The Kazakhstan government has introduced a draft law to Parliament called “On Amendments and Additions to Certain Legislative Acts on Competition in the Republic of Kazakhstan” (the Proposed Competition Law). The Proposed Competition Law is intended to make significant changes to competition law and related transactions.
This article summarizes the most substantial changes and amendments provided in the Proposed Competition Law.
Increase in the Threshold of Transactions Subject to Antimonopoly Agency Approval
Under the current legislation, even relatively small-scale transactions are viewed as “economic transactions” subject to prior authorization by the Antimonopoly Agency if the following requirements are met:
- the total book-value of the assets of the market entities that are under reorganization (group of persons), or the total book-value of the assets of the acquirer (group of persons), and of the market entity shares (participation interest, unit shares) with the right of vote in whose charter capital are acquired, or their total volume of realization of goods for the last financial year exceeds two million times the monthly calculated index (MCI)3 (appr. $21.6 million) on the day the application is submitted, or
- one of the transaction participants is an entity that has a dominant or a monopoly position in the particular market.
Under the proposed legislation, the threshold is increased to ten million times the MCI (appr. $108 million). Accordingly, certain transactions that were subject to prior authorization by the Antimonopoly Agency have been freed from that requirement.
New “Notice” Requirement (Substituting “Approval” Requirement) in Certain Economic Transactions
Under the current legislation, transactions are subject to authorization by the Antimonopoly Agency if the following requirements, among others, are met:
- an acquisition by a market participant of rights allowing such market participant to (a) issue mandatory executive orders to another market participant upon performance of its business activities, or (b) serve as the executive body of another market participant; and
- participation of the same individual(s) in the executive bodies, board of the directors, supervisory boards or other management bodies of two or more market participants if such individuals carry out management of the business activities of the said market participants.
Under the Proposed Competition Law, if one of the above requirements is fulfilled and the abovementioned thresholds are met, it is only necessary to file a notice to the Antimonopoly Agency. Such notice should be submitted within 45 days after the completion of the respective transactions. The practical effectiveness of the proposed amendment should be further considered.
Definitions of “Direct” and “Indirect” Control Have Been Introduced
The existing competition law does not provide definitions for the terms “direct” and “indirect,” which is a challenge for market participants that are planning M&A transactions. Since clear definitions are required to determine whether transactions will require prior approval of the Antimonopoly Agency.
The Proposed Competition Law introduces the following definitions for direct and indirect control:
Direct control – is the ability of a legal entity or physical person to determine the decisions of another legal entity through one or more of the following:
- ability to perform functions of a governing body of the latter legal entity;
- the right to define terms for the business operations of the latter legal entity;
- control of 50% or more of the total voting stock (participation interest) in the initial capital contribution of the latter legal entity.
Indirect control – is the ability of a legal entity or an individual to direct the decisions of another legal person via one or several other legal entities that have direct control between themselves.
Definition of “Group of Persons” Has Been Amended
Under the current legislation, implementation of transactions (economic transaction), if such transactions occur within one group of persons, it is not recognized as an “economic concentration.”
In this regard, please note that a group of persons, as a number of individuals and/or legal entities, includes the following:
- a person who has the right to directly or indirectly (through third parties) control more than 25% of the voting stock of a legal entity;
- a legal entity or several affiliated legal entities that can control the decision-making of a third person, including the decision-making with respect to performing business activities, or that can act as an executive body thereof;
- an individual, his or her spouse, and/or close relatives that can control the decision-making of a third person, including decision-making relating to performing business operations, or that can act as an executive body thereof; and
- persons, each belonging to the same group pursuant to any of the conditions stipulated in paragraphs 1–3 above, and other persons belonging to the same group with each of the said persons pursuant to any of the conditions stipulated in paragraphs 1–3 above. Such group of persons is treated as one market participant. Thus, the provisions of the law on competition pertinent to market participants are also applicable to groups of persons.
Furthermore, under the existing law, the additional acquisition of shares, if the acquirer controlled more than 25% before the acquisition, does not require prior approval, since the target entity (affiliated company) is considered to be in the same group as the acquirer.
Under the Proposed Competition Law, the threshold set forth in paragraph 1 above is increased to 50%. Provided that the Proposed Competition Law is adopted, affiliated entities that were previously considered a group of persons due to control of more than 25% of the voting stock, but not meeting the 50% threshold, will no longer be considered as part of one group of persons. This in turn, could lead to an increase in the number of notifications to the Antimonopoly Agency on the acquisition of the voting stock in an affiliated company (acquisition of the controlling share (51%) that effectively allows such market participant to issue mandatory executive orders to its affiliate on performance of its business activities even if before the acquisition the acquirer controlled more than 25%, but less than 50% of the entity’s voting stock in its affiliate.
Anti-Competitive Policy Prohibition of Vertical Agreements
The Proposed Competition Law prohibits entering into vertical agreements between market participants that:
- fix or fix resale of products, except when the seller imposes a maximum resale price on the purchaser;
- prohibit the purchaser from selling the products of the seller’s competitor. This prohibition does not extend to agreements on distribution of products sold under a trademark or another means of individualization stipulated by the seller or the manufacturer.
The new rules provide a basis for legal protection of the rights of consumers and purchasers from dominance of sellers in the circumstances described. We will continue following the developments of the draft law and will update you as it progresses through the legislative process.