Despite the geopolitical turmoil that has affected the east of the country nothing should mask the highly significant step that Ukraine took on 27 June 2014, when it signed up to the economic section (the Deep and Comprehensive Free Trade Area sections (DCFTA)) of its controversial Association Agreement with the European Union (the Agreement). The political section of the Agreement was signed on 21 st March earlier this year. Background Ukraine is a key partner in the Eastern Partnership, part of the EU’s European Neighbourhood Policy. Since 1998 the Partnership and Cooperation Agreement has allowed the EU and Ukraine to cooperate with one another on all major aspects of reform. This will now be replaced by the Agreement including DCFTA which will hopefully put Ukraine on the path to eventual EU membership bringing with it political stability, territorial security and economic prosperity. One of the key foundations of that economic prosperity will be the establishment of an effective, non-discriminatory and transparent competition enforcement regime. The Agreement contains important obligations upon Ukraine to approximate its competition laws with those of the European Union. In this article we look at a number of steps Ukraine can take to achieve that. The Agreement The key provisions in the Agreement which relate to competition policy are set out in Chapter 10, Articles 253 to 267. (i) Competition and Mergers The Agreement prohibits and sanctions certain practices and transactions which could distort competition and trade (see Article 254). Anti-competitive practices such as cartels, abuse of a dominant position and anti-competitive mergers will be subject to enforcement action. The Parties agree to maintain effective competition laws and appropriately equipped competition authorities. In the case of Ukraine this will be the Anti-Monopoly Committee (AMC). Antitrust and Competition Client Service GroupBryan Cave LLP America | Asia | Europe www.bryancave.com 2 Of particular interest in the Agreement are the specific provisions which require both Parties to agree to apply their competition laws in a transparent, timely and non-discriminatory manner with particular regard to procedural fairness and the rights of the defence. There is also to be an effective independent appeal process. Specific requirements that Ukraine publish principles for the setting of fines for breach of competition law and guidelines on the assessment of horizontal mergers are also specifically set out in Article 255(5) & (6). It is unusual to see such blunt wording in an agreement of this type but it is no secret that despite the efforts of the Ukrainian Government, the EU still remains worried about corruption and the rule of law in Ukraine. It sees the rights of the defence, an independent appeal mechanism and transparency through the publication of reasoned decisions and guidelines in mergers and competition law cases, as an essential bulwark against these challenges. Under Article 256, Ukraine agrees to align its competition law and enforcement practice to that of the EU acquis (the essential body of EU case law). This body consists of: The investigation and enforcement of competition law (Council Regulation No.1/2003). Merger control (Council Regulation No. 139/2004). The adoption of similar safe harbour/block exemption regulations on vertical agreements and concerted practices (Commission Regulation No. 330/2010) and technology transfer agreements (Commission Regulation No. 316/2014). These changes are to be implemented over the lifetime of the Agreement. However, certain changes relating to the adoption of block exemptions for vertical and technology agreements and the publication of reasoned merger and competition decisions have been fast tracked to be put in place within three years of the entry into force of the Agreement. Monopolies Additional obligations are placed on Ukraine and the EU in the Competition Chapter - relating to state controlled enterprises or enterprises granted special or exclusive rights (the right to undertake a function under a licence such as electricity or telecoms provider). This ensures that companies in both the EU and the Ukraine will have equal access to each other’s markets and there will be no discrimination by, or in favour of such monopolies. State Aid & Subsidies The EU and Ukraine are also committed to remedy or remove distortions of competition caused by subsidies where those affect trade and competition. The Parties agree to refer any disputed aid or a subsidy to a dispute settlement mechanism. Ukraine commits itself to adopting a system of control of state aids similar to that of the EU including the setting up an independent authority to vet state aid in all areas liberalised by the DCFTA except agriculture and fisheries. To improve transparency and confidence between them the Parties will further provide information on the grant of subsidies or aids upon request.Bryan Cave LLP America | Asia | Europe www.bryancave.com 3 Present Ukrainian Competition Law In competition law terms Ukraine is not a greenfield site. It has a considerable body of competition law and an established competition regulator, the Anti-Monopoly Committee of the Ukraine (AMC). Over the 21 years of its existence, the AMC has been particularly active through its many regional branches investigating and tracking down a large number of usually small cartels. The level of the fines also illustrate the small nature of these arrangements. The historical legacy of the Soviet era (which left few market participants in small markets) has led to action against a significant number of companies for abuse of dominance. In fact over 42% of all infringements in 2012 related to an abuse of dominance. The AMC has therefore been an active regulator but for the reasons we discuss later, further