Ukraine: Merger Control

On 18 May 2016 the Law of Ukraine on the Protection of Economic Competition was amended, introducing new financial thresholds triggering merger notifications.

According to such new financial thresholds, the notification of concentration is required when:

• the combined worldwide sales or assets in the last financial year of all the parties to the concentration exceeded €30 million and, in addition, 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's group) exceeded €8 million, while the sales of at least one other party exceeded €150 million worldwide.

It was also debatable whether the parties should take into account the assets/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, the figures for both the acquirer's and the target's whole group (including the seller) should be considered for the purpose of the thresholds' calculation.

Finally, the old-fashioned and heavily criticised market share threshold of 35% is no longer applicable as a triggering event in Ukraine.

The undertakings concerned do not now have to seek Ukrainian merger clearance to complete M&A deals (including foreign-to-foreign transactions) that do not have any apparent connection with Ukrainian markets. The official statistics show that the number of purely ‘technical' notifications has significantly dropped. The Anti-Monopoly Committee (AMC) reviewed 774 merger notifications in 2015, and 547 merger notifications in 2016. The number for 2017, the first full calendar year under new thresholds, is expected to be lower still.

Procedural rules

Except for the threshold increase, the Law introduced a number of significant procedural amendments, including:

• 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 simplified review procedure, as well as remedying defects in a notification within 15-day preview period).
• Failure to provide the AMC with the information on the ultimate beneficial owners shall serve as grounds for AMC to reject the merger notification.
• 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 case: (i) only one party is active in Ukraine; (ii) the combined market share of the notifying parties does not exceed 15%; or (iii) the combined market share of the notifying parties on the vertical markets does not exceed 20%.
• Establishment of the 30-days extendable term for the notifying parties to offer remedies with an opportunity to discuss such remedies with the AMC.
• Filing fees increase by four times (up to approximately €750 for one notification of concentration).

New merger notification rules

On 19 August 2016 the new version of the Regulation on Concentration (the Regulation) took effect. Adoption of the Regulation is a great step forward in the evolution of the Ukrainian merger control regime. The previous version of the Regulation had not been substantially amended for more than 10 years and did not meet the needs of the legal environment.

The Regulation has reduced the scope of information and cut the list of irrelevant documents that undertakings are required to file with the AMC. Furthermore, the Regulation cancelled the requirement to file an electronic version of merger notifications via special software. In contrast, the undertakings shall now provide the AMC with an electronic version of merger notification as a PDF, a Word document, etc.

The Regulation sets up a separate list of information/documents that undertakings shall submit to the AMC under simplified and standard procedures respectively.

The simplified procedure is a great opportunity for undertakings with insignificant shares in the Ukrainian market to go through clearance procedures within 25 days (in contrast to 45 days under the standard procedure) with a limited set of documents. Since 18 May 2016, the AMC has reviewed around 100 merger notifications under the simplified procedure.

Under the standard procedure, the AMC tends to focus on the affected market and the effect the concentration might have on such market. For this purpose, the undertakings shall provide the AMC with in-depth and comprehensive economic analysis of the anticipated impact of the concentration on the affected markets. The standard procedure lasts up to 45 days, with an option to request a shorter-term AMC review, where appropriate.

Although there are some problems with practical application of the Regulation, it has definitely introduced long-awaited notification approaches. Furthermore, prescribing specific rules with respect to each type of concentration is another step forward to harmonising Ukrainian competition laws with the EU standards.

Guidelines on the assessment of horizontal mergers

On 27 December 2016 the AMC approved Guidelines on the assessment of horizontal mergers (the Guidelines). Generally, the Ukrainian document is based on the European Commission analogue.

According to the Guidelines, the assessment of a merger's effect on competition is a comprehensive process that requires detailed examination of various elements. In particular, and subject to specific market structure as well as parties' market shares, the AMC shall examine, among others, the following:

• market shares of undertakings concerned on the affected markets as well as level of concentration on the affected markets (including by means of HHI);
• possible anticompetitive effect on the affected markets (unilateral and coordinated effects);
• the probability that buyer power will act as countervailing factor to anticompetitive effects;
• the probability that entry of new companies to the market will act as countervailing factor to anticompetitive effects; and
• bankruptcy risks.

The Guidelines are a similarly long-awaited document, which brought clarity to assessment of horizontal mergers by the AMC.

Calculation of fines

On 9 August 2016 the AMC amended its Recommendations (which were initially enacted in 2015) on fines calculation for breaches of the competition legislation. These provide for principles of fine calculation, ie, the criteria by which the AMC 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's clearances, cartels, unfair competition acts, abuse of dominance, etc.

In terms of fines for merger clearance violations, the Recommendations primarily distinguish between concentrations occurred on overlapping and non-overlapping markets. The basic amount of fine is calculated in the amount of:

• 10% of the violator's turnover on the relevant or adjacent market (in that case that the concentration resulted in monopolisation or substantial restriction of competition);
• between 510,000 hryvni and 5% of the violator's turnover on the relevant or adjacent market in Ukraine (in the case that the concentration does not result in monopolisation or substantial restriction of competition); and
• between 170,000 and 510,000 hryvni in the case that the parties of concentration acted on non-overlapping or non-adjacent markets.

The basic fine amount may be further increased or decreased:

• following the application of three modifying coefficients, each varying from 0.05 to two depending on the sensitivity of the markets involved, the effect of violation on competition, and profitability of the commercial activity associated with such violation; or
• depending on the aggravating and mitigating circumstances of each particular case (by up to 50%). The aggravating circumstances, are, among others, refusing to cooperate with the AMC and obstructing the AMC in the course of antitrust investigations. The list of mitigating circumstances is not exhaustive, but the key ones are, among others, cooperating with the AMC, terminating the violation, and seeking merger clearance approval for a non-authorised deal before the AMC identifies the violation.

On the one hand, the Recommendations provide guidelines for undertakings to calculate the anticipated fine amount. However, the AMC still has wide discretion, and it remains difficult to predict the ultimate fine amount in each particular case. It should be noted that the AMC still lacks a sufficient explanation of methodology it applies in each particular case to calculate the fine amount.

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.

A number of global transactions that require Ukrainian merger clearance raise the issue of global closing before 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 carve-out arrangements regarding Ukraine.

Regarding carve-out 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 a national 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 carve-out regarding Ukraine. Thus, carving out the Ukrainian part of the transaction will not per se affect the AMC decision to impose a fine, although it may reduce the amount of the potential fine to be imposed by the authority.

A scenario involving closing of the global transaction prior to its 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.

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 type of parties' requests by the AMC, a well-grounded justification may still shorten the term of review.

Overview of merger control activity during the past 12 months

Overall number of merger clearance applications filed with the AMC in 2016 decreased comparedto 2015.

In 2016, 54 out of 547 transactions were cleared in Phase II after a deeper case investigation was initiated by the AMC. In practice, the AMC generally initiated Phase II if the transaction concerned could potentially adversely affect the competition in Ukraine - eg, when the parties to the concentration had relatively high market shares in respective Ukrainian markets.

In 106 cases applications filed with the AMC for concentration in 2016 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 a number of further documents to bring Ukrainian laws in compliance with the EU standards. One of the first documents to be so developed is the Guidelines on Vertical Concerted Actions.

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 case review, guarantees ensuring the respect of parties' rights, and so on.

The expected initiatives are likely to fill in existing gaps and eliminate legislative inconsistencies.