Recent decisions of the Antimonopoly Committee of Ukraine (the “AMC”) on fines for antimonopoly infringements demonstrate that the AMC is starting to use its penalizing authorities to the fullest, which means that breaching Ukrainian competition rules may become expensive. Following the principle “an ounce of prevention is worth a pound of cure” we urge our clients to become acquainted with important aspects of the Ukrainian competition legislation which may be applicable to companies having a nexus to Ukraine. This article is intended to help entities having subsidiaries in Ukraine, those carrying out sales to Ukraine or those considering launching business in Ukraine understand how to comply with the Ukrainian competition rules, thereby avoiding significant fines.

Mergers and Acquisitions

In Ukraine, the term “concentration” is used to describe a number of types of mergers, acquisitions and other transactions involving a change of control in business entities. Ukrainian anti-monopoly law requires prior approval of the AMC for concentrations that fall within certain statutory parameters. A concentration includes any of the following:

  1. a merger or consolidation of business entities;  
  2. the direct or indirect acquisition of 25% or more or 50% or more of the votes in the highest management body of a business entity;  
  3. the acquisition of control, directly or indirectly through third parties, by one or more business entities in one or more other business entities by various means (such as acquisition of an integral property complex/its structural unit, or appointing a person as a head/deputy head of a business entity if such person already occupies a similar position in a different business entity);  
  4. the establishment of a company by two or more entities that will engage in business activities independently over a prolonged period (e.g., a corporate joint venture), provided that such establishment does not result in coordination of competition among (i) the founders; and/or (ii) the founders and the newly established legal entity.  
  5. If a transaction qualifies as a “concentration,” then the AMC’s approval must be sought if the following financial thresholds (the “Financial Thresholds”) are met:
    1. the worldwide aggregate value of assets or net sales turnover of the participants, including all related entities, for the previous financial year exceeds EUR 12 million, and at the same time:
      1. the worldwide aggregate asset value or net sales turnover of each of at least two of the participants (including all related entities) for the latest financial year exceeds EUR 1 million; and  
      2. the aggregate asset value or net sales turnover in Ukraine of at least one of the participants (including all related entities) for the previous financial year exceeds EUR 1 million;

or  

  1. the individual or aggregate market share of the participants (including all related entities) in the market concerned or the neighboring market exceeds 35%.

The participants of the concentration include the parties to a transaction and all entities controlled by or controlling the participants. Thus, for the purposes of calculation of the Financial Thresholds, the financial data of all entities constituting the relevant group of companies (e.g., seller’s, buyer’s and target’s group) need to be taken into account. Moreover, the financial data of the seller’s group needs to be taken into account even if the control relations between the seller and the target will cease upon closing of the contemplated transaction.

Due to Ukraine’s very low Financial Thresholds the requirement for obtaining prior AMC approval is triggered in the vast majority of the M&A transactions. This requirement also extends to purely foreign deals, i.e., those carried out outside Ukraine, if the relevant parties have a certain nexus to Ukraine, such as having Ukrainian subsidiaries or sales to Ukraine, regardless of the concentration’s actual impact on competition in Ukraine. The long-awaited amendments to the legislation envisaging the increase of the Financial Thresholds to EUR 4 million and EUR 50 million, respectively, were adopted by the Parliament in the first reading in 2009, but still have not been passed and signed by the President, both prerequisites to becoming law.

If it is determined that a concentration meets the requirements for obtaining prior AMC approval, parties to the concentration must file an application to the AMC accompanied by various documents translated into Ukrainian and pay a filing fee of US$640. While the statutory review term by the AMC constitutes 45 days from the date of submission, in practice, the AMC often requests additional information which, depending on the circumstances, may sometimes delay the review of the application beyond the prescribed 45-day period.

Risks Associated with Unauthorized Concentrations

Under the Competition Law, failure to obtain a prior AMC Approval, if required, is punishable by a fine in the amount of up to 5% of the combined annual revenue of the breaching entity’s group, including its related parties incorporated abroad, for the most recent reporting year.

As a matter of practice, since adoption of the Competition Regulation in 2002, the AMC, in exercising its discretionary right in setting a fine amount, has tended to impose comparatively low fines for notifiable concentrations having no significant affect on competition in Ukraine. However, recently the AMC announced that starting from July 1, 2012 it will impose maximum fines provided by legislation for carrying out concentrations without prior AMC approval. It should be noted that even though enforcement of such sanctions remains problematic if the parties are non-Ukrainian residents, one may not exclude the risk that a Ukrainian subsidiary of the relevant party may be held accountable.

Additionally, if the concentration was carried out without obtaining a prior AMC approval and resulted in monopolization or significant restriction of competition on the Ukrainian market or a part thereof, the AMC may petition a court requesting to invalidate the respective acquisition agreement. Additionally, there is a risk of a private party claim for compensation in an amount double the caused harm resulting from a concentration carried out without prior AMC approval. Finally, failure by respective parties to obtain the AMC clearance when required may cause considerable delays in processing of those parties’ future concentration applications by the AMC and have a negative reputational impact.