reform and transparency measures are needed to equip the regulator for a move towards a wider European future. The basic laws which make up competition regulatory framework in Ukraine are the Law of Ukraine on the Protection of Economic Competition of 2001 (Law No. 2210-III of 11 January 2001). This provides the main principles, concepts and penalties for the regulation of mergers, restrictive agreement/concerted practices as well as the abuse of dominance. This is supplemented by the Commercial Code of Ukraine of 2003 and the Law on the Anti-Monopoly Committee of Ukraine of 1993. The AMC is the principal enforcer of competition law entrusted with the assessment of transactions and practices which affect local conditions of competition within the jurisdiction. It has the power to review relevant merger transactions and to investigate and punish restrictive agreements and abuses of dominance. Substantial fines of up to 10% of the worldwide turnover of the offending companies, cease and desist order, invalidity and exposures to third party damages actions before the Courts are the potential sanctions for breach. However, competition decisions are subject to political interference. The Cabinet of Ministers of Ukraine can overturn any prohibited merger or competition decision of the AMC. The AMC has also issued a number of implementing regulations relating to the way they enforce their general merger and competition enforcement powers. Comparison between EU and Ukrainian Competition Law Whilst Ukraine does have a comprehensive competition law framework, it does fall into the usual trap of many newly-developed competition regimes of imposing unrealistically low thresholds for merger control, allowing very wide exclusions and exemptions from competition law which diminish its effectiveness whilst working with underdeveloped rules of procedure which arguably fail to fully respect the rights of the defence. A preliminary review of Ukrainian competition law and Ukraine’s obligations under the Agreement highlights that the following features of the Ukrainian competition regulatory framework require attention:Bryan Cave LLP America | Asia | Europe www.bryancave.com 4 Merger Thresholds - low merger notification thresholds as presumably the AMC was worried about not having jurisdiction to intervene in a merger key to the economy. We understand there are currently reform proposals to increase the current thresholds. Foreign to Foreign Transactions - too many foreign to foreign mergers are caught by the merger control regime where the target has no presence in the jurisdiction. Consequently these types of transactions have little or no impact on Ukrainian economy. Lack of Fast Track or Simplified Merger Notification Procedures - failing to have any fast track or simplified procedure for straightforward merger notifications. Introducing such measures would boost business confidence in the system and encourage inward investment. Statutory Consideration Periods - lack of adherence to timely statutory consideration periods. For example generous consideration periods for Phase II review in merger cases permit the AMC to suspend or restart the three month consideration period for want of information or additional documents. This can lead to AMC investigations becoming potentially open ended. Political Interference - political interference in the competition and merger control enforcement regime not limited to cases of financial stability, plurality of the media or national security. Varying Merger Regulation - different approaches to the regulation of mergers at variance to the EU Merger Regulation No. 139/2004. For example, the Ukrainian law has different rules on the calculation of turnover and the nature of the undertakings concerned. Differences in Substantive Competition Law - material differences with EU competition law relating to the substantive law and its interpretation on the control of restrictive agreements and the abuse of dominance under the Law of 1991. Differences include the use of rebuttable presumptions of dominance based on market share bright line tests. Too Wide a System of Exclusions and Exemptions - a wide system of exclusions from general competition prohibitions exist alongside a very generous system of general or block exemptions which differ in material respects to those existing under EU law, particularly in relation to vertical and technology transfer agreements. State Aid - the need to establish independent oversight and scrutiny of the granting of aids and subsidies by the State whilst possibly extending the role of the AMC. Therefore although the basic building blocks are present, a review of the current state of Ukrainian competition law and that of the EU shows that a considerable amount of work still needs to be done to approximate the two regimes. Action Needed The Agreement mentions "approximating" Ukrainian laws to those of EU. This does not mean slavishly copying the text of EU legislation without any consideration of whether such reforms are suited to the economy of Ukraine. However, it does require law makers to achieve similar outcomes in a manner most appropriate for the Ukrainian legal system. Despite the possibility of national variations it has to be said that the greater and sooner the convergence of Ukrainian and EU competition law, the easier will be Ukraine’s eventualBryan Cave LLP America | Asia | Europe www.bryancave.com 5 incorporation into the European Union wide competition regulatory framework. So what steps does Ukraine need to take to meet its obligations under the Agreement it is about to sign? In our view the Agreement has highlighted a number of priority action points which need to be incorporated into Ukrainian competition law within three years of the Agreement. There is also a longer term objective of approximating the two