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Dmitry Taranyk

Merger Control in Ukraine

An interview with Dmitry Taranyk, Valentyna Hvozd & Julia Kuyda

Dmitry Taranyk is a counsel at Sayenko Kharenko, focusing on antitrust and competition. He advises clients on a variety of antitrust law aspects, involving merger control, concerted practices, abuse of dominance, monopolisation and unfair competition. He also counsels on antitrust matters in relation to multinational and domestic acquisitions and joint ventures, including merger clearances by the Antimonopoly Committee of Ukraine. His experience includes obtaining competition clearance for numerous mergers and acquisitions by banks and companies in the agricultural, electricity, food processing, insurance and shipbuilding industries (Apple, Cadbury, Citi, Coca-Cola, Comcast, Goldman Sachs, Hewlett Packard, Japan Tobacco, Philips, Porsche, Société Générale and The Walt Disney Company, among others).

Valentyna Hvozd is a senior associate focusing on antitrust and competition matters. Her expertise includes various aspects of competition law matters, including merger control, concerted practices, abuse of dominance, and unfair competition. She has particular experience in multinational and domestic merger clearance cases, developing compliance programmes, as well as advising on complex unfair competition law issues bordering with intellectual property. She regularly represents clients before the Antimonopoly Committee of Ukraine and been involved in a number of high-profile matters in the banking, financial, agricultural, chemical, electricity, food and consumer products, insurance and tobacco sectors.

Julia Kuyda is an associate, specialising in antitrust and competition matters. She regularly advises clients on merger control rules, concerted practices, abuse of dominance, as well as unfair competition. She has been involved in a number of matters in the agriculture, automotive, banking, food and beverages, pharmaceutical and health care, and transport and logistics sectors.

"Based on the past few years, the Concentration Department has considered approximately 1,000 concentrations annually."

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GTDT: What have been the key developments in the past year or so in merger control in your jurisdiction?

Dmitry Taranyk, Valentyna Hvozd & Julia Kuyda: The Antimonopoly Committee of Ukraine (AMC) is the only state body responsible for merger control in Ukraine. Specifically, the Concentration Department of the AMC monitors mergers and exercises control over them. Based on the past few years, the Concentration Department has considered approximately 1,000 concentrations annually. This year the Concentration Department kept the same review level despite the fact that the AMC suffered significant employee losses. The budget of the AMC was cut down and the regulator had to lay off more than 30 per cent of its staff. As a result, in 2014 the number of employees working in the Concentration Department dropped from 21 to 14. Notwithstanding this, the AMC officers did not only maintain the high level of concentration reviews but developed new detection practices by enforcing competition laws more rigorously.

One of the favourite instruments used by the AMC to discover failure to notify the deal is an electronic database that tracks control links between undertakings. While this database was only introduced in 2011, it has proven to be effective and the AMC now easily compares the groups to discover any unsanctioned changes. In addition, the AMC officers constantly monitor press releases and websites of other competition agencies worldwide (mainly the European Commission and the Federal Trade Commission). When any officer come across familiar brands involved in the deal, the AMC issues letters to the parties (usually big multinational corporations) asking whether the approval of the AMC was received for this deal or not. Having said that, the AMC has significantly progressed in detecting unsanctioned mergers in Ukraine over the past year.

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?

DT, VH & JK: Similarly to the European Merger Control Regulation, the merger review process is split into two stages - Phase I and Phase II reviews. Each denotes a different time frame and a different level of scrutiny of a particular concentration and the parties' activities in Ukraine.

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Valentyna Hvozd

The Phase I review is supposed to be completed by the AMC within 45 days from the date of its submission. During the first 15 days, the AMC will conduct an initial review, and it may return the filing without considering it if it determines that it is incomplete. During the subsequent 30-day period, the AMC analyses the submitted information and decides whether to grant or deny the approval.

It should be pointed out that the AMC is an extremely formalistic agency, especially in light of the current unstable situation in Ukraine, and it adheres to the deadlines prescribed by the law very strictly.

On the other hand, taking into account that the AMC is heavily overloaded, it may sometimes lack resources to complete the market analysis within Phase I and grant the approval by the end of 45-day review period. In this case, there is no other choice for the AMC to act except by initiating Phase II proceedings, delaying the approval process by months.

