A new version of the Russian Competition Law1 amended by the so-called ‘fourth antimonopoly package’2 (the “275 Law”) came into effect on January 5, 2016 (except for certain provisions). The 275 Law includes long-expected changes to the Competition Law, the Natural Monopolies Law3 and the Administrative Code, which, inter alia, will significantly affect M&A and joint venture transactions in Russia. The changes affecting M&A transactions as well as other significant aspects of the 275 Law are summarized below.
Joint Venture Agreements Require Prior FAS Approval
The 275 Law extends the list of transactions that require prior approval by the Federal Antimonopoly Service (the “FAS”) by adding joint venture agreements (in Russian: соглашения об осуществлении совместной деятельности) (the “JVA”) concluded between competing persons (including both companies and individuals). Under the Competition Law, competitors are persons (both foreign and Russian) operating in the same product market. Depending on the sphere, a product market may encompass foreign products and territories of foreign states. In other words, a JVA between Russian and foreign persons (even those which do not operate directly in Russia) may potentially be subject to prior approval of the FAS. At the same time, intra-group JVAs shall not be subject to FAS prior approval, although post-completion notification may be required.
It is unclear which agreements the FAS may view as JVAs (neither the Competition Law nor the 275 Law contain a definition). Based on previous FAS explanations, it could be viewed broadly to include any joint activities between the parties. Applicants may, however, seek the FAS's preliminary clarification as to whether their agreement would be considered a JVA by means of a new procedure set forth in the 275 Law: applicants may inform or otherwise interact with the FAS with respect to an anticipated JVA transaction before applying for prior approval or post-completion notification (for intra-group transactions).
Under the 275 Law, the FAS must approve the JVA prior to its execution if the relevant thresholds are reached4, though applicants may seek approval from the FAS for a JVA where the relevant thresholds are not reached.
Prior to these changes, the Competition Law did not set out a legal mechanism for verifying whether a JVA is in compliance with the Competition Law. Therefore, persons competing with one another operating in the same product market tried to avoid executing JVAs (or making such agreements public) because there was a risk that the FAS would consider that such an agreement would constitute cartel activity prohibited by Article 11 of the Competition Law. The FAS decided to address this situation by legalizing such JVAs.
Elimination of the FAS 35% Register
The 275 Law eliminates the register of companies holding more than 35% of the relevant market share or having a dominant position, which has been maintained by the FAS (the “Register”). Consequently, the following requirements covering companies listed in the Register are abolished (which has significantly reduced administrative burdens for such companies and should be a major change for companies in this area):
- To receive prior approval of or to submit post-completion notification to the FAS in relation to transactions specified in Articles 27 and 28 of the Competition Law (e.g. (a) on creation and reorganization of Russian companies or (b) acquisition of control over a Russian company) where a participating company is listed in the Register (even if the relevant thresholds are not met).
- To annually report to FAS on its activities.
Reduction in Control over Natural Monopolies
The FAS considered that state control over transactions with natural monopolies was excessive in certain aspects. Therefore, the 275 Law reduces a certain level of control, e.g.:
- it eliminates the requirement to notify the FAS of transactions regarding the acquisition of shares/participatory interests in natural monopolies; and
- it establishes state control over transactions (investments) involving natural monopolies only if revenue from the natural monopoly activities exceeds 1% of the total revenue of this natural monopoly (currently, there is no such requirement regarding revenue).
New Means of Communication with the FAS
The 275 Law provides for a new means of communication with the FAS with regard to M&A and joint venture activities:
- Applications/notifications may be filed with the FAS in electronic form.
- Applicants may inform the FAS of an anticipated transaction before applying for prior approval or post-completion notification (for intra-group transactions). Applicants may provide information and documents to the FAS and propose conditions aimed at preserving competition. The FAS shall take this information into consideration when making its decision on the prior- or post-competition clearance of the transaction.
- The FAS must disclose information on filings (e.g. prior approvals) on its website so that interested parties may provide the FAS with their input on the influence of this transaction on competition.
Other significant changes introduced by the 275 Law are as follows:
- Jurisdiction of Eurasian Economic Community. In order to bring the Russian Competition Law into compliance with the laws of the Eurasian Economic Community (“EEC”) (which covers Russia, Kazakhstan, Belarus, Armenia and Kyrgyzstan), the 275 Law introduced new Article 3(3) which provides that the Russian Competition Law shall not apply to those relations which are governed by the unified rules of competition in trans-border markets and shall be controlled by the EEC Commission. The EEC Agreement5 and unified rules of competition in the EEC have implemented certain mechanisms for regulation of such relations. In practice, this means that if (a) the market is of a trans-border character (the geographical borders of the relevant goods market covers the territory of two or more members to the EEC Agreement); and (b) at least two companies participating in a transaction/activity are registered in two different member-states covered by the EEC Agreement, the Russian Competition Law shall not apply.
- Adjustment of the Dominant Position Definition. The 275 Law decreases the number of cases where a company can be recognized as having a dominant position. For instance, the 275 Law abolished the rule under which the FAS can consider companies with a market share of less than 35% as having a dominant position if this company: (a) can unilaterally determine the price of relevant goods and have a determinative influence on the sale of goods in the relevant market; or (b) produces/sells non-interchangeable goods on the relevant market. This will be a positive step for small and medium-size companies because if a company is believed to have a dominant position, its business activity falls under the FAS’s scrutiny.
- Clarifying Unfair Competition. The 275 Law introduces a new chapter to the Competition Law clarifying unfair competition and its types. The chapter contains separate articles on the various types of unfair competition: e.g. (a) defamation/whispering campaign; (b) incorrect comparison of two market participants; and (c) actions on the sale or exchange of goods, if certain intellectual property rights were used illegally, etc.
- Cartel Activity of Customers. The 275 Law specifies that cartel activity includes not only agreements among companies to sell goods/services, but also agreements to purchase goods/services (cartel of customers). The idea is to bring the Russian Competition Law into compliance with world practice in this respect.
- New Procedure for Appealing Regional FAS Decisions. Given that the Arbitrazh (Commercial) Courts are overloaded, the 275 Law establishes a new procedure under which decisions of the FAS’s regional bodies can be appealed to the collegiate departments of the FAS (the newly established Presidium of the FAS and a Board of Appeals of the FAS). The appeal can be filed with the FAS’s collegiate department in cases specified under the 275 Law, in particular, when the FAS’s regional bodies’ decisions are inconsistent with the application of the Competition Law. This should expedite the process for considering appeals. Subsequently, the FAS collegiate department’s decisions may be challenged in the Arbitrazh (Commercial) Court within a month of the date that such decision comes into effect.
- Extension of the FAS’s Practice of Prescriptions and Warnings. The 275 Law extends the practice of prescriptions (when the FAS has information on forthcoming breaches of the Competition Law) or warnings (when the FAS has information that the Competition Law has been breached). Prescriptions and warnings can now be issued to state and municipal bodies, instead of just to commercial entities. The number of cases where a warning might be issued will increase (e.g. creating discriminatory conditions on the market; or a 'whispering campaign' against a competitor). Generally, the FAS has a very positive view of the practice of prescriptions and warnings since companies generally comply with these prescriptions/warnings and the FAS is, therefore, not required to commence administrative proceedings.
- Administrative Liability. The 275 Law also amends the RF Administrative Code with regard to violating the Competition Law. For instance, sanctions against state and municipal bodies are stepped up (e.g. an official will be disqualified for a term of up to three years for breaching the Competition Law a second time). The Law introduces a new article to the RF Administrative Code covering violations of the Competition Law in terms of tenders and the sale of state and municipal property.