Alexander Viktorov is counsel at Freshfields Bruckhaus Deringer LLP, heading the antitrust, competition and trade (ACT) practice of the Moscow office. Alexander’s significant experience includes advising various multinational companies and Russian clients on Russian law aspects of their cross-border M&A transactions, including preparation of merger control and foreign investment filings and obtaining clearances from the Federal Antimonopoly Service of Russia (FAS) and the Government Commission in charge of foreign investments in strategic assets.
Olga Kovtunova is a Moscow ACT practice associate at Freshfields Bruckhaus Deringer LLP. Her experience includes advising clients in the industrial, commercial, financial and service sectors on various Russian merger control aspects and laws on foreign investments in strategic assets.
GTDT: What have been the key developments in the past year or so in merger control in your jurisdiction?
Alexander Viktorov and Olga Kovtunova: According to the statistics published by the Federal Antimonopoly Service of Russia (FAS), following the adoption of a set of amendments to the Russian Law on Protection of Competition dated 26 July 2006 (LPC) in 2016, the trend for reduction in the number of merger control filings continues. This is due to the elimination of the register of companies whose market share exceeds 35 per cent (previously, being on the register automatically triggered the filing requirement even if the relevant asset or turnover thresholds were not met), and the increase of certain notification thresholds.
As previously, the FAS is focused on the ‘markets of social importance’ that include markets for energy, food, agriculture, pharmaceuticals, telecommunications, transportation and some others. Special attention is paid to global deals involving interconnected markets and digital technologies. Generally, digitalisation of economy is one of the major concerns of the authority, in light of which the new set of proposed amendments to the LPC, prepared by the FAS and known as the Fifth ‘Digital’ Antimonopoly Package, was published and widely discussed within the business community in 2018. The proposed amendments include, among other things, certain changes to the merger control rules, and are expected to be adopted later in 2019 and enacted in 2020. We will dwell on them separately.
Public interest issues continue to arise primarily where foreign investments are made into companies that are viewed as ‘strategic’ for the purposes of the Foreign Strategic Investments Law. In 2018, a new set of amendments to that law was enacted, which provided, basically, that private foreign investors are only allowed to acquire control over strategic companies if they disclose information on their controlling parties and beneficiaries to the FAS to its satisfaction and that, before such disclosure is made, they are generally viewed as sovereign foreign investors, to which the much stricter regulatory regime applies. The new disclosure requirements seem to be quite burdensome but we have yet to see how they will work in practice.
As regards non-strategic companies, the Bayer/Monsanto deal is an example of a case in which the public interest element was present. As one of the remedies imposed by the FAS was the requirement that Bayer should transfer its selected technologies to Russian companies and give them access to its data bank, that was perceived by many as protection of Russian public interest, in particular food security of the state.
Generally, the Bayer/Monsanto decision issued in April 2018 may be viewed as the most significant in 2018 for the reason that the FAS used new approaches to merger assessment and imposed remedies that are new as to their form and content. We will discuss this decision in greater detail separately.
GTDT: What lessons can be learned from recent cases to help merger parties manage the review process and allay authority concerns at an early stage?
AV & OK: Generally, as in the past, cases that raise no competition concerns, are complete, meet all applicable requirements (such as, for example, formalisation of documents) and contain information aimed at pre-empting the FAS’s likely questions (such as market share information) are typically cleared within 30 days of the filing date. If the deal gives rise to competition concerns, the FAS typically extends the review period by up to two additional months, and the extension decision should be issued by the expiry of the initial 30 days after submission. In our experience, the FAS has always (except for maybe two or three cases) met the statutory deadlines for decisions. At the same time, the timing of the review process is not always predictable, as the FAS has broad discretion in determining whether the deal gives rise to concerns and, accordingly, whether to extend the review period.
