The Antimonopoly Committee of Ukraine (AMC) is the authority exclusively responsible for dealing with mergers.
i Notion of concentration
Merger approvals are required whenever an economic concentration is consummated, provided that the parties thereto exceed the relevant financial thresholds. In particular, for the purposes of the Ukrainian merger control rules, a notifiable concentration is deemed to occur, inter alia, in cases of:
- a mergers between undertakings (i.e., when two or more independent undertakings amalgamate into a new undertaking and cease to exist as separate legal entities);
- b absorption of one undertaking by another (with one retaining its legal identity and the other ceasing to exist as a legal entity);
- c acquisition of control directly or through other persons or entities by one or more undertakings over one or more undertakings, including by the way of:
- • direct or indirect acquisition (gaining control over or acquiring a lease) of assets that amount to a going concern or a structural subdivision of an undertaking;
- • appointment to the post of a chair or deputy chair in the supervisory council, the executive (management) board or any other supervising or executive body of an individual who already occupies one or more such positions in another undertaking; or
- • composition of the supervisory council, the executive (management) board, or any other supervising or executive body of an undertaking, in such a manner so as to enable the same individuals to represent more than 50 per cent of the members of such bodies in two or more undertakings;
- d establishment by two or more undertakings of a joint venture, which in turn is intended to perform on a continuing basis all the functions of an autonomous economic entity; and
- e direct or indirect acquisition of assets or participation interests (including shares) in an undertaking that allows the acquirer to reach or exceed 25 or 50 per cent of votes in the target undertaking’s highest management body.
ii Definition of control
Ukrainian competition laws contain a very broad definition of control that is largely based on the EU example, but in practice is even wider in scope. Control is broadly defined in the Law of Ukraine ‘On Protection of Economic Competition’ as follows:
[…] decisive influence by one or more related legal entities and/or individuals over the business activity of an undertaking or its part, which is exercised directly or through other persons, in particular due to: the right of ownership or use of all assets or a major portion of them; a right that ensures a decisive influence over the formation, voting results or decisions of the managing bodies of the company; conclusion of agreements or contracts which allow the determination of the conditions of business activity, the giving of mandatory instructions or the performing of the functions of a managing body of the company; or the occupation of the position of chairman or deputy chairman in the supervisory council, the executive (management) board, or any other supervising or executive body of an undertaking by a person who already occupies one or more of the listed positions in another business entity. Related undertakings are those legal entities and/or individuals that perform business activity jointly or in coordination, including if they jointly or in coordination exercise influence over the business activity of an undertaking. In particular, spouses, parents, children, brothers and sisters are considered to be related.
The local competition regulation provides a number of criteria based on which the undertaking is deemed to have or be subject to a ‘decisive influence’, including the following:
- a undertakings in which the acquirer or the target undertaking directly or indirectly:
- • owns more than 50 per cent of the authorised capital;
- • holds more than 50 per cent of the votes of the managing bodies;
- • has the right to appoint the director, vice-director, chief accountant or more than 50 per cent of the members of the supervisory council, the managing body (e.g., the board of directors) or the audit committee; or
- • has the right to receive not less than 50 per cent of the net profits;
- b undertakings that have the rights and powers mentioned in (a) above in relation to the acquirer or the target undertaking;
- c undertakings that:
- • are managed by the acquirer or the target undertaking pursuant to a trust agreement, joint cooperation agreement, lease agreement or other agreement; or
- • have the same persons holding the positions of director, vice-director or chief accountant, or not less than 50 per cent of the members of the supervisory council, the managing body or the audit committee; and
- d undertakings that provide financial assistance that is used to achieve the concentration, if this may result in a decisive influence of one undertaking over another.
In addition, related entities of the party concerned may include any affiliates that might have an ability to influence the respective party, or to be so influenced, as follows:
- a undertakings in which the acquirer or the target undertaking and their related entities, as defined above, directly or indirectly:
- • own more than 25 per cent of the authorised capital;
- • hold more than 25 per cent of the votes of the managing bodies;
- • have the right to appoint the director, vice director, chief accountant or more than 25 per cent of the members of the supervisory council, the board (or other management body) or the audit committee; or
- • have the right to receive not less than 25 per cent of the net profits; and
- b undertakings that have the rights and powers mentioned in (a) above with respect to either the target undertaking or the acquirer or any of their respective related entities.
It therefore follows that, under Ukrainian merger control rules and local practice, the ability to exercise de jure or de facto control (including negative control) is the prerequisite for establishing a control relation between undertakings. Namely, if an undertaking can, on the basis of rights, contracts (shareholders’ agreement, etc.), historic pattern of attendance at annual general meetings or other means, obtain any form of control (including the possibility to exercise the right of veto over strategic commercial decisions such as the budget, business plan, appointment or removal of senior management, major investments) over undertakings, it necessarily follows that a control relationship between such undertakings is established.
