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13 September 2019

First case with structural remedies in 24 years by the Ukrainian competition authority

Fact: on 5 September 2019, the Antimonopoly Committee of Ukraine (AMC) ruled on the compulsorily split of Ostchem Group owned by the Ukrainian businessman, Dmytro Firtash, and simultaneously imposed a fine of EUR 3.8 million on one of the companies of Ostchem Group, for an infringement amounting to abuse of dominance on the Ukrainian market of nitrogen fertilizers.

Importance: this is the first AMC decision on compulsory split adopted in 24 years. A similar sanction was applied by the AMC only once, back in 1995 in the case of dominance abuse by dairy factories.

Looking Ahead: this case may signal changes in the AMC’s practice and approach towards dominant position treatment and types of remedies applied in abuse of dominance cases. Furthermore, it cannot be excluded that the AMC may apply the same sanctions in complex merger control proceedings where, to date, behavioral remedies were applied in the vast majority of cases. Most importantly, this precedent may be “the case” that can finally open the door for private damages claims in Ukraine.

Nature of the Violation: The AMC concluded that Ostchem Group (group of major Ukrainian nitrogen fertilizers plants: PrJSC Severodonetsk Azot, PJSC Azot and PrJSC Rivneazot along with related wholesale trading company NF Trading Ukraine LLC), abused its dominant position on the market of nitrogen fertilizer primary sales during the 2014-2017 period. The following violations were identified by the authority:

  • intra-group overpricing of natural gas, the main raw material in the production of fertilizers, that caused unreasonable growth of production costs and, consequently, overcharging for fertilizers sold on the market;
  • suspension of nitrogen fertilizer production during the 2017 spring season which caused a shortage of fertilizer supply to farmers.

The AMC has noted that these violations would be impossible if the three principal domestic plants were not united in a single group, and has ordered compulsory separation that must be completed within 9 months from the date when the decision is received. Furthermore, NF Trading Ukraine LLC, which was selling fertilizers, was fined EUR 3.8 million, the maximum possible amount for this type of infringement provided by law.

Next Steps: the decision is more than likely to be appealed. Ostchem Group can file an appeal within 2 months upon receipt of the decision. As to the procedure itself, no legislation governing compulsory separation exists in Ukraine at the moment. The law only provides that the separation model lies within the sole discretion of the dominant entity abusing its position, subject to the condition that the dominant market position shall be eliminated as a result of such partition.

Key takeaways:

  1.    The decision of the authority demonstrates significant changes to treatment of dominant positions in general. While under Ukrainian competition legislation, the dominance threshold is 35%, Ostchem Group was considered dominant with a market share of 35.45% in 2017. This approach clearly shows the AMC’s inclination to strict and thorough control over companies holding slightly less than 35% of the market, let alone those with higher shares.
  2.    The current case might be a signal of the new authority’s approach to sanctions in abuse of dominance cases, and, possibly, even in merger control proceedings. From now on, the well-established AMC practice of applying behavioral remedies might be shifted to more structural remedies.
  3. Considering the absence of a regulatory framework for and practical cases on compulsory splits, the future outcomes of the case will be extremely interesting and illustrative for the business community in terms of compulsory separation procedure and the peculiarities possibly leading to the introduction of guidelines by the AMC on application of such remedies.
  4. According to Ukrainian competition legislation, those whose rights were infringed by the abuse of dominance can apply to the commercial court for double damages. Although private damages claims are not a widely used instrument in Ukraine, there are chances that the Ostchem case will nevertheless give rise to private damages claims.

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