As reported in our Client Briefing of 18 February 2014, the UAE Competition Law (the "Competition Law") came into force on 23 February 2013. However, since then there has been considerable uncertainty as to its scope and application. This uncertainty chiefly arose because the Competition Law indicated that a number of legislative implementing measures and regulations would be adopted to address key matters. The UAE's Federal Cabinet of Ministers has now issued the first set of executive regulations (the “Regulations”) which have been published in the Gazette and took effect on 27 October 2014.
The Regulations clarify the process for seeking an exemption for a restrictive agreement or dominant market practice, the merger control process and complaints procedures under the Competition Law. Their publication clearly shows that, after an initial hiatus, the momentum behind the Competition Law is building. However, procedural and substantive uncertainties remain and parties will need to continue to bear these in mind when transaction planning. In this Briefing we set out the key points to note from the Regulations and consider the practical impact these may have upon parties doing business in the UAE.
2. WHAT DO THE REGULATIONS ADDRESS?
The Regulations deal with:
- the procedure for seeking a merger approval/clearance;
- the procedure for seeking exemptions from rules relating to restrictive agreements and abuse of dominant position; and
- the procedure for complaints/investigations in respect of violations of the Competition Law.
3. MERGER CONTROL
Procedure and timing
The Competition Law introduced a merger control regime pursuant to which transactions which will result in an enterprise attaining a particular market share (and especially those which result in the creation or enhancement of a dominant position) will have to be notified to the UAE Minister of Economy (the "Minister") and may only be completed upon the prior approval of the Minister following an application to the Competition Authority of the UAE Ministry of Economy (the "Authority"). Upon the enactment of the Competition Law it was clear that its merger control provisions are not comprehensive and further elaboration was required in a number of areas (see our Client Briefing of 18 February 2014 for further details). The Regulations have now clarified some of these issues, in particular as to:
Form of an application - the Regulations now set out the various supporting documents that applicants need to submit to the Authority as part of their merger control application; these will include a report on the economic impact of the economic concentration, stating the positive effects thereof and the proposed actions to be undertaken in order to mitigate any potential adverse effects.
Timing of an application - the Regulations provide that an application in respect of a notifiable transaction needs to be made 'within 30 days of concluding the draft contract or agreement' (see below in relation to the uncertainty of what this means in practice). Following submission of an application, the Regulations provide that the Authority will prepare an evaluation report and issue a recommendation on the proposed resolution to the Minister. The Minister must issue his resolution within 90 days of notifying the parties of receipt of the complete application, although this may be extended by an additional 45 days at the Minister's discretion. If no decision is made within this timeframe, the Minister will be deemed to have approved the transaction. The decision of the Minister must include an explanation of the reasoning behind the decision. The Minister is entitled to make his approval subject to the satisfaction of conditions and compliance with undertakings. The Regulations provide that a merger clearance may be revoked by the Minister in certain circumstances, e.g. for non-compliance by the parties with any conditions attached to a clearance.
