Ukrainian antitrust approval requirements for distribution agreements
January 2014 | EXPERT BRIEFING | COMPETITION & ANTITRUST
Representatives of the Antimonopoly Committee of Ukraine (AMC) have on many occasions announced that the AMC will investigate vertical agreements in the Ukrainian markets to determine their compliance with Ukrainian legislation on protecting economic competition. The problem is that there is a high level of uncertainty surrounding distribution-specific exemptions from obligations to obtain antitrust approvals.
The Law of Ukraine ‘On Protection of Economic Competition’, dated 11 January 2001, No. 2210-III, as subsequently amended, (the ‘Competition Law’) establishes that the conclusion of an agreement between (independent) undertakings constitutes concerted actions. The Competition Law envisages the following kinds of concerted actions: (i) concerted actions which are in principle considered to be innocuous and therefore permitted in Ukraine – these concerted actions are not subject to prior clearance of the AMC if they fall within the exemption criteria; and (ii) anti-competitive concerted actions (concerted actions which have resulted or may result in the banning, elimination or limitation of competition) which are, in principle, prohibited in Ukraine, unless explicitly approved by the authorities.
According to Article 8 of the Competition Law, vertical ‘supply and use’ agreements (vertical agreements between non-competitors – companies operating at different levels of the production or distribution chain (e.g., between manufacturers and wholesalers) may lawfully include restrictions and do not require individual antitrust approval from the AMC, if the supplier imposes upon the buyer (distributor) restrictions: (i) regarding the subsequent (re-)sale and/or use of supplied goods or goods from third suppliers; (ii) on the purchase or sale products to other undertakings or consumers of other goods (e.g., obligation to render preferences to certain categories of goods or obligation to obtain prior consent for purchase or sale of any other goods); (iii) on purchase of goods, which in their nature or according to trade customs and other fair customs in business, have nothing in common with the subject of the agreement; and (iv) on formation of prices or other terms of agreements on sale of goods, supplied by one party of agreement, to other undertakings or consumers.
The above provisions apply provided such agreements do not: lead to a significant restriction of competition on the relevant Ukrainian market or in a substantial part of it, including monopolization of the market; restrict the access of other undertakings to the market; or lead to economically unjustified price increases or deficit of goods. However, there is no reliable court practice or legal guidance from the AMC as to when these three conditions are met. Thus there exists a risk of fines for concerted practices of up to 10 percent of the global turnover of the parties to a distribution agreement in the year immediately preceding the year when the fine is imposed, in the case of conclusion of distribution agreements, but no certainty as to how to avoid these fines using the exemptionsaccording to Article 8 of the Competition Law.
A few words about prospective legislation – in 2011 the AMC published a draft regulation ‘On Standard Requirements to Concerted Practices of Undertakings related to supply and use of goods for their Exemption from the Requirement to Obtain Prior AMC Clearance’ (the ‘Exemption Resolution Related to Supply and Use of Goods’). This draft regulation is aimed at clarifying the exemptions stated in Article 8 of the Competition Law. According to it, the restrictions under (i)-(iv) above do not require individual antitrust approval from the AMC if the aggregate market share of the supplier’s and the distributor’s groups in the market of contract product is below 30 percent and none of the parties (including their groups) have a monopolistic (dominant) position in any relevant market.
The draft ‘Exemption Resolution Related to Supply and Use of Goods’ states thatthe exemption of restrictions under (i)-(iv) above (in particular, but not as a limitation thereof) is not applied to the following. First, to restrictions of a buyer’s ability to set resale prices (except the ability of the supplier to impose a maximum or recommended sale prices provided that these do not lead to setting of fixed or minimum sale prices as a result of pressure from, or bonuses offered by one of the parties).
Second, to restrictions of the territory in which, or customers to which, the buyer can sell contract product (except restrictions regarding buyer’s location area and restrictions of: (i) active sales by the buyer to the group of exclusive customers (or on the territory) of the supplier (or undertaking authorised by the supplier) provided that such restriction does not result in limitation of sales by the customers of this buyer; (ii) sales to end-customers by the buyer which is active at the wholesale level of trade; (iii) sales by members of a selective distribution system to distributors which were not authorised by the supplier to resell products within the territory of the selective distribution system; and (iv) the buyer’s ability to sell components which are supplied for assembly of products to the customers which will use components for the production of products similar to those that are produced by the supplier).
