Antitrust and Competition Client Service Group To: Our Clients and Friends August 2014 What needs to be done to deliver an EU compatible competition regulatory framework in Ukraine? Introduction Despite the geopolitical turmoil that has affected the east of the country nothing should mask the highly significant step that Ukraine took on 27 June 2014, when it signed up to the economic section (the Deep and Comprehensive Free Trade Area sections (DCFTA)) of its controversial Association Agreement with the European Union (the Agreement). The political section of the Agreement was signed on 21st March earlier this year. Background Ukraine is a key partner in the Eastern Partnership, part of the EU’s European Neighbourhood Policy. Since 1998 the Partnership and Cooperation Agreement has allowed the EU and Ukraine to cooperate with one another on all major aspects of reform. This will now be replaced by the Agreement including DCFTA which will hopefully put Ukraine on the path to eventual EU membership bringing with it political stability, territorial security and economic prosperity. One of the key foundations of that economic prosperity will be the establishment of an effective, non-discriminatory and transparent competition enforcement regime. The Agreement contains important obligations upon Ukraine to approximate its competition laws with those of the European Union. In this article we look at a number of steps Ukraine can take to achieve that. The Agreement The key provisions in the Agreement which relate to competition policy are set out in Chapter 10, Articles 253 to 267. (i) Competition and Mergers The Agreement prohibits and sanctions certain practices and transactions which could distort competition and trade (see Article 254). Anti-competitive practices such as cartels, abuse of a dominant position and anti-competitive mergers will be subject to enforcement action. The Parties agree to maintain effective competition laws and appropriately equipped competition authorities. In the case of Ukraine this will be the Anti-Monopoly Committee (AMC). This Client Alert is published for the clients and friends of Bryan Cave LLP. Information contained herein is not to be considered as legal advice. This Client Alert may be construed as an advertisement or solicitation. © 2014 Bryan Cave LLP. All Rights Reserved. Bryan Cave LLP America | Asia | Europe www.bryancave.com Of particular interest in the Agreement are the specific provisions which require both Parties to agree to apply their competition laws in a transparent, timely and non-discriminatory manner with particular regard to procedural fairness and the rights of the defence. There is also to be an effective independent appeal process. Specific requirements that Ukraine publish principles for the setting of fines for breach of competition law and guidelines on the assessment of horizontal mergers are also specifically set out in Article 255(5) & (6). It is unusual to see such blunt wording in an agreement of this type but it is no secret that despite the efforts of the Ukrainian Government, the EU still remains worried about corruption and the rule of law in Ukraine. It sees the rights of the defence, an independent appeal mechanism and transparency through the publication of reasoned decisions and guidelines in mergers and competition law cases, as an essential bulwark against these challenges. Under Article 256, Ukraine agrees to align its competition law and enforcement practice to that of the EU acquis (the essential body of EU case law). This body consists of: The investigation and enforcement of competition law (Council Regulation No.1/2003). Merger control (Council Regulation No. 139/2004). The adoption of similar safe harbour/block exemption regulations on vertical agreements and concerted practices (Commission Regulation No. 330/2010) and technology transfer agreements (Commission Regulation No. 316/2014). These changes are to be implemented over the lifetime of the Agreement. However, certain changes relating to the adoption of block exemptions for vertical and technology agreements and the publication of reasoned merger and competition decisions have been fast tracked to be put in place within three years of the entry into force of the Agreement. Monopolies Additional obligations are placed on Ukraine and the EU in the Competition Chapter - relating to state controlled enterprises or enterprises granted special or exclusive rights (the right to undertake a function under a licence such as electricity or telecoms provider). This ensures that companies in both the EU and the Ukraine will have equal access to each other’s markets and there will be no discrimination by, or in favour of such monopolies. State Aid & Subsidies The EU and Ukraine are also committed to remedy or remove distortions of competition caused by subsidies where those affect trade and competition. The Parties agree to refer any disputed aid or a subsidy to a dispute settlement mechanism. Ukraine commits itself to adopting a system of control of state aids similar to that of the EU including the setting up an independent authority to vet state aid in all areas liberalised by the DCFTA except agriculture and fisheries. To improve transparency and confidence between them the Parties will further provide information on the grant of subsidies or aids upon request. 2 Bryan Cave LLP America | Asia | Europe www.bryancave.com Present Ukrainian Competition Law In competition law terms Ukraine is not a greenfield site. It has a considerable body of competition law and an established competition regulator, the Anti-Monopoly Committee of the Ukraine (AMC). Over the 21 years of its existence, the AMC has been particularly active through its many regional branches investigating and tracking down a large number of usually small cartels. The level of the fines also illustrate the small nature of these arrangements. The historical legacy of the Soviet era (which left few market participants in small markets) has led to action against a significant number of companies for abuse of dominance. In fact over 42% of all infringements in 2012 related to an abuse of dominance. The AMC has therefore been an active regulator but for the reasons we discuss later, further reform and transparency measures are needed to equip the regulator for a move towards a wider European future. The basic laws which make up competition regulatory framework in Ukraine are the Law of Ukraine on the Protection of Economic Competition of 2001 (Law No. 2210-III of 11 January 2001). This provides the main principles, concepts and penalties for the regulation of mergers, restrictive agreement/concerted practices as well as the abuse of dominance. This is supplemented by the Commercial Code of Ukraine of 2003 and the Law on the Anti-Monopoly Committee of Ukraine of 1993. The AMC is the principal enforcer of competition law entrusted with the assessment of transactions and practices which affect local conditions of competition within the jurisdiction. It has the power to review relevant merger transactions and to investigate and punish restrictive agreements and abuses of dominance. Substantial fines of up to 10% of the worldwide turnover of the offending companies, cease and desist order, invalidity and exposures to third party damages actions before the Courts are the potential sanctions for breach. However, competition decisions are subject to political interference. The Cabinet of Ministers of Ukraine can overturn any prohibited merger or competition decision of the AMC. The AMC has also issued a number of implementing regulations relating to the way they enforce their general merger and competition enforcement powers. Comparison between EU and Ukrainian Competition Law Whilst Ukraine does have a comprehensive competition law framework, it does fall into the usual trap of many newly-developed competition regimes of imposing unrealistically low thresholds for merger control, allowing very wide exclusions and exemptions from competition law which diminish its effectiveness whilst working with underdeveloped rules of procedure which arguably fail to fully respect the rights of the defence. A preliminary review of Ukrainian competition law and Ukraine’s obligations under the Agreement highlights that the following features of the Ukrainian competition regulatory framework require attention: 3 Bryan Cave LLP America | Asia | Europe www.bryancave.com Merger Thresholds - low merger notification thresholds as presumably the AMC was worried about not having jurisdiction to intervene in a merger key to the economy. We understand there are currently reform proposals to increase the current thresholds. Foreign to Foreign Transactions - too many foreign to foreign mergers are caught by the merger control regime where the target has no presence in the jurisdiction. Consequently these types of transactions have little or no impact on Ukrainian economy. Lack of Fast Track or Simplified Merger Notification Procedures - failing to have any fast track or simplified procedure for straightforward merger notifications. Introducing such measures would boost business confidence in the system and encourage inward investment. Statutory Consideration Periods - lack of adherence to timely statutory consideration periods. For example generous consideration periods for Phase II review in merger cases permit the AMC to suspend or restart the three month consideration period for want of information or additional documents. This can lead to AMC investigations becoming