On December 5 and 6, 2011 the President of the Russian Federation signed Federal Law No. 401-FZ “Amendments to the Federal Law ‘On the Protection of Competition’ and Certain Statutes of the Russian Federation” (the Law) and Federal Law No. 404-FZ “Amendments to the Code of Administrative Offences of the Russian Federation,” collectively known as the “third antimonopoly package.”
The Law went into effect on January 3, 2012 and introduced key amendments to the Federal Law “On the Protection of Competition” (the Competition Protection Law) with a view to clarifying certain concepts and institutions and optimizing regulations applicable to the following aspects of the existing antimonopoly laws.
The Law clarifies that provisions of the Competition Protection Law shall apply to agreements concluded outside Russia by and between Russian or foreign individuals or entities, and to acts conducted by the same, provided that such agreements or acts affect the competitive environment in Russia. Therefore, the Competition Protection Law further extends to cover agreements and acts in respect of stocks of, shares in or rights with respect to foreign companies.
Article 4 of the Competition Protection Law has been expanded substantially; in particular, the following definitions were added or modified:
- Business entity
- Coordination of business activity
- Signs of restraint of competition
- Vertical agreement
- Person subject to economic concentration
Group of Persons
The list of the grounds for treating business entities as a group of persons has been amended. The list was reduced by excluding the grounds for treating entities that are under common control or management as a group of persons (the so-called “horizontal” grounds).
State Monitoring of Economic Concentration
The Competition Protection Law provides that the following transactions and acts shall be subject to governmental control over economic concentration:
- Transactions and acts involving assets, stocks of, shares in or rights with respect to Russian financial institutions
- Transactions and acts involving fixed assets and intangible assets within the Russian territory, or voting stocks of, shares in or rights with respect to Russian profit-making and nonprofit organizations, as well as foreign persons and organizations selling goods to the Russian Federation worth at least 1 billion rubles over the year immediately preceding the transaction
The Law establishes new criteria that would require prior approval of the Federal Antimonopoly Service of the Russian Federation (FAS of Russia) for any transaction involving acquisition by a person (or group of persons) of more than 50 percent of the voting stocks of or shares in a foreign legal entity, or other rights that would result in the ability to determine the conditions of such entity’s business.
It further states that in appraising the value of the assets of the parties to the transaction involving stock (shares) or assets of, or rights with respect to, profit-making organizations, whereby the seller would lose control over the acquired entity, the value of assets owned by the disposing person shall not be taken into account. The requirements for the test of the total sale of goods shall remain unchanged.
The Law increases the thresholds at which prior consent of FAS of Russia is required for the formation and reorganization of profit-making organizations, namely:
- For a merger of profit-making organizations, or absorption by a profit-making organization of one or more other profit-making organizations, the gross asset value of such organizations exceeded 7 billion rubles, while total sales exceeded 10 bullion rubles, in the preceding year.
The law provides that any transaction involving absorption of a financial organization by a profit-making organization, or vice versa, (within the established thresholds) would require prior approval by FAS of Russia.
Anticompetitive Agreements and Concerted Action
A. Cartels and Other Competition-Restricting Agreements
The Law reduces substantially the list of peremptory prohibitions (per se) relating to competition-restricting agreements between competing business entities in the same product market, by qualifying such agreements, for the first time ever, as cartel agreements. Pursuant to Article 11 (1) of the Competition Protection Law, an agreement shall be deemed to constitute a cartel agreement if it aims or leads or could lead to:
- Setting of or maintaining prices (tariffs), discounts, surcharges (markups) or extra charges;
- An increase, reduction or support of prices in the bidding process;
- Product market sharing by territory, volume of sales or purchases, products offered, or seller or buyer/customer mix;
- Reduction or termination of production; or
- Refusal to make a contract with certain sellers or buyers/customers (boycott).
It is not allowed to file a motion with FAS of Russia seeking permission to validate a cartel agreement. Such agreements will lead to the strictest legal liability (turnover-based fines and criminal penalties).
The Competition Protection Law retains a ban on other agreements between business entities (other than allowable “vertical” agreements) that result or may result in the restraint of competition, and on the coordination of economic activities of business entities where such coordination leads to the consequences detailed in the Competition Protection Law.
The above bans do not apply to agreements on licensing or transfer of the right to use intellectual property or corporate identity kits and means of individualization of products, work or services.
