New federal competition regime in the UAE
April 2013 | EXPERT BRIEFING | MERGERS & ACQUISITIONS
The UAE has recently enacted a law regulating competition: Federal Law No. 4 of 2012. The objects of the law are the promotion and enhancement of competition and the control of monopolistic market practices.
The law came into force on 23 February 2013. A grace period of six months has been granted to existing entities to comply with its provisions. The body responsible for implementing the law is the Ministry of Economy assisted by a Competition Regulation Committee.
The law applies to all ‘establishments’ (defined as “any legal or natural person undertaking an economic activity, any related person or any consortium of such persons regardless of the legal form thereof”) in respect of their activities within the UAE, their activities outside the UAE that may affect competition in the UAE and their use of intellectual property rights in the UAE or outside the UAE. The law would thus have an extraterritorial effect.
A number of exemptions are provided for in the law. It does not apply to ‘small and medium establishments’ (a term which will be defined in subsequent regulations), or to establishments owned or controlled by, or actions carried out by or on the orders of, the UAE Federal government or the government of any emirate within the UAE. Certain prescribed sectors including the financial sector, telecommunications, petroleum and the production and distribution of pharmaceutical products are expressly exempted from the application of the law. The Ministry of Economy has been granted broad powers to include or exclude other sectors.
The law’s key operative provisions include regulations on restrictive agreements between establishments, abuse of a dominant position and merger clearance provisions.
The prohibition on restrictive agreements is set out at Article 5 of the law. ‘Agreements’ are defined as “agreements, contracts, arrangements, coalitions or practices between two establishments or more or any cooperation among establishments or resolutions issued by establishment consortiums whether they are written or oral, explicit or implicit or public or confidential”. The law draws no distinction between horizontal and vertical agreements and it is of particular note that the prohibition extends to oral and implicit agreements.
A ‘restrictive agreement’ is an agreement that has the aim or effect of prejudicing, limiting or preventing competition, particularly one targeting market segmentation or exclusion of competitors. Further examples of restrictive agreements include agreements to artificially fix prices or restrict supply.
The prohibition on restrictive agreements does not apply to ‘weak-impact agreements’, where the market shares of the parties to an agreement fall below a prescribed threshold (which will be established by subsequent regulations). Commercial agency agreements made between foreign parties and UAE national agents pursuant to the Commercial Agencies Law (Federal Law No. 18 of 1981) are also exempted from the law.
The prohibition on abuse of a dominant position is set out at Article 6 of the law. A dominant position is defined to be a position that enables any establishment, by itself or in participation with some other establishments, to dominate or affect the relevant market. An establishment enjoys a dominant position if its share of all transactions in a relevant market exceeds a prescribed threshold (to be established by subsequent regulations).
An ‘abuse’ of a dominant position is any activity carried out with the aim of prejudicing, limiting or preventing competition. Examples of abuse could include predatory pricing and tying arrangements. Being in a dominant position is not in itself a breach of the law, the prohibition is on abusing such a position. An establishment that enjoys a dominant position must take particular care to ensure that its actions do not constitute abuse.
Establishments may seek from the Ministry of Economy an exclusion for an agreement or practice that would otherwise be prohibited by Article 5 or Article 6 of the law. The exclusion may be granted if the proposed activity would enhance economic development, improve the performance and competitive ability of establishments generally, develop production or distribution systems, or generally benefit consumers.
If approval is granted, it may be conditioned or made subject to periodic review; and even if it is unconditional, the Ministry may later revoke it (including where the relevant market conditions change). Approval is deemed granted if the Ministry fails to respond to the application within 90 days.
The law regulates the creation of economic concentrations. The provisions regulating economic concentration are to be found in Article 9. Economic concentration may arise from “any behaviour from which a total or partial alienation (merger or acquisition) of a property or usufruct of the properties, rights, stocks, shares or liabilities of an establishment to another establishment shall result and that may enable one establishment or a consortium of establishments from controlling, directly or indirectly, another establishment or a consortium of other establishments”. Therefore, mergers and acquisitions would be caught as transactions which could result in an economic concentration.
Clearance from the Ministry of Economy must be sought in respect of any ‘economic concentration’ where the parties’ combined market share would exceed a prescribed threshold (which will be determined by subsequent legislation), particularly where a dominant position would be created. Establishments intending to carry out a transaction which would constitute an economic concentration must apply for clearance at least 30 days before the transaction is due to be carried out. Approval will be granted if the concentration would not negatively impact competition or would have a positive impact outweighing its negative impact.
If approval is granted, it may be conditional. Approval is deemed granted if the Ministry fails to respond to the application within 90 days.
A violation of the prohibition on restrictive agreements or the prohibition on abuse of a dominant position is punishable by a fine of between AED500,000 (about US$136,000) and AED5m (about US$1.36m).
Failing to seek the Ministry of Economy’s approval in respect of an economic concentration in violation of Article 9 is punishable by a fine of between 2 and 5 percent of the concerned establishment’s turnover in the preceding financial year, or if this cannot be calculated, by a fine of between AED500,000 (approximately US$136,000) and AED5m (approximately US$1.36m).
Failing to await clearance from the Ministry of Economy in respect of an economic concentration in violation of Article 9 is punishable by a fine of between AED500,000 (approximately US$136,000) and AED5m (approximately US$1.36m).
For repeat violations, penalties may be doubled, and the courts may order an establishment to suspend its operations for a period of between three and six months.
The new law represents a significant development in UAE law, which hitherto lacked a comprehensive competition/antitrust regime. However the executive regulations required to give full effect to the FCL and in particular to prescribe the relevant notification thresholds are yet to be published. It remains to be seen how the new law will affect business practices and mergers and acquisitions activities in the UAE.
Farhad Bayati is a partner and Ian Gaitta is an associate at Anjarwalla Collins & Haidermota. Mr Bayati can be contacted on +971 4 346 9890 or by email: firstname.lastname@example.org. Mr Gaitta can be contacted on +971 4 346 9890 or by email: email@example.com.
© Financier Worldwide
Farhad Bayati and Ian Gaitta
Anjarwalla Collins & Haidermota