To Buy or to File? Antitrust Implications of Public Bids in Ukraine vs. the European Union
When an acquisition is done via a public bid, antimonopoly-related issues often arise. In particular, the acquisition of a certain number of shares may require a merger clearance from a competent competition authority. At the same time, from a business perspective, receiving clearance prior to the acquisition often does not make sense or may even ruin the deal.
It goes without saying that unconditional offers are more attractive for shareholders. So if one bidder proposes to wait until merger clearance receipt and the other doesn’t, there is a high possibility that the shareholders or the board of the target company will decline the conditional offer in favor of the unconditional. Moreover, in certain cases public bids are required by law to be unconditional and may not depend on the receipt of prior merger clearance. And last but not least, in competing public bids there may be some bidders that are not willing to apply for merger clearances prior to the end of public bid proceedings, as only the successful bidder will acquire the shares, while the others will remain with the cost and time spent on getting no result.
How does the European Union deal with this?
As the European Union is aware of these issues it introduced separate merger control rules for public bids. The Council Regulation (EC) No 139/2004 of 20 January 2004 on the Control of Concentrations between Undertakings (the European Union Merger Regulation) regulates those matters.
In particular, the regulation contains a general rule that a concentration notifiable to the European Commission cannot be implemented before its notification to the European Commission or until it has been declared compatible with the common market (Article 7(1) of the European Union Merger Regulation; suspension obligation or standstill obligation). However, Article 7(2) of the document sets out an exception from the general rule by stating that it should not prevent from the implementation of (i) a public bid or (ii) a series of transactions in securities including those convertible into other securities admitted to trading in a market, such as a stock exchange, by which control is acquired from various sellers. The latter is subject to the following conditions: (a) the concentration is notified to the European Commission without delay; and (b) the acquirer does not exercise the voting rights attached to the securities in question (or does so only to maintain the full value of its investments based on a derogation granted by the European Commission).
As a result, in the event of a public bid the acquirer may purchase shares first and only then apply for merger clearance, provided that it (i) submits the filing without delay, and (ii) does not vote with the shares (or does so in limited cases according to the relevant derogation).
It should also be noted that many countries aiming to become members of the European Union have regulations which are identical or similar to those of the European Union with respect to public bids. These include Moldova, Bosnia and Herzegovina, Albania, Macedonia and Serbia.
However, even if a transaction involves a public bid, it still should be carefully analyzed from the antitrust perspective. In December 2012 Marine Harvest ASA acquired approximately 48.5% shares in Morpol ASA from Friendmall Ltd. and Bazmonta Holding Ltd. (both controlled by one individual) and after the acquisition submitted a mandatory public offer for the remaining 51.5% shares in the company. In August 2013 the transaction was notified to the European Commission. The authority imposed a fine on Marine Harvest ASA for closing the notifiable transaction without the prior clearance. It held that de facto control over Morpol ASA was acquired by Marine Harvest ASA from the single seller yet in December 2012, when 48.5% of the company’s shares were acquired, and such acquisition did not form a part of implementation of the public bid. The fine for the violation came to EUR 20 million.
What about Ukraine?
Ukrainian merger regulations completely lack a specific mechanism for the acquisition of shares in publicly-listed companies that exists in the European Union. Notifiable concentrations are subject to prior merger clearance by the Antimonopoly Committee of Ukraine (the “AMCU”) and there are no exceptions in this regard. In particular, Ukrainian antitrust legislation lacks the carve-out mechanism which would allow the closing of a transaction in other countries while putting it on hold in Ukraine until the AMCU clearance is obtained.
Shouldn’t Ukraine adopt the relevant European practice?
Ukraine undertook to adapt some of its merger rules to the relevant requirements of the European Union under Article 256 of the Association Agreement between Ukraine and the European Union. However, those obligations relate only to financial thresholds, the calculation of the turnover and publication of merger approvals.
In the firm’s recent practice there was a case where the publicly-listed shares of a foreign company were acquired via a public bid from various sellers and a merger notification to the AMCU was filed within several business days right after the transaction was closed. Prior to receipt of clearance from the European Commission the acquirer had not voted via its shares and fully relied on the exception from standstill obligation provided by the European Union Merger Regulation.
