Ukraine: casting a wide net for merger control

In summary

Practically every global transaction is subject to Ukrainian merger control if the parties have any business in Ukraine. The 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. The Antimonopoly Committee of Ukraine imposes sanctions for failure to notify on foreign companies.

Discussion points

• Financial thresholds requiring merger clearance
• Procedural rules and scope of information to be disclosed
• Fines for failure to notify
• Martial law

Referenced in this article

• Law on protection of economic competition
• Antimonopoly Committee of Ukraine
• Council Regulation (EC) No. 139/2004
• Guidelines on the assessment of horizontal mergers
• Guidelines on the assessment of non-horizontal mergers
• Guidelines on the establishment of joint ventures
• Fining Guidelines

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 Anti-Monopoly 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 are taken from the 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 no guidance about the 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; a 10th 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 a simplified review procedure (fast-track 25-day review) and a standard review procedure (45 days). The fast-track 25-day review procedure applies to transactions raising no competition concerns; in other words, 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 the 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). The Phase II review should not last more than 135 days; however, in practice, the authority may fail to complete a review within this time.

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 fee is 20,400 hryvnas, irrespective of the 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 must submit to the AMC under simplified and standard procedures.

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

• a list of entities connected by control relationships (ownership structure) and a general description of their activities on Ukrainian markets, and 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

The 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 must 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 must examine the following, among other things:

• market shares of the undertakings concerned as well as concentration levels on relevant markets (including by means of the 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).

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. The Guidelines are also similar to the respective document issued by the European Commission, although they 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 the establishment of joint ventures (JVs). According to the Guidelines, the formation of a JV if notifiable if all the following criteria are met:

• newly created entity: the formation of the 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: the 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: the JV must operate on a lasting basis; or
• no coordination of competitive behaviour: the Guidelines clarify that the formation of a JV generally does not lead to this type of coordination and, consequently, will qualify as a concentration if:
  • the JV and its parents are not active in the same, neighbouring, or upstream or downstream market or markets;
  • the JV takes over the existing activities of its parents that virtually exit from the relevant market, or markets; or
  • the JV acquires control over its parents (ie, a de facto merger).

The adoption of the Guidelines is a good step towards harmonisation of the Ukrainian merger control regime with the respective practices of the European Commission. In particular, the Guidelines exempt purely technical JVs from merger control.

However, there are still some unclear approaches in respect of the assessment of whether to notify, especially those relating to functionality criteria, which is introduced rather ambiguously. Thus, the parties should be careful when making their assessment of whether to notify. Furthermore, to benefit from the Guidelines, a JV should be newly established by its founders from the beginning since establishment of the company solely by one of the shareholders with a further transfer of shares to another shareholder is not covered by the exception. The latter type of transaction should be formally qualified as a purchase of shares rather than the establishment of a JV.

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; in other words, to proceed with a scheduled global closing and avoid contractual sanctions for delay, parties consider the 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.

Carving out the Ukrainian part of a transaction will, thus, 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 still typically impose a fine.

In addition, according to the applicable legislation, parties are not prevented from approaching the AMC for an earlier clearance. In that case, they may apply to the authority with a motion justifying the need for an earlier closing (eg, a global nature to the transaction, obtained clearances in other jurisdictions and lack of any competition concerns in Ukraine or potential financial losses). This option is not common practice for the authority, and there is no officially established procedure for submission and consideration of those types of requests by the AMC; however, 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 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 the 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 hryvnas 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 hryvnas.

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 the violation, which may each increase or decrease a fine. Further, in each case, the above basic amounts are subject to possible further adjustment depending on aggravating or mitigating circumstances.

The literal interpretation of Ukrainian laws allows the AMC to calculate a fine amount based on the total income of the whole group. However, in January 2021 the Supreme Court clarified that this rule applies to a particular group of companies accused of having committed a violation. If this is not the case, the fine should be calculated based on the income of the immediate acquirer. The decision is expected to bring more uniformity and predictability to the AMC approaches on fines calculating.

In July 2021, the AMC imposed a fine of 68.2 million hryvnas for concentration without a clearance. This is the largest fine imposed to date for this type of violation.

Merger control during the martial law regime

Since the enactment of the martial law regime in Ukraine, effective in Ukraine in view of the ongoing Russian aggression, the AMC has temporary suspended review of merger clearance applications. However, on 30 March 2022, the AMC adopted Guidelines on notification requirements during the martial law regime. According to the Guidelines, parties are not exempted from submitting notifications during the period of martial law. Notifications shall be filed not less than 15 days prior to completion of a concentration. However, the AMC will review such notifications in substance and issue clearance only after the termination or cancellation of the martial law regime. The scope of information required for Ukrainian notification during the period of martial law regime is shortened compared to the standard procedure. Should the parties complete the transaction subject to compliance with the Guidelines’ requirements and before clearance is issued, the AMC will impose a formal fine up to approximately €1,600.