Note that the list above is not exhaustive, leaving the AMC with full discretion to find other cases where a control relationship may arise.
iii Financial thresholds
According to newly introduced merger filing thresholds, which were long awaited by the business communities within and outside Ukraine and that entered into effect on 18 May 2016, the merger filing requirement would be triggered, if at least one of the two alternative tests below is met.
Test 1: At least two parties are active in Ukraine:
- a the combined worldwide turnover or value of assets of all parties exceeds €30 million; and
- b the turnover or value of assets in Ukraine of each of at least two parties exceeds €4 million.
Test 2: Target or founder has significant operations in Ukraine:
- a the target in an acquisition, seller of assets or one of the joint venture founders have a turnover or value of assets in Ukraine exceeding €8 million; and
- b the turnover of at least one other party exceeds €150 million worldwide.
All thresholds are calculated for the previous financial year on a group-wide basis, which means that the turnover and value of assets for all undertakings connected by a control relationship must be added together, including for the seller that controls the target.
The new merger filing thresholds represent a significant improvement on the former regime, which was heavily criticised for the lack of nexus: it was sufficient for one of the parties to have a turnover or assets in Ukraine exceeding €1 million in order to trigger the filing requirement. The market share test of more than 35 per cent of the relevant market was abolished completely by the newly introduced amendments.
iv Block exemptions
The Ukrainian competition laws provide for certain specific exceptions for notification of a concentration. They are intended to provide clarity and legal certainty, outlining which sorts of transactions do not amount to a concentration. The following, in particular, trigger the Ukrainian filing requirement:
- a establishment of a joint venture undertaking by two or more undertakings that, in turn, results in the coordination of competition behaviour among the founders or between the founders and the new undertaking (such actions are instead treated as concerted practices and may also require a separate approval from the AMC);
- b acquisition of shares or other equity interest in an undertaking by a person or entity whose main activities are financial or securities transactions, for the purpose of reselling such shares or other equity interest within one year, provided that the acquirer does not participate in the undertaking’s managing bodies;
- c actions otherwise constituting a concentration that occur between undertakings connected by control relations, provided that the latter were initially established in compliance with the Ukrainian merger control rules; and
- d acquisition of control over an undertaking by an insolvency administrator or a state official.
The Ukrainian merger control rules also provide for a pre-notification procedure. Unlike in some jurisdictions, there is no requirement to make a pre-notification filing in Ukraine provided that certain conditions are met. Instead, the procedure is generally used by the parties to ascertain whether a particular transaction requires a merger filing in Ukraine. In other words, the parties can seek a comfort letter (in Ukraine, ‘preliminary conclusions’) from the AMC to confirm whether a merger filing is required under particular circumstances.
II YEAR IN REVIEW2
The level of market consolidation in 2015 showed a slight decrease as compared with 2014. In 2015, 774 merger filings were made to the AMC, which is a 1 per cent decrease over 2014. In turn, out of the 774 filings submitted to the AMC in 2015, 116 were returned by the authority for being incomplete, and were therefore not reviewed. On a positive note, there was a decline in the number of filings returned in 2015 (116 in 2015, compared with 183 in 2014). Further, out of 658 reviewed merger filings, 568 did not contain any threats to Ukrainian economic competition and were approved within a Phase I review, while the remaining 72 required greater scrutiny under a Phase II review. The AMC conducted more investigations for clearing transactions in 2015 than it had in 2014 (only 25 investigations).
In 2015, the AMC issued several merger approvals that contained behavioural remedies concerning prices, sales tariffs, conditions of sale, the methodology behind price setting as well as conditions of market entry of other undertakings.
Following the anticipated increase of financial thresholds discussed further in Section V, infra, we expect the number of Phase II reviews to grow substantially, as the AMC will look into concentrations having real impact on Ukraine more thoroughly. Deals posing no threat to competition will be left outside the regulator’s oversight or fall under a simplified review procedure.
A trend observed in 2014 of a majority of applicants being foreign companies continued in 2015. In fact, due to the political situation in Ukraine, the number of domestic deals requiring clearance has decreased significantly; out of the 774 applications received by the AMC, 647 were filed by foreign applicants. The number of foreign applicants in 2015 increased by approximately 2.8 per cent compared with 2014. This trend can be linked to the AMC’s active monitoring of M&A transactions, as reported by mass media, and the numerous times when multinational companies have been contacted by the regulator itself with a reminder about the merger filing requirement immediately after an M&A transaction has been announced. Ultimately, there were a number of cases when such companies were prosecuted for failure to seek merger clearance.
During 2015, the AMC also focused its efforts on discovering past violations consisting of completing a qualifying concentration without the prior approval of the AMC. As a result, the AMC discovered 32 cases of such violations and prosecuted the violators by imposing fines. Following its review of these past concentrations, the AMC has granted its approvals post factum.