In addition, the FAS may return the filing if it finds it to be incomplete, and in this case the review period will start anew as soon as the full set of documents is submitted. In this context, and although the preparation of the filing may take a month or even more, it is advisable to submit it only when all information and documents required by the law are available and duly formalised and processed. In particular, the client should be ready to provide the constituent, registration and some other documents of the purchaser and the target (documents issued abroad must carry an apostille or be legalised by a Russian consulate in the relevant country, need to be translated into Russian and the translation must be certified by a Russian notary), information on companies in their respective groups and also on the ultimate beneficiaries of the groups, the market share information and rather extensive information on the groups’ business activities in Russia for two years preceding the filing, including performance results, key customers and key suppliers. It is critical, therefore, when planning a deal, to factor in sufficient time for preparation of the Russian filing.
Prohibition remains rare in practice. According to the FAS’s officials, only about 1.5 per cent of the notified transactions are blocked. Generally, the test for clearance is competition-related – the FAS may refuse clearance if it finds that the transaction leads or may lead to a limitation of competition, including as a result of creating or strengthening a dominant position. However, the FAS may also refuse clearance if it believes that information in the filing is false or insufficient.
The review process is generally not public, and communication between an applicant and the authority is formal. The FAS would typically issue a formal written request if it needs additional information or clarifications. Such formal requests may result in an extension of the review period, and from that perspective it is advisable to avoid them, including by means of making the filing as complete as possible and trying to pre-empt the FAS’s queries. However, it is usually possible for an applicant to call the case-handler to check whether further input is required and generally monitor the process to the extent possible. Such communication substantially facilitates the process, but it is only available if the filing is not designated as confidential (if it is, the review process is fully closed) and if the case-handler is reasonably friendly (most of them are). The officers at a higher level, participating in the approval process (eg, heads of the FAS’s industry departments) are generally also accessible and open to discussions.
That said, in our view, in 2018 the approach to review of merger filings used by certain FAS departments became more formalistic. Thus, we saw an increased number of extensions of review periods of our filings on formal grounds in cases that raised no competition concerns. In a number of cases, we also experienced the case-handlers’ reluctance to talk to us or to cooperate on technical aspects. By way of example, there were several cases where the case-handlers refused to give us requests for information personally and instead sent them by regular post, which significantly delayed the process. One of these requests was sent to us in December and, because of the very busy season for the post was stuck somewhere on its way to us: while the distance between the FAS and our office is about 7 kilometers, the request was not delivered for 20 days, and it was only after we started formal ‘find-a-lost-letter’ proceedings with the post and provided evidence of same to the FAS, the FAS agreed to share a copy of the request with us. We have also noticed that the case-handlers were less happy to discuss information requests over phone, which we think may be because the authority is overloaded and tends to take advantage of the extensions. In light of such tendency, we make our filings as complete as possible and thus try to pre-empt the FAS’s requests for information that is not required as a matter of law, but that, if not provided up-front voluntarily, is often requested by the FAS additionally (eg, the market share information).
GTDT: What do recent cases tell us about the enforcement priorities of the authorities in your jurisdiction?
AV & OK: The FAS is a governmental agency in charge of securing competition in Russia and enforcement of the LPC. Generally, the FAS is independent in making decisions within the scope of its authority, including in the merger control sphere. As previously, the authority pays particular attention to mergers between competitors and especially where it suspects that the transaction may give rise to competition concerns.
In such cases, the FAS typically extends the initial 30-day review period by an additional two months in order to conduct full-scale market analysis, in the context of which it requests very detailed factual information from the parties involved. Where, as a result of such in-depth analysis, the FAS comes to the conclusion that the deal is problematic from a competition law perspective, it imposes remedies on the parties (typically, of a behavioural nature) or even blocks the deal (which occurs rarely).
It is noteworthy that, following the Bayer/Monsanto case, we saw in the press numerous comments of the FAS officials on the necessity to change traditional approaches to merger control analysis in relation to deals that involve ‘network effects’, transfer of innovation technologies and big data. Accordingly, we expect that such deals may become hardest to get approval for in the near future.