Third, to restrictions of active and passive sales by the members of a selective distribution system to end-customers which are active at the retail level of trade (except prohibitions related to members of a selective distribution system to act out of the area authorised by the supplier).
Fourth, to restrictions of cross-supplies between buyers (active on the same and different levels of trade) within a selective distribution system.
Fifth, to arrangements between suppliers of components and buyers which use such components for assembly of products regarding restrictions on the supplier’s ability to sell components as spare parts to end-customers which provide maintenance and repair services for such products and were not authorised by the buyer to perform such activity.
Finally, to restrictions of the buyer’s ability to sell branded products of certain competitors of the supplier.
The Draft ‘Exemption Resolution Related to Supply and Use of Goods’ is aimed at applying to vertical concerted actions related to the supply and use of goods (i.e., to the relations under distribution agreements) which are not covered by the exemptions provided under the Resolution of the AMC ‘On Standard Requirements to Concerted Practices of Undertakings for their General Exemption from the Requirement to Obtain Prior AMC Clearance’, dated 12 February 2002, No. 27-p, as amended, (the ‘General Exemption Resolution’). The general exemptions exist alongside the exemptions according to Article 8 of the Competition Law. Under the General Exemption Resolution a distribution agreement falls within the general exemption criteria (no approval is required for vertical concerted actions), provided that: (i) the aggregate market share of all parties’ (supplier and distributor) groups in any relevant market is below 5 percent; or (ii) none of the parties (including parties’ groups) have a monopolistic (dominant) position in the relevant market or any exclusive rights or powers granted to them by a government authority, body of local self-government, natural monopoly, or other monopoly undertakings.
In addition, to the above, the following conditions must also be met: (i) the aggregate market share of all parties (including parties’ groups) in any relevant market is below 20 percent; and (ii) parties to the distribution agreement do not meet the following thresholds: first, the aggregate worldwide value of assets or the worldwide total net sales revenue of the participants to the concerted actions (including their groups), for the previous financial year exceeds the amount equivalent to €12,000,000 at the official exchange rate of the National Bank of Ukraine on the last day of the respective financial year; and second, the worldwide aggregate assets value or the worldwide total net sales revenue for the previous financial year of at least two participants to the concerted actions (including their groups) exceeds the amount equivalent to €1m at the official exchange rate of the National Bank of Ukraine on the last day of the respective financial year for each; and third, the aggregate assets value or the total net sales revenue for the previous financial year in Ukraine of at least one participant to the concerted actions (including such participant’s group) exceeds the amount equivalent to €1m at the official exchange rate of the National Bank of Ukraine on the last day of the financial year.
The above exemptions do not apply and an antitrust approval from the AMC is required if the parties are at least potential competitors and they: (i) set forth tariffs (prices) for sale or purchase of goods (i.e. price fixing); (ii) divide markets or sources of supply based on criteria of territory, assortment, purchase volumes, sellers, buyers, customers or otherwise; (iii) impose limitations on production or purchase and sale of goods; or (iv) distort the results of trading, auctions, competitions or tenders.
Thus, until we receive further clarification from the AMC, the safest way to conclude distribution agreements in Ukraine is to either make sure they fall under the general exemptions for concerted practices or to apply for a preliminary conclusion or an approval of the AMC in each case of conclusion of a distribution agreement. Alternatively, parties should bear the risk of meeting or not meeting the distribution-specific exemptions and the necessity to pay fines if the distribution-specific exemption criteria are not met.
Denys Sytnyk is a partner and Liudmyla Gorodnycha is an attorney at law at Schoenherr. Mr Sytnyk can be contacted on +38 044 220 10 46 or by email: firstname.lastname@example.org. Ms Gorodnycha can be contacted on +38 044 220 10 46 or by email: email@example.com.
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Denys Sytnyk and Liudmyla Gorodnycha