As to the timing, more specifically, the Phase II review may last up to three months, and this period can be suspended until the AMC receives any subsequently requested information. Generally, the authority tends to open this second review stage if it discovers any grounds based on which the concentration can be prohibited or needs to engage in complicated research (that is, if the AMC comes to the conclusion that the relevant market is an important one, or that the concentration involves parties with very high market shares). Thus, the possibility of a Phase II review largely depends on how wide the relevant product market is, as well as the relevant market shares of the parties to the concentration. If the parties' combined market share is close to 35 per cent of the relevant product market, denoting dominance (monopoly), it is likely that the AMC will initiate a Phase II review. In addition, the time frame of the AMC's review depends on whether the AMC currently has any ongoing investigations in this market. Moreover, if the authority comes to believe that the relevant concentration may lead to the creation or strengthening of a dominant (monopoly) position, or to the significant restriction of competition on any market, or a part thereof, in Ukraine, it will not issue its approval.

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Julia Kuyda

There is no explicit possibility to accelerate the review procedure provided by the Ukrainian competition laws. This is primarily because the AMC has historically been suspicious of undertakings attempting to accelerate the merger review process; the prevalent view within the authority is that such intentions represent covert attempts to obscure the merger review process and distract the AMC's attention from some important facts, or even anti-competitive effects, of the merger. In practice, however, a possibility exists to obtain a clearance decision on an expedited basis. The success of efforts to accelerate the merger review procedure exclusively depends on the strength of the arguments put forward by the applicants. Successful arguments include the necessity to complete a tender offer to avoid bankruptcy or insolvency, for example. In other words, in order to obtain a clearance decision on an expedited basis, applicants must make the AMC's involvement as easy as possible.

GTDT: What do recent cases tell us about the enforcement priorities of the authorities in your jurisdiction?

DT, VH & JK: As mentioned earlier, the AMC is likely to initiate a Phase II review if the parties' combined market share is close to 35 per cent of the relevant product market and in practice higher that 20 per cent. In addition, if the authority comes to believe that the relevant concentration may lead to the creation or strengthening of a dominant (monopoly) position, or to the significant restriction of competition on any market, or a part thereof, in Ukraine, it will not issue its approval. As a practical matter, prohibitions are rather rare for Ukraine and usually there are only one or two cases a year if any at all.

Irrespective of the level of the market shares of the parties to the transaction, the AMC may be also interested in conducting an in-depth investigation on socially important markets. In recent years, the AMC has paid particular interest to the pharmacy, fuel, retail, communications and banking markets.

GTDT: Have there been any developments in the kinds of evidence that the authorities in your jurisdiction review in assessing mergers?

"Whenever the market concerned is new to the AMC, the regulator very much appreciates all the information provided by the parties, including independent market reports disclosing detailed information on the respective markets."

DT, VH & JK: Whenever the market concerned is new to the AMC, the regulator very much appreciates all the information provided by the parties, including independent market reports disclosing detailed information on the respective markets. In situations where the AMC believes that the information provided by the parties does not shed the light on the market or the AMC does not have any of its own experts in the area, the regulator usually contacts independent external specialists to obtain more details and a better understanding. In practice, the AMC contacts state bodies or state marketing agencies depending on the area to be examined. In some cases, the AMC may even contact a university professor to get a professional opinion on the specific market. At the same time, given that such independent external specialists are usually state authorities, their involvement into the process may cause delays to the review process.

The only downside the AMC's practice of collecting evidence is that it takes the authority a long time to implement it. In particular, it may take weeks for the AMC to come up with proper questions for an expert, preparation of the report also usually takes a few weeks, and additional weeks are needed for the AMC to analyse the response and come to a conclusion. All of this may delay the concentration review procedure by months. To avoid such delay, the AMC appreciates it when the parties provide an independent report from an expert in the area of the market concerned.

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.

DT, VH & JK: The AMC's annual report for 2014 has not been released yet. Based on the AMC's annual report for 2013, 78.4 per cent of reviewed merger filings did not contain any threats to Ukrainian economic competition and were approved during Phase I review, while the remaining 21.6 per cent required in-depth investigations and were approved under Phase II review.

As a result of in-depth investigations, the AMC issued only eight approvals that contained behavioural remedies. The AMC concluded that in these eight cases the transaction may have had some negative impact on economic competition in Ukraine. At the same time, none of the mergers considered by the AMC in 2013 were prohibited.

As an illustration, let us discuss the acquisition of 50 per cent of shares by Jura-Cement-Fabriken AG in Lafarge Ukraine Holding. In the process of review, the AMC identified that owing to the significant market share of the parties, the transaction may have a negative impact on competition on the Ukrainian cement market. Given this finding, the AMC issued the decision clearing the transaction that contained behavioural remedies, in particular, concerning prices and the terms of supplying products. In addition, the AMC also obliged Jura-Cement-Fabriken AG to submit to the authority every six months for three years data regarding the volume of production and sale, primary consumers, the information on the average prime cost of the products, etc.