As previously, certain transactions that involve the markets of ‘social importance’, foreign state-owned investors or assets that qualify as strategic under Russian national security law are subjected to closer political scrutiny. As a result, the review of such transactions takes longer and its result is less predictable. It is noteworthy that the government exercises control over certain transactions relating to the acquisition by foreign investors of the shares in, or assets of, Russian strategic companies. There is a list of 46 types of strategic activities (sectors) that have political interest for Russia. Among them are defence, nuclear, aviation and space, mining and exploration of certain deposits, natural monopolies, mass media, etc.
Such transactions require prior approval by a special governmental commission in accordance with the Foreign Strategic Investments Law, and the merger control review of those cases is suspended until the strategic clearance is granted, which, by statute, may take up to six months but in practice may take even longer. The FAS, as the governmental body authorised to oversee foreign investments in Russia, reviews the strategic filing, takes some preparatory steps and forwards the case, together with its recommendations, for review by the governmental commission, which is the final decision-maker. The preparatory steps include obtaining advisory opinions from the Federal Security Service, the Ministry of Defence and, at the FAS’s discretion and depending on the case in hand, from the relevant industry authority.
In 2017, changes were introduced to Russian foreign investments regime, which gave the Russian authorities a very wide discretion in determining whether a transaction requires a foreign investment filing or not. Under those new rules, the Chairman of the Government Commission, which post is held by the Prime Minister by virtue of his or her office, has the statutory right to decide, in order to ensure the defence of the country and the security of the state, that any transaction made by a foreign investor in relation to a Russian company, requires a strategic filing. We are not aware of any cases where the new rule was applied in 2018, and think that such decisions would be taken rarely and in extraordinary circumstances only – Russian foreign investment law is so comprehensive and covers such a wide range of transactions that the Chairman of the Government Commission would not, in most cases, exercise his discretion.
Generally, public interest seems to be taking on increased importance in merger control review. A notable example in this respect is the Bayer/Monsanto deal, where the FAS required that Bayer should transfer certain technologies in the area of seeds breeding and digital farming to Russian companies and give them access to its data bank, so that they could compete with foreign companies on equal terms – the case is very important, and we will say more about it later. It is noteworthy that, following the issuance of conditional clearance in relation to the Bayer/Monsanto transaction, the FAS announced that it would require Syngenta and DuPont, which in 2016 and 2017 entered into transactions relevant to the Russian seeds markets that had been unconditionally cleared by the FAS (Dow Chemical/DuPont deal and ChemChina/Syngenta deal), to work in Russia on conditions similar to those imposed on Bayer.
GTDT: Have there been any developments in the kinds of evidence that the authorities in your jurisdiction review in assessing mergers?
AV & OK: As regards highly complicated cases involving new business models comprising innovative technologies, we understand from the Bayer/Monsanto case that the authority is prepared to conduct deep economic analysis using new approaches to defining and assessing markets and structuring remedies. We further understand that, in order to implement such new approaches, the authority is ready to cooperate closely with other relevant governmental authorities, scientific and business communities and antimonopoly authorities of other countries.
In relation to ‘traditional’ cases involving significant overlaps and thus giving rise to competition concerns, in 2018 we did not see any developments in the kinds of evidence that the FAS reviews in assessing mergers. As previously, the authority typically initiates a market analysis and circulates questionnaires to market participants asking them to provide their views on the situation in the market, including their knowledge of existing and potential competitors, and on existing economic, administrative, strategic and other barriers to market entry.
Submission of expert economic evidence in the filing is not a ‘must’, but often turns out to be useful in complicated cases. Also, in such cases it may be useful to prepare evidence that the deal meets permissibility criteria set out in the LPC (eg, evidence that there would be positive effects such as improvement in production and sales, economic and technological progress, raising competitiveness of Russian products abroad and benefits to consumers comparable to those to the parties) and either include such evidence in the application up front or submit it at a later stage if the authority expresses any concerns.
