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20 January 2021

Merger Control 2020. Ukraine

Source: Lexology GTDT

Vladimir Sayenko is a partner practising law since 1994, admitted in Ukraine and in the State of New York (USA). Vladimir specialises in competition, M&A, corporate and securities law. He has extensive experience in supporting clients through the entire life cycle of their business, from formation and day-to-day operational issues to major transactions and exit.

Maksym Nazarenko is a partner at Sayenko Kharenko, focusing on antitrust and competition matters, with more than 17 years of legal practice. Maksym has extensive experience in antitrust law issues related to multinational and domestic M&A and joint ventures, including merger and ancillary restriction clearances with the AMC. He regularly advises clients on a wide variety of antitrust law matters involving merger control, concerted practices in agreements, cases on cartels, abuse of dominance, and unfair competition.

Valentyna Hvozd is a partner with over 14 years of professional experience focusing on antitrust and competition matters advising clients on a wide range of antitrust law matters, including merger control, cartels, abuse of dominance, antitrust investigations and advice, distribution agreements, and unfair competition.

Anastasia Bodnar specialises in antitrust and competition matters. She regularly advises clients on a wide variety of antitrust law aspects, involving merger control, concerted practices, abuse of dominance, antitrust and market investigations, antitrust compliance, and unfair competition.

What are the key developments in the past year in merger control in your jurisdiction?

Last year, the Antimonopoly Committee of Ukraine (AMC) continued aligning Ukrainian competition laws, including merger control rules, with the best European practices. The year was also notable for the increased enforcement efforts of the AMC leading to record high fines of up to EUR 2 million imposed for merger control violations.

In terms of statistics, in 2019 the AMC reviewed more or less the same number of notifications (532) as compared to the year before and approved 439 of them. Unlike in previous years, Ukrainian applicants took the lead and filed 351 applications, while foreign applicants submitted only 181 filings to the AMC, which is 25  per cent less than in 2018. The vast majority (96 per cent) of the notified mergers were cleared within the Phase I review. In addition, the AMC applied the fast-track review procedure more often: 151 out of 442 notifications were reviewed under the fast-track procedure which is 14 per cent more than the year before. The AMC also reviewed 20 merger cases within Phase II which is slightly less than in the previous year, which saw 25 merger cases reviewed.

Meanwhile, the AMC continued  working  with  the  business  community  and its counsels on questionable issues. In particular, the AMC issued 44 preliminary conclusions clarifying whether or not a particular transaction required notification under the circumstances described by the parties. Such preliminary conclusions enable the parties to comply with Ukrainian competition law and to proceed with filing where necessary.

In 2019, the most popular sectors applying for AMC approval were the agricul- ture, industry, fuel and energy and housing and utility sectors. The AMC focused on in-depth investigations in the markets of the fuel and energy, agriculture, pharmaceutical and healthcare sectors.

In addition, during 2019–2020, the composition of the AMC was almost completely renewed as the president of Ukraine appointed six new state commissioners, including a head of the AMC. The new AMC top officials, along with the chairwoman, are expected to continue working on merger control reform initiated by the previous team and aligning AMC’s approaches with the best standarts and practices of European countries.

Have there been any developments that impact how you advise clients about merger clearance?

In September 2019, the AMC issued important  guidelines  on  the  consideration and clearance of mergers amounting to the establishment of joint ventures (JVs).

The guidelines, largely inspired by the European 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 and significantly ease the burden for many foreign parties to transactions who are unfamiliar with the peculiarities of the AMC’s approaches towards JVs.

The guidelines establish new approaches towards the treatment of deals involving JV structures using vehicles specifically created for participation in a bid for acquisition. Under the guidelines, it is now clear that the establishment of bidding vehicles, if done outside of Ukraine and exclusively for bidding purposes, will not amount to a concentration until the bid is won. In the past, the AMC’s approach towards the treatment of similar transactions was far more conservative and JV founders were required to obtain separate approval for the creation of a bidding vehicle before its setup or face a fine for failure to notify qualifying concentrations. In M&A deals involving JVs, many applicants came across 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 outlined in the guidelines.

