18 minute read
Valeriia LEPSKA, Yelyzaveta KASHYNA
Antitrust Law Reform — Key Changes
Valeriia LEPSKA
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is an associate at AVELLUM
Yelyzaveta KASHYNA
is an associate at AVELLUM
The Ukrainian Parliament is planning to implement comprehensive reform of Ukrainian competition law. Draft Law of Ukraine On Amendments to Some Laws of Ukraine in Relation to Competition Law Reform, No.2730, of 14 January 2020, focuses on the introduction of new merger control thresholds, settlement procedures, an improved leniency program, joint and several liability, and some other amendments.
This article analyses the major changes that this reform introduces.
merger Control rUles
The Antimonopoly Committee of Ukraine intends to lower the pressure on businesses and shift its attention to transactions with a reasonable local nexus.
At this time, the value of assets and turnover of the seller and all the entities related to the seller by control, i.e., consolidated financial indicators of the seller’s group, are included in the jurisdictional test. This often requires parties to provide notification on the acquisition of a small business or business having no nexus to Ukraine. Under the Draft Law, the financial indicators of the seller group shall be no longer counted towards the target if the seller ceases to control the target as a result of the transaction.
However, to prevent the split of one single transaction into several small transactions and in this way to avoid notification requirements, the regulator will consider two or more transactions among the same parties taking place within two years as a single transaction. If the financial indicators of the parties exceed the jurisdictional thresholds, such transaction will be subject to merger control rules.
Given that the financial indicators of the seller group will not be counted towards the target, the Antimonopoly Committee of Ukraine proposes to lower the jurisdictional thresholds. It is expected that the transaction will be subject to merger control rules if it results in: — reaching or exceeding 25% or 50% of votes in the target’s highest governing body or acquisition of control over the target; — acquisition of control over the target through the purchase or lease of assets; and
— entering into a contractual arrangement which will subsequently grant control over the target, provided that: — the target’s Ukrainian turnover or value of assets exceeds EUR 2 million, and the parties’ combined Ukrainian turnover or value of assets exceeds EUR 30 million; or
— the target’s Ukrainian turnover or value of assets exceeds EUR 2 million, and worldwide turnover of at least one other party exceeds EUR 150 million.
Such an approach will reduce notifications of foreign-to-foreign transactions without any local Ukrainian nexus, which are currently being notified to the Ukrainian competition authority.
At the same time, existing jurisdictional thresholds will continue to apply to transactions that result in: — amalgamation of companies; — establishment of joint ventures; and — acquisition of control through appointment of management.
In addition, the AMCU proposes introducing the full-functionality criterion for joint ventures into the Law of Ukraine On the Protection of Economic Competition of 11 January 2001. Currently, this criterion is mentioned in the regulator’s nonbinding guidelines. It often creates uncertainty in its enforcement practice when it comes to the assessment of whether the establishment of a non-fully functioning joint venture is subject to merger control rules.
proCedUral rights
The parties will have a broader scope of procedural rights during the Phase II review. In particular, the parties will be able to:
— participate in hearings during the Phase II review; — extend the Phase II review for one (1) month, if the parties offer remedies; — examine the materials of the Phase II review, if there are potential grounds to prohibit concentration or concerted practices.
improved lenienCy programme
In 2012, the AMCU introduced the concept of a leniency programme to detect existing cartels. Even though this is an efficient tool in fighting cartels in other jurisdictions, leniency is still unpopular in Ukraine due to the local business mentality and vague regulation for its application.
The current Ukrainian leniency programme offers companies involved in a cartel, which self-report and hand over evidence to the AMCU, total immunity from fines, which the regulator would have otherwise imposed on them. However, given that the immunity is granted on a first come, first served basis, the company that considers applying for leniency is unaware as to whether it is the first applicant. So such a company faces the risk of receiving a fine for concerted actions instead of benefiting from self-reporting.
The improved leniency programme will set out more detailed guidelines for those who wish to benefit from it. It will encourage companies to come forward with evidence of illegal cartels by offering reduced fines. In particular, a cartel participant would be able to apply for leniency, if it: — cooperates with the regulator during an investigation; — provides sufficient evidence (e.g., detailed overview of cartel activities and full information on participants); — ceases cartel activities, unless the regulator instructs otherwise; and — is not the ringleader.
