Ukraine: Focus on illegal actions

Author: | Published: 1 Oct 2009
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Ukrainian legislation protecting economic competition was inspired by the laws of the European Union and is based on the same principles that can be found in many other European jurisdictions. However, the implementing regulations and practices of the Antimonopoly Committee of Ukraine (AMC) may differ significantly from those of the other European competition regulators.

Competition laws in Ukraine derive from Article 42 of the Constitution of Ukraine, which provides for the protection of fair competition by the state and prohibits the abuse of monopolistic position, as well as Chapter three of the Commercial Code of Ukraine. The laws and regulations implementing these principles address all the key areas of competition law, including: (i) concentrations (merger control); (ii) concerted practices (cartels); (iii) abuse of monopoly (dominant) position; and (iv) unfair competition (including restrictive and discriminatory practices, unauthorised use of business reputation and unauthorised collection, dissemination and use of commercial secrets).

The most recent trend in the policy of the AMC is to shift the attention and resources from merger control to the illegal behaviour that poses the highest threat to competition in Ukraine and falls either under cartel regulation or under abuse of dominance.

Merger control

Ukrainian merger control laws are often criticised for their low financial thresholds, which trigger the filing obligation and lack of sufficient nexus. In many other respects, Ukrainian merger control laws are very similar to the EC competition laws. Pursuant to Article 22 of the Law of Ukraine "On Protection of Economic Competition" (the Competition Law), a concentration takes place in case of:

  • merger of undertakings or absorption of one undertaking by another;
  • acquisition of control directly or through other persons or entities by one or more undertakings over one or more undertakings or their parts, including by way of acquisition or lease of assets, combining positions by executive officers and board members, etc.:
  • establishment by two or more undertakings of an undertaking, which will be engaged in independent business activity during a long period of time; and
  • direct or indirect acquisition of ownership or management rights over shares or participation interest which allow the acquirer to reach or exceed 25% or 50% of votes in the highest management body of the target undertaking.

At the same time, the Competition Law specifically excludes the following transactions from the notion of a concentration:

  • acquisition of shares or other equity interest in an undertaking by a person whose main activities are financial or securities transactions, for the purpose of reselling such shares or other equity interest within one year, provided that such person does not participate in the managing bodies of the undertaking;
  • actions otherwise constituting a concentration, which occur between undertakings connected by a control relationship, provided that such control relationship was initially created in compliance with competition laws;
  • establishment of an undertaking by two or more undertakings resulting in coordination of activities between the founders or between the founders and the new undertaking (such actions are treated as concerted practices); and
  • acquisition of control over an undertaking by insolvency administrator or other state official.

Once the transaction falls under the notion of concentration, the parties may be required to seek prior approval from the AMC in case the following financial and market thresholds are met:

  • the aggregate worldwide asset value or sales turnover for all parties to the concentration exceeds €12 million;
  • the aggregate worldwide asset value or sales turnover for each of at least two parties to the concentration exceeds €1 million; and
  • the asset value or sales turnover in Ukraine of at least one party to the concentration exceeds €1 million; or
  • market share of any of the parties to the concentration (including all affiliates of such party) or combined market share of all parties to the concentration on any product market in Ukraine exceeds 35%, and the concentration takes place on this or a neighbouring product market.

Obviously, such low financial thresholds are inadequate, especially considering that sales by one party in Ukraine are sufficient to create the necessary nexus. In order to remedy the situation, following numerous recommendations of the International Competition Network, the Organisation for Economic Competition Development, as well as pressure from local and international businesses, the AMC has prepared a draft law that is supposed to increase the financial thresholds by four times and introduce a requirement that at least two of the parties to the concentration should have assets or sales in Ukraine exceeding €4 million. A filing will also be required if at least one party has assets or sales in Ukraine exceeding €50 million. The approval by the Ukrainian Parliament of such amendments should allow the AMC to focus its attention on those transactions that are more likely to influence competition in Ukraine and avoid spending resources to clear transactions that have no impact on any of the Ukrainian markets whatsoever.