The merger was also notifiable in a number of other jurisdictions inter alia the European Union, Moldova, Bosnia and Herzegovina, Albania, Macedonia and Serbia.
As was previously noted, unlike Ukraine, the above other countries have regulations with respect to public bids which are identical or similar to those of the European Union. As a result, it was only in Ukraine that a fine for closing without merger approval was imposed.
What fines can be imposed in theory for violation?
As a matter of law, for implementation of the concentration without the prior receipt of clearance from the AMCU, the authority can impose a fine on the violator in the amount of up to 5% of its group worldwide turnover for the year preceding the year in which the fine is imposed.
However, when calculating fines the AMCU takes into account the Guidelines on Calculation of Fines for Violation of Ukrainian Competition Law (the “Guidelines”). The Guidelines are of a recommendation nature. However, the AMCU repeatedly, including in public statements, stressed that it uses the Guidelines to calculate fines.
According to the Guidelines, the theoretical maximum of a fine of 5% of the group’s turnover applies only in exceptional cases so as to ensure deterrence.
Based on the Guidelines, the initial fines in merger cases are:
from UAH 170,000 (approximately EUR 5,5611) to UAH 510,000 (approximately EUR 16,683) — for concentration where the participants are active on different and non-adjacent markets;
from UAH 510,000 (approximately EUR 16,683) to 5% of the turnover on the markets where concentration took place and adjacent markets — for concentrations which did not lead to monopolization or significant limitation of competition; and
10% of the turnover on the markets where concentration took place and adjacent markets — for concentrations which lead to monopolization or significant limitation of competition.
In order to define a basic fine, the AMCU multiples the initial fine with coefficients and applies aggravating or mitigating circumstances to a basic fine in order to define the final amount of the fine.
However, it is not always possible to calculate the exact amount of a fine to be imposed by the AMCU based on the Guidelines. In particular, the amount of a basic fine is calculated using inter alia three coefficients, each of which may vary from 0.05 to 2, depending on the influence/possibility of influence of the violation on adjacent markets, social value of goods and profitability level of the activity connected with the violation. If the initial fine comes to UAH 68,000 (approximately EUR 2,224) or less, the coefficients are accepted at level 1. However, if the initial fine is higher than that, the violator may only guess at which level the coefficients will be accepted in the case at hand, as the exact coefficients used for calculations are internal information of the relevant national competition authority and are not disclosed by the AMCU in its decisions. At the same time, the final amount of a fine may differ significantly depending on the level of coefficients used in calculations.
Also, under certain circumstances the authority may impose a larger or smaller fine than that provided in the Guidelines. For instance, under Clause 5 of the Guidelines, in exceptional cases (e.g. force-majeure or other special circumstances inter alia the circumstances of social nature), the fine may be defined in a smaller amount (a token fine). However, based on the experience of Wolf Theiss, the AMCU does not consider the absence of a mechanism in Ukrainian merger regulations for the acquisition of shares of publicly-listed companies, available in the European Union, as such special circumstances.
What about sums of fines imposed in practice?
The biggest fine to date2 for closing a concentration without a clearance imposed by the AMCU is UAH 15 million (approximately EUR 490,700). The authority imposed it on Sergii Kurchenko for acquiring control over a Ukrainian bank called BROKEBUSINESSBANK PJSC. The second biggest fine, UAH 3,015,000 (approximately EUR 99,000) was imposed in 2016 for closing a transaction prior to receipt of AMCU clearance (so-called “gun jumping”) discovered during Phase II proceedings. The case related to acquisition of control over KUB-GAS LLC, a Ukrainian company active in the oil and gas sector.
So what’s the solution?
The ideal solution for Ukraine would be to adapt national legislation to the relevant practice of the European Union and include the mechanism for the acquisition of shares of publicly-listed companies available in the European Union into Ukrainian merger control regulations. Until then the AMCU could consider the absence of such a mechanism as special circumstances and, therefore, impose minimum fines in relevant cases.
Olga IVLYEVA is the head of competition practice of Wolf Theiss Kyiv
1 In this article all conversions from UAH to EUR are made using the official exchange rate of the National Bank of Ukraine as of 1 April 2019, according to which 1 EUR is approximately UAH 30.57.
2 As of 18 april 2019.