Robert Bell, a competition law specialist with international law firm, Bryan Cave, analyses what Ukraine should be doing with respect to its competition law, in the context of its association with the EU.
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 Association Agreement). The political section of the Agreement was signed on 21st March earlier this year. The Association Agreement 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, nondiscriminatory and transparent competition enforcement regime. The Association Agreement contains important obligations upon the 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 existing Ukrainian competition law framework falls into the usual trap of many newlydeveloped competition regimes: Imposing unrealistically low thresholds for merger control. Allowing very wide exclusions and exemptions from competition law. Diminished effectiveness due to underdeveloped rules of procedure which arguably fail to fully respect the rights of the defence in competition investigations. We have set out below 10 steps which we believe the Government of the Ukraine needs to take to fulfill its obligations under the Competition Law Chapter of the Association Agreement. Antitrust and Competition Client Service GroupBryan Cave LLP America | Asia | Europe www.bryancave.com 2 1. Substantially raise the-merger notification thresholds The current merger thresholds are set at an unrealistically low level. We recommend that they are therefore raised to a sensible level taking into account the average deal size in the economy but also set against the level of thresholds set by other recent members of the Union. 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. The existing thresholds were presumably fixed by the Government in liaison with the AMC as it was worried about not having sufficient jurisdiction to intervene in all relevant mergers key to the economy. But the all-encompassing thresholds have clogged up the system with a rash of small mergers with little or no effect on competition. We understand there are currently reform proposals to increase the current thresholds. 2. Exempt foreign to foreign transactions which have little or no impact on the Ukrainian economy Too many foreign to foreign mergers require notification to the AMC even though the target has no presence in the jurisdiction. Consequently these types of transactions have little or no impact on the Ukrainian economy. Low merger notification thresholds, taking into account the whole of the Seller’s Group’s turnover rather than just the target and the vague and indistinct rules about when a foreign to foreign merger will have a local nexus with Ukraine have led to many transactions being needlessly caught within the AMC’s control. We would recommend that the Government amends the turnover calculation rules to only take into account the target of the buyer’s group and the target (excluding the other members of the seller’s group). The AMC should also publish clear guidelines about when a foreign to foreign merger will be caught following the review of the merger thresholds in 1 above. 3. Introduce a fast track or simplified merger notification procedure Another drawback of the current merger control regime is a lack of a fast track or simplified procedure for certain straightforward merger cases. It has taken certain other EU Member State regulators a long time to introduce such a scheme. Other still do not have one. For instance Poland has just introduced one. The EU has had a simplified procedure for many years. Nevertheless we are confident that introducing such measures will help boost business confidence in the competition regulatory framework and encourage inward investment in the economy of Ukraine.Bryan Cave LLP America | Asia | Europe www.bryancave.com 3 4. Publish comprehensive horizontal merger 1 guidelines We have already alluded to how important an effective merger control regime is to a developing country like Ukraine. The hallmark of success is transparency. The business community must also know where it stands in relation to key areas of policy such as the calculation of fines in competition and merger cases. Also highly important is Government policy on horizontal mergers which are potentially the most restrictive of competition. It is interesting to note that the EU is highly critical of Ukraine’s commitment to transparency in the Association Agreement and it singles out the need for Ukraine to introduce horizontal mergers guidelines. Therefore in line with the EU mandate in the Agreement, Ukraine should publish such guidelines as soon as it can. 5. Stricter adherence to statutory consideration periods Long consideration periods and the ability for the AMC to escape the discipline of strict adherence to timely statutory consideration periods can have a detrimental effect on the way business views the Ukrainian economy. Witness the recent outcry of business to longer consideration periods in the UK’s newly reformed merger regime twinned with substantial stop the clock powers. A lesson from the UK is that regulators need to use any ability to extend consideration periods restrictively and appropriately. In Ukraine, 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 system is open to abuse and needs to be reviewed. 6. An end to political intervention Political interference with the AMC’s competition and merger control enforcement activities needs to be reviewed. We understand it is a theoretical right and is seldom exercised. But it is still in existence and that is the point. The system needs to be more transparent and certain. In relation to mergers such political intervention should be limited to the accepted reserved areas under the EU Merger Regulation namely financial stability, plurality of the media and national security. In competition cases assessment of anti-competitive behaviour should be decided on competition grounds alone to stop competition policy becoming an instrument of national industrial policy. 1 A horizontal merger is a merger of companies operating at the same level of trade such as a merger of two producers of household chemicalsBryan Cave LLP America | Asia | Europe www.bryancave.com 4 7. Approximate substantive competition law and merger control legislation with that of the EU This is not going to happen overnight. Material differences exist between EU and Ukrainian 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 need to analyse a company’s market position to ascertain whether it holds market power to ground a finding of dominance rather than relying on arbitrary market share thresholds which is the current Ukrainian practice. Converging merger control assessment and practice is also needed in the areas referred to above. This is a long term goal as envisaged by the Association Agreement. 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 Ukraine 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. 8. Too wide a system of exclusions and exemptions from competition law The Association Agreement is, by implication, critical of the wide system of exclusions from general competition prohibitions which exists alongside a very generous system of general or block exemptions. 2 These differ in material respects to those existing under EU law. The EU specifically asks that the Ukrainian Government reviews their treatment of vertical agreements 3 and technology transfer agreements and introduces a system of bloc exemptions based on the text of their EU equivalents. 9. Guarantee procedural fairness and the rights of the defence Ukraine should undertake a root and branch review of competition and merger procedure before the AMC. The Association Agreement contains specific provisions which require Ukraine to apply their competition laws in a transparent, timely and non-discriminatory manner. Of particular importance are safeguarding procedural fairness and the rights of the defence. The Agreement also envisages an effective independent appeal process. 2 A block exemption is safe harbour legislation which exempts certain restrictive clauses in common commercial agreements provided the conditions of the legislation are satisfied. Examples of EU block exemption regulations are those covering vertical agreements and technology transfer agreements. 3 Vertical agreements are agreements between two companies at a different level of trade such as a supplier and a distributorBryan Cave LLP America | Asia | Europe www.bryancave.com 5 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. The EU 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 essential to fight corruption and instill respect for the rule of law. 10. The introduction of an EU style system for the regulation of State Aid There is a need to establish independent oversight and scrutiny of the granting of aids and subsidies by the State through possibly extending the role of the AMC to this function. Accession to an EU wide economy is impossible without it. If a single state is able to support its national producers through the grant of unlawful state aid, this will fundamentally contradict the single market policy of the Union. Conclusion The competition law provisions occupy only one chapter out of many in the Association Agreement. 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 Ukraine 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 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) by the Parliament 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 Ukraine competition law in existence probably complicates rather than assists this analysis. However it is essential Ukraine demonstrates to the EU that sizeable strides in converging its own laws with those of the EU are underway. About the author: Robert Bell is a partner in the London office of 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 6 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.