The AMCU would grant full immunity from a fine to the first applicant for leniency that meets the above conditions. Subsequent leniency applicants would be able to apply for a reduced fine: — up to 50% for the second applicant; — up to 30% for the third applicant;
and
— up to 20% for others.
new settlement proCedUres
The regulator intends to introduce settlement procedures in concerted actions and abuse of dominance cases. After the company receives a statement of objection, it would be entitled to settle a case by sending a request to the AMCU asking for the settlement procedure. Such a procedure should be carried out via the signing of a settlement agreement that must include the following:
COMPETITION LAW
S. Riabokon
— acceptance by the defendant of the fact of infringement specified in the statement of objection; — acceptance by the defendant of the amount of the fine; and — a 15% reduction in the fine to be imposed in the event of non-application for the settlement procedure.
The settlement agreement is subject to further approval by a commercial court.
The amendments shall accelerate the investigation of infringements of competition law, and they shall also avoid the further challenge of a decision adopted by the AMCU.
Joint and several liability
Over the years the regulator has faced challenges with the enforcement of fines. To avoid liability for infringements of competition law, the companies might well employ aggressive tactics. For example, there are reported cases when a defendant company transfers its assets to a related entity and then files for liquidation or bankruptcy.
To confront these issues, the reform introduces the concept of joint and several liability, making controlling entities liable for infringements of their subsidiaries. Therefore, the regulator will be able to impose fines on a group of companies.
Moreover, the regulator will be entitled to split the fine and apply it to each company separately in different amounts depending on the severity of any infringement. To enforce the fine against several group companies, the regulator has to initiate court proceedings against each company.
The proposed changes aim to implement the provisions of the Ukraine-EU Association Agreement. Even though the draft is still subject to further deliberations and review, it is a step in the right direction to improve current Ukrainian competition law.
State of Play
For the last couple of years, the approach and institutional capacity of competition regulation and enforcement handled by the Antimonopoly Committee of Ukraine has seen substantial changes, and another portion of them is on the way.
With the lack of awareness around the powers of the regulator, business experiences certain problems in formulating strategic priorities in line with best practices. We asked Yuriy Terentyev, former head of the Antimonopoly Committee of Ukraine (2015-2020), who recently joined Redcliffe Partners as a partner, to share his big picture vision of the competition landscape. Some insights from the inside out are surprising to a certain extent, though some are predictable. Our discussion has a clear mission, namely to shed light on the state of play and upcoming global trends in competition enforcement and broaden the understanding of fundamental rationale behind the decisions of various stakeholders.
UJBL What lessons did you learn from your time in public service? What opportunities and limitations did you face as Chairman of the Antimonopoly Committee of Ukraine in 2015-2020?
Yuriy Terentyev: The main lesson is that in public service your success, even more than anywhere else, depends on people. The performance of the authority is the performance of its employees, which is based on their competence and motivation.
Any chairman has a difficult task. On the one hand, the AMCU is a collegial body, which consists of 9 commissioners who are equal. Each commissioner may have his or her own priorities and ambitions. On the other hand, the Chairman bears overall political responsibility for the authority and its effectiveness, and manages it as a legal entity. My main job was to build an effective institution which would be able, firstly, to competently understand the markets and the problems which exist in them and, secondly, to deal with such problems in the most adequate and effective way.
Historically, public authorities in Ukraine have lacked a clear mission and strategy. Internal competences in AMCU were not built around proactive detection of violations and understanding of market specifics. The AMCU has existed for more than 20 years but there was a limited number of material cases which dealt with the relevant economic problems that exist. At the same time, the AMCU produced thousands of cases on an annual basis of relatively minor wrongdoings predominantly in regulated sectors.
During my term we made systemic changes to the way the authority works: introduced a system of internal target setting based on external economic effects, which was calculated following OECD methodology; started detailed transparent reporting which is focused not on enforcement statistics but rather on the analysis of industries and the problems which they have; intensified enforcement which led to adoption of decisions with the amounts of penalties imposed and collected to the budget exceeding the cumulative amount since the authority was established (in dollar equivalent); started cases involving the main oligarchic groups; optimized the organizational structure of the authority and its regional presence.