Failure to obtain the approval of the AMC for a concentration may lead to a fine and other negative consequences. Hypothetically, the amount of fines can reach 5% of the annual gross turnover of the group. As a practical matter, in the past the fines for failure to obtain an approval for concentration where the concentration did not have any negative impact on competition in Ukraine have been relatively low, up to €20,000. However, the recent practices show that the AMC has begun increasing the levels of fines for such violations by times in order to have a greater deterrent effect, especially for larger corporate groups. This tendency can be seen even in foreign-to-foreign transactions, where only one party has some presence in Ukraine and concentration does not have any impact on competition in Ukraine.

Regulating cartels

When regulating cartels and various restrictive practices, Ukrainian competition law operates with the notion of concerted practices that are defined as any agreements between undertakings, any decisions by associations of undertakings, or any other concerted practice of undertakings, as well as establishing another undertaking or association of undertakings for the purpose of coordinating activities of its founders, including with the newly formed undertaking.

Those concerted practices that "resulted or may result in limitation or restriction of competition" are deemed to be anticompetitive pursuant to the Competition Law. Examples of anticompetitive concerted practices include:

  • fixation of prices or other conditions for purchase or sale of goods;
  • limitation of production, product markets, technical and technological development, investments or imposing control over them;
  • dividing the markets or sources of supply based on territorial principles, assortment of goods, volumes of sales or purchase, identity of the sellers, buyers or consumers, as well as other criteria;
  • distorting the results of tenders or actions;
  • removing from the market or limiting access to the market (or exit from the market) for other undertakings, including purchasers and sellers;
  • application of different terms to similar agreements with other undertakings, which puts them in unequal competitive position;
  • entering into a contract conditional upon additional obligations that are not related to the subject matter of the contract based on their substance or customs of fair trade;
  • substantial limitation of competitiveness of other undertakings without an objective justification.

Anticompetitive concerted practices are prohibited under Ukrainian law, unless an approval is obtained from the AMC. In order to obtain approval of the AMC for concerted practices, the participants have to demonstrate that such concerted practices have pro-competitive effects and will not result in the restriction or limitation of competition.

Certain concerted practices may be subject to a block exemption including, for example, if the combined market share of all of the undertakings connected by control relationships to the undertakings engaged in concerted practices on any relevant market does not exceed 5%. If the initial market share of the parties does not exceed 5%, but later grows to up to 10%, then AMC approval must be obtained within two years of the 5% threshold being exceeded or within one year of the 10% threshold being exceeded.

In January 2009, the AMC has introduced another block exemption that applies to horizontal concerted practices implemented in connection with specialisation of production. It permits such concerted practices without the approval of the AMC, if the total combined market share of their participants does not exceed 25% on any of the affected markets.

Being engaged in anticompetitive concerted practice may result in fines by the AMC in the amount of up to 10 % of the worldwide revenues of the group of companies. One of the biggest AMC's fines for cartel practices was imposed on two oil traders and amounted to approximately UAH161 million (approximately €13.5 million).

The applicable competition legislation provides for a leniency program for cartel practices, which relieves from any liability the party that was the first one to notify the AMC of the violation.

Recently, the AMC has proposed a draft law that introduces criminal responsibility for anticompetitive concerted practices related to price fixing; market division; limitation or cancellation of product manufacturing; and limitation of sales and distribution of products. It is not certain whether and when this law will be voted by the Ukrainian Parliament and will come into force. At the moment criminal liability exists only for forcing into anticompetitive concerted practices by using violence or material harm.

Abuse of dominance

Pursuant to Article 12 of the Competition Law, dominance is presumed to arise when the market share of an undertaking (including all related undertakings) exceeds 35% of the relevant market. An undertaking with a market share of less than 35% may also be found to hold a dominant position if it is not subject to substantial competitive constraints (if market shares of other competitors are not significant). An undertaking may challenge the finding of dominance if it proves that it is subject to vigorous competition from other competitors due to, for example, low market entry barriers.

The Competition Law also recognises the notion of collective dominance, which is presumed to arise upon reaching 50% combined market share by two or three undertakings and 70% combined market share by four or five undertakings, provided that there is no competition between them with respect to certain products or the existing competition is insignificant.

