Ukraine: Strong Commitment

On the path of reforms Ukrainian competition law is that very area where progress is recognized by professional circles and international community.

The European choice is a so-called anchor with strong commitment to pursue reform of competition law, enhancing institutional capacity, improving transparency and the regulatory approach.

What are the implications of recent changes in competition law, enforcement results and subsequent logical issues that should be addressed in further reforms? We decided to ask Vladimir Sayenko and Maksym Nazarenko, key figures of the competition team at Sayenko Kharenko.

What are the main developments in Ukrainian competition law of late?

Maksym Nazarenko: After more than 15 years of relative stability, Ukrainian competition laws were amended in 2015-2017 to address the most vital concerns of the business community, including those reflected in the EU-Ukraine Association Agreement. In November 2015, the Ukrainian Parliament improved public access to the decisions of the Antimonopoly Committee of Ukraine (the AMCU), requiring the full text of its decisions to be published except for confidential information regarding the parties.

In May 2016, the long-waited amendments to the Law of Ukraine On Protection of Economic Competition came into force, having increased the financial thresholds and introduced a number of other important improvements to the merger control regime. These included a fast track review option and other procedural changes, e.g. limitation of information and documents required, disclosure of beneficiary owners, filing fee increase, etc.

Many improvements to secondary legislation were also initiated and brought to life by the new leadership of the AMCU.

In August 2016, the AMCU heavily revised its procedural regulations governing merger controls, eliminating numerous unnecessary formalistic requirements and emphasizing economic analysis in complex cases.

At the end of 2016, the AMCU approved the Guidelines Regarding Assessment of Horizontal Concentrations. This was done in order to increase transparency and predictability in the initial analysis of horizontal mergers by the Ukrainian competition authority.

How would you assess the recent changes?

Vladimir Sayenko: These recent changes demonstrate a strong commitment on the part of the Ukrainian competition authority to become more business-oriented in its policy and to harmonize Ukrainian competition laws with European standards. The improvements in legislation and, even more importantly, in the practices of the competition authority, were praised by the international expert and business community. In May 2017, the AMCU's activities in competition advocacy received a special award from the World Bank at the ICN annual conference.

Personally, I would like to emphasize the importance of the Guidelines for Calculation of Fines for Violation of Ukrainian Competition Law introduced in September 2015. Even though these guidelines are not a binding legal act, they serve as an important element in increasing the transparency and predictability of the AMCU's decision-making process when determining the amount of the fine for most violations of competition law. They also introduced an amnesty programme for past merger control violations, which lasted for a year and a half and enabled many businesses, both multinational and domestic, to clean up their corporate history. The guidelines were amended several times to reflect the problems that the AMCU faced in its operations, which shows that the AMCU treats even non-binding guidelines as an important instrument of competition policy.

We view the recent changes to competition law as an important step towards improving competition policy in the country, reflecting the transformation of the AMCU into a modern and effective competition agency. However, we believe that even in the merger control sphere where reforms were most successful, there are numerous areas for further improvement.

Did the increase of financial thresholds result in a fall in deals to be cleared and shrinkage of business for law firms?

M. N.: Indeed, the amendments to competition laws significantly decreased the number of transactions requiring prior approval of the AMCU. As expected, the decrease in financial thresholds for merger control reduced the number of merger clearance decisions by about one third (441 clearances in 2016 as compared to 658 in 2015), primarily in those cases where a concentration had no nexus to Ukraine or negligible impact on competition in Ukraine.

However, the largest foreign-to-foreign transactions are still often caught by the new thresholds. Moreover, merger filings for such complex transactions became even more complicated. Formal "tick the box" procedures were replaced by the need to provide proper economic justification of the transaction and analysis of its expected outcome, which means that lawyers actually have more work to do on such transactions than previously.

Finally, the reduction in merger control work was compensated by the active position of the AMCU in investigating a number of markets. As a result, we saw almost no reduction in the workload for our competition team. In fact, we had to strengthen our team by hiring senior experts who could contribute deep legal and economic analysis, and to have additional resources in order to stay ahead of the market, leading and developing the trends in managing competition law risks for our clients.