When assessing a deal, the authority should take evidence submitted within the filing into account. That said, currently, the FAS’s decisions issued upon review of filings do not contain information as to which exactly details were taken into account in the course of review. It is expected that the Fifth Antimonopoly Package will introduce a new rule that will require the FAS to issue reports describing the circumstances of the case, which, as we understand, will include description of the economic data taken into account. It is expected that such reports will be issued prior to issuance of the final decisions and, based on them, the parties will be able to submit additional arguments to support permissibility of the notified transaction.
Speaking about third parties’ possible influence on the outcome of the review, as previously, where the deal gives rise to competition concerns and the FAS extends the review period, it would typically publish, on its website, the extension decision and an invitation to all interested third parties to provide comments on the possible impact of the transaction on competition. Given that the final decision made by the FAS upon the review is typically very brief (half a page), it is hardly possible to assess whether third parties’ comments, if any, influenced the outcome of the review.
GTDT: Talk us through any notable deals that have been prohibited, cleared subject to conditions or referred for in-depth review in the past year.
AV & OK: As mentioned above, based on the FAS’s statistics, only 1.5 per cent of the notified transactions are blocked. In 2018, we saw on the FAS’s website a number of decisions rejecting clearance on the ground that the deals would lead to limitation of competition owing to strengthening of dominant position. As information included in those decisions is very limited, we cannot comment on the specific details of those deals, but such cases show that, as a practical matter, the risk that the FAS may block a deal in the case of competition concerns is real.
As regards notable deals referred for in-depth review and cleared subject to conditions, Bayer/Monsanto is the most significant one. In that case the authority used the new approach to merger control analysis, whereby it assessed the deal not only on the basis of the existing overlaps between the parties’ activities and their market shares, but also assessed the effects of combination of the innovation technologies and know-how owned by the parties. The authority conducted an in-depth review in course of which it consulted with experts from different governmental authorities, scientists, representatives of the business community as well as with foreign antitrust authorities. Moreover, the FAS held regular meetings with the parties and discussed possible negative effects of the transactions and measures to avoid such effects with them. Ultimately, the FAS imposed conditions that are totally new in substance. In particular, the FAS required that Bayer transfer certain technologies in the area of seeds breeding and digital farming to Russian companies for a period of five years and give them access to its data bank. Also, the FAS for the first time involved a trustee to monitor implementation of the remedies. Namely, the FAS required Bayer to enter into an agreement with the National Research University Higher School of Economics (or its affiliate) that would monitor Bayer’s transfer of technologies.
The FAS is working on creation of a special digital filing system that will make the electronic submission, and the review process in general, more convenient.”>
GTDT: Do you expect enforcement policy or the merger control rules to change in the near future? If so, what do you predict will be the impact on business?
AV & OK: Over the past years, several complex global transactions reviewed by the FAS, including the Bayer/Monsanto transaction, revealed a number of problem zones in the merger control rules that require changes to the currently effective legislation, especially in high-technology sectors. The FAS took the relevant experience into account in the course of preparation of a new set of amendments to the LPC, called the Fifth ‘Digital’ Antimonopoly Package. Some of the proposed changes relate to the merger control procedure. More specifically, the proposed amendments provide that the authority will have the right to extend the review period for up to three years (such extensions, however, will be subject to approval by the Russian government and may be applied in relation to multi-jurisdictional cross-border transactions only). Furthermore, as part of the new merger control rules, the FAS will have to prepare a report setting out the details of the assessment and send it to the parties before issuance of the final decision, so that the parties could submit additional evidence that the notified transaction is permissible. The parties will also have the right to offer remedies to the authority, which procedure is currently not envisaged by the LPC. Also, it is expected that a new notification threshold will be introduced, which will be based on the value of the proposed transaction: namely, if the value of the proposed transaction exceeds 7 billion roubles, the transaction will require clearance even if the relevant asset or turnover thresholds are not met. Furthermore, the proposed changes envisage introduction of the institute of independent trustees, which will control and monitor implementation of the remedies imposed.
