Ukraine: Merger Control: Ukrainian Chapter

Last Updated: 13 August 2013

By Dmitry Taranyk and Predrag Krupez1

I INTRODUCTION

The Antimonopoly Committee of Ukraine ('the AMC') is the authority exclusively responsible for dealing with mergers.

Merger approvals are required whenever a concentration is consummated, provided that the parties thereto meet or exceed the relevant financial thresholds. In particular, for the purposes of the Ukrainian merger control rules, a 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 per cent or 50 per cent of votes in the target undertaking's highest management body.

Wherever a transaction gives rise to a concentration as described above, the Ukrainian filing requirement would be triggered if the parties meet all of the following financial thresholds:

a the aggregate worldwide value of assets or sales for all parties to the concentration, including related entities, exceeds E12 million;

b the aggregate worldwide value of assets or sales for each of at least two of the parties to the concentration, including related entities, exceeds E1 million; and

c the value of assets or sales in Ukraine of at least one party to the concentration, including related entities, exceeds E1 million.

In addition to the above financial thresholds, the Ukrainian merger control rules also establish a market share threshold that, if met, also triggers the Ukrainian merger filing requirement. Thus, irrespective of whether the financial thresholds are exceeded by the parties to the concentration, a requirement to seek a merger approval in Ukraine would arise if the market share of any party or the combined market share of all parties to the concentration on any product market in Ukraine exceeds 3 per cent, and the concentration takes place on the same or a neighbouring product market.

It should also be mentioned that the Ukrainian competition laws provide for certain specific exceptions from the notion of a concentration. They are intended to provide clarity and legal certainty, outlining which sort of transactions do not amount to concentrations and therefore do not trigger the Ukrainian filing requirement, which include, in particular, the following:

a establishment of a joint venture undertaking by two or more undertakings that, in turn, results in the coordination of activities 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 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 some other jurisdictions, there is no requirement to make a pre-notification filing in Ukraine provided 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.

No statutes, regulations or guidelines relating to merger control issues were issued during 2012. However, important legal developments are in the pipeline that may have far-reaching consequences regarding when the Ukrainian merger filing requirement is triggered. These are considered in Section V, infra.

II YEAR IN REVIEW

2012 saw the same tendency of market consolidation as 2011. Namely, 944 merger filings were made to the AMC in 2012, which is approximately a 25 per cent increase over 2011 and a 35 per cent increase over 2010. In turn, out of the 944 filings submitted to the AMC in 2012, 194 were returned by the authority for being incomplete and were therefore not reviewed. Further, out of 750 reviewed merger filings, 709 did not contain any threats to Ukrainian economic competition and were approved within a Phase I review, while the remaining 41 required greater scrutiny under a Phase II review. In 2012, the AMC issued four 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.

One particular decision by the AMC may have a significant strategic impact on future concentrations that trigger the Ukrainian filing requirement. In December 2011, the AMC imposed a fine on Microsoft for its failure to seek the AMC's prior approval for a high-profile transaction in the IT industry,2 which was three times higher than the historical maximum fine for the same violation. Subsequently, the AMC seems to be coming to the conclusion that its fines generally need to be much more substantial in order to have a greater deterrent effect, especially for larger corporate groups.

Another important development occurred when the AMC issued a press release on 18 June 2012 in which it stated that it intended to start imposing maximum statutory fines (up to 5 per cent of gross global group-wide annual turnover) for unauthorised mergers starting from 1 July. This caused real controversy within the legal and business communities, and within two days the press release was removed from the AMC's website. Nevertheless, the message contained in the press release clearly demonstrates the change of attitude of the AMC's officials, and a shift in the AMC's modus operandi characterised by a more punitive stance.

These observations apply equally to domestic and foreign-to-foreign transactions, irrespective of the actual presence of the parties in Ukraine. However, following the AMC's recent statement, we cannot exclude the possibility that the regulator will impose a fine that significantly exceeds historical levels, although the imposition of a maximum fine would probably be unlikely since it would be in too stark a contrast to the regulator's historical practice.