What further changes can we expect in competition law?

V. S.: As I mentioned earlier, even in the merger control area where a lot of progress was made, many problems remain. The new thresholds are far from perfect and leave numerous loopholes in place. The fast track option does not always work in the intended manner. Some procedures are missing in protecting confidential information of clients in sensitive M&A transactions. It would be nice to have guidelines in place for assessment of vertical concentrations, similar to those that exist for horizontal concentrations.

Outside of the merger control area, there are also plenty of problems that need to be resolved. For example, the entire approach to control over concerted practices appears to be outdated. Changes are also required to specify clearly and protect the procedural rights of parties under investigation by the AMCU, and to introduce limits to the duration of investigations conducted by the AMCU. The possibility to settle the AMCU claims, which has always existed in practice, needs a proper legal basis and procedures. A large set of issues arise out of the weaknesses present in the judicial system, which leads to situations when courts fail to enforce competition law and create impediments for the AMCU's activities on the one hand, while refusing, on the other hand, to perform proper judicial review of substantive issues in the AMCU's decisions.

Most importantly, we have the impression that most amendments to competition laws resemble the patching up of holes, while the drafting of legislation requires a more systemic approach that starts with development of competition policy. This task goes far beyond the remit of the AMCU and requires the joint efforts of experts from various government and public institutions in order to balance public and private interests. I am glad to see that AMCU officials also regularly bring up the issue of competition policy and, in practice, the AMCU tries to be reasonable in applying the law, often taking into account best international practices that have not yet been reflected in Ukrainian legislation.

What is happening with enforcement of competition laws these days? Which sectors are likely to be investigated by the AMCU?

V. S.: The current leadership of the AMCU maintains the same pace that the Ukrainian competition authority always had in enforcing competition legislation. According to the AMCU annual report for 2016, last year the AMCU identified 3,072 potential violations of competition laws. In 56% of cases, it imposed fines. Other cases were closed after the AMCU issued its recommendations. About 43% of these potential violations were the abuse of dominance, 26% — anticompetitive practices of state authorities, 9% — anticompetitive concerted practices of undertakings, and 9% — unfair competition violations. To investigate these alleged violations, the AMCU conducted 118 on-sight inspections, about 70% of which were inspections of state bodies and enterprises. In general, the AMCU follows the policy of the Ukrainian Government to reduce administrative pressure on businesses in Ukraine. However, certain undertakings will strongly contradict this statement.

The largest ever fine was imposed by the AMCU in January 2016 on Gazprom of almost UAH 86 billion (more than EUR 3 billion) for abuse of its dominant position on the Ukrainian gas transit market. Gazprom lost all its appeals recently. The State Enforcement Service is now trying to collect the fine (double the original amount).

The second largest fine was imposed by the AMCU at the end of 2016 on TEDIS Ukraine (formerly known as Megapolis Ukraine) of UAH 431 million (about EUR 16 million) for abuse of its dominant position on the cigarette distribution market. For a number of years, TEDIS Ukraine acted as the only distributor of tobacco products for the four largest multinational cigarette producers in the country. The fine has already been partially paid. The AMCU continues its investigation against some tobacco manufacturers.

M. N.: The motor fuel market (retail gas stations) traditionally receives a great deal of attention from the AMCU. The most common violation on this market is parallel behaviour of fuel station operators by maintaining prices for fuel at the same level without objectively justified reasons. The amount of fines imposed on the defendants in this case reached UAH 204 million (over EUR 7 million) in total.

