Global Private Equity Newsletter - Spring 2016 Edition: Russian Competition Law Update: Impact on M&A and Joint Ventures in Russia

by Dechert LLP
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A new version of the Russian Competition Law1 amended by the so-called ‘fourth antimonopoly package’2 (the “275 Law”) came into effect on January 5, 2016 (except for certain minor provisions with an earlier effective date). The 275 Law includes long-expected changes to the Competition Law, the Natural Monopolies Law3 and the Administrative Code, which will significantly affect M&A and joint venture transactions in Russia.

The 275 Law also has important implications for product distribution and cartel conduct. In large part, these changes tend to move Russian substantive competition law principles and procedures in the direction of those of the European Community and the United States. 

The changes affecting M&A transactions as well as other significant aspects of the 275 Law are summarized below.

Mergers & Acquisitions and Joint Ventures

Joint Venture Agreements Require Prior FAS Approval: The 275 Law requires competitors (both Russian and foreign) to obtain approval from the Federal Antimonopoly Service (the “FAS”) prior to consummating certain joint venture agreements4 (“JVAs”). Such prior approval is required for deals between parties operating in the same product market, where: 

  • the parties (and their groups) have a combined asset value in excess of RUB 7 billion; or

  • the parties (and their groups) had combined revenues from the sale of goods in Russia during the previous calendar year in excess of RUB10 billion.5

Parties may also seek voluntary prior approval of JVAs even if neither threshold is reached. 

While neither the Competition Law, nor the 275 Law, defines what constitutes a JVA (previous FAS explanations have suggested almost any joint activity could constitute a JVA), applicants may now seek FAS's preliminary clarification as to whether their agreement would be considered a JVA by seeking prior guidance from FAS with respect to an anticipated JVA transaction. 

Prior to the 275 Law, companies did not have a mechanism for obtaining approval of JVAs under the Competition Law. As a result, competitors avoided forming JVAs (or making such agreements public) because there was a risk that FAS would consider such agreements to be cartel activity prohibited by Article 11 of the Competition Law. The 275 Law seeks to remedy this gap.

Elimination of the FAS 35% Register: Previously, companies with more than 35% of a relevant market (or otherwise having a dominant position) were listed on the relevant register by FAS (the “Register”) and were required to submit annual reports to FAS. FAS approval was required for transactions with companies listed in the Register, including all acquisitions of such companies as well as their reorganization.6 The 275 Law eliminates the Register and the related reporting requirements; transactions with companies previously listed on the Register will be required to be approved by or notified to FAS only if other thresholds are met. 

Jurisdiction of Eurasian Economic Community: In order to bring the Russian Competition Law into compliance with the laws of the Eurasian Economic Community (“EEC”) (which covers Russia, Kazakhstan, Belarus, Armenia and Kyrgyzstan), the 275 Law provides that the Competition Law shall not apply to transactions that are governed by the unified rules of competition in trans-border markets and subject to the jurisdiction of the EEC Commission. The impact of the EEC Agreement,7 is that the Russian Competition Law shall not apply if:

  • the geographical borders of the relevant market cover the territory of two or more member-states of the EEC; and

  • at least two companies participating in a transaction/activity are incorporated in two different member-states covered by the EEC Agreement. 

New Merger Control Notification Procedures: The 275 Law provides for new FAS notification procedures with regard to M&A and joint venture activities:

  • As noted, applicants may seek guidance from FAS regarding an anticipated transaction before applying for competition clearance (or post-completion notification for intra-group transactions). In so doing, applicants may provide information and documents to FAS and propose remedies that FAS may consider in the context of its clearance decision.

  • FAS must disclose on its website information on proposed transactions seeking prior approval so that interested parties may provide the FAS with their input on the competitive effects of a proposed transaction.

  • Notifications may be filed with FAS in electronic form.

Other Significant Competition Law Changes 

Limitation of the Dominant Position Definition: The 275 Law limited the number of cases in which FAS can consider a company with less than a 35% market share to hold a dominant position. Cases in which companies with less than a 35% market share may still be considered to be dominant generally are now restricted to special sectors, such as in radiotelephone communications.

Buying Cartels: The 275 Law supplements the Competition Law by prohibiting cartels among purchasers of goods or services (buyer cartels). Previously, the Competition Law recognized cartels only among sellers. 

20% Safe Harbor for Vertical Arrangements: The 275 Law clarifies that vertical arrangements are permissible so long as the market share of each participant does not exceed 20% of the goods in a relevant market. Previously the Competition Law was vague as to whether the safe harbor applied if one of the parties had a 20% market share in any market (including one not involved in the vertical arrangement).

New Appellate Procedure: Under the 275 Law, parties may appeal from the decision of a regional body of FAS to collegiate departments of FAS (the newly established Presidium of FAS and a Board of Appeals of FAS). Previously, appeals were heard by the Arbitrazh (Commercial) Court. The aim is to expedite the appeals process and to reduce the burden on the Arbitrazh Courts. FAS collegiate department decisions may still be challenged in the Arbitrazh Court within a month of the effective date of a decision. 

Clarifying Unfair Competition: The 275 Law provides guidance regarding certain types of recognized unfair competition, including defamation/whispering campaigns; false comparisons of two market participants; and importer use of certain intellectual property rights. 

Extension of the FAS’s Practice of Prescriptions and Warnings: The 275 Law extends FAS’s ability to issue prescriptions or warnings to state and municipal bodies, as well as to commercial entities, in cases where FAS has information about present or potential future breaches of the Competition Law. FAS views prescriptions and warnings as an efficient enforcement technique, as parties usually heed them, permitting FAS to avoid administrative proceedings.

Administrative Liability: The 275 Law also amends the Administrative Code with regard to violations of the Competition Law. This includes inter alia increased penalties against state and municipal bodies that violate the Competition Law. Officials who violate the Competition Law more than once can be disqualified from office for a term of up to three years. 

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In sum, the 275 Law provides for some sweeping changes in the Competition Law that, in several substantive and procedural ways, tend to move the Competition Law in the direction of antitrust/competition law in the European Union, the United States, and elsewhere. While it remains to be seen to what extent the enforcement decisions under the 275 Law will also be in harmony with the approaches taken by other global antitrust/competition enforcement agencies, the new statutory framework and changes outlined above provide a vehicle from which progress can be made toward harmonization.

Footnotes

1) Federal Law No. 135-FZ “On Protection of Competition”, dated July 26, 2006 (as amended) (the “Competition Law”).

2) Federal Law No. 275-FZ “On Amending the Competition Law and Other Laws”, dated October 5, 2015.

3) Federal Law No. 147-FZ “On Natural Monopolies”, dated August 17, 1995 (as amended).

4) In Russian: соглашения об осуществлении совместной деятельности. Intra-group JVAs do not require FAS prior approval (provided that such group was disclosed to FAS), although post-completion notification may be required.

5) Approximately US$100 million in combined asset value, or US$142 million in revenues at a rate of RUB70 to US$1.

6) See Articles 27 and 28 of the Competition Law for the full list of types of transactions previously covered by the Register.

7) The Agreement on Eurasian Economic Community, dated May 29, 2014, ratified in the RF by Federal Law No. 279-FZ, dated October 3, 2014 “On Ratification of the Agreement on Eurasian Economic Community” (the “EEC Agreement”).

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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