The declarations of the AMC made in 2012 regarding a significant increase in the level of fines for unauthorised mergers to a statutory maximum, (i.e., up to 5 per cent of gross global group-wide annual turnover) did not come to fruition. Similar to 2014, in 2015 the AMC imposed relatively low fines for this type of violation. The average level of fine for failure to notify a qualifying merger (also explained in part by the substantial devaluation of the national currency during the past year) amounted to several thousand euros.
These observations apply equally to domestic and foreign-to-foreign transactions, irrespective of the actual presence of the parties in Ukraine.
III THE MERGER CONTROL REGIME
i Waiting periods and time frames
Similar to the European Merger Control Regulation,3 the merger review process is split into two stages: Phase I and Phase II reviews. Each denotes a different time frame, and a different level of scrutiny of a particular concentration and the parties’ activities in Ukraine.
The Phase I review is supposed to be completed by the AMC within 45 days from the date of submission. During the first 15 days, the AMC will conduct an initial review (‘formal examination’), and it may return the filing without considering it if it determines that it is incomplete. During the subsequent 30-day period, the AMC analyses the submitted information per se and decides whether to grant or deny the approval.
On the other hand, the Phase II review may last up to 180 calendar days starting from the date of submission of notification. The authority generally tends to open this second review stage if it discovers any grounds based on which the concentration can be prohibited or needs to engage in complicated research (i.e., if the AMC comes to the conclusion that the relevant market is an important one, or that the concentration involves parties with very high market shares). Thus, the likelihood of a Phase II review largely depends on how wide the relevant product market is, as well as the relevant market shares of the parties to the concentration. If the parties’ combined market share is close to 35 per cent of the relevant product market, denoting dominance (monopoly), it will be highly likely that the AMC will initiate a Phase II review. In addition, if the authority comes to the view that the relevant concentration may lead to the creation or strengthening of a dominant (monopoly) position, or to the significant restriction of competition on any market, or a part thereof, in Ukraine, it will not issue an approving decision.
ii Expedited review procedure
According to newly introduced amendments to the competition laws, the AMC will review a merger filing and grant the approval for concentration within 25 calendar days (reduced from the usual 45 days) in any of the following cases:
- a only one party is active in Ukraine; or
- b the combined market share of the parties does not exceed 15 per cent in the same market or 20 per cent in a vertically related market.
However, the revised AMC Regulation ‘On the Rules for Submission of Applications to the Antimonopoly Committee of Ukraine for the Prior Approval of a Concentration of Undertakings’ stipulating the procedure under which the AMC would review transactions on an expedited basis, is still being approved by the Ministry of Justice of Ukraine – it has not yet entered into effect. Despite the fact that the procedure is still being approved, in recent practice, the AMC has been much more willing to satisfy pleas from applicants requesting that the regulator expedite the review process.
iii Third-party access to files and rights to challenge mergers
The Ukrainian competition laws do not allow third parties to, on their own initiative, become involved in the merger review process. However, this does not prevent third parties from filing a complaint or providing information for the AMC to take into account when making a decision on whether to approve a concentration. Indeed, the AMC itself may, during the Phase II review, contact any third parties, including customers and competitors, with the aim of collecting any information it requires to conduct the review.
iv Appeals and judicial review
Parties to concentrations (including third parties, if they can prove that their rights have been violated) can appeal against AMC decisions to the appropriate economic and administrative courts within a two-month period after the respective decision has been issued.
AMC decisions can also be appealed by the parties to the Cabinet of Ministers within a 30-day period of receiving the authority’s decision. If an AMC decision is appealed to the Cabinet of Ministers, the latter creates a special commission, which includes a number of independent experts from different industries and authorities as well as the AMC’s senior officers. The commission analyses the positive and negative effects of implementing the concentration using the same substantive test employed by the AMC. The Cabinet of Ministers then prohibits or approves the reviewed concentration.
v Effect of regulatory review
The Ukrainian competition laws provide for a possibility for a merger review being conducted by another body. However, such review is not concurrent with the review carried out by the AMC; as mentioned above, parties to the concentration can address the merger to the Cabinet of Ministers within 30 days of the AMC’s blocking decision, and the Cabinet of Ministers can, in turn, approve the merger. Nevertheless, this procedure is very rarely resorted to, since the AMC very rarely blocks concentrations (i.e., no more than once a year).
Parties must refrain from consummating the concentration until the AMC’s approval is obtained.
IV OTHER STRATEGIC CONSIDERATIONS
i Coordination with other jurisdictions
The Ukrainian merger review procedure is very specific, making it particularly difficult to coordinate with other jurisdictions. At the same time, the Ukrainian lawmakers have already introduced the respective amendments to the antitrust laws, in order to take on the EU competition practices.