The activities of the undertakings having a dominant position are subject to stricter regulations under Ukrainian competition laws than the activities of any other undertakings: the respective dominant undertakings may not take advantage of certain exemptions otherwise available. In particular, dominant undertakings are generally prevented from implementing mergers or any concerted practices on the markets in which they are active. The most common abuses of dominance arise of the attempts to fix an unreasonably high price, impose an unrelated obligation or foreclose the market.

In April 2009, the AMC imposed the largest fine in its history amounting to more than UAH265 million (over €26 million). The fine was imposed for abuse of dominant position by several undertakings engaged in sales of aviation fuel and related services at the Boryspil airport near the city of Kyiv. In March 2008, the AMC imposed a fine of UAH175 million (€17.5 million) on two producers of sunflower oil for the abuse of dominant position.

Unfair competition

While the Competition Law prohibits restrictive or discriminatory practices of undertakings in general, the Law of Ukraine "On Protection Against Unfair Competition" (the Unfair Practices Law) specifically prohibits such practices as an unauthorised use of business reputation of an undertaking, creating obstacles for undertakings in the process of competition, and unauthorised collection, dissemination, and use of confidential information.

Restrictive and discriminatory practices include the following:

  • unauthorised use of a commercial name, trademark or advertising material;
  • distribution of misleading information;
  • unauthorised obtaining and use of commercial secrets;
  • unauthorised use of a product of another producer (under own name);
  • copying the appearance of a product of another producer;
  • gaining a competitive advantage as a result of the violation of competition laws;
  • bribing buyer's employee with the purpose of obtaining an advantage over the competitor

The Unfair Practices Law was amended in 2009 to introduce specific rules for distribution of misleading information. It includes distribution of incomplete, imprecise, or untrue information including, but not limited to distribution via advertisement, presentations, omission of facts, and inappropriateness of the language, which have influenced or may influence the intent of individuals or companies to purchase or sell goods or services.

About the author

Vladimir Sayenko is a partner in Sayenko Kharenko specialising in competition, M&A, corporate, and securities law. He has advised extensively in the financial, energy, oil & gas, real estate and media sectors.

Sayenko has been named the best competition lawyer in Ukraine by Ukrainian Legal Awards (2007); named among top five lawyers in antitrust, corporate, energy and securities law by Ukrainian Law Firms 2009, recommended for Ukraine by all major international directories including IFLR 1000, Legal 500, Chambers Global, PLC Which Lawyer?, Best Lawyers International.

Most recently he has advised on a number of high-profile acquisitions including acting for Japan Tobacco on merger clearance and acquisition of Gallaher Group, Evraz Group on merger clearance and acquisition of steel, mining, coke and chemical assets in Ukraine and Porsche Automobil Holding on the acquisition of Volkswagen Aktiengesellschaft.
Contact information

Vladimir Sayenko
Sayenko Kharenko

10 Muzeyny Provulok
Kyiv 01001, Ukraine
Tel: +380 44 499 6000
Fax: +380 44 499 6250
E-mail: VSayenko@sk.ua
Web: www.sk.ua

About the author

Dmitry Taranyk is a counsel in Sayenko Kharenko focusing on antitrust and competition matters. He also practices corporate law, M&A, foreign investments, and privatisation. Taranyk advises clients on all aspects of antitrust law, including abuse of dominance, concerted practices, merger control, and unfair competition. He also counsels on antitrust matters related to multinational and domestic M&A transactions, joint ventures and financial transactions. 

 Taranyk has advised on a number of high profile cases and competition clearances for numerous mergers and acquisitions by companies in the agricultural, automobile, banking, chemical, electricity, food processing, insurance, oil and gas, shipbuilding, and tobacco industries, including for Arcapita Bank, First Data Corporation, Generali, Japan Tobacco, LBO France, Monsanto, Severstal, Société Générale and Philips.
Contact information

Dmitry Taranyk
Sayenko Kharenko

10 Muzeyny Provulok
Kyiv 01001, Ukraine
Tel: +380 44 499 6000
Fax: +380 44 499 6250
E-mail: DTaranyk@sk.ua
Web: www.sk.ua