Ukraine: Merger Control

A number of reforms of the applicable legislation were initiated and widely discussed among experts and representatives of the Antimonopoly Committee of Ukraine (AMC) within the past year. Moreover, the Ukraine–EU Association Agreement and the terms of the EU macro-financial assistance to Ukraine imposed specific obligations on Ukrainian authorities regarding the harmonisation of Ukrainian competition law and law enforcement practices with the relevant EU regulations, which definitely accelerated the process.

The top news of the Ukrainian competition law reform is entry into force of the Law providing for increase of the previously applicable financial thresholds for notification of concentrations as well as certain other updates to the Ukrainian merger control regime. The Law became effective as of 18 May 2016.

The earlier extremely low financial thresholds have consistently been noted by legal experts and business circles as one of the biggest drawbacks of the Ukrainian merger control regime. Consequently, undertakings concerned had to seek Ukrainian merger clearance to complete their M&A deals, including foreign-to-foreign transactions, even though such deals did not have any obvious nexus with Ukrainian markets.

Upon entry into force of the Law, the situation where an undertaking having Ukrainian assets or turnover of over €1 million and worldwide assets or turnover of over €12 million must obtain clearance for any transaction anywhere in the world, if the other party’s volume of assets or turnover exceed €1 million worldwide, has ceased to exist.

The Law introduced a new approach to calculation of financial thresholds triggering the notification requirement in Ukraine, namely, the notification of concentration will be required when:

• the combined worldwide sales or assets in the last financial year of all the parties to the concentration exceeded €30 million and at the same time the sales or assets in Ukraine of each of at least two parties exceed €4 million; or
• the sales or assets in Ukraine in the last financial year of the target including its relations of control (eg, the seller group) exceeded €8 million, while the sales of at least one other party exceeded €150 million worldwide.

It was debatable whether the parties should take into account the assets or sales volumes on the group level, in particular those of the seller (when the control relations are terminated post-transaction). However, according to the final wording of the Law, both the acquirer’s and target’s whole group (including the seller) figures should be considered for the purpose of the thresholds’ calculation.

Finally, the old-fashioned and heavily criticised market share threshold of 35 per cent will no longer be applicable as a triggering event in Ukraine.

Procedural rules

Except for the thresholds increase, the Law introduced a number of significant procedural amendments, including the following key amendments:

• the notifying parties may apply to the AMC for arrangement of consultations after submission of the notification (regarding, inter alia, scope of documents required for the review of notification, including for the simplified review procedure, as well as removal of defects in a notification within a 15-day preview period);
• failure to provide the AMC with the information on the ultimate beneficial owners of the notifying parties will lead to declaration of the submitted notification as incomplete;
• introduction of the simplified review procedure. The review period is limited to 25 calendar days (in contrast to the 45-day standard procedure) from the filing date in the event (i) only one party is active in Ukraine, (ii) the combined market share of the notifying parties does not exceed 15 per cent, or (iii) the combined market share of the notifying parties on the vertical markets does not exceed 20 per cent;
• establishment of the 30 days’ extendable term for the notifying parties to offer remedies with an opportunity to discuss such remedies with the AMC; and
• a four times increase in the filing fees (up to approximately €750 for one notification of concentration).

New merger notification rules

Further to the above-mentioned legislative amendments, the AMC is also working on the new version of the Regulation on Concentration (the Regulation), which has not been substantially amended for more than 10 years.

Please note that the Regulation currently in effect does not distinguish between simplified and standard procedures and, consequently, all undertakings shall provide the AMC with the same set of documents and information irrespective of the concentration’s nature and its potential impact on Ukrainian markets. In contrast, the draft Regulation is aimed at specifying the scope of information and the list of documents that undertakings shall submit to the AMC pursuant to standard and simplified procedures respectively.

In comparison to the current notification requirements, the AMC is proposing to shorten the scope of information and documents that undertakings are required to file with the AMC within a simplified procedure.

On the other hand, the standard notification procedure seems to imply a rather complicated and challenging task for potential applicants. In particular, the undertakings shall provide the AMC with an in-depth and comprehensive economic analysis of the anticipated impact of the concentration on the affected markets.

