Ukraine: Merger Control

In summary

Practically every global transaction is subject to Ukrainian merger control if the parties have any business in Ukraine. Ukrainian laws set up a rather formalistic approach to notifying obligations. The obligation to notify arises if the parties exceed filing financial thresholds irrespective of whether the deal has any effect on Ukrainian markets. Thus, foreign-to-foreign deals with no effect on Ukrainian markets may also be caught by merger control rules. Furthermore, the Antimonopoly Committee of Ukraine (AMC) imposes sanctions for failure to notify on foreign companies. In 2019, the AMC published guidelines clarifying applicability of merger control rules to establishment of joint ventures. Although the guidelines are non-binding in nature, they are followed by the authority in its activity. By adopting the Guidelines, the AMC has made one more step forward towards harmonisation of Ukrainian merger control regime with respective practices of the European Commission. In 2019, the Parliament of Ukraine added one more temporary exception to merger clearance requirements. According to this exception, banks and other financial institutions, in certain cases, may enforce collateral without a need to obtain merger clearance.

Discussion points

• Financial thresholds requiring merger clearance
• Procedural rules and scope of information to be disclosed
• Fines for failure to notify
• Overview of the Antimonopoly Committee of Ukraine’s merger control activity in 2019
• Expected initiatives

Financial thresholds requiring merger clearance

According to financial thresholds introduced by the Law ‘On protection of economic competition’ (the Law), a concentration requires merger clearance by the Antimonopoly Committee of Ukraine (AMC) if either of the following tests is met:

• the combined global value of assets or the turnover of parties to a concentration exceeds €30 million and the value of Ukrainian assets or turnover of each of at least two parties exceeds €4 million; or
• the Ukrainian value of assets or the turnover in Ukraine of a target, or of at least one of the founders of a new entity, exceeds €8 million and the global turnover of at least one other party exceeds €150 million.

All figures shall be taken from the last financial year immediately preceding the year of a concentration. In either case, the parties to a concentration should be considered at their group levels. This means that the assets or turnover of a seller group should be counted towards a target.

The turnover figures should be used exclusive of value added tax and other turnover-based taxes and contributions. Revenues generated via intragroup sales should not be counted either.

From a geographical standpoint, there is still no guidance about allocation of turnover for the purposes of the ‘local presence’ test. However, in practice, revenues are generally attributed by a customer’s location. For either party to meet this test, supplies from abroad (to Ukrainian customers) will also suffice.

On a separate note, special rules apply to the calculation of turnover and assets of commercial banks and insurance companies. Thus, a tenth of a bank’s assets should be considered for the purposes of both asset and turnover thresholds. In respect of insurance companies, the net assets should be used for the purposes of calculating the value of assets, and revenue from insurance activities for the purposes of the turnover calculation.

Procedural rules

The Law provides for simplified review procedure (fast-track 25-day review) and standard review procedure (45 days). A fast-track 25-day review procedure applies to transactions raising no competition concerns, that is to say when:

• only one party is active in Ukraine; or
• the parties’ combined shares do not exceed 15 per cent on horizontally overlapping markets, and the parties’ shares or combined shares do not exceed 20 per cent on vertically related markets.

The AMC is currently developing practice in this area and some reasonably non-problematic deals may still be reviewed under standard 45-day procedure (eg, when parties exceed market share thresholds on non-relevant markets).

If the AMC finds grounds to prohibit the merger, it initiates a Phase II review (in-depth investigation). A Phase II review should not last more than 135 days; however, in practice, the authority may fail to complete a review within this term.

The parties are welcome to request formal consultations with the AMC, which, however, do not apply at the pre-filing stage. In practice, the AMC officials are usually available for brief, unofficial discussions regarding some technical issues.

The filing fees constitute 20,400 hryvnia irrespective of review procedure for each notifiable event (a transaction may require multiple notifications depending on its structure).

Scope of information to be disclosed

The Concentrations Regulation (Council Regulation (EC) No. 139/2004) sets up separate lists of information and documents that parties shall submit to the AMC under simplified and standard procedures.

