On January 26, 2015 Verkhovna Rada of Ukraine passed a Law “On introduction of amendments into the Law of Ukraine “On protection of economic competition” (as for improvement of the system of control over economic concentration)” which represents one of the number of the regulatory acts adoption of which was undertaken by Ukraine under the Article 256 of the Ukraine–European Union Association Agreement. Pursuant to the mentioned article Ukraine undertook an obligation to approximate its legislation on competition and its enforcement to the EU legislation base. In particular, the following regulations shall be subject to implementation:
- Council Regulation (EC) No 1/2003 of 16 December 2002 on implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty (Article 30);
- Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings (the EU Merger Regulation) (Articles 1, 5 (1) – (2) і 20);
- Commission Regulation (EU) No 330/2010 of 20 April 2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices (Articles 1, 2, 3, 4, 6, 7 and 8);
- Commission Regulation (EC) No 772/2004 of 27 April 2004 on the application of Article 81(3) of the Treaty to categories of technology transfer agreements (Articles 1, 2, 3, 4, 5, 6, 7 and 8).
The said provisions of the Regulations must be implemented within three years following the moment when the Association Agreement comes into force.
The Law of Ukraine “On introduction of amendments into the Law of Ukraine “On protection of economic competition” (as for improvement of the system of control over economic concentration)” is one of the most discussed and anticipated laws in the sphere of competition law. In the course of many years business community has been criticizing essentially low value thresholds upon reaching of which the parties to the M&A Agreements had to apply to the Antimonopoly Committee of Ukraine (AMCU) to receive the merger clearance.
In most cases the agreements submitted to the AMCU did not stipulate establishment of any monopolistic organizations and did not carry any threat to competition at the national or regional commodity markets. The overall issue was in mere conformance of the parties to the agreements to archaic criteria established at the beginning of this century and which do not correspond with the level of development of the economy of our country.
The new law finally introduces almost revolutionary changes which stipulate not only many-fold increase of the value thresholds, but also the change of the basic principles of their establishment, i.e. the grounds under which the necessity to apply to the AMCU arises. Now the concentrations will be subject to approval with the AMCU in such cases:
- when the total value of assets or the total sales of goods of all participants exceeds the equivalent of € 30 mln in the previous year and of at least two participants of concentrations in Ukraine exceeded the equivalent of € 4 mln each; and
- when the total value of assets or the volume of sales of goods in Ukraine of the object of concentration, or at least one of the founders of the created business entity for the previous financial year exceeds the equivalent of € 8 mln, and the volume of sales of goods of at least one other participant of concentration for the previous year exceeds the equivalent of € 150 mln.
That is, considering the first criterion for determining the thresholds, merger clearance is no longer required during implementation of the agreements, in which only one party (the party acquiring control or the seller together with the object to be acquired) is more or less significant player in the commodity market of Ukraine. It is clear that the second criterion for determining the thresholds envisages mainly the need to obtain a permit specifically for the cases when a large business entity – non-resident acquires control over the entity that has a more or less significant market power in the relevant market of Ukraine.
If according to the previous requirements it was necessary to obtain a merger clearance even when control was acquired by a non-resident, who might not be present in the Ukrainian market, just because the other party to the agreement had a relatively small presence in the Ukrainian market (even if it sold the asset, which in no way was active in the Ukrainian market), now this illogical requirement will no longer apply. Thus, the need to obtain a merger clearance is canceled in cases of M&A agreements between the non-resident companies, when only one party to such agreement was present in the Ukrainian market.
This requirement surprised the representatives of foreign business as agreements, often having no impact on competition in the Ukrainian markets, had to be approved with the AMCU only because of a formal sign (assets or sales in Ukraine of one participant for over € 1 mln).
The requirement to obtain a merger clearance when the share in the relevant commodity market of any participant of concentration, or the total share of participants of concentration, taking into account the control relations, exceeds 35% and concentration occurs in this or adjacent commodity market was canceled, as this requirement has not proved its practical value for protection of competition for 10 years of existence.
It is worth noting that there was a time when the AMCU received about 1,000 applications for merger clearance, i.e. many times more than in many developed countries worldwide. It was not because the country’s investment climate caused a boom of M&A agreements, but only because of the specific statutory requirements. In a huge number of cases they alleged concentrations that had no effect on the state of competition in the Ukrainian commodity markets and were approved only on formal grounds. We believe that due to a meaningful reduction of the number of applications the pressure on the appropriate AMCU’s division, which monitors concentrations, will ease greatly that would give it the opportunity to focus on assessment of the agreements, which are really important from the point of view of competition protection. The new threshold values and principles of calculation will facilitate and accelerate implementation of M&A agreements, and reduce money and time for their drafting.
Further, a simplified (shortened to 25 days) procedure for consideration of applications and the possibility of holding consultations with the AMCU (also regarding correction of errors and deficiencies in the submissions to the Committee as part of the application) can be finally applied to some concentrations that is really important to speed up the implementation of M&A agreements. Incidentally, it was possible in the nineties of the last century and at the beginning, and it did not provoke any significant manifestations of corruption. On the contrary, the ability to freely discuss with the Committee and correctly understand the requirements of the legislation reduces the possibility of corrupt practices, and its absence only pushes the search for specific arrangements.
It should be separately noted that the Law excluded the possibility of opening cases on concentration or concerted actions upon availability of a ground such as “the need for complex in-depth study or expertise”, which caused a lot of discontent on the part of business, because it often resulted in biased and prejudiced, in the applicants’ opinion, delay of consideration of applications by the Committee. In this case consideration of the case could last almost endlessly.