Concerted Arrangements

Pursuant to the Competition Law concerted practices are essentially any actions of a competitive nature that are agreed by two or more business entities. There are broad categories of agreements in which concerted arrangements may be included: business sale and purchase agreements, employment contracts, shareholder agreements, distribution and supply contracts. Besides, the actions need not necessarily result from formal agreements, but may be based on informal arrangements and concerted practices.

Under the Competition Law any concerted practice between entities which has led or could potentially lead to the prevention, elimination or restriction of competition are considered anti-competitive and are prohibited. Anti-competitive concerted practices, in particular, include: (i) price-fixing; (ii) market allocation; (iii) restriction of market access; (iv) distortion of the results of tenders and auctions; (v) substantial restriction of competitiveness of other entities without justification; and (vi) entering into agreements that are conditional on the contracting party’s acceptance of additional obligations which are unrelated to the subject-matter of an agreement. To qualify as anti-competitive, the actions do not necessarily have to be carried out by entities having a dominant position. The prohibition equally applies to actions which are the result of vertical or horizontal arrangements.

Ukrainian competition legislation provides for the following exemptions from the requirement to obtain approval for concerted actions (i) if parties’ aggregate market share is less than 5% of the relevant market; or (ii) if parties’ aggregate market share is less than 15% (for horizontal and combined concerted actions) or 20% (for vertical and conglomerate concerted actions) of the relevant market, as long as the Financial Thresholds are not reached; or (iii) in certain circumstances where (a) the parties are small or medium-sized enterprises; or (b) concerted actions relate to supply and use of goods; or (c) concerted actions relate to intellectual property rights.

The above exemptions are not applicable, however, with respect to the hard-core horizontal and combined concerted actions: (i) price fixing; (ii) restriction, including termination, of production, sale or purchase of goods; (iii) sharing of markets or sources of supply by a territory, range of goods, volume of sales, customers, sellers or consumers or other criteria;

and (iv) distortion of tenders and auctions. Thus, in all listed cases the contracting parties are required to apply for the AMC’s prior approval before engaging in the respective concerted behavior.

If an entity falls under the requirement to obtain approval from the AMC in respect of a concerted practice, it must file an application with supporting documents and a filing fee of US$320, in which case the AMC has 3.5 months to decide whether or not to authorize the concerted practice. If approval for concerted actions is sought as part of an M&A deal and the parties apply for merger approval and concerted actions’ approval simultaneously, the AMC frequently reviews applications for both approvals during the 45-day period (statutory term for the merger applications’ review), thus allowing the parties to close their transaction within a shorter time frame.

Frequently, concerted arrangements do not adversely impact market competition, but instead lead to facilitation of production, optimization of trade and development of uniform standards. Nevertheless, even if the parties believe that their concerted actions will not affect competition, the parties are required to apply for prior AMC approval, if the relevant statutory requirements for obtaining approval are met, as the AMC is vested with authority to assess the impact of the respective concerted actions and decide whether they can be allowed.

The Competition Law gives the AMC the right to permit concerted practices in the following circumstances: (a) if the participants can prove that the relevant practices encourage manufacturing, technological or economic development, or the development of small or medium-sized enterprises; and (b) if the practices do not lead to a substantial restriction of competition on the market. In addition, in certain circumstances the Cabinet of Ministers of Ukraine has the right to allow concerted practices (even where the AMC has not approved such practices) if the participants can show that the positive social effects of these practices outweigh the negative consequences of the restriction of competition. Currently, there are no criteria for measuring such positive effects.

Risks Associated with Unauthorized Concerted Practices

According to the Competition Law, failure by the parties to obtain approval for concerted actions (if required) constitutes a violation of the Ukrainian antimonopoly legislation, which is punishable by a fine in the amount of up to 10% of the combined annual revenue of the breaching entity’s entire group, including its related parties incorporated abroad, for the most recent reporting year. The AMC’s decisions on fines in respect of concerted actions in May and June of 2012 demonstrate that the AMC has stiffened its fine policy by imposing maximum penalties allowed by the legislation (in particular, EUR 20 million imposed on a single entity for dominant position abuse and EUR 42 million imposed on a group of companies for distortion of results of a tender). Furthermore, if the profit resulting from the concerted arrangement exceeds 10% of the combined group’s revenue, an additional fine may be applied in an amount not exceeding a triple amount of unlawfully earned profit.

Therefore, when planning an M&A transaction in or outside of Ukraine or entering into a commercial agreement containing certain competition restraints, the best approach for companies with a connection to Ukraine would be to carefully assess the terms of the relevant arrangements from the Ukrainian competition law perspective, so that risk of fines or claims is reduced or eliminated.