In other developments, the AMC does not disrupt the work of its merger control department and continued accepting merger filing for review notwithstanding the covid-19 outbreak. As of September 2020, the AMC has already cleared 338 mergers and imposed fines in 31 cases of merger control violations. There is also no observable trend of merger filings being rejected or fast-track reviews being denied as a result of the covid-19 pandemic. While many officers work remotely, the AMC does not lose grip on substantive analysis, maintaining the usual level of scrutiny. Although applicants are encouraged to provide electronic copies of all data via emails, filings are still required to be made in hard copies during normal working hours. During this time the AMC also demonstrates a certain willingness to extend deadlines for responding to written RFIs or to satisfy motions to waive the submission of certain information that are not crucial for review. This attitude, however, does not extend to direct requirements of law, one of which is the legalisation of the documents issued abroad. This becomes problematic for applicants located in jurisdictions where authorities issuing formalised documents are locked down due to the pandemic. Although the AMC’s officers show their understanding of the situation as they sometimes agree to wait for legalised documents until the end of the 15-day waiting period, they are not allowed to proceed with review in substance if the necessary documents are not provided by the end of the required period. These formalities should certainly be taken into account when planning a submission in Ukraine.

Do recent cases or settlements suggest any changes in merger enforcement priorities in your jurisdiction?

In 2019, the AMC imposed two record fines for merger control violations.

The first fine of EUR 1.8 million was imposed on the TAS Group, which is controlled by a former member of the Ukrainian Parliament, Sergei Tygipko, for the acquisition of control over Dniprometyz, a subsidiary of Severstal. This precedent is notable, not only because of the amount of the fine, which is 3.5 times higher than the historical maximum (the previous highest fine reached approximately EUR 500,000 for the acquisition of control over a Ukrainian bank), but also because the authority did not ultimately clear the transaction due to sanctions imposed on Severstal, a Russian steel and mining company controlled by Alexei Mordashov.

The second fine of EUR 2 million was imposed on the DCH Group, which is controlled by Oleksandr Yaroslavsky, another former member of the Ukrainian Parliament, for the acquisition of control over Dnipropetrovsk Metallurgical Plant, a subsidiary of Evraz. By contrast to the Dniprometyz case, the AMC approved the acquisition of control over the Dnipropetrovsk Metallurgical Plant by the DCH Group following the case review. These precedents clearly show the intention of the AMC to increase the level of fines for merger control violations in order to have a greater deterrent effect. Fines for closing transactions that technically meet the filing thresholds but have no effect in Ukraine have been gradually increasing over the last few years but still remain reasonably low reaching the level of EUR 20,000. While the AMC does not specifically target purely technical violations it keeps prosecuting every failure to obtain approval for notifiable transaction that comes onto its radar.

At the same time, it is interesting to observe the courts overruling the AMC’s fining decisions which more and more often give room for appeal. This is definitely a positive indication especially compared with a few years ago when more than 90 per cent of AMC decisions were upheld in courts.

A further notable increase in the AMC’s enforcement efforts may be expected after the implementation of a new anti-BEPS law adopted in Ukraine in 2020. According to the law, Ukrainian residents who own or control foreign companies will have to disclose such companies for taxation. These law requirements are likely to lead many local businesses to restructure their existing operating models to comply with the new rules. Although such restructuring should qualify for intra-group transactions and can be exempt from merger control requirements, the AMC is likely to become interested how such groups were formed in the first place and whether necessary approvals were initially obtained. If relevant approvals were not obtained intra-group restructurings will no longer benefit from the exemption. As the AMC may easily obtain information on group structures from tax authorities, the companies should carefully review their corporate structures with respect to any historical competition law risks.

Are there any trends in merger challenges, settlements or remedies that have emerged over the past year? Any notable deals that have been blocked or cleared subject to conditions?

As mentioned above, in 2019 the AMC conducted 20 Phase II investigations. None of these investigations resulted in prohibition of a transaction while some approvals were granted subject to commitments from the parties.

At the same time, the AMC did not complete the review of all Phase II cases in favour of applicants. Last year, three out of the 20 cases remained undecided. One of these cases related to transactions where notifying parties were subject to sanctions in Ukraine, as the AMC is not allowed to accept or review such types of applications under the law and had to close proceedings without any decision in substance. In two other cases, the AMC concluded that concentrations may lead to a strengthening of the monopoly position of the parties and thus, may not be allowed. In order to avoid decision on prohibition the applicants withdrew their notifications. The AMC is imposing more elaborate remedies when it comes to the threat of anticompetitive behaviour. One of the examples of conditional clearances was an acquisition by Metinvest, a Ukrainian steel and mining group, of the shares of the Dniprovskyi coke plant.