According to the Concentrations Regulation, the parties shall disclose, as a minimum:

• a list of entities connected by control relationships (ownership structure) and a general description of their activities on Ukrainian markets. Ultimate beneficial owners and entities that are active or registered in Ukraine should be listed;
• a calculation of market shares (as applies to affected markets);
• the economic rationale for the transaction; and
• financial indices for the financial year preceding the deal.

To obtain clearance for transactions potentially raising competition concerns, parties are required to provide extensive and substantiated explanations based on the economic analysis.

Guidelines on the Assessment of Horizontal Mergers

Guidelines on the Assessment of Horizontal Mergers approved in late 2016 brought more clarity to the analysis of mergers involving actual or potential competitors. In general terms, the document is based on the European Commission’s analogue.

Pursuant to the Guidelines, the AMC is required to assess whether the changes brought about by a horizontal merger would result in any unilateral or coordinated effects.

While assessing a merger, among other things, the AMC shall examine the following:

• market shares of the undertakings concerned as well as concentration levels on relevant markets (including by means of Herfindahl-Hirschman Index);
• the likelihood that buyer power or new market entries will act as factors countervailing anticompetitive effects; and
• bankruptcy risks (ie, conditions for using the ‘failing firm’ defence), among others.

Guidelines on the Assessment of Non-horizontal Mergers

In March 2018, the AMC approved the Guidelines on the Assessment of Non-horizontal (ie, vertical and conglomerate) Mergers. These Guidelines are also similar to the respective document issued by the European Commission, though do not precisely mirror the latter (eg, the Ukrainian guidelines do not cover non-coordinated theories of harm other than foreclosure). Nevertheless, it is a long-awaited document that has made the respective approaches to assessment by the AMC transparent.

Guidelines on the establishment of joint ventures

On 26 September 2019, the AMC approved its guidelines clarifying applicability of merger control rules to establishment of joint ventures (JVs). According to the Guidelines, the formation of JVs shall be notifiable if all the following criteria are met:

• newly created entity – the formation of a JV must be structured as an establishment of a new entity by two or more parties, which, in turn should contribute financial, production, research and development or similar assets to a JV and jointly control it;
• full functionality – a JV must be engaged in economic activities, performing the functions normally carried out by undertakings operating in the same market;
• operation on a lasting basis – a JV must operate on a lasting basis; or
• no coordination of competitive behaviour – the Guidelines clarifiy that the formation of a JV generally does not lead to this type of coordination and, consequently, will qualify as a concentration if:
  • a JV and its parents are not active in the same, neighbouring, or upstream or downstream market, or markets;
  • a JV takes over those existing activities of its parents that virtually exit from the relevant market, or markets; or
  • a JV acquires control over its parents (ie,  a de facto merger).

Adoption of the Guidelines is a good step towards harmonisation of the Ukrainian merger control regime with respective practices of the European Commission. In particular, the Guidelines exempt purely technical JVs from merger control. However, there are still some unclear approaches as to the assessment of notifiability, especially those relating to functionality criteria, which is introduced rather ambiguously. Thus, the parties should be careful when making their analysis of notifiability.

Carve-out arrangements

Ukrainian merger control rules are applicable to any transaction that affects, or could affect, economic competition in Ukraine. There is currently no specific legal doctrine or rules of law demonstrating how the effect test shall be applied by the AMC.

A number of global transactions that require Ukrainian merger clearance raise the issue of global closing before Ukrainian approval is obtained, that is to say, to proceed with a scheduled global closing and avoid contractual sanctions for delay, parties consider a possibility of carve-out arrangements regarding Ukraine.

Based on applicable rules, no completion of a transaction prior to the AMC clearance (gun-jumping) is allowed (on either a global or Ukrainian level). Therefore, formally, no carve-out arrangements are provided for by law. This means that, if the AMC discovers that global closing of a transaction requires Ukrainian merger clearance, it is very likely that the closing will be treated by the authority as a violation even in the case of some sort of contractual carve-out regarding Ukraine. Thus, carving out the Ukrainian part of a transaction will not affect the AMC’s decision to impose a fine, per se, although it may reduce the amount of a potential fine to be imposed by the authority.