Issues in practice
The Regulations are helpful in so far as they clarify to whom a merger clearance application should be made and the information that needs to accompany such an application. However, there are a number of important issues (including the following) that are not addressed in the Regulations:
Lack of market share thresholds remains an issue - the Competition Law provides that clearance must be sought in respect of transactions which exceed relevant market share thresholds. The Competition Law contemplates that the relevant market share will be the subject of subsequent implementing regulations. The Regulations do not, however, specify the thresholds and instead provide that these will be separately specified in a subsequent Council of Ministers resolution. Until such a resolution is published, transacting parties remain in an unfortunate period of uncertainty. For example, it remains unclear whether parties can properly be found to have breached the merger approval regime when the relevant market share threshold trigger has not been specified. Until the market share thresholds have been published it will be essential for market participants to monitor whether and how the Authority is implementing the procedures set out in the Regulations in practice;
No further guidance on sectors excluded from the application of the Competition Law - the Competition Law sets out a number of sectors and activities to which the provisions of the Competition Law will not apply. However, in a number of cases the description of the relevant sector is very broad and not entirely clear in its scope - for example, does the 'gas and petrol sector' extend to oil and gas service providers and suppliers? Unfortunately, the Regulations have not clarified the scope of these exclusions;
No further guidance on interpretation of ‘relevant market’ - the Regulations do not provide any detailed guidance on how the "relevant market" will be determined. Clearly, this will be crucial in determining whether the Competition Law applies to a given situation and, if so, whether substantive competition concerns arise;
The stage at which a merger clearance application must be made remains unclear - the Regulations provide that an application for pre-approval must be submitted to the Authority within 30 days from "the date of concluding the contract or the agreement concerning the economic concentration". The Regulations further provide that one of the documents required to be submitted as part of any pre-merger approval is the "draft contract" relating to the merger. The combination of these provisions means that it is unclear whether the parties may enter into a conditional SPA before notification (as in many other jurisdictions) or will be required to start the formal approval process before signing the SPA;
Parties are prohibited from completing a transaction pending clearance - the Regulations expressly provide that the parties may not carry on any actions related to the completion of a notifiable transaction until such time as the Minister issues his resolution. These type of 'gun-jumping' restrictions are also found in other merger control regimes. The restriction means that each party must continue to conduct its business in the same independent manner as it did before the transaction was entered into - parties will therefore need to ensure that transaction documents do not allow parties to influence each other's business in any way prior to merger clearance being obtained, and that this does not happen in practice;
Timing - to the extent that merger control clearance in the UAE is to be obtained, parties will need to factor in the time periods for deliberation by the Authority and the Minister. The Regulations provide that the Minister will have up to 135 days to make a decision, taken from the date that the Minister informs the parties of receipt of their application and fulfillment of all required conditions (the initial period is 90 days, but the Minister can extend this by a further 45 days). However, it is not clear from the Regulations whether the "days" referred to in the Regulations are calendar or working days. When considering transaction timetables and, for example, negotiating longstop dates, parties should bear in mind that: i) that the deadline for the deliberation period will only commence when the application for merger clearance has been accepted as complete by the Authority (meaning that in practice a decision may be issued more than 135 days after an application is submitted); and ii) it may take a significant amount of time to prepare an application with the requisite legal and economic analysis (particularly if a transaction raises substantive competition issues). The Regulations provide that merger clearance applications and supporting documents need to be submitted under a 'duly certified power of attorney'. Depending upon the location of the applicant, obtaining such a power of attorney will require the applicant to undertake a number of formalisation steps (in particular, notarisation and consularisation). Furthermore, to the extent not in Arabic, the application and supporting documents will need to be submitted with certified Arabic translations. The time required to prepare these documents and undertake the necessary formalisation procedures will need to be factored into a transaction's timetable, and should not be underestimated;
Confidentiality - It is unclear from the Regulations whether the fact of a merger clearance application will be made public, however, consultation with third parties is expressly contemplated. It may be that the Ministry will consult directly with relevant third parties or will make the fact of the application public and invite consultation: however, at this stage the approach that will be adopted is unclear. The Regulations expressly provide that a party may require that information and documents that are submitted as part of the clearance process are kept confidential (by specifying this). However, parties must also submit a nonconfidential summary of such information/documents that is sufficient to indicate the content of confidential data; and
No procedure for consultation - unlike some other regimes, the Regulations do not set out any procedures for parties to approach or consult with the Authority in order to determine whether they need to make a formal application. The ability to obtain informal guidance is helpful as it allows parties to make informed decisions and avoid unnecessary delays to transactions and an unnecessarily high workload for the regulator.
Competition clearance - time to introduce clearance as a condition to completion in sale documentation?