B. Concerted Action
The Law clarifies the difference between forbidden agreements and concerted actions by clarifying one of the criteria on which an action may be held to be concerted: apart from common interest in the result, each of the parties involved must be aware in advance of an action taken by a business entity as a result of a public statement on the planned behavior in the market made by one of the parties.
The prohibitions per se as described above shall apply to the concerted action by competing business entities as well.
The Law also prohibits other types of concerted action, provided the existence of the restraint of competition due to such concerted action has been established, such as:
- Attempts to impose on a counterparty any unfavorable contractual terms and conditions;
- Setting different prices for the same product that are not justified commercially or technologically; and
- Impeding access to the relevant product market.
The prohibitions mentioned above shall not apply to concerted actions when:
- The aggregate product market share held by the relevant business entities does not exceed 20 percent, and the share held by each of them individually does not exceed 8 percent; or
- One of the business entities controls the other, or both of them are controlled by the same person.
The Law does allow an entity to file a motion seeking to validate concerted actions in certain circumstances.
Definition of Control
The above-mentioned prohibitions (see clauses A and B) do not apply to an agreement between or concerted action by business entities belonging to the same group of persons, if one entity controls the other, or if both entities are controlled by a third party. To this end, the Competition Protection Law for the first time ever offers the following definition of “control”:
“Control” means the ability of an individual orlegal entity to determine, directly or indirectly, the decisions to be taken by another legal entity, through:
- Holding more than 50 percent of the total voting stock of (shares in) such legal entity; or
- Acting as an executive body of such legal entity.
The Law specifies that agency agreements do not constitute vertical agreements (and therefore are not subject to the restrictions set forth by antimonopoly laws). The setting of a maximum resale price by the seller for the buyer was excluded from the list of peremptory prohibitions applicable to vertical agreements between entities, provided that the respective share held by each of them in any product market does not exceed 20 percent (any resale price setting in this scenario was forbidden previously).
Monopolistically High Pricing
The Law has established the conditions that, if all of them are present at the same time, would prevent any price from being held to be monopolistically high in the case that such price was set at an exchange. The conditions are as follows:
- Sales of product are below the limit set forth by FAS of Russia and any federal authority;
- Transactions are made as part of the exchange trading;
- Acts of the business entity enjoying a dominant position, or its affiliates, do not qualify as market manipulation; and
- A number of other conditions.
In addition, the Law provides that a product price established in accordance with the pricing procedure with regard to the starting price for a product sold at the commodity exchange shall not be held to constitute a monopolistically high price.
Procedure for Filing an Appeal Against Tender Results
The Competition Protection Law has been expanded with a new article establishing the procedure for reviewing complaints about violation of the bidding and contracting process. The new rules provide for filing an appeal with the antimonopoly authority against any act (or omission) by the bidding process organizer, tender or auction committee in staging or holding a statutory bidding process.
Amendments to the Criminal Code
The Law introduces amendments to Article 178 of Russia’s Criminal Code that exclude criminal liability for concerted action and vertical agreements, while retaining criminal liability for cartel agreements. These amendments become effective on January 3, 2012.
Amendments to the Code of Administrative Offences
Federal Law No. 404-FZ, “On Amendments to the Code of Administrative Offences of the Russian Federation” (Law No. 404-FZ), became effective on January 4, 2012.
Law No. 404-FZ categorizes the acts of dominant business entities into:
- Those resulting in the prevention, restriction or elimination of competition; and
- Those resulting in the infringement of third-party interests but not involving any prevention, restriction or elimination of competition.
As before, the first type of offense entails, in the case of legal entities, an administrative fine depending on the revenue generated by the offender from the sales of its goods, work or services in the relevant market. A fixed fine of up to 1 million rubles (instead of a turnover-based fine) shall be imposed for the abuse of a dominant position that infringes on the interests of counterparties but does not restrict competition in the market.
In addition, this law expands the list of mitigating and aggravating circumstances to be taken into account in determination of administrative liability for anticompetitive agreements and concerted action.
Law No. 404-FZ also introduces liability for price manipulation in wholesale and retail electricity markets by players that do not enjoy a dominant market position:
- 20,000 to 50,000 rubles for company officers
- 500,000 to 1 million rubles for legal entities
Failure to file applications, notices or disclosures with the federal governmental authority (currently, FAS of Russia) as required by laws governing foreign investments in Russia would also result in administrative fines:
- 15,000 to 50,000 rubles for company officers
- 500,000 to 1,000,000 rubles for legal entities