A situation involving closing of a global transaction prior to its Ukrainian clearance to avoid delays in global completion and obtaining a post-closing approval shortly after 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 typically still impose a fine.

In addition, according to the applicable legislation, parties are not prevented from approaching the AMC for an earlier clearance. In such a case, they may apply to the authority with a motion justifying the need for an earlier closing (eg, a global nature to a transaction, obtained clearances in other jurisdictions, lack of any competition concerns in Ukraine or potential financial losses). Notwithstanding, this option is not a common practice for the authority and there is no officially established procedure for submission and consideration of these types of requests by the AMC, a well-grounded justification may still shorten the term of review.

Fines for failure to notify

The maximum statutory fine for the implementation of a concentration without a prior clearance is up to 5 per cent of an entity’s turnover (possibly at a group level) for the financial year preceding the year in which a fine is imposed.

However, based on the Fining Guidelines (non-binding, but in practice strictly followed by the authority), a 5 per cent statutory fine can be imposed only in exceptional circumstances to ensure deterrence. Therefore, actual fines are significantly lower.

Under the Fining Guidelines, basic fines in merger cases are:

• for failure to notify a concentration that results in monopolisation or a substantial restriction of competition: 10 per cent of turnover on relevant (and adjacent) Ukrainian markets;
• for failure to notify a concentration that does not lead to monopolisation or a significant restriction of competition or have an impact on Ukrainian product markets: between 510,000 hryvnia and 5 per cent of turnover on relevant (and adjacent) Ukrainian markets; and
• for failure to notify a concentration if the parties are active on non-overlapping and non-adjacent markets in Ukraine: between 170,000 and 510,000 hryvnia.

When defining a basic fine, the AMC may apply coefficients depending on the effect of the violation on competition, the social importance of respective products and the profitability of economic activity related to violation – which may each increase or decrease a fine. Also, in each case, the above basic amounts are subject to possible further adjustment depending on aggravating or mitigating circumstances.

In 2019, the AMC imposed two of the largest fines to date for failure to notify: one of 58 million hryvnia and one of 55 million hryvnia. These fines significantly exceed the largest fine imposed in 2018, in the amount of 15 million hryvnia. Both fines were imposed on the national Ukrainian group of companies.

Formally, the AMC may impose a fine on any legal entity connected by control relationships with participants to a concentration. In practice, however, the AMC tends to impose fines on immediate acquirers.

Overview of merger control activity in 2019

The overall number of applications filed with the AMC during 2019, including those for preliminary conclusions, remained the same as in 2018, at 532 (486 merger applications and 46 applications for preliminary conclusions). The authority cleared 439 applications, while 44 of the applications filed were either returned by the authority (because they were incomplete) or withdrawn by applicants for their own reasons.

In 2019, the AMC conducted 20 Phase II investigations. In general, these are initiated if a concentration could potentially adversely affect the competition in Ukraine (eg, when the parties had relatively high market shares on relevant Ukrainian markets). After Phase II in-depth investigations, 17 transactions were cleared by the authority and other investigations were closed without taking any decision on merits.

First joint purchase alliance decision

In 2019, the AMC cleared the merger of three grocery retailers, which was the first step towards the establishment of a joint purchase alliance. The concerted actions between alliance members were cleared in April 2020. The alliance in this case is aimed, in particular, at the creation of buying power that could lead to lower prices and better quality for consumers, and to ensure effective competition between national and regional retailers. Despite the functioning of similar alliances being a standard European practice, this is the first joint purchase alliance that has ever been cleared by the AMC.

Expected initiatives

In January 2020, the draft law ‘On amending certain Laws of Ukraine on competition anti­monopoly reform’ was registered with Parliament. The draft law provides for numerous changes to the competition regulations. With respect to merger control, in particular, it has been suggested that a new triggering event and an increase in filing fees be introduced. However, at this stage, the draft law has only passed the first reading in Parliament. It is also being widely debated by the professional community, which is pushing for a number of changes, and amendments to the current wording of the draft law.