regimes but work on this aspect should begin sooner rather than later as the EU will use this as a barometer of Ukraine’s eagerness to meet its obligations. Priority Action Therefore we would see as a priority the need to ensure that the AMC publishes reasoned decisions relating to merger and competition decisions as soon as possible. This will also help improve transparency. Article 255 also sets the Ukraine the task of developing two sets of guidelines. The first relates to the criteria the AMC will use to calculate the imposition of pecuniary sanctions. The EU Commission has similar guidelines as set out in Commission Guidelines on the method of setting fines imposed pursuant to Article 23(2)(a) of Council Regulation No. 1/2003 (2006). However, the Ukrainian guidelines should also extend to the imposition of fines for breaches of merger control laws. The EU will also expect these guidelines to cover Leniency issues and the calculation of reduced fines as part of the Leniency process similar to the Commission’s Notice on immunity from fines and reduction in fines in cartel cases (2006). The second set of guidelines relate to the assessment of horizontal mergers. Merger control policy is perhaps the most important area of competition law for Ukraine. An effective and credible merger policy will help shape future industrial development, encourage the inward flow of investment and create an incentive for the transfer of technology. There is a need for the uniform and transparent enforcement of merger policy in all developed European economies but this requirement is particularly acute in Ukraine in its current state of transition from a centrally planned to a fully market orientated economy. Decisions now taken by competition authorities will have long term consequences for the country. Horizontal mergers are potentially the most restrictive of competition and the EU will want to see a comprehensive and clear statement of how the AMC will look at these types of combinations. The EU Commission has set out its own views on horizontal mergers in its Horizontal Merger Guidelines 2004. Preliminary analysis suggests that Ukrainian law needs a radical overhaul to bring it more in line with EU jurisprudence. Article 256 of the Agreement states that Ukraine should prioritise the implementation of block exemption regulations for vertical agreements and technology transfer agreements in line with relevant EU block exemption regulations. Procedural Fairness Whilst it is easy to identify specific measures for reform, the general requirement in Article 255 for Ukraine to adopt transparent, timely and non-discriminatory competition enforcement proceduresBryan Cave LLP America | Asia | Europe www.bryancave.com 6 (particularly with regard to the rights of the defence) is a far more complicated task. A thorough review of both merger and competition law investigation and enforcement procedures will be necessary. At the same time, the AMC will have to satisfy the EU’s concerns on this point. Transparency, publication of comprehensive guidelines, the ability of the defence to be heard and have access to the file as well as an effective appeal procedure will all be necessary to provide adequate safeguards. Longer Term Approximation The final action point is in fact the largest in scope and will require wholesale consideration of Ukrainian competition law with that of the EU over the lifetime of the Agreement. It will also need to develop a system of state aid regulation and to ensure state monopolies and undertakings having exclusive or special rights are subject to effective competition law oversight. Conclusion The competition law provisions of the Agreement occupy only one chapter out of many. However, effective competition law and enforcement is one of the key foundations of economic prosperity upon which many of the other chapters rely. It is therefore of fundamental importance to the success of the Agreement. A number of specific fast track legislative changes to Ukrainian competition law highlighted above are likely to meet the EU’s immediate concerns. However, a more intractable problem is ascertaining what exactly needs to be done to meet Ukraine’s wide ranging obligations to guarantee procedural fairness and the rights of the defence in competition proceedings. This will need to be the subject of a detailed legislative review of Ukraine competition law practice and procedure (and perhaps wider Ukraine law) in liaison with the AMC. Finally, the approximation of merger and competition law including the introduction of effective state aid regulation is a significant project in its own right and will require considerable resources dedicated to it over the longer term. The fact that there is a sizeable body of Ukrainian competition law in existence probably complicates rather than assists this analysis. However, the sooner Ukraine can demonstrate to the EU that sizeable strides in converging its own laws with those of the EU the quicker their path will be along the road to eventual EU membership. About the author: Robert Bell is a partner in the London office of the international law firm Bryan Cave and head of the EU & Competition Group. Robert is a lawyer with 30 years of experience. In the 1990s Robert advised the Czech government on approximating Czech competition laws to the EU laws pursuant to the Czech-EU Association Agreement. The Czech Republic joined the EU in 2004.Bryan Cave LLP America | Asia | Europe www.bryancave.com 7 For more information on this subject, kindly send your questions to the author, your contact at Bryan Cave or to any member of the Antitrust and Competition Client Service Group. Robert Bell, London Direct Dial: +44 (0)20 3207 1232 / firstname.lastname@example.org Bryan Cave's alerts/bulletins/briefings are available online at www.bryancave.com/bulletins.