UJBL What were the challenges along the way? Did you feel the political nature of competition law?
Y. T.: Competition enforcement and economic policy may, indeed, need to be aligned. The policy should be formulated and executed with pro-competitive objectives in mind. Competition enforcement, in its turn, needs to address the most relevant economic problems which may also be high on the political agenda. In this regard, the issue here is constructive interaction between policy and competition enforcement.
In fact, the political component of competition enforcement is not something which is regarded negatively. In the EU, the supreme body which takes decisions in competition cases is the European Commission, which is a political body and includes only one commissioner out of many, who is responsible for competition. In the USA the formation of the FTC is done on a political basis. Some countries, like South Africa, have country specific political and economic objectives which need to be taken into account for the purposes of merger assessment.
However, the relations between AMCU and political leadership may also become problematic when, instead of policy, we may see political pressure. Such pressure may appear if someone wants you to open or close a case or to influence a specific decision. There is no ultimate remedy from such threats. I saw that the only possible practical way forward is to build up consistent case law, which should specify in more detail the limits for qualification of specific conduct as problematic from the perspective of competition law and would also establish the standards of proof for specific types of violations. The existence of such clarity limits the possibility of subjectivity and bias and improves the legal certainty, which is one of the key elements of the rule of law.
UJBL What limitations in private practice do you experience after leaving public service?
Y. T.: Obviously, I need to avoid situations of conflict of interest. The law does not allow me to represent clients at the authority for a period of one year after resignation (which ends on 3 July 2021) and have deals with entities which were defendants in the cases which I handled.
UJBL There is a legislative initiative in the Ukrainian Parliament (draft law No. 3132) to extend the powers of the AMCU. How can you comment on this? How could, in your opinion, the institutional capacity of the Committee be broadened?
Y. T.: In order for the competition agency to be effective it should obviously stop doing the things which reduce its efficiency and ability to focus on the most relevant problems and add capacity and powers to those activities which produce the most positive effect on the competitive environment. The AMCU should be able to define its priorities and have more freedom on cases which it starts rather than to react to every incoming complaint on minor issues.
The most problematic area for the AMCU is its work with procurement complaints. The annual number of complaints increased from under 1,000 in 2014 to over 15,000 now. This situation requires the permanent involvement of all commissioners in the review of complaints and limits their capacity to work on competition, merger control and state aid cases. At the beginning of 2021 Parliament approved changes to legislation which will enable the addition of complaints review officers who will be carrying out this intense work instead of commissioners. This will free up the resources of the AMCU to deal with competition-relevant issues.
Another area for improvement is merger control. Ukraine used to be notorious in the international legal community for its poorlydesigned merger control thresholds, which required that transactions that even were not affecting Ukraine had to be notified. This situation was improved in 2016 when a jurisdictional nexus for both parties was introduced. The number of notifications decreased from over 1,000 to about 500. However, the thresholds still remain inconsistent with EU rules and the requirements of DCFTA with the EU, which require that the whole turnover of the seller’s group need not be counted, but only that of the object of acquisition. The further alignment of Ukrainian merger control rules with EU standards would lead to a reduction in the number of notifications to around 200 and enable focus only on those transactions which are relevant for Ukraine.
The effectiveness of competition enforcement is not possible without more precise definitions of investigatory powers, including the rights to conduct dawn raids, searches at business and residential premises, and more effective instruments to bring transgressors to account, like parental liability and succession of liability in the event of transfer of a business to another entity. Undoubtedly, these initiatives should be balanced with safeguards of a fair process for defendants.
Controlling state aid is the most recent addition to the AMCU mandate. In order for this tool to have proper effectiveness it should be aligned at the level of basic concepts with EU standards. This should start from the definition of “state aid” itself and include not only the components of effect on competition, use of public resources, granting of an advantage, but also the “effect on trade” as envisaged in EU legislation and the DCFTA. Such alignment should help to reduce the number of minor notifications which flood the authority.
Another very promising area for legislative development is private enforcement. In the EU the parties concerned may opt to file a complaint with the European Commission, the national competition authority or directly with a national court. Opening the door for private enforcement will reduce the workload on the AMCU with regard to traditional abuse of dominance cases which are now possible only as follow-on cases based on a prior decision of the agency establishing the dominance and the fact of a violation.