Exclusion of the specified ground for opening cases will affect the number of such cases significantly, reduce tension in the relations between the Committee and the participants of the alleged concentrations and concerted actions, eliminate subjective assessment of concentrations and concerted actions submitted to the Committee, which often resulted in certain misunderstandings in relations with the Committee due to a significant delay in receipt of merger clearances.
However, it is hard to resist some criticism. While the rule is effective that when calculating thresholds for the parties to the agreements under which the seller disposes of all its shares (parts, portions) in the sale item, the value indicators of such seller with the thresholds of the item shall be taken into account. It means that the lawmaker did not follow the example of the EU rules, which do not take into account the indices of the seller alienating complete control over a business entity. Thresholds of the seller will continue to be added to the thresholds of the purchased item that is illogical, because the seller as a result of alienation of full control does not concentrate with the purchaser in any way. We hope that this misunderstanding will be corrected in the near future by amending Articles 23 and 24 of the Law, and a certain number of transactions will thus be withdrawn from the excessive control of the Committee.
Much has been said by experts with regard to adoption by the AMCU, yet in September last year, of recommended clarifications on definition of the amount of fines, thus, it is not necessary to dwell on this separately, but I would add that on February 16, 2016 the AMCU issued the new recommended clarifications, which specified and completed the position of the Committee regarding the fines that may be imposed by the territorial offices of the Committee; procedure for calculation of the basic amount of fine in case of anticompetitive concerted actions of business entities during bidding, auctions, tenders; procedure for calculation of the basic amount of fine in case of violations of the concentration rules; procedure for calculation of the basic amount of fine in case of violations in the form of unfair competition; procedure for calculation of the basic amount of fine in case of violations of informative nature; and specified the aggravating circumstances in the form of repeat violation.
I would separately focus on the new obligations of the AMCU to promulgate its decisions. Thus, in accordance with Article 256 of the Association Agreement at the end of last year amendments were introduced in the legislative acts of Ukraine as regards ensuring transparency of the AMCU’s activities. Amendments to the Law of Ukraine “On Protection of Economic Competition” and “On Protection Against Unfair Competition” envisage that within two months the AMCU will have to publish non-confidential information on the approved orders regarding beginning of consideration of cases on concerted actions, concentration; decisions made according to the results of consideration of applications, cases on concerted actions or concentration, unfair competition, within 10 business days from the date of approval.
Such promulgation will not only increase transparency of activities of the AMCU’s bodies, but will also provide legal certainty to business entities to avoid risks of violation of legislation and in some sense a greater degree of predictability of the regulator’s actions.
Meanwhile, unfulfilled tasks include implementation of Commission Regulation (EU) No. 330/2010 of April 20, 2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices (Arts. 1, 2, 3, 4, 6, 7 and 8). Now, in many areas of business there is a situation when business entities do not have confidence in the lawfulness of some of their vertical agreements, including distribution agreements.
What is it about? According to Article 256 of the Association Agreement, Ukraine has to implement the rules of Commission Regulation (EU) No. 330/2010. However, Article 101 of the Treaty on the Functioning of the European Union shall apply to agreements, including vertical, which may affect trade between Member States and which prevent, restrict or distort competition. It establishes a legal basis for determining the vertical restraints that can be used in the implementation of vertical agreements. Article 101(1) prohibits agreements that explicitly restrict or distort competition, while Article 101(3) determines agreements that do not fall under the prohibition of Article 101(1) as their pro-competitive impact exceeds anti-competitive effects of certain agreements.
It is important that Article 101 is aimed at preventing the threat of competition to the detriment of consumers’ interests, thus, for most vertical restraints competition concerns may arise only when there is insufficient competition at the level of the supplier of goods, the buyer of goods or at both levels.
Article 101(3) excludes liability of parties to vertical agreements (including distribution contracts) if such agreements contribute to improvement of production or distribution of products, technical or economic progress enabling consumers to receive the appropriate share of the resulting benefit, and at the same time, such agreements do not impose on the parties concerned restrictions, which are not mandatory to achieve this objective, and do not allow the parties to eliminate competition in respect of a substantial part of the relevant products.
It should be noted that Regulation No. 330/2010 envisages that certain types of vertical agreements potentially contribute to increase of economic efficiency in the chain of production and distribution by facilitating coordination between the participating business entities, especially those resulting in a reduction of operating expenses of the parties, optimization and distribution of sales, increase of the level of investment.
If the market share in the relevant market of each of the parties to the agreement does not exceed 30% and the vertical agreement does not contain the appropriate types of severe restrictions of competition, such an agreement generally leads to improvement of production and (or) distribution and offers consumers a fair share of the resulting benefits.
Only if market shares of both parties exceed 30%, it is difficult to consider that the agreement falling within the scope of Article 101(1) results in the objective advantages of such nature and size as to compensate for the problems caused by it for competition. In addition, Regulation assumes the block of exemptions for vertical agreements, even if they fall within restrictions of Article 101.
In fact, there are two basic requirements for vertical agreement not to fall under Article 101(1): (a) the market shares of both the supplier and the buyer shall not exceed 30% of the relevant commodity market, and (b) the agreement must not include the so-called restrictions. Severe restrictions are specified in Article 4 of Regulations and envisage: limitation of the buyer’s possibility to set a minimum resale price (in this case the seller can set a maximum price or to recommend a resale price); limitation of resale area or range of buyers (subject to certain exceptions); limitation of active or passive sales to end buyers and limitation of cross-supplies between distributors in a selective distribution system, etc.
Since the issues of admissibility of certain vertical agreements requires urgent solution, it is necessary to accelerate implementation of said Regulation by adoption of the relevant laws and regulations.