Merger control is beneficial to both consumers and competition in that potentially problematic anticompetitive transactions are identified early on, before implementation. Consumers benefit from the filtering out of those transactions with the potential to raise prices through market dominance, while the market is protected from some transactions that could substantially restrict competition. Merger control is aimed at the prevention or remediation of transactions that are likely to have an anticompetitive outcome.
At the same time, burdensome filing requirements, uncertainty regarding the legality of the contemplated transaction, vast discretion vested with competition authorities, relatively high filing costs and other similar factors affect market participants' decisions to skip mandatory merger clearance procedures regardless of the potentially negative consequences.
The fundamentals of the merger control system in the Ukraine are set forth in Article 42 of the Constitution of the Ukraine, which provides for the protection of fair competition by the state and prohibits the abuse of monopolistic position, as well as Chapter 3 of the Commercial Code of the Ukraine. The key legislative act that governs competition on the whole and merger control in particular is Law 22-10 On the Protection of Economic Competition, dated January 11 2001 (Economic Competition Act). In addition, these issues are covered by several regulations of the Antimonopoly Committee of the Ukraine (AMC), including Regulation 33-p On the Procedure for Document Filing to the AMC for Prior Approval of Concentration of Business Entities, dated February 19 2002 (Concentration Regulation).
Unlike many jurisdictions where the obligation is to notify rather than to apply for approval, the Ukraine requires market participants to refrain from any actions that are aimed at closing the transaction until they have obtained AMC approval (where required). The closing of the contemplated transaction is prohibited until approved by the AMC.
Effect without effect
Ukrainian merger control rules are applicable to any transactions that affect or could affect economic competition in the Ukraine. At the same time, there is no specific legal doctrine or rule of law demonstrating how the effect test will be applied by the national competition authorities. In fact, according to existing practice and the recent approach of AMC officials, if the parties technically meet the thresholds envisaged by law, the AMC's prior approval is required even in the case of a pure foreign-to-foreign transaction with minimal effect on Ukrainian competition. As a result, the Ukrainian merger control rules often capture transactions with no reasonable likelihood of an anticompetitive effect on Ukrainian markets: for example, a transaction with a relatively small revenue generated in the Ukraine by the acquirer group only.
Triggering thresholds
The Ukrainian merger control system employs thresholds based on assets and/or revenue (turnover), as well as market share thresholds. Ukrainian merger clearance obligations are triggered if all of the following conditions are met:
- the aggregate value of assets, or aggregate volume of sales over the last financial year, including those abroad, by participants of the transaction (the buyer group and the target group), exceeding an amount equivalent to €12 million ($17 million) under the exchange rate of the NBU effective on the last day of such financial year;
- the aggregate value of assets or aggregate volume of sales, including those abroad, by at least two participants of the transaction, exceeding an amount equivalent to €1 million; and
- the aggregate value of assets, or aggregate volume of sales, in the Ukraine by at least one participant of the transaction, exceeding an amount equivalent to €1 million.
Following a lengthy discussion, the Economic Competition Act was supplemented in 2005 with a market share test: that is, the prior approval of the AMC is mandatory where either participant has a market share over 35%, or the combined market share of the participants in the transaction exceeds 35% and the transaction takes place in the same market, or in adjacent markets.
These assets/turnover thresholds have not changed since the adoption of the Economic Competition Act, and remain among the lowest set forth in any national competition laws, including those of CIS states. Given that a significant number of the multi-million euro transactions have a certain (though minimal) impact on the Ukrainian national market, and that foreign-to-foreign transactions are clearly caught under the Ukrainian merger clearance procedure, the existing thresholds are seen by the majority of practitioners as being understated and obsolete. The need to increase the existing thresholds has also been confirmed by AMC officials. Based on draft legislation under consideration by the AMC, it is intended to increase the existing assets/turnover thresholds by a factor of four. Moreover, under the respective draft, transactions where the said thresholds are met by only one participant are not affected by Ukrainian merger control. However, it may take quite a long time for the respective amendments to be adopted.
It should be noted that the market share test generates significant uncertainty and sometimes imposes unnecessary transaction costs on the transaction parties, requiring intensive investigations as to the market concerned and its real size. Moreover, the rules provide for a certain allowance in defining the particular market segment and geographical market in which the market participants are active. Under certain conditions there is the possibility of re-qualifying the market position (to increase or decrease the market share) depending on the market area and the market participants (manufacturers, distributors, sellers only/pure Ukrainian, global or foreign, for example) acting thereon.
