The federal government of the United Arab Emirates (“UAE”) has issued Federal Law No. 4 of 2012 (the “Law”), which is the country’s first comprehensive competition law. The Law aims at protecting competition and prohibiting anti-competitive practices. When the Law comes into force in February 2013, the UAE will join the growing number of countries in the GCC region and broader Middle East that enforce competition law principles.

Scope of the Law

The Law applies to all entities with respect to their economic activities or use of intellectual property rights in the UAE, as well as activity abroad that affects competition within the UAE. Certain economic sectors, however, are exempt from the Law’s application, including telecommunications; pharmaceuticals; postal services (not including express mail); financial services; oil and gas; electricity; water; waste disposal; as well as land, air and rail transport.

In addition, the Law exempts the activities of the UAE’s Federal Government and local Emirate governments. This exemption extends to the activities of state-owned enterprises and Sovereign entities, although the scope of this exemption (such as the level of state control needed to qualify for the exemption) is not clear. The Law also calls for an exemption for small and medium sized enterprises, the scope of which will be defined in implementing regulations that are to be adopted within the next six months.

Targeted Practices

Similar to competition laws in other countries, the Law has three main areas of focus: (1) restrictive agreements, (2) abuse of dominance, and (3) mergers and acquisitions.

The Law prohibits “restrictive agreements,” which are defined as agreements (whether formal or informal) aimed at prohibiting or minimizing competition. Restrictive agreements include those that fix prices; rig bids; divide markets; allocate customers; preclude or impede entry into a business or business activity; refuse purchases from, or supplies to, another firm; limit the free flow of goods or services in a relevant market; limit terms of sale or purchase; or prohibit or limit production, development, distribution, marketing, or other investments. The Law provides for a de minimis exception to the prohibition on restrictive agreements, based on the combined market share of the parties subject to the agreement, although this has yet to be defined.

The Law also prohibits entities (either acting on their own or in concert with others) from abusing a dominant position. The Law calls for dominance to be determined by an entity’s share in a relevant market, although the specific threshold currently is not defined. Actions that can constitute an abuse of dominance include imposing resale price terms; predatory pricing; discriminatory pricing; refusing to deal; compelling others not to deal; restricting supply; conditioning the sale of a good or service on the purchase of another good or service (so-called “tying”); disseminating false information about products or prices; or artificially increasing or decreasing quantities in a market.

Entities that may be subject to the Law’s prohibitions on restrictive agreements or abuse of dominance may apply to the Minister of Economy (the “Minister”) for a decision exempting the agreement or practice from the Law’s application. The Minister may grant an exemption (either conditionally or unconditionally) based on a showing that the agreement or practice would enhance economic development, increase efficiency, develop production or distribution systems, or achieve specific consumer benefits. The Law contemplates the adoption of regulations within the next six months that would define the details of the exemption process.

Concerning mergers and acquisitions, the Law states that parties to “economic concentrations” (i.e., acquisitions or mergers) satisfying certain thresholds must submit applications for approval to the Ministry of Economy. The reporting thresholds are not yet defined, although the Law states that they are to be determined based on the market share of the parties concerned. Once submitted, the Minister has 90 days to issue a decision concerning the application, which can be extended for an additional 45 days. The parties cannot consummate the merger or acquisition during this time. The Minister may approve the application (either unconditionally or subject to conditions) if the merger or acquisition does not adversely affect competition, or if it creates economic benefits that exceed any adverse competitive effects. If the Minister does not issue a decision within the proscribed timeframe, the application will be deemed as accepted.

Enforcement and Potential Penalties

As noted above, much of the Law’s investigative and enforcement responsibilities are entrusted with the Minister and the Ministry of Economy. The Minister shall be assisted in these functions by a Competition Regulation Committee, created under the Law. Decisions by the Minister with respect to the Law may be appealed before a competent court in the UAE within a period of 60 days from the date of notification to the parties.

Each violation of the Law’s prohibitions on restrictive agreements or abuse of dominance is subject to fines of between AED 500,000 and AED 5,000,000 (i.e., approximately US$ 135,000 to US$ 1.35 million). Similar fines apply for firms that consummate reportable mergers or acquisitions without the Minister’s approval. For repeat offenders, fines are automatically doubled. A competent court may also close down an offending business for a period of three to six months, and can order the suspension of conduct pending final judgment. In addition to the fines set out in the Law, an aggrieved party has recourse to the courts for claiming damages arising from violations of the Law.

Implementation

As noted above, the Law is scheduled to come into force in February 2013. There is a six-month grace period after implementation (to August 2013) for firms to ensure that their agreements and practices are in compliance with the Law’s provisions. The Law contemplates that implementing regulations will be adopted during this time.

During this grace period, it is highly advisable for entities with UAE-based operations to review their existing and proposed commercial arrangements, such as distribution or supply agreements, agreements or alliances with actual or potential competitors, and trade association rules and regulations, to ensure compliance with the Law. In addition, businesses that may hold a dominant position within a market in the UAE should ensure that their commercial practices (including pricing and distribution) are in compliance. Finally, entities with assets or business operations in the UAE should consider the possible application of the Law’s merger and acquisition requirements on their future strategic transactions.