Ukraine: Merger Control

According to financial thresholds introduced by a new law ‘On protection of economic competition’ (the Law) in late May 2016, a concentration requires merger clearance by the Antimonopoly Committee of Ukraine (the AMC) if either of the following tests is met:

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

All figures shall be taken for the last financial year immediately preceding a year of a concentration.

In either case, parties to a concentration should be considered at their group levels. Assets or turnover of a seller group should be counted towards a target.

The turnover figures should be used excluding VAT and other turnover-based taxes and contributions. Revenues generated via intra-group sales should not be counted as well.

From a geographical standpoint, still there is 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, 10 per cent of a bank’s assets should be considered for the purposes of both asset and turnover thresholds. When it comes to an insurance company, its net assets should be used for the purposes of the assets value calculation and revenues from insurance activities – for the purposes of the turnover calculation.

Other key policy developments

Except for the thresholds increase, the Law introduced several significant procedural amendments, including:

• the introduction of a fast-track 25 day review procedure for transactions raising no competition concerns, ie, where:

• only one party is active in Ukraine; or

• parties’ combined shares do not exceed 15 per cent on horizontally overlapping markets; 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, where parties exceed market share thresholds on non-relevant markets).

Further key amendments in the Law include:

• the introduction of formal consultations with the AMC, which, however, do not apply at pre-filing stage. In practice, the AMC officials are usually available for brief unofficial discussions regarding some technical issues; and
• a four times increase of filing fees – approximately €640 per one notifiable event (a transaction may require multiple notifications depending on its structure).

Procedural rules

The new Concentrations Regulation (the Regulation) which came into force in August 2016 significantly reduced disclosure requirements and simplified filing forms, especially for mergers with no or limited overlaps.

The most notable changes eliminated the requirement to provide:

• detailed information on non-relevant markets – instead, parties should provide only general description of their activities on such markets;
• lists of all subsidiaries – now, only entities active or registered in Ukraine should be listed;
• lists of minority shareholdings;
• detailed information about officers and directors and relatives (subject to conditions); and
• some of the documents to be filed along with an application.

On the other hand, more detailed information is required on financial aspects of notified transactions and parties’ ownership structure (the information on ultimate beneficial owners should be disclosed). Furthermore, to obtain clearance for transactions potentially raising competition concerns, parties are required to provide much more extensive and substantiated explanations based on the economic analysis.

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

Although there are some problems with practical application of the Regulation, it has 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

The Guidelines on the Assessment of Horizontal Mergers (the Guidelines), approved in the late 2016, brought more clarity to the analysis of mergers involving actual or potential competitors. Generally, 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, the AMC shall examine, among other things, the following:

• market shares of 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 respective document issued by the European Commission. Though, they do not precisely mirror the latter (eg, Ukrainian guidelines do not cover non-coordinated theories of harm other than foreclosure). However, it is a long-awaited document that made transparent respective assessment approaches of the AMC.

Fines for failure to notify

The maximum statutory fine for 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 last financial year preceding a year in which a fine is imposed.

However, based on the Fining Guidelines (non-binding, but in practice strictly followed by the AMC), 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:

• 10 per cent of a turnover on relevant (and adjacent) Ukrainian markets – for failure to notify a concentration that results in monopolisation or substantial restriction of competition;
• between approximately €15,900 and 5 per cent of a turnover on relevant (and adjacent) Ukrainian markets – for failure to notify a concentration that does not lead to monopolisation or significant restriction of competition or have impact on Ukrainian product markets; and
• between approximately €5,300 and €15,900 for failure to notify a concentration in case parties are active on non-overlapping and non-adjacent markets in Ukraine.

When defining a basic fine, the AMC may apply coefficients depending on the effect of violation on competition, social importance of respective products, profitability of economic activity related to violation, which may 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.

According to the decisions published by the AMC in 2017, most of the fines were imposed in non-problematic deals and were in a range of €3,300 to €14,000. Lower fines are usually imposed on participants to foreign-to-foreign deals, while transactions involving Ukrainian entities and assets are treated more strictly and their participants are subject to higher fines.

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 imposes fines on immediate acquirers.

Carve-out arrangements

Ukrainian merger control rules are applicable to any transactions that effect or could effect the economic competition in Ukraine. Meanwhile, there is 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, ie, in order to proceed with scheduled global closing and avoid contractual sanctions for delay, parties consider a possibility of carve-out arrangements regarding Ukraine.

It is worth noting that, 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 such closing will be treated by the AMC as a violation even in case of some sort of contractual carve-out regarding Ukraine. Thus, carving out Ukrainian part of a transaction will not per se effect the AMC’s decision to impose a fine, although it may reduce the amount of a potential fine to be imposed by the authority.

A scenario involving the 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 case, they may apply to the authority with a motion justifying the need for an earlier closing (eg, a global nature of a transaction, obtained 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 AMC 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 in 2017

Overall number of merger applications filed with the AMC in 2017 increased compared to 2016 (ie, 666 against 547). Of these, 602 were cleared by the authority.

In particular, 11 transactions were cleared after Phase II – generally 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).

In 2017, 64 applications filed with the AMC (against 106 in 2016) were either returned by the authority (due to their incompleteness) or withdrawn by 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. Certain amendments are expected in procedural rules established in cases on violation of competition laws, including access to case materials, limitation of term for cases review, introducing guarantees ensuring the respect of parties’ rights, etc. The expected initiatives are likely to fill in existing gaps and eliminate legislative inconsistencies.