When faced with relevant markets that it has not had a chance to scrutinise and review previously, the AMC has shown itself to be flexible enough to consider market definitions used by other regulators, particularly the European Commission. Indeed, the AMC’s efforts to increase coordination with other European regulators are widely apparent, with the authority organising panels and fora that are consistently visited by senior members of competition authorities worldwide.
In addition, cooperation with the competition authorities of the US and the EU, as well as some other regulators from Central and Eastern Europe and authorities from Baltic states, is flourishing. The AMC has also established good rapport with international organisations such as the International Competition Network, the United Nations Conference on Trade and Development and the CIS International Council for Anti-monopoly Policy.
ii Special situations
As mentioned above, when one of the parties to a concentration is under financial distress, facing insolvency or bankruptcy, or is in the middle of tender offer proceedings, the AMC has usually been lenient in its modus operandi, allowing for an expedited review.
In cases of hostile takeovers, where the acquiring party cannot obtain the target’s documents or the necessary information for the Ukrainian merger filing, the AMC can rely on a special procedure and impose upon the target the necessary requests. However, this process requires that the parties allocate significantly more time for the Ukrainian merger review process in order to account for potential delays in information and document gathering.
The Ukrainian merger control rules do not provide a special procedure to deal with cases where minority ownership interests are involved.
iii Calculation of fines
Following numerous discussions with the public and in line with previously expressed commitment to increase the transparency and predictability of fines, on 15 September 2015, the AMC approved and published the Recommendations on Calculation of Fines for Violation of Ukrainian Competition Law (the Recommendations) on its official website. The Recommendations highlight the methodology used by the AMC to calculate fines and introduce a one-year amnesty period for merger control violations.
Ukrainian law vests the AMC with broad discretionary powers to determine the amount of the fine up to a very high cap expressed as a percentage of the worldwide turnover of the undertaking; for example, 10 per cent for cartels or 5 per cent for merger control violations. The Recommendations describe a set of principles, which the AMC will follow to determine the exact amount of the fine for various violations of competition laws, including cartels, abuse of dominance, failure to seek merger clearance, failure to respond to a request for information or submission of inaccurate information, etc. In simple terms, the AMC will calculate a base fine as a percentage of the violators’ sales on the relevant market, and, furthermore, the base fine would be subject to adjustment, depending on aggravating and mitigating circumstances.
iv Amnesty procedure
In addition to the procedure for the calculation of fines, the AMC introduced a quasi-amnesty procedure for merger control violations that became available for one year, starting from 16 September 2015. When a company discovers that it failed to seek a merger clearance approval from the AMC in its past M&A activity prior to 15 September 2015, such company may apply to the AMC to obtain the approval post factum. Pursuant to the Recommendations, the AMC has undertaken to shorten the list of documents and information necessary for obtaining the approval, and to impose the following symbolic fines:
- a for violations notified until 15 March 2016 the fine was approximately €730; and
- b for violations notified until 15 September 2016 the fine will be approximately €3,700.
iv Publication of the decisions
According to newly introduced amendments to the competition legislation, which took place on 12 November 2015, the AMC is required to publish the following on its official website, within 10 working days of the adoption of such decisions or orders:
- a information on initiation of the concentration or concerted practices investigations (name and legal nature of the parties to concentration or concerted practices, type of concentration or concerted practices);
- b decisions as the result of review of applications, cases on concentration or concerted practices (except for information with limited access); and
- c decisions as the result of review of cases on violation of competition legislation (except for information with limited access).
V OUTLOOK and CONCLUSIONS
Due to recent political developments in Ukraine and the introduction of amendments to the Ukrainian competition legislation, 2016 and beyond are highly likely to see changes to the AMC that aim to transform it into a modern European competition agency. In particular, lawmakers have already introduced a number of legislative changes that will reshape competition policy in Ukraine and will put some restraints on the regulator.
The most expected change in the Ukrainian competition laws, namely, increase of financial thresholds in merger control, has already been enacted. This provides a great improvement of the nexus requirement, eliminating the need to notify numerous global transactions that do not raise any competition concerns in Ukraine.
Moreover, starting from 2015, the regulator must publish all of its decisions in merger clearances, including those made within the context of an in-depth review.
Finally, a more transparent procedure for determining the amount of fines for violations of Ukrainian competition laws, including failure to notify a qualifying concentration in Ukraine, has already been established.
Additionally, an amended Regulation on Concentration determining the scope of information and documents required to be submitted for merger clearance filings, is expected to be introduced in the second half of 2016.
Another recent initiative of lawmakers is to develop new procedural regulations, including those under which the AMC would define the relevant and affected markets, which are similar to those approaches that are applied by the European Commission.
All of these changes are part of the Ukrainian commitments under the EU-Ukraine Association Agreement, and have a strong chance of being implemented in the near future, thereby finally fulfilling the expectations of the business community.