The amendments are yet to be approved by the Russian government and the State Duma. According to the Head of the FAS, the amendments are expected to be adopted and come into force in 2020.
In addition to the above, certain changes in the procedure for the submission of filings are expected. Namely, the FAS is considering replacing the procedure for ‘physical’ submission of merger control filings with electronic submission. The electronic submission is envisaged by the currently effective regulations but in practice is used rarely owing to a number of technical aspects. The FAS is working on creation of a special digital filing system that will make the electronic submission, and the review process in general, more convenient.
The Inside Track
What are the most important skills and qualities needed by an adviser in this area?
We would say that the most important, in addition to knowing the law and the relevant court practice and the practice of the authority (which is not unique to merger control and are required for practising any regulatory area of law), are an ability to look at the proposed transaction (eg, in terms of its impact on competition) and on the related filing (eg, in terms of its completeness and comprehensiveness) through the eyes of the FAS’s personnel of various levels of seniority, and therefore being able to properly advise a client on the chances of getting the deal cleared, likely time of review and ways to make the filing fully complete while disclosing as little sensitive information as possible. Another important quality (which, again, is not specific to merger control) is to be able to strike the right balance between legal and practical advice, which is a must for dealing with such clients’ questions as ‘What are the risks if we close without clearance?’ and the like. Also, the adviser must be creative in all, even most technical aspects of preparation of a merger filing and obtaining clearance. We, for example, developed a ‘know-how’ that sometimes makes it easier for our clients to formalise non-Russian documents and helps to save time.
What are the key things for the parties and their advisers to get right for the review process to go smoothly?
In our experience, the key things the parties and their advisers should do to get through the review process as smoothly as possible are: estimate the time required to prepare the filing and obtain clearance, taking into account all peculiarities of the Russian review process; estimate substantive competition issues of the deal and work out an approach that would help to present the deal to the FAS in a most favourable way; and comply with all formal requirements for the filing and include information that would pre-empt the FAS queries and thus reduce the risk of delays.
While Russian merger control rules are similar to those of other jurisdictions in some aspects, certain requirements in the merger control context are Russia-specific, certain provisions of the LPC are still open to interpretation and the practice of application of the LPC is still evolving. Furthermore, some rules and concepts commonly used in international transactions may not work or be enforceable in Russia, and may even subject the parties to certain risks (with non-compete being one example). It is critical, therefore, that a Russian competition lawyer is involved at an early stage of the transaction structuring and planning process.
What were the most interesting or challenging cases you have dealt with in the past year?
We have been involved in several high-profile global deals as Russian antitrust advisers in the past year, and the most interesting and challenging cases include advising Japan Tobacco International, the No. 1 manufacturer of tobacco products in Russia, on the Russian antitrust aspects of its acquisition of the Donskoy Tabak group, the No. 4 manufacturer of tobacco products in Russia, for approximately US$1.6 billion. Our work included preparation of the Russian merger control filing and obtaining clearance from the FAS. Another case to highlight is advising Knauf, a leading international manufacturer of construction and insulation materials, construction equipment and tools, on the Russian antitrust aspects of its proposed acquisition from Armstrong, a major producer of ceiling, wall and suspension system solutions, of its modular suspended ceilings business in EMEA and the APAC region for US$330 million. Our work included preparation of the merger control filing and obtaining unconditional clearance from the FAS. Furthermore, we advised American Express GBT (GBT) on the Russian antitrust and foreign investment aspects of its recommended public takeover offer to acquire the entirety of Hogg Robinson Plc, a UK public listed company. GBT and Hogg Robinson are two of the world’s leading business travel management companies, operating in more than 100 countries around the globe and serving the biggest corporate clients in the world. Our work included preparation of antitrust and foreign investment filings and obtaining clearance from the FAS. We also worked on a number of other notable deals that, unfortunately, we cannot name for confidentiality reasons.
Alexander Viktorov and Olga Kovtunova
Freshfields Bruckhaus Deringer LLP