Recent Developments in the Ukrainian Merger Control

01 12 2007

The fundamentals of merger control regulations in Ukraine are set forth in Article 42 of the Constitution of Ukraine that provides for protection of the fair competition by the state and prohibits abuse of monopolistic standing, and Chapter 3 of the Commercial Code of Ukraine. The key legislative act that governs the competition on the whole and merger control in particular is the Law of Ukraine No. 22-10 'On Protection of Economic Competition,' dated January 11, 2001 (the 'Economic Competition Act'). In addition, the said issues are covered by several regulations of the Antimonopoly Committee of Ukraine (the 'ACU'), including Regulation No. 33-p 'On the Procedure for Document Filing to ACU for Prior Approval of Concentration of Business Entities,' dated February 19, 2002, (the 'Concentration Regulation'). Adopted in 2002, the said documents remained almost unchanged until May 2005, when significant amendments aimed at removing some existing legal uncertainties came into affect.

Despite the precise criteria set forth in the Economic Competition Act, transaction parties do find difficulty in its application, as they should, themselves or through local legal counsel, evaluate their positions on the market, and decide whether or not to apply to ACU for prior approval and which scope of information to provide to the ACU on the parties' business activities. The Economic Competition Act provides for the possibility to receive preliminary rulings from the ACU as to whether the prior approval is required, and whether it would grant its approval in respect of the contemplated transaction. However, the preliminary ruling procedure takes up to one month and legally does not relieve the parties from the need to receive the prior approval, when required, that takes up to additional 45 days. In this context and in order to facilitate cooperation between the markets players and ACU officers, the Concentration Regulation has been amended to grant the transaction parties the right to communicate with ACU officers within 15 days after filing/registration of the application for prior approval with the ACU. Respective amendments are designed to prevent application from being rejected on some technical or similar formalistic basis and provide the parties with the possibility to agree with the ACU on the scope of the necessary information. However, the said communication and consultations, unlike in the EU, are only possible upon actual filing of the application. Therefore, consultations with the ACU officers in respect of specific transactions are practically initiated only after the application is registered, and they are generally limited to the issues related to the substance of the application being already filed.

Among other amendments having material effect it is worth mentioning introduction of an additional criterion (other than turnover/assets thresholds of merger participants) triggering the obligation of the transaction parties to obtain a prior approval from the ACU. More specifically, the prior approval is mandatory where either participant, taking into account its control relations, has a market share of over 35%, or a combined market share of the transaction participants exceeds 35% and the transaction takes place on the same market or on adjacent markets. The said criterion was adopted following a lengthy discussion. It is primarily designed to prevent monopolization of regional markets where the parties, having comparatively insignificant turnover/assets, have considerable regional market shares. However, the ambiguity existing in the Ukrainian competition law with respect to definition of merger parties, i.e. participants of concentration, and the relevant market, often forces diligent parties to apply for merger clearance when there is a threat of a purely technical meeting of the said threshold even if no competition concerns are reasonably expected.

Under the Economic Competition Act, entire groups of participants of concentration include all the companies/individuals and, according to the recent amendments, family members of respective individuals as well, all of whom are linked by relations of control with the target or the purchaser. Unlike in the most national competition laws, the entire target group, based on the relevant definitions in the Economic Competition Act, usually includes all the companies affiliated with the seller, i.e. the whole seller group. Thus, for the purpose of calculating thresholds, the aggregate value of turnover/assets and market share of the entire target/seller group shall be considered. In view of a significant number of the EUR multimillion transactions with a certain (though minimal) impact on the Ukrainian domestic market and the fact that foreign-to-foreign mergers are clearly caught under the Ukrainian merger clearance procedure, the said existing provision is seen by a majority of practitioners as obsolete and unjustifiable. Having said that, it should be noted that despite the broad definition of participants of concentration as envisaged by the applicable legislation, the ACU, considering the international practice, has recently adopted the position allowing the parties to limit the definition of a target group to companies subject to direct/indirect acquisition. Such limitation is only applicable if the seller loses any control over the target as of the date of closing, and the parties provide sufficient information and documents confirming termination of such control. Moreover, according to the recent statements by the ACU officers, if the only companies active in Ukrainian market are the those companies linked with the target by relations of control, where such relations would be terminated as of the date of closing, the turnover generated by the said companies in Ukraine shall not be considered and, thus, the Ukrainian merger clearance shall not be required for such transactions.

Furthermore, the adopted amendments entitle the ACU to publish certain information on the transaction subject to merger clearance and on the parties concerned. Before the respective amendments were adopted, the said right of ACU was limited to the sphere of prior approvals for concerted practices only. Prior to that, ACU was authorized to publish the information on the ongoing merger clearance only with the parties' consent, or if the information was already publicly available. Currently providing the ACU with the said right is seen as a safeguard for the potentially adversely affected parties. In other words, becoming aware of the respective information, any third parties which may be potentially affected by the contemplated transaction are able to file with the ACU any objections and information they possess for the latter to have comprehensive and independent data to appropriately evaluate the impact of the transaction on the relevant markets and competition levels when adopting the final decision. Considering that the transaction parties are usually very sensitive in respect of disclosure of certain key commercial information, they may indicate the respective information as confidential and the latter will not be published or otherwise disclosed. In particular, the information to be furnished by the parties to the ACU may be identified as 'information with limited access' that results in the ACU's obligation to keep it strictly confidential. Moreover, as a matter of practice, if the merger clearance application is labeled as 'information with limited access', the ACU officers, before publishing any information in respect of the contemplated transaction, usually discuss the scope of disclosure as well as the very possibility of such publication with the respective parties.

Another important amendment worth noting is the provision granting the ACU an express authorization to file a suit to the competent Ukrainian courts with a view to recognize agreements or any other documents underlying the transaction null and void if the latter will or may result in monopolization of respective markets, abuse of monopolistic or dominant position, and restriction of competition.

The most recent amendments to the Economic Competition Act may be considered as less significant in respect of their expected effect on the regulatory framework, since they mainly concern expert rights and expert examination procedure in competition cases.

Although the Ukrainian law on merger control allows for a number of ambiguities and uncertainties, it represents a significant and successful institutional innovation. Despite certain gaps partly mentioned above, the Ukrainian legislation on merger control is capable of duly governing the relations resulting from the parties' intention to expand their business. In 2006, the number of merger clearance applications received by ACU and, respectively, the amount of the issued prior approvals grew by 100% against the same figures of the previous year. Such statistics clearly evidences the development of competition legislation, particularly - merger clearance regulations of Ukraine as well as their sustained application in practice. Furthermore, in case of obvious gaps or ambiguity in the applicable Ukrainian legislation, both the transaction parties and ACU officers, acting by analogy, do increasingly apply the relevant provisions of the EU competition law. In view of this trend, the progressive development of the Ukrainian competition legislation appears to keep in line with the growing sophistication of the domestic and international competition levels.

Competition & Antitrust Review 2007, Euromoney Yearbooks
Authors: Denis Lysenko, Mariya Nizhnik