UJBL Foreign investors always assess country risks when entering the Ukrainian market. Many of them argue that certain economic sectors are still lagging behind the competitive environment, mainly due to the oligarchic structure of our economy. Does the AMCU possess legitimate powers to change the situation in these sensitive areas?
Y. T.: The AMCU does, indeed, have powers to improve the competitive environment both via enforcement and, in some cases, even more effectively through competition advocacy initiatives. It may be surprising, but after decades of reform and after the signing of the DCFTA with the EU, the state itself remains a violator of competition rules at the central and local levels. On a yearly basis the anti-competitive actions of government agencies are the most popular offence, with several hundred cases a year; local municipalities are setting up municipal enterprises which, in many cases, compete with taxpayers actually using the money of taxpayers; state enterprises either dominate in some sectors or get advantages through parallel business activity and performance of quasiregulatory functions; there are thousands of cases a year that public procurement procedures are organized in a way which is either discriminatory or limits competition unreasonably.
The business groups which are referred to as oligarchic are rarely present in highly-competitive sectors but rather worked “hand in hand” with the state, either when operating in regulated sectors or in potentially competitive markets where the state set up barriers to entry or allocated resources.
The AMCU mandate is designed to detect and address individual violations but is not sufficient to remedy the systemic problems of economic policy. In such cases action needs to be taken at the level of the government or Parliament. The AMCU can catalyze the pro-competitive changes that need to be agreed on and implemented. A good example of such activity is the market study of the energy sector, which back in 2016 defined key 25 problems in the sector and established the framework for their systemic correction. This involved actions at the level of Parliament, government, sector regulator and the key state-owned enterprises.
UJBL What were the main pitfalls in the positions of legal counsel advocating clients before the authorities? We know this is a provocative question, but it would be really interesting to know your true “helicopter view” opinion.
Y. T.: Businesses do not face issues with the competition authority on a regular basis. Therefore, when a problem arises, they may tend to outsource the case completely to external counsel which may have limited knowledge about the nature of the client’s business. At the beginning of my term at the AMCU I saw many cases where lawyers were arguing cases in front of the authority in the same manner in which they would have been arguing a tax claim in an administrative court. They were just denying the statements of AMCU saying that they were “wrong” or “unproven”. This approach had very low efficiency. In competition cases you need to give a consistent alternative picture of the respective activities with a detailed explanation of the business rationale behind the decisions.
UJBL Are there any global competition trends that have emerged over the past few years? If so, do you expect them to emerge in Ukraine?
Y. T.: For many years cartels were the most important topic for academics and enforcers internationally. However, there has been a renewal recently of interest in the topic of abuse of dominance, both for tech companies and the traditional sectors. It is noteworthy that, especially with regard to healthcare enforcers in some jurisdictions like the UK, are looking not only at exclusionary behavior, but also at excessive pricing.
Digitalization has been a hot topic for at least 5-6 years. In all international events the most discussed subjects were the platforms, algorithm-based collusions, big tech, the use of data and killer acquisitions. The topics related to digital markets will definitely remain on top of the list of priorities of enforcers globally. The EU is developing a regulation package for digital markets which will impose specific non-discriminatory obligations on the biggest tech companies.
The interest shown towards big tech comes in parallel with the willingness in many jurisdictions, including the EU, to screen sensitive sectors of the economy in the event of foreign acquisitions. Investment control mechanisms existed in countries like the US and Canada, but now they are becoming more popular.
Covid-19 related restrictions have greatly affected the competitive environment, making some authorities take actions against market shocks, but also allow in some cases cooperation between competitors, like agreeing on the schedules for store opening hours.
UJBL Which practices and services do you plan to develop as partner of a law firm?
Y. T.: My previous management experience of over 20 years and in-house legal experience enable me to see the strategic priorities of clients and address them from a cross-practice perspective and not just look at them only from the perspective of competition law. At the same time, clients may not be aware that some issues can be resolved with instruments of competition law. So, I see that the potential to offer new services, both by extending the scope of competition work as well as in serving the client, which require complex strategic solutions, is quite big.
Having been on the enforcement side in the past, I am able to evaluate which defense strategies are more likely to be effective and how the argumentation in the case should be structured and substantiated to be more understandable for the authority.
