Despite the geopolitical turmoil that has affected the east of the country nothing should mask the highly significant step Ukraine took on 27 June 2014 when it signed the Deep and Comprehensive Free Trade Area (DCFTA) sections of its controversial Association Agreement with the European Union (the Association Agreement). The political section of the Agreement was signed on 21st March earlier this year.
The Association Agreement 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 Association Agreement contains important obligations upon the 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.
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. We have set out below 10 steps which the Government of the Ukraine needs to take in our view to fulfill its obligations under Competition Law Chapter of the Association Agreement.
1. Substantially raise the merger notification thresholds:- The current merger thresholds are set at an unrealistically low level. We recommend that they are therefore raised to a sensible level taking into account the average deal size in the economy but also set against the level of thresholds set by other recent members of the Union. Merger control policy is perhaps the most important area of competition law for Ukraine. An effective and credible merger policy will help shape future industrial development, encourage the inward flow of investment and create an incentive for the transfer of technology. Such low thresholds were presumably fixed by the Government in liaison with the Anti-Monopoly Committee (AMC) as it was worried about not having sufficient jurisdiction to intervene in all relevant mergers key to the economy. But the all-encompassing thresholds have clogged up the system with a rash of small mergers with little or effect on competition. We understand there are currently reform proposals to increase the current thresholds.
2. Exempt foreign to foreign transactions which have little or no impact on the Ukrainian economy:- 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 the Ukrainian economy. Low merger notification thresholds, taking into account the whole of the seller’s group’s turnover rather than just the target and the vague and indistinct rules about when a foreign to foreign merger will have a local nexus, have led to many transactions being needlessly caught. We would recommend that the Government amends the turnover calculation rules to only take into account the target of the buyer’s group and the target (excluding the other members of the seller’s group). The AMC should also publish clear guidelines about when a foreign to foreign merger will be caught following the review of the merger thresholds in 1 above.
3. Introduce a fast track or simplified merger notification procedure:- Another drawback of the current merger control regime is a lack of a fast track or simplified procedure for certain straightforward merger cases. It has taken certain other EU Member State regulators a long time to introduce such a scheme. Other still do not have one. For instance Poland has just introduced one. However the EU has had a simplified procedure for many years. We are confident that introducing such measures will help boost business confidence in the system and encourage inward investment.
4. Publish comprehensive horizontal merger guidelines:- We have already alluded to how important an effective merger control regime is to a developing country, like Ukraine. The hallmark of a successful competition and merger policy is transparency and the business community must know where it stands in relation to key areas of policy such as the calculation of fines in competition and merger cases. Also highly important is Government policy on horizontal mergers which are potentially the most restrictive of combinations. It is interesting to note that the EU is highly critical of Ukraine’s commitment to transparency in the Association Agreement and it singles out the need for Ukraine to introduce horizontal mergers guidelines. Therefore in line with the EU mandate in the Agreement, Ukraine should publish such guidelines as soon as it can.
5. Stricter Adherence to Statutory Consideration Periods:- Long consideration periods and the ability for regulators to escape the discipline of strict adherence to timely statutory consideration periods can have a detrimental effect on the way business views such an economy. Witness the recent outcry of business to longer consideration periods in the UK’s newly reformed merger regime twinned with substantial stop the clock powers. A lesson from the UK is that regulators need to use any ability to extend consideration periods restrictively and appropriately. In the Ukraine 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 system is open to abuse and needs to be reviewed.
6. An end to political intervention:- Political interference in both the competition and merger control enforcement regime needs to be reviewed. We understand it is a theoretical right and is seldom exercised. But it is still in existence and that is the point. The system needs to be more transparent and certain. In relation to mergers such political intervention should be limited to the accepted reserved areas under the EU Merger Regulation namely financial stability, plurality of the media or national security. In competition cases assessment of anti-competitive behaviour should be decided on competition grounds alone to stop competition policy becoming an instrument of national industrial policy.
7. Approximate substantive competition law and merger control legislation with that of the EU:- This is not going to happen overnight. Material differences exist between EU and Ukrainian competition law relating to the substantive law and its interpretation on the control of restrictive agreements and the abuse of dominance under the Law of 1991. Differences include the use of rebuttable presumptions of dominance based on market share bright line tests. Converging merger control assessment and practice is also needed in the areas referred to above. This is a long term goal as envisaged by the Association Agreement. The approximation of merger and competition law including the introduction of effective state aid regulation is a significant project in its own right and will require considerable resources dedicated to it over the longer term. The fact that there is a sizeable body of Ukraine competition law in existence probably complicates rather than assists this analysis. However, the sooner Ukraine can demonstrate to the EU that sizeable strides in converging its own laws with those of the EU, the quicker their path will be along the road to eventual EU membership.
8. Too wide a system of exclusions and exemptions from competition law:- The Association Agreement is, by implication, critical of the wide system of exclusions from general competition prohibitions which exists alongside a very generous system of general or block exemptions. These differ in material respects to those existing under EU law. The EU specifically asks that the Ukrainian Government reviews their treatment of vertical agreements and technology transfer agreements and introduces a system of block exemptions based on the text of their EU equivalents.
9. Guarantee procedural fairness and the rights of the defence:- The Ukraine should undertake a root and branch review of competition and merger procedure before the AMC. The Association Agreement contains specific provisions which require both parties 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. The Agreement also envisages an effective independent appeal process. 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.
10. The introduction of an EU style system for the regulation of State Aid:- There is a need to establish independent oversight and scrutiny of the granting of aids and subsidies by the State through possibly extending the role of the AMC to this function. Accession to an EU wide economy cannot bring with it the ability of a single state to support its national champions through the grant of unlawful state aid as this will fundamentally distort the market economy approach of the Union.
The competition law provisions occupy only one chapter out of many in the Association Agreement. However, effective competition law and enforcement is one of the key foundations of economic prosperity upon which many of the other chapters rely. It is therefore of fundamental importance to the success of the Agreement.
A number of specific fast track legislative changes to Ukraine competition law highlighted above are likely to meet the EU’s immediate concerns. However, a more intractable problem is ascertaining what exactly needs to be done to meet the Ukraine’s wide ranging obligations to guarantee procedural fairness and the rights of the defence in competition proceedings. This will need to be the subject of a detailed legislative review of Ukraine competition law practice and procedure (and perhaps wider Ukraine law) in liaison with the AMC.
Finally, the approximation of merger and competition law including the introduction of effective state aid regulation is a significant project in its own right and will require considerable resources dedicated to it over the longer term. The fact that there is a sizeable body of Ukraine competition law in existence probably complicates rather than assists this analysis. However it is essential Ukraine demonstrates to the EU that sizeable strides in converging its own laws with those of the EU are underway.
The article was written by Robert Bell. Robert is a partner and the head of Bryan Cave’s EU competition law team with nearly thirty years’ experience advising clients on the application of EU and UK competition law to their businesses. In the 1990s, Robert advised the Czech government on approximating Czech competition laws to the EU laws pursuant to the Czech EU Association Agreement.