Although the draft Regulation has a number of drawbacks and vague provisions, it definitely introduces long-awaited notification approaches. Furthermore, adoption of the new Regulation prescribing specific rules with respect to each type of concentration will be another step forward to harmonising Ukrainian competition laws with the EU standards.

The new Regulation is expected to be adopted and enacted within the coming months of 2016 and may be seen as another breakthrough in enforcement of the Ukrainian merger control.

Calculation of fines

On 15 September 2015 the AMC approved and enacted its Recommendations (which were further updated in February 2016) on fines calculation for breaches of the competition legislation providing for:

Principles of fines calculation (ie, criteria for the AMC to determine the basic fine amount that may be adjusted depending on aggravating or mitigating circumstances applicable to a particular case)

The Recommendations set up basic fine amounts for each type of antitrust law violations (eg, mergers lacking AMC clearance, cartels, unfair competition acts, abuse of dominance). In terms of fines for merger clearance violations, the Recommendations primarily distinguish between concentrations occurred on overlapping and non-overlapping markets. Should the parties to concentrations be active on non-overlapping markets, the basic fine amount would vary from 170,000 to 510,000 hryvnas. In cases where the parties to concentrations are active on overlapping or adjacent markets, but the concentrations do not lead to monopolisation or significant restriction of competition, the basic fine amount would vary from 510,000 hryvnas up to 5 per cent of the undertaking’s income from the sale of goods or services on the relevant and adjacent product markets for the period of violation.

The basic fine amount may be increased or decreased by up to 50 per cent depending on aggravating and mitigating circumstances of each particular case. The aggravating circumstances, among others, are: refusal to cooperate with the AMC and making obstacles to the AMC in the course of antitrust investigations. The list of mitigating circumstances is not exhaustive. In particular, the mitigating circumstances are: cooperation with the AMC, termination of violation, seeking merger clearance approval for a non-authorised deal before the AMC identifies the violation, etc.

By enacting the Recommendations, the AMC seeks to impose more significant fines for merger clearance violations. The AMC has not imposed fines of over 510,000 hryvnas for non-problematic concentrations in the past.

Amnesty for historical failures to file for Ukrainian merger clearance

In preparation for further toughening of the merger control regime, the AMC has launched an amnesty programme whereby global corporates and Ukrainian business groups are welcome to disclose their group structures to the AMC and voluntarily inform on any historical failures (committed before 15 September 2015) to notify certain transactions to the Ukrainian competition authority. Financial risk of any identified historical breaches of the Ukrainian merger control rules is limited to the following, rather nominal penalty figures:

• equivalent of approximately €700 per breach (if voluntarily disclosed to the AMC prior to 15 March 2016); and
• equivalent of approximately €3,500 per breach (if voluntarily disclosed to the AMC between 16 March 2016 and 15 September 2016).

To the best of our knowledge, the AMC has since adhered to fine amounts prescribed by the Recommendations regardless of the undertakings’ income, provided that undertakings applied to the AMC under the amnesty programme.

We believe that respective amnesty programme may present a good opportunity to disclose any previous transactions which for whatever reason were not filed in Ukraine. Respective steps will contribute to bringing the corporate structure of the groups in full compliance with the Ukrainian merger control rules.

In order to benefit from such amnesty programme, the parties need to file an application for merger clearance with the AMC. The scope of the information required for such application will be similar (with an option to reasonably limit the scope of provided information) to the scope that is generally required for merger clearance notifications in Ukraine.

Importantly, the AMC will not publish information regarding any such historical breaches by the applicants that apply for the amnesty programme and request that their applications be treated with full confidentiality. Previously, the AMC had no publicly available document providing for the methodology of the fine calculation applied for breaches of competition legislation. Now the AMC has a uniform and consistent practice of applying the Recommendations, which brings greater clarity and predictability for business.