The AMC concluded that the proposed concentration may lead to monopolisation and the substantial limitation of competition on the markets of coal tar oil, nut coke, breeze coke and pitch. In order to eliminate potential negative effects on the market the AMC issued its approval subject to certain obligations imposed on the parties. While in the past, the AMC applied more general protective obligations, the main aim of which is to require the parties to refrain from limiting competition or creating market entry barriers, in this case, the AMC was more specific and obliged the parties to ensure a supply of a certain share (50 per cent or 70 per cent) of products in question to third-party undertakings for a period of three or seven years depending on the products. In addition, the AMC required the parties to submit annual reports to the AMC confirming supply of the respective products.

When it comes to remedy discussions, the AMC noticeably increased its amount of contact with other competition authorities. The officers now often seek opinion of the European Commission on market definition and potential effects on the market in Phase II investigations. Thus, if a concentration is reviewed by both authorities in parallel many synergies could be achieved during the review. Last year, in one of the Phase II cases, we managed to avoid remedies in Ukraine by convincing the AMC that remedies imposed on the parties by the European Commission eliminated any competition concerns in Ukraine as well.

Although behavioural remedies remain the most common type of remedies applied in merger control cases, the AMC is now looking into structural remedies as a sanction in abuse of dominance cases. In 2019, the AMC ruled on the compulsory split of the Ostchem Group owned by the Ukrainian businessman, Dmytro Firtash, and simultaneously imposed a fine of EUR 3.8 million on one of the companies within the Ostchem Group, for an infringement amounting to the abuse of dominance in the Ukrainian market of nitrogen fertilisers. This is the first AMC decision on compulsory split adopted in 24 years. 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 same type of sanctions in complex merger control proceedings where, to date, behavioural remedies were mostly applied.

Have the authorities released any key studies or guidelines or announced other significant changes that impact merger control in your jurisdiction in the past year?

In addition to the JV guidelines, the AMC also amended merger control regulations and introduced draft guidelines providing more clarity on approaches applied during the AMC’s review. The most notable of them are a new methodology of market definition and methodology on establishment of monopoly position; and new guidelines on the application of a hypothetical monopolist test, known as the SSNIP test.

The competition laws were also amended by adding an additional exemption from the notion of a concentration. Acquisition by a bank or any other financial institution of certain types of assets has been excluded from transactions triggering a merger control filing obligation. However, the aforementioned provisions are applicable only if such acquisition is envisaged by the financial restructuring plan under the Law of Ukraine ‘On Financial Restructuring’ and will be terminated upon expiry of this law. The AMC has also amended its merger control regulation reflecting these amendments to the law and introducing the new definition of ‘assets acquisition’ that amount to a concentration.

In addition, the AMC also amended its regulation on the requirements for concerted practices that fall under general exemption from AMC’s approval. In Ukraine, non-compete restrictions that are common in M&A transactions require a separate clearance for concerted practices. As with merger control, an approval for non-compete was only required when specific financial thresholds were exceeded by the parties. Following recent amendments, the financial thresholds were removed and any non-compete restrictions related to division of the markets, restriction of production, or sale or purchase of goods, now require prior approval of the AMC.

In terms of sectoral guidelines, the AMC continued its study of pharmaceutical markets and issued its guidelines on the application of competition laws by participants of pharmaceutical markets in terms of vertical relations for supply and promotion of pharmaceutical products. This document mostly focused on the assessment of concerted practices, but also provides for helpful insight on market definition which could be applied in merger review.

Do you expect any significant changes to merger control rules? How could that change your client advocacy before the authorities? What changes would you like to see implemented in your jurisdiction?

For many years now, the AMC has been trying to solve one of the key concerns of the Ukrainian merger control regime: to prevent sellers calculating targets’ figures at testing against notifiable thresholds. This exclusion of sellers’ figures has been widely expected by the business on mostly international and, to a certain extent, local levels for more than a decade and is one of the most long-awaited changes to the Ukrainian merger control regime by the AMC’s new leadership.

So far, several sets of amendments to the law have been proposed for public discussion and some of them have been included into the draft law introduced to the Ukrainian parliament at the beginning of the year. Along with the exclusion of the sellers’ figures, amendments provide for other changes to filing thresholds aiming to prevent any loopholes allowing to avoid a filing requirement for transactions having potential effect on Ukrainian market. As of today, these proposed amendments have not been adopted as law and it is still unclear when such amendments will be implemented. The draft law is widely discussed among the business and legal communities and numerous further amendments thereto are expected.

The business community is also still expecting more clarity from the AMC on a number of other vital issues, including the application of a fast-track review procedure, and similar treatment of non-compete obligations to ancillary restraints in the European Union.

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