The entire group of transaction parties includes all the companies/individuals (and, according to 2005 amendments, family members of respective individuals as well), all of whom are linked by relations of control with the target or the acquirer. Unlike 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: that is, the whole seller group. Thus, for the purpose of calculating thresholds, the aggregate value of the turnover/assets and market share of the entire target/seller group is considered. Foreign-to-foreign transactions with only the seller having assets/turnover/market shares exceeding those established by law will be cleared with the AMC despite an obvious lack of competition concerns in any Ukrainian markets.
Specific rules for the calculation of volume thresholds are applicable to banks and insurance companies. To calculate the value of assets or volume of sales for a bank, one tenth of the bank's assets are used, so, for the purpose of Ukrainian merger clearance, the bank's assets will be the same as the sales volume. For insurance companies, one tenth of the assets are included in the calculation of the assets value, as well as all profit obtained from insurance activities (as defined under applicable Ukrainian legislation) for the calculation of the sales amount.
Triggering events
The Economic Competition Act provides for a wide spectrum of transactions that result in business concentration and need to be cleared with the AMC. Ukrainian merger control rules set forth a clear standard to assess the establishment of control as a result of the transaction. The concept of control provided under the applicable legislation is based on the principle of "the possibility of exercising a decisive influence" (for example, through the rights to use assets, holding top management positions, voting at the supervisory or executive body of the market participant) and thus allows for a broad interpretation of the establishment of relations of control. The merger clearance procedure, on the other hand, may be applicable even when no establishment of control is expected. For example, in the pure direct/indirect acquisition of 25% of the voting rights, even if the remaining 75% is held by another controlling market participant, Ukrainian merger clearance is required if the thresholds are met.
Filing requirements seen as burdensome
The merger control rules require a substantial amount of information to be included in AMC filing forms. In particular, the notification includes detailed information on the transaction parties, taking into account their control relations, including registration data, contact details, officers, the amount of shareholdings/votes and the Ukrainian turnover of each entity of the entire target and acquirer groups.
Despite the broad definition of the target group (extended to the sellers), the AMC, in considering international practice, has recently adopted a position allowing the parties to limit the 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 if the parties provide sufficient information and documents confirming termination of such control. However, such a position is not applicable for the calculation of triggering thresholds, so in order to find out whether the transaction requires Ukrainian merger clearance or not the entire seller group will still be considered.
Furthermore, the notification will necessarily include the definition of the relevant product and geographical markets, the contact information of Ukrainian competitors, customers and suppliers and the volume of sales/gains of each customer/supplier. Such information is filed with the AMC for each company of the target/acquirer group generating Ukrainian turnover, regardless of the markets concerned. In other words, even in the absence of overlapping markets, the parties are bound to file detailed information on their activities in the Ukraine.
The rules allow parties to request exemption from filing certain information, if this will not affect the decision made by the AMC. However, in practice, the information regarding parties' activities in the Ukraine (including the above information regarding customers, competitors and suppliers) is treated by AMC officials as mandatory: even in the absence of substantial overlaps, it is extremely difficult to procure exemptions.
Producing information at an early stage of a transaction often requires substantial time and incurs significant costs: this can determine the parties' decision to close a transaction, especially a global one, without Ukrainian merger clearance. Recently, market participants have been avoiding delay by closing a transaction globally with minimal Ukrainian consequences.
The applicable provisions do not allow the parties to close a foreign-to-foreign transaction globally before obtaining AMC approval (where required), even if the parties commit to refrain from any actions in respect to Ukrainian markets. The possibility of closing a foreign-to-foreign transaction before notification and obtaining post-closure approval shortly after closure (providing the AMC with reasonable justification for failure to pre-notify) moderates this strict rule. Given the technical failure to receive merger clearance before closing, the AMC usually: (i) issues post-closure clearance (unless there are legal grounds to reject the transaction); and (ii) imposes a fine as envisaged by law. However, in such cases, the parties are usually considered by the AMC to be acting in good faith, and the amount of the fine imposed is technical in nature rather than material.
Key factors in filing decisions
Given these uncertainties and burdens, a number of market participants, both Ukrainian residents and foreign entities, often base their decision of whether or not to clear a transaction with the respective Ukrainian competition authority upon the following factors:
- the likelihood of a potential inquiry by the AMC regarding the transaction (especially where the parties are not resident in the Ukraine and the transaction is purely foreign-to-foreign);
- the consequences of the transaction itself, if failure to receive prior approval is discovered;
- the potential liability of the party that failed to receive the respective AMC approval; and
- the enforcement mechanism in place.