Although the AMC's annual report for 2014 has not yet been released, considering the authority's recent practice we can predict that the number of cases approved by the authority under Phase II in 2014 has increased by about 30 per cent in comparison with 2013.

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?

DT, VH & JK: Since 2008 there have been a number of attempts to amend the Ukrainian competition law, including the parts relating to merger control. The most important development relates to the financial thresholds, which are the triggering factor for the Ukrainian filing requirement. It seems that the Ukrainian parliament is very close to finally enacting amendments to the financial thresholds that were instigated in 2008. Additionally, the amendments are intended to fully acknowledge the recommendations issued by the International Competition Network, requiring that merger notification thresholds should have an appropriate level of local nexus, such as material sales or assets within the respective jurisdiction.

Under the first proposed set of amendments, the combined total value of assets or combined sales (turnover) sufficient to trigger the Ukrainian filing requirement should be increased from €12 million to €30 million. The amendment also envisages that at least two of the parties to the concentration should have assets or sales in Ukraine amounting to a minimum of €2.5 million, instead of €1 million by only one of the parties. The proposal effectively changes the current status quo, where a merger filing Ukraine may be required if only one party to the concentration generates sufficient sales or owns sufficiently large assets in Ukraine.

Alternatively, the second proposed amendment provides for the AMC's approval in cases where the aggregate Ukrainian asset value or sales turnover for one of the parties to the deal exceeds €30 million, while the aggregate worldwide asset value or sales turnover of any other party exceeds €30 million.

The increase of the existing thresholds by 2.5 times and, most importantly, the fact that two parties should meet this threshold, is intended to exclude a number of deals having no significant impact on competition in Ukraine from the need to seek merger clearance in the country.

These amendments were scheduled for adoption in 2014, but the unstable political situation in Ukraine has shifted the priorities of the Ukrainian parliament. However, we hope that in 2015 the lawmakers will return to the original agenda and the expectations of the business community will finally be rewarded by adoption of the respective amendments to the Competition Law.

"As a result of the expected increase of the financial thresholds, the number of transactions subject to clearance in Ukraine, especially foreign-to-foreign transactions, is likely to fall dramatically."

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As a result of the expected increase of the financial thresholds, the number of transactions subject to clearance in Ukraine, especially foreign-to-foreign transactions, is likely to fall dramatically. This should free up the resources that the AMC may use to monitor ongoing transactions and review historical transactions in an attempt to find past violations within the five-year limitation period that could still be prosecuted. Violations can also be easily discovered when the AMC compares different notifications, including in the electronic database that easily tracks the corporate history of an undertaking as discussed earlier.

The Inside Track

What are the most important skills and qualities needed by an adviser in this area?

One of the key skills and qualities an adviser should have in merger control proceedings is profound knowledge and comprehensive understanding of various kinds of business. This allows the adviser to properly define the market, geographic and commodity boundaries, interchangeability criteria, etc.

In addition, it is crucial for the adviser to organise an effective communication channel between the parties and the regulator. On the one hand, the representatives of business absolutely need to understand the views of the regulator and reasoning of possible issues. On the other hand, it is vital for the regulator to understand the parties' business model.

On a separate note, the adviser should constantly keep track of the main developments in the regulator's practice and updates to the applicable legislation.

What are the key things for the parties and their advisers to get right for the review process to go smoothly?

In order for the merger review process to go smoothly, the client should be flexible and be ready to listen to the regulator's arguments with respect to the market definition, its boundaries, interchangeability of products, etc, and be able to accept different views and approaches to market definition. For those clients who follow the regulator's advice and are ready to fulfil its requirements regarding the provision of information, the review process will be much smoother than for those clients who take an aggressive approach and insist on their point of view as being the only view.

What were the most interesting or challenging cases you have dealt with in the past year?

During the past few years, the AMC paid much more attention to socially important business areas, including the pharmaceutical sector. Pharmacy has been within the sights of the AMC for many years. With this in mind, the regulator already has its own view, knowledge and understanding of the market definition in the sector. In particular, the regulator usually defines the market according to ATC3 classification. However, this year we presented the client's approach to defining the relevant market based on the disease type, rather than based on ATC3 classification. After lengthy discussions, the AMC has agreed with the suggested approach.

Dmitry Taranyk, Valentyna Hvozd & Julia Kuyda
Sayenko Kharenko

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