In this respect and in view of the increased financial thresholds one may expect that the number of transactions requiring merger clearance in Ukraine will decrease, and thus the AMC will be more focused on (i) failures to notify the transactions requiring prior clearance, (ii) more complex horizontal mergers, (iii) cartels, and (iv) unfair competition and abuse of dominance cases.

Possibility of carveout arrangements

The Ukrainian merger control rules are applicable to any transactions that affect or could affect the economic competition in Ukraine. At the same time, there is no specific legal doctrine or rules of law demonstrating how the effects test shall be applied by the national competition authorities in Ukraine.

A number of global transactions that require Ukrainian merger clearance raise the issue of global closing before the Ukrainian approval is obtained (ie, in order to proceed with the scheduled global closing and avoid contractual sanctions for the delay, the parties consider the possibility of carveout arrangements regarding Ukraine).

Regarding carveout arrangements, it is worth noting that, based on applicable rules, no completion of the transaction prior to the AMC approval (gun jumping) is allowed (on either a global or local Ukrainian level). Therefore, formally, no carveout 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 affect the AMC decision to impose a fine, though it may reduce the amount of the potential fine to be imposed by the authority.

At the same time, the scenario involving closing of the global transaction prior to the Ukrainian clearance to avoid delays in global completion and obtaining a post-closing approval shortly after the closing (providing the AMC with a reasonable justification of failure to pre-clear) is applicable in practice. Given the failure to receive merger clearance before closing, the AMC will typically still impose a fine, however minimal.

In addition, according to the applicable legislation, the parties are not prevented from approaching the AMC for an earlier clearance. In such 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, lack of any competition concerns 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 shorten the term of review.

Publication of the AMC’s decisions

On 3 March 2016 the Law obliging the AMC to publish its decisions on its official website became effective.

The document provides for the obligatory publication of the non-confidential version of the AMC’s decisions on: (i) merger and concerted actions applications as well as initiation of cases on concentration (equivalent to Phase II review); and (ii) breaches of competition legislation, including unfair competition, within 10 business days of the decision date. For this purpose, undertakings shall argue the confidential status of particular information. Still, the AMC has a right to reject the confidential status of the information if it deems that request for confidentiality is not properly motivated and justified. Publication of AMC decisions will ensure better understanding and predictability of the regulator’s activity as well as contribute to the anti-corruption effect.

Overview of merger control activity during the past 12 months

The number of merger clearance applications filed with the AMC in 2015 was practically the same as 2014.

In 2015, 72 of 774 transactions were cleared in Phase II after a more in-depth case investigation was initiated by the AMC, which almost tripled the respective figure from 2014. In practice, the AMC generally initiated Phase II if the transaction concerned might have potentially adversely affected the competition in Ukraine (eg, when the parties to the concentration have relatively high market shares in Ukrainian markets).

In 116 cases, applications filed with the AMC for concentration in 2015 were either returned by the authority (due to their incompleteness) or withdrawn by the applicants for their own reasons.

Expected initiatives

The AMC is now focusing on developing the document on principles and approaches to be applied in substantive assessment of horizontal mergers, the respective commitment being directly envisaged in the Ukraine-EU Association Agreement. Furthermore, certain amendments are also expected in procedural rules established in cases on violation of competition legislation, including access to the case materials, limitation of the term for consideration of the case, establishment of guarantees ensuring the respect of parties’ rights, etc.

It is also worth mentioning that in 2015 one more draft law providing amendments to the Ukrainian antitrust legal environment was registered with the Parliament. By virtue of that draft law, Ukrainian courts are expected to be vested with a right to review the AMC’s decisions in terms of the amounts of fines. The said draft law sparked great controversy among experts and members of the Parliament. Opponents of the draft law mainly argue that Ukrainian courts are not qualified to reduce or increase amounts of fines, and may abuse their powers, being prone to corruption. Ultimately, the Parliament of Ukraine has refused to adopt the draft law in its proposed wording. Yet, upon further revision the draft law may be adopted later on.

Following the adoption of the mentioned laws and regulations it is equally important to ensure that the AMC employs a clear and practical approach to interpretation and enforcement of the new legislation.