Clearing the Hurdles of the Competition Law
Olga Ivlyeva
A number of important steps were taken in Ukraine last year in order to adapt Ukrainian merger control regulations to the legislation of the European Union. To name a few: merger filing thresholds were significantly increased and a new Merger Regulation1 was issued by the national competition authority (the Antimonopoly Committee of Ukraine).
The merger filing thresholds that existed before the increase did not correspond to market realities, resulting in a large number of minor transactions without any impact on competition in Ukraine attracting the attention of the local competition authority. As an example, an acquirer owning assets exceeding EUR 12 million worldwide and only EUR 1 million in Ukraine was obliged to ask for merger approval of the Antimonopoly Committee of Ukraine (AMCU) even in case of purchase of a shell company if the worldwide assets of the seller’s group exceeded EUR 1 million.
As a result of the amendments, a two-tier test was introduced according to which AMCU merger clearance is required for concentrations2 where:
the aggregate worldwide asset value or turnover of the parties to the concentration exceeded EUR 30 million and aggregate Ukrainian asset value or Ukrainian turnover of each of at least two parties to the concentration exceeded EUR 4 million in the last financial year, or
the aggregate Ukrainian asset value or Ukrainian turnover of the target or one of the founders of a new entity exceeded EUR 8 million, and the worldwide turnover of at least one other party to the concentration exceeded EUR 150 million in the last financial year.
It goes without saying that the increase in merger filing thresholds resulted in a fall in the number of transactions notified to the AMCU, which is a very positive sign for business. However, certain issues relating to mergers are still treated by Ukrainian competition laws differently than in the European Union. Such particularities of national regulation should be considered carefully to avoid unintentional violation of the relevant laws. In this article several most common “traps” of Ukrainian merger control regulations are described.
Certain actions may be qualified as concentrations that are notifiable in Ukraine, although in fact they neither have a Ukrainian nexus nor involve a transfer of control
Purchase of a foreign company with no nexus to Ukraine may still require AMCU merger clearance
One could consider that an acquisition of a foreign company without assets and turnover in Ukraine should not be subject to the approval of the local competition authority as the transaction does not have the local nexus. However, this is not the case in Ukraine. Ukrainian legislation does not contain a notion of “undertakings concerned”. Instead, it treats legal entities and individuals connected by control relations as a single undertaking. In other words, financials of all undertakings connected by control to the target company should be taken into account while calculating the financials of the target. This is true even when certain undertakings of the group have nothing to do with the transaction and the seller ceases to exercise control over the target as a result of concentration. For instance, if the acquirer purchases 100% of shares in a French company (active only in France) from a Dutch entity which had sales in Ukraine last year, such merger may be subject to approval by the AMCU even though the Dutch entity will cease to control the French company and the latter has no nexus to Ukraine. Moreover, due to the above particularities of Ukrainian legislation, even the purchaser of a shell company may be subject to prior receipt of AMCU approval.
Taking into account the above, even when acquiring a company that has no assets and sales in Ukraine, it is particularly important to analyze the structure of the target group and ensure that the group’s assets and sales in Ukraine for the last financial year did not exceed EUR 4 million. If the relevant threshold was exceeded, other merger filing thresholds should be examined to decide on the necessity to file in Ukraine.
Establishment of a new company may also be subject to AMCU approval
It is often the case that a new business is established using the funds of two or more independent investors contributing to the charter capital of a newly-established company. The incorporation of such a joint venture may be subject to prior merger clearance of the AMCU. The same applies to the incorporation of a special purpose vehicle (SPV) by several shareholders for the implementation of a certain transaction. If the relevant financial thresholds are exceeded, two separate merger approvals are required — one for the creation of the SPV and another — for the merger itself. In such case, the establishment of the SPV without AMCU approval is considered a violation of Ukrainian competition regulations, even if the merger itself has not been taken place.