In jurisdictions with more established merger control regimes, it is typical for completion of a sale to be conditional upon specified competition clearances having been obtained or notifications having been made. Prior to the publication of the Regulations it was unusual for sale documentation in respect of companies which carry out economic activities in the UAE to include such conditions. Following the publication of the Regulations, transacting parties will need to consider carefully whether it is now prudent to introduce such conditions into their sale documentation. Even if parties take the view that, until the thresholds have been issued by the Council of Ministers, they are willing to complete their transaction without notification to/approval from the Authority, it will be important that the parties consider (and transaction documents contemplate) the effect of publication of the thresholds in the period between signing and completion. The inclusion of competition conditions in sale documentation will give rise to parties having to consider unfamiliar issues; for example, parties will need to carefully negotiate the extent to which they might be required to complete a transaction in the event that merger clearance is conditional upon the parties complying with undertakings or conditions (for example, obligations to complete divestments).
4. RESTRICTIVE AGREEMENTS AND ABUSE OF A DOMINANT POSITION
Procedure and timing
The Competition Law contemplates that the Minister may grant exemptions from both the prohibition on restrictive agreements (Article 5 of the Competition Law) and abuse of a dominant position (Article 6 of the Competition Law). The Regulations confirm that an application for such an exemption must be made to the Authority and that certain specified documents will need to be submitted (including a report on the economic impact of the exemption being granted stating the positive effects and role it will play in economic development). Following submission of the necessary documents the Authority will examine the application and make its recommendation to the Minister. The Minister will then either approve the application or reject it. The Minister is entitled to make his approval subject to conditions.
The Regulations confirm that the Minister must issue his decision within 90 days of notifying the relevant parties of receipt of the complete application. However, this may be extended by an additional 45 days at the Minister's discretion. If no decision is made, the Minister will be deemed to have approved the exemption.
Issues in practice
Again, the Regulations are helpful in that they clarify to whom an exemption application should be made and specify the information that needs to accompany such an application. There are, however, a number of important issues that are not addressed in the Regulations. Some of the issues that arise in respect of merger clearance applications also arise in respect of applications for exemptions (for example, uncertainty in respect of the deliberation period available to the Minister; the extent to which the fact of an application will remain confidential; the lack of clarity as to the scope of sector exemptions; and the lack of clarity as to how the "relevant market" will be defined). In addition, the Competition Law provides that the prohibition on restrictive agreements will not apply to 'weak impact agreements' (i.e. agreements between businesses with a market share below a certain threshold), but the Regulations do not specify the threshold for qualification as a 'weak impact agreement'; instead, they provide that this threshold will be separately specified in a resolution by the Council of Ministers. Until such a resolution is published it remains unclear whether transacting parties might be able to fulfil the conditions for exemption of a restrictive agreement under this heading.
Procedure and timing
The Regulations now provide that any concerned person may submit a complaint to the Authority in relation to any alleged violation of the Competition Law. The Regulations also clarify that a complaint must be accompanied by certain specified documents and that the Authority may elect or decline to undertake further investigation. In the event the Authority elects to investigate the complaint further, the Authority will notify the relevant parties. The Regulations provide that concerned parties will be able to defend themselves against allegations, following which the Authority will issue a report and recommendation to the Minister. The Minister must then issue a decision on the matter within 30 days of receipt of the Authority's report.
The Regulations also confirm that the Authority shall be entitled to carry out investigations on its own initiative should there be reasonable grounds and sufficient data concerning the existence of practices that are likely to be in breach of, restrict or prevent competition.
Issues in practice
- The universe of people capable of lodging a complaint is very wide. Accordingly, there is a possibility of disruptive (and potentially mostly unfounded) complaints, the risk of which will depend on the particular transaction and circumstances.
- The potential disruption that could be caused by such a complainant could lead to parties deciding to err on the side of caution and seeking a clearance/exemption even if there is uncertainty as to whether this is necessary.
- As with any new regime, it is likely that the first few years may be challenging for all concerned - until the procedural and substantive uncertainties are addressed and resolved.