AMC officials have recently announced in a number of public statements that the AMC intends to strengthen its monitoring department with a special focus on the monitoring of publicly available sources of information (such as press releases, internet sites and statements in the media) in order to create a database of transactions that may affect economic competition in the Ukraine. Moreover, it is likely that the AMC will scrutinise every detail of the historical establishment of relations of control within the effective target/acquirer group structure and, in the case of the discovery of an earlier failure to receive merger clearance, will impose a fine on the respective party. The time limit for such fines is five years.
The law presumes that a transaction that is closed without Ukrainian merger clearance is still legally binding on, and fully enforceable against, the parties involved. However, the AMC may apply to the court in order to recognise the transaction as invalid due to the parties' failure to receive prior AMC approval if the transaction has adversely affected, or could adversely affect, competition in the Ukraine. Based on publicly available sources, no purely foreign-to-foreign transactions have been invalidated by a Ukrainian court at the request of the AMC on such a basis so far.
Failure to obtain the prior approval (where required) can incur penalties of up to 5% of the transaction parties' turnover from the previous year's worldwide sales. The fine imposed by the Ukrainian competition authorities may theoretically be very large. The Economic Competition Act does not provide for any mechanism or rules applicable to the determination of the amount of this fine. As a matter of practice, the AMC applies its internal guidelines to determine the level of a fine on a case-by-case basis. In practice, the maximum amount has never been imposed in the case of a foreign-to-foreign transaction, and generally the fines have been rather moderate given the minimal effect on competition in the Ukraine. However, if the failure to receive prior AMC approval is discovered by the AMC itself or from information provided by a third party, the parties are generally considered by the AMC to be acting in bad faith: this can increase the fine and affect the AMC's attitude to the future transactions of the parties concerned. In addition, the AMC can oblige the parties to negate any negative consequences of the failure to receive prior merger clearance.
The total penalties imposed for violating the provisions of the competition law increased almost sevenfold in 2007. The most problematic issue with penalties for the AMC is their enforcement in cases of foreign-to-foreign transactions where the parties in breach are not residents of the Ukraine and cannot be reached by the authorities. There are a small number of cases in AMC practice where the fine was imposed in the case of foreign-to-foreign transactions with no actual presence in the Ukraine of either party. If either of the parties is present in the Ukraine through a subsidiary or has any assets there, the AMC can impose a fine on the party's local subsidiaries (or on the company holding Ukrainian local assets), providing for mandatory collection.
Although the Ukrainian merger control system can encompass a number of ambiguities and uncertainties, it represents a significant and successful institutional innovation aimed at promoting economic efficiency by protecting fair competition. On the other hand, the development of more provisions would bring about further progress. Based on recent statements, the AMC is interested in simplifying the Ukrainian merger clearance procedure, in some cases providing a balance between the level of market participants' efforts to gain clearance and the efficiency gains of the transaction. In turn, such a balance could increase the number of transactions that are voluntarily cleared with the AMC and therefore benefit competition as a whole.
In order to sustain their existing good track record with the AMC and minimise any post-closure challenges, foreign entities are increasingly applying for Ukrainian merger clearance, even in the case of pure foreign-to-foreign transactions with minimal impact on the Ukrainian market. This trend clearly shows the development of competition legislation and merger control in the Ukraine, as well as its sustained application in practice.
| Author biographies |
Denis Lysenko
Vasil Kisil & Partners
Denis Lysenko is a partner in Vasil Kisil & Partners with more than nine years of practical experience in corporate finance. Denis practices banking and finance law, M&A, investments and privatisation projects. He has wide experience representing the interests of foreign and domestic investors in cross-border transactions involving Ukrainian assets, as well as of cooperation with the European Commission on competition matters. Among recent acquisitions supported by Denis Lysenko and successfully closed are the Factorial Bank (Kharkov) by SEB Group (Sweden), a minority stake in Kredobank by PKO Bank SA (Poland) from the EBRD and the complex cross-border share-deal acquisition of Globus shopping mall (Kiev) by London & Regional Properties (UK) and its subsequent refinancing.
Mariya Nizhnik
Vasil Kisil & Partners
Mariya Nizhnik joined Vasil Kisil & Partners as an associate in 2005. She received a bachelor of law (magna cum laude) from the University of Pittsburgh in 2003. Mariya has experience of practising American law in the US Court of Appeals for the Third Circuit in Pittsburgh, US. She focuses on general corporate, project finance and competition matters. Her key areas of competition practice are M&A, commercial agreements (such as joint ventures, distribution and licensing arrangements, development activities and strategic alliances) and the abuse of market dominance. She has extensive experience of advising the firm's foreign and domestic clients on private and/or government competition issues in a number of global M&A transactions. |