III THE MERGER CONTROL REGIME

i Waiting periods and time frames

Similarly 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, 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 and decides whether to grant or deny the approval.

On the other hand, the Phase II review may last up to three months, and this period can be suspended until the AMC receives any subsequently requested information. 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 possibility 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 Accelerated review procedures, tender offers and hostile transactions

The Ukrainian competition laws provide no special procedure for tender offers or hostile transactions. Equally, there is no explicit possibility to accelerate the review procedure. This is primarily because the AMC has historically been suspicious of undertakings attempting to accelerate the merger review process; the prevalent view within the authority is that such intentions represent covert attempts to obscure the merger review process and distract the AMC's attention from some important facts, or even anticompetitive effects, of the merger. In practice, however, a possibility exists to obtain a clearance decision on an expedited basis.

The success of efforts to accelerate the merger review procedure exclusively depends on the strength of the arguments put forward by the undertakings. Successful arguments include the concept of 'failing firm' and the necessity to complete a tender offer to avoid bankruptcy, insolvency, etc. In other words, in order to obtain a clearance decision on an expedited basis, applicants must make the AMC's involvement as easy as possible. In relation to the frequency of expedited reviews, there are periods where approximately half of all the AMC's clearances are obtained on an accelerated basis.

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 its 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. However, there is the possibility to make the most of the similarities between Ukraine and Russia, both in terms of language and the requirements set by the countries' respective competition authorities. For instance, applicants can benefit from certain synergies, as the Federal Antimonopoly Service in Russia and the AMC largely require the same information and documents to be submitted for their review. Moreover, when dealing with manifold cross-border merger reviews, parties can usually benefit from reduced costs if translations into Ukrainian are made from Russian rather than other languages.

In addition, when faced with relevant markets that it has not had a chance to scrutinise and review, the AMC has shown itself to be flexible enough to consider market definitions used by other regulators, particularly the EU Commission. Indeed, the AMC's efforts to increase coordination with other regulators are widely apparent, with the authority organising panels and forums that are consistently visited by senior members of competition authorities worldwide.

Moreover, the AMC cooperates on the basis of bilateral and multilateral agreements with the competition authorities from the Commonwealth of Independent States ('CIS') countries, the US and the EU, as well as some other regulators from central and eastern Europe. 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 the 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 address the target with the necessary requests. However, this would inevitably mean that the parties would need to 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.

V OUTLOOK AND CONCLUSIONS

Important legal developments are currently in the pipeline that may have far-reaching consequences on when the Ukrainian merger filing requirement is triggered. The first development relates to the financial thresholds, which is the triggering factor of the Ukrainian filing requirement. It seems that the Parliament is very likely finally to enact amendments to the financial thresholds that were instigated in 2007. The amendments are intended to acknowledge fully recommendations issued by the International Competition Network, requiring that merger notification thresholds should have an appropriate level of local nexus, such as material sales or assets within the respective jurisdiction.

The AMC has put two sets of amendments before the Parliament for its review. Under the first proposed set of amendments, the combined total value of assets or combined sales (turnover) sufficient to trigger the Ukrainian filing requirement has been increased from E12 million to E50 million. The amendment also envisages that at least two of the parties to the concentration should have assets or sales in Ukraine amounting to a minimum amount of E4 million. The proposal effectively changes the current status quo, where a merger filing may be required if only one party to the concentration generates sufficient sales or owns sufficiently large assets in Ukraine.

Alternatively, the second proposed amendment provides for the AMC's approval in cases where one of the parties has assets or sales in Ukraine exceeding E50 million, and the other party has assets or sales exceeding E50 million worldwide.

Footnotes

1 Dmitry Taranyk is a counsel and Predrag Krupez is an associate at Sayenko Kharenko.

2 Microsoft's acquisition of Skype.

3 Council Regulation (EC) 139/2004 of 20 January 2004.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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