Another traditionally sensitive market for the AMCU is the pharmaceutical products market. Investigations on this market last for many years. In 2016, the AMCU imposed fines on two major international pharmaceutical producers together with their Ukrainian wholesale distributors, accusing them of anticompetitive concerted practices. The respective actions concerned restrictions on parallel import, obligation of distributors to report certain data to the producer, non-transparent retroactive rebates, and other benefits that allegedly allowed the parties to maintain high prices including in government procurement tenders. Fines in one case amounted to UAH 3.5 million (less than EUR 150,000) in total, while in the other case they reached UAH 1.6 million (about EUR 60,000) in total. Currently, the AMCU continues to investigate other international pharmaceuticals manufacturers and their distributors.

For 2017, the AMCU views the following markets as a priority: outdoor advertisement; cash management and payment services; tobacco products; power sector; processing services; mobile services; gasoline and diesel fuel; pharmacy; social products; petrol for aviation; bank guarantees market; products carrying the "ECO" symbol; and waste management services.

How often do the defendants in the AMCU's investigations challenge AMCU decisions? How successful are these challenges?

V. S.: Many undertakings penalized by the AMCU try to challenge the AMCU's decisions in court. However, the courts are still reluctant to uphold appeals against the AMCU based on substance, being more willing to do so when there are certain procedural grounds for challenge. At the same time, the AMCU has become much more experienced in avoiding procedural failures. It is generally effective at securing its decisions in court.

In 2016, 178 of 1,117 AMCU decisions on the violation of competition laws were subject to appeal in the courts. Only 26 of 178 AMCU decisions appealed by defendants were considered by courts as partially or fully invalid. Taking into account these statistics, parties often prefer to find common ground with the AMCU by negotiating a settlement, which may include a reduction of prices or other change in market behaviour in exchange for a reduced fine.

How do clients react to the AMCU's prosecution practices?

V. S.: To avoid prosecution by the AMCU, international and local companies have to carefully monitor their compliance efforts and analyse their activities that present potential risks from the competition law perspective. The importance of an individually crafted compliance program cannot be underestimated. The most important step is to adapt the best international practices in this area to the peculiarities of the local market. The typical antitrust compliance risks in Ukraine tend to be very different from those that multinationals face in other European jurisdictions. You really have to think like an official of the competition authority in order to predict what the next AMCU investigation will be targeting and how to mitigate risks. For example, if you see that your competitor raises prices, it would be wise to avoid the temptation to increase your prices for competing products before you analyse whether such action could be viewed as parallel behaviour that qualifies as concerted practices.

How could competition compliance help private companies to avoid possible investigations?

M. N.: Antitrust compliance is a system of organizational and management measures and procedures enabling the undertaking to detect, minimize, and prevent potential antitrust violations that may have not only financial but also reputational consequences. Long ago, multinational corporations that attract particular attention from the competition authorities realized the importance of effective risk management, including the management of risks related to the violation of antitrust laws. As a result, they implement corporate antitrust compliance programs that provide, inter alia, general international competition compliance policy, sales and distribution (marketing) policy, antitrust training programs, complex due diligence by independent advisors, sections for violation of internal antitrust rules, etc.

In general, the goal of basic antitrust compliance programs is not only to educate personnel and thereby reduce the number of antitrust violations, but also to ensure a rapid procedure for reporting violations within the company in order to mitigate their consequences. It relates to the rapidly expanding practice of many countries to adopt leniency programs whereby undertakings that report on a cartel in which they participated might receive full or partial immunity from fines as they contribute to exposing violations and the prosecution of other cartel participants.

What is the role of Government Relations (GR) in handling investigations by the competition authority?

M. N.: GR is a specific area of services aimed at the maintenance of dialogue between business and authorities with the task of keeping the authorities informed on industry-specific issues that the business faces. This channel of communications with government bodies is, of course, bilateral. It allows for the timely and proper understanding of the authority's position on any specific market or behavioral issue.

When acting in a transparent and Western-style manner, the GR counsel could be of utmost help to the client in handling investigations by the AMCU. In particular, the counsel could collect, analyze, and properly present all relevant information in support of the defendant's position to AMCU officials so as to draw their attention to the vision of the business while participating in conferences and events or via public communications, etc.

Originally published by The Ukrainian Journal of Business Law.

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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