlapping markets, the parties are bound to file detailed information on their activities in Ukraine.
The applicable rules allow parties to request that the AMC be exempted from filing certain information if the latter does not affect the decision to be adopted by the AMC. However, in practice, the information regarding parties’ activities in Ukraine (including the above information regarding customers, competitors and suppliers) is treated by the AMC officials as mandatory, and even in the absence of substantial overlaps, to receive any exemption in respect of such information is hardly possible.
Considering that the transaction parties are usually very sensitive as regards the disclosure of certain key commercial information, they may indicate the information (whole or part) filed with the AMC as confidential and the latter will not be published or otherwise disclosed. In particular, the information to be provided by the parties to the AMC may be identified as ‘information with limited access’ that results in the AMC’s obligation to keep it strictly confidential. Moreover, as a matter of practice, if the merger clearance application is identified as such, then the AMC officers, before publishing any information in respect of the contemplated transaction, usually discuss the scope of disclosure as well as the possibility of such publication with the respective parties.
Based on the existing practice, the AMC publishes transaction information only after the approval or prohibition of such transaction (ie, the fact of filing is generally not disclosed by the authority). However, if a transaction may potentially negatively effect competition in Ukraine, the information on the filed application usually becomes public to ensure third parties’ rights to prevent such transaction.
There is no commonly established practice to have a pre-notification meeting with the competition authority to discuss the proposed transaction. Indeed, the possibility of receiving informal guidance in respect of a particular transaction without any filings is very limited. The applicable legislation provides for the possibility of receiving preliminary rulings (formal guidance) from the AMC in respect of the contemplated transaction (ie, a preliminary ruling from the AMC that determines whether a prior approval is required and whether it is likely to approve the contemplated transaction). However, given that the preliminary ruling procedure takes up to one month, requires submitting with the AMC almost identical information to that submitted for the actual filing and legally does not relieve the parties from the need to receive the approval itself, when required (which takes up to additional 45 days (Phase I) as described above), such procedure is not commonly used in practice.
Observance of EU practice
If the transaction notified with the AMC is considered by the European Commission or antitrust authorities of other jurisdictions, it is a common AMC practice to be aware of the status of the procedures in other jurisdictions (especially as regards foreign-to-foreign transactions) and consider the findings of the respective authorities – in particular, the findings and conclusions of the European Commission. However, decisions of the European Commission are not binding for the AMC. Moreover, no tools are established by law or by practice to persuade the authority to manage the process in order to follow the EU practice.
Key appraisal techniques applied
Currently, no guidelines on the approach to substantial merger assessment have been issued. The AMC grants its approval as long as the transaction will not result in the emergence of a monopoly in the affected market and will not materially restrict competition in the affected market or its substantial part. In the case of overlapping markets, the emergence of a monopoly is tested through the expected aggregated market share (ie, an entity holding a 35 per cent share of the market may be considered as having a monopoly position in the market).
Given the lack of accepted substantial merger assessment tests, the AMC usually applies market share assessment to identify the effect on competition (ie, the ability to substantially restrict competition).
Under internal ‘unpublished’ AMC guidelines, the AMC generally estimates the level of competition (and respectively adopts its decision to approve or prohibit the transaction) based on the market shares held by the parties, presuming that:
- there is strong competition when neither entity has a market share exceeding 5 per cent;
- there is sufficient competition when neither entity has a market share exceeding 15 per cent;
- there is weak competition when one or more entities have a market share exceeding 15 per cent but less than 35 per cent; and
- there is extremely weak or no competition when one or more entities have a market share exceeding 35 per cent.
In cases involving strong competition, the merger clearance procedure is rather technical; in cases involving weak competition, Phase II is generally initiated, but approval is commonly unconditional; and if competition is extremely weak, the approval is conditional, or the transaction is prohibited.
Generally, the AMC does not disclose its practice in respect of merger clearance investigations or approaches taken by the authority in terms of market definition and transaction assessment details. Therefore, respective information is generally limited to the practical experience gained by the applicants and their legal advisers. However, according to AMC representatives, it is expected that the disclosure of respective AMC practices (for the most distinguished cases) will become publicly available in the forthcoming year.
Overview of merger control activity in the past 12 months
The number of concentrations filed with the AMC in 2013 was slightly higher than in 2012 and almost reached the 2008 level.
In 2013, 23 of 962 transactions were cleared in Phase II after a deeper investigation was initiated by the AMC with respect to the transaction. In practice, the AMC generally initiates Phase II if the transaction concerned may potentially negatively effect the competition in Ukraine, for example, when the parties to the concentration have relatively high market shares in Ukrainian markets (eg, exceeding 15 per cent). Almost all transaction cleared in Phase II were unconditional, except for a few transactions that involved market players with significant market shares. According to the AMC, such transactions might substantially restrict the competition in Ukraine and thus AMC issued its clearances under condition for the parties to undertake certain behavioural remedies.
In 183 cases, the applications filed with the AMC for concentration in 2013 were either returned by the authority (due to notification incompleteness) or withdrawn by the applicants for their own reasons.
According to the relevant legislation, a transaction prohibited by the AMC may be approved by the Cabinet of Ministers if the parties concerned can prove that the positive effect of the transaction for public interest is much greater than its negative consequences. However, there were no transactions prohibited either by the AMC or by the Cabinet of Ministers in 2013.
Following the revolution events in Ukraine, the AMC experienced certain changes in the state commissioners’ team and is currently operating without an appointed authority head. However, these factors do not influence the process and timing of merger clearance procedures. The AMC works in full force and currently there is no sign that the situation will change for the worse.
Moreover, in view of potential appointment of a new head of the authority, certain nominees declare their clear intention to initiate and promote changes into the applicable merger clearance legislation and practice. Among such initiatives are:
- an increase in jurisdictional thresholds for application of merger clearance requirements;
- the implementation of a simplified merger clearance procedure for some types of mergers (having no effect on Ukrainian competition);
- the enforcement of effective ‘antimonopoly amnesty’ enabling business entities to reveal their structure and discharge historic violations; and
- the development of a clear and transparent methodology of fine calculation.
It is expected that the implementation of these respective changes shall increase the amount of transactions to be voluntarily cleared with the AMC, and benefit competition as a whole.
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