It should be noted that in case of establishment of the company by several independent co-founders, the necessity to file in Ukraine does not depend on the amount of shares to be held by each co-founder in the undertaking. If, for example, one co-founder were to hold 89% of shares in the company and the other — just 11%, AMCU approval for the establishment of the company is still required, given that the financial thresholds are exceeded. To avoid the necessity to file in Ukraine, the first co-founder may establish the company unilaterally (within its group) and then sell 11% of shares to the independent investor.
Appointment of certain officials of a company may be considered a concentration notifiable to the AMCU
Oftentimes (especially with offshore companies) the same individuals occupy managerial positions in several companies of different groups. Such overlapping positions may be considered a concentration requiring approval from the AMCU. Thus, prior to the appointment of individuals to certain managerial positions (e.g. CEO, Chairman of the Supervisory Board or their deputies), it is necessary to ensure that such appointment does not trigger merger filing obligations in Ukraine. In practice, businesses often neglect the above precautions, thereby resulting in violation of the relevant Ukrainian merger control regulations.
Even lease of real estate can be a notifiable concentration in Ukraine
Ukrainian competition regulations define the lease of “assets in the form of an integral property complex” as one of the possible ways of concentration, which may require AMCU approval. At the same time, the definition of an integral property complex in Ukrainian legislation is extremely broad. According to it, an integral property complex is a commercial object with a complete cycle of production, land plot, autonomous utilities and energy supply system. Thus, from the standpoint of Ukrainian legislation, even a gas station may be considered an integral property complex, the lease of which may require the AMCU’s merger clearance. So, before entering into lease agreements for business, it is necessary to ensure that they do not fall within the definition of integral property complex, and if they do, to check the relevant financials to decide whether such lease is subject to approval by the Ukrainian competition authority.
Some Particularities of Ukrainian legislation to be taken into account while structuring a deal
Calculation of group financials
There are a number of uncertainties related to calculation of the group financials for merger control assessment in Ukraine. No official guidelines are issued by the AMCU in this regard. It should be noted that in case of uncertainties regarding the necessity to file in Ukraine, the parties to the merger may apply for the relevant approval “to stay on the safe side”, as the AMCU then does not have the possibility to reject the application arguing that the merger does not require clearance.
Number of approvals for acquisition of business
An acquisition of one business by purchasing the shares of several companies from the same seller generally requires one merger clearance in the European Union. However, it is not the same in Ukraine. The national approach is quite formalistic: each acquisition should be covered by a separate clearance. If, for instance, the business is acquired by way of acquisition of 100% of shares in thirty companies from the same seller, thirty separate approvals from the AMCU will be required. Restructuring the deal may be an option to avoid the necessity to submit a number of applications to the AMCU and pay numerous fees for review of the applications. For example, if the shares of all the target companies are transferred to a SPV established by the seller and then the SPV is sold to the acquirer, only one approval of the AMCU for the acquisition of the SPV will cover the entire transaction.
Non-compete arrangements
Agreements on the sale of a business usually contain non-compete arrangements. In the European Union, a non-compete clause is treated as a restraint ancillary to a merger and so is covered by merger clearance. However, in Ukraine, an agreement to abstain from competition is considered to be concerted actions, generally prohibited without the relevant approval. Thus, in case a sale and purchase agreement contains a non-compete clause, a separate concerted actions approval may be required. It should be noted that in theory the receipt of concerted actions approval may take longer than the merger clearance. However, in practice, the AMCU tends to issue merger clearances and associated concerted actions approvals simultaneously.
Conclusions
Although Ukrainian legislation is in a process of adaptation to European Union legislation, national merger control regulations often contain specifics, the ignoring of which may lead to violations of Ukrainian laws. To avoid this, it is highly recommended that you engage Ukrainian legal specialists to advise on local merger control issues prior to structuring a deal.
1 The Regulation on Concentration approved by the Resolution of the Antimonopoly Committee of Ukraine No 33-p of 19 February 2002 was amended on 21 June 2016.
2 The notion of concentration introduced by the Law of Ukraine “On Protection of Economic Competition” No. 2210-III of 11 January 2001 (as amended) includes inter alia mergers and acquisitions, purchase of 25% or more shares in a company, incorporation of a new company by several shareholders, establishment of control over an undertaking by other means.
