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3 October 2019

Ukrainian competition authority adopted new merger control guidelines on JVs establishment

The Antimonopoly Committee of Ukraine (the AMC) recently adopted new guidelines on consideration and clearance of mergers amounting to the establishment of joint ventures (JVs) (the Guidelines). A document aiming to address the issues facing almost every party to a transaction that envisaged establishment of JVs and required clearance in Ukraine has been in the pipeline for quite some time. During drafting, leading competition law practitioners had a chance to contribute to it, in order to address issues crucial for their clients. The Guidelines were adopted by AMC decision on 27 September 2019.

Prior to assessing the Guidelines, it may be helpful to look again into the law provision that was the reason for adopting the Guidelines. In particular, according to paragraph 3 of part 2 of Article 22 of the Law of Ukraine “On Protection of Economic Competition”, a concentration is amongst other considered to arise from:

“…establishment of an undertaking by two or more undertakings, which in turn is intended to perform on a continuing basis all the functions of an autonomous economic entity, and at the same time such establishment does not lead to coordination of competitive behavior between the undertakings that established such new undertaking or between such founding undertakings and newly established undertaking…”

The Guidelines, largely inspired by the Commission’s Consolidated Jurisdictional Notice under Council Regulation (EC) No 139/2004 on the control of concentrations between undertakings, set out the elements for JV establishment to fall under the notion of concentration. These are: (i) newly created entity; (ii) full functionality; (iii) operation on lasting basis; (iv) non-coordination of competitive behaviour.

Why is adoption of the Guidelines important? How do they aim to improve Ukrainian merger control and to solve the issues foreign and domestic parties face when notifying deals based on JV structures in Ukraine? To answer these questions, it makes sense to look at the elements drawn by the Guidelines closer.

i. Newly created entity

The Guidelines outline that the establishment of the JV under Ukrainian merger control rules is considered a concentration only when it is being founded anew (from scratch) through registration procedure as a legal entity by two or more unrelated undertakings. This specific type of concentration is clearly distinguished from cases where (1) the JV is created solely by one of the founders with further transfer of shares to the other(s), or (2) where one of the JV founders ceases to conduct its business activity after formation of the JV. The first case is viewed by the AMC as acquisition of shares, while the second scenario should be considered acquisition of assets, both of which in any case belong to other concentration types than establishment of the JV.

From a practical perspective, each of the scenarios has to be evaluated on the basis of the exact type of concentration taking place from the formal point of view, which brings a lot more clarity when assessing the notifiability of this or that transaction under the Ukrainian merger control regime.

ii. Full-functionality

The requirement of full-functionality for the newly established JV amounts to its independence from the JV founders in its main activities. In particular, the activities of the JV have to be economically autonomous from its founders in a broad sense. If the JV acts at its own risk, this is considered a substantial pattern of full-functionality, while in case of significant sales to or influence on business decisions by its founders, the JV is not deemed full-functional.

As a practical matter, the Guidelines provide for a broad range of criteria aiming to determine the JV’s full-functionality. This is the opposite of the previous AMC mindset, according to which, any and each JV established without the goal of coordination was deemed full-functional. The applicants under Ukrainian merger notifications may from now on rely on these criteria when justifying full-functionality of the JV or its absence before the AMC.

iii. Operation on a lasting basis

The Guidelines set out the principle of operation on a lasting basis for the establishment of the JV to be viewed as concentration. As a rule, the JVs lifetime of up to 3 years is not considered as lasting. To the contrary, contribution of the resources necessary for the JV’s activities by its founders is usually viewed as an intention of a lasting JV. In addition, the JV is not considered as operating on a lasting basis if the launch of its activities depends on a third party’s decision(s) of indeterminate and uncertain nature.

A clear illustration of the Guideline’s importance for potential applicants in Ukraine would be the setup, by several consortium members, of a bidding vehicle to participate in a public takeover bid. Even if some or all of the consortium members exceed the relevant thresholds for the establishment of the JV to be notifiable in Ukraine, the Guidelines offer a solid defence against any implications from the side of the AMC, as the bidding vehicle lacks an element of operation on a lasting basis. In such cases, mere establishment of the JV would not require clearance in Ukraine, while the takeover itself may do when the bid is won by the JV.

iv. Non-coordination of competitive behaviour

This element, being much more elaborate in the AMC’s regulations than the other three, is clarified by the new Guidelines as well. In particular, if the founders retain independence in their competitive behaviour after the establishment of the JV, the latter is likely to be viewed as non-coordinating. The Guidelines outline the list of attributes that a non-coordinating JV most commonly has, such as e.g. absence of overlaps between the JV’s and founders’ activities on the same and neighbouring markets, exit of the JV’s founders from the market where the JV aims to conduct business, etc. Logically, if a JV does not have such attributes and is created with the aim of coordination of competitive behaviour between the JV founders, its establishment would be qualified as concerted practices and, if the JV’s founders meet the respective thresholds set out by Ukrainian laws, require separate concerted practices clearance.

This criterion also specifically refers to testing vertical and neighboring markets while defining coordinative or non-coordinative behavior hinting at the AMC’s willingness to conduct more profound analysis of the market presence of the parties, which is not limited to overlapping markets only.

The AMC also clarified that if the JV has the elements of both merger and concerted practices, clearance shall be required for the type whose elements prevail.

Short summary

The Guidelines, to a large extent mirroring the concept of treatment of JVs that is common in the EU, are a clear step towards easing the burden for many foreign parties to transactions who are unfamiliar with the peculiarities of the AMC’s approaches towards JVs.

The Guidelines actually establish new approaches towards many deals involving JV structures, such as specially created bidding vehicles. Under the Guidelines, it is now clear that the establishment of BidCo/SPV, if done outside of Ukraine exclusively for bidding purposes, will not amount to a concentration until the bid is won. In the past, the AMC’s approach towards treatment of similar transactions was far more conservative and JV founders who dared to report BidCo/SPV establishment in their notifications were fined for failure to notify qualifying concentrations. In M&A deals involving JVs, many of our clients faced issues deriving from obsolete practices of the AMC, and we were constantly bringing the necessity to fix the issues by filling the loophole to the agency’s attention. Our contribution to the Guidelines drafting culminated in at least one case of overturning the authority’s outdated approach: in June 2019, even before the Guidelines were adopted, we succeeded in persuading the AMC to clear a merger involving a JV on the principles now offered in the Guidelines. We are now proud to assert that the AMC acknowledges the issues market comes across of and takes progressive steps towards improvement of the regulatory framework and Ukraine’s image as a jurisdiction with a well-developed competition law.

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