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Concentrations in the Context of Privatization of State or Communal Property: When Is AMCU Permit Required?

Date of publication: 12 April 2024

Oleksandr Fefelov, Partner, Head of Antitrust and Competition Practice

Source: Yurydychna Gazeta

I would like to draw the attention of specialists involved in the privatization process of the state or communal property, particularly those assisting with obtaining concentration permits, to the critical aspect of determining the necessity of obtaining a permit from the Antimonopoly Committee of Ukraine (AMCU) for concentration when acquiring shares, stakes, or a single property complex of a privatization object.

It is essential to recognize that participants in the concentration process, who are required by the Law On the Protection of Economic Competition to obtain AMCU permit, are economic entities acquiring or intending to acquire control over another economic entity (the privatization object). These participants also include business entities that are the objects of privatization, or executive and local self-government bodies that manage these entities, assets (property), stakes (shares, participation shares) of which constitute object of privatization in the process of state and communal property privatization.

The issue of obtaining permits from the Antimonopoly Committee of Ukraine (AMCU) often arises for potential recipients of control over privatization objects, as well as for the territorial branches of the State Property Fund of Ukraine (SPFU) and executive authorities. For example, in my practice, there were several cases where the SPFU sold privatization objects whose asset values and sales volumes were significantly below the EUR 4 million threshold mentioned in the Law On the Protection of Economic Competition. This was demonstrated not only by financial statements, but also in practical terms, historically, and even visually. Additionally, the sale price of these objects was far less than the equivalent of UAH 160 million. Moreover, the situation with the buyers was also clear: even considering control relationships, their threshold indicators did not reach either the EUR 30 million equivalent or even the EUR 4 million specified in Article 24(1) of the Law. Despite this, regional branches of the SPFU refused to sign the acceptance and transfer act without AMCU’s permit for concentration or preliminary conclusions from AMCU stating that such permit was not required. They justified their caution by claiming that the Fund is not authorized to determine the necessity of obtaining a concentration permit.

As a result, the process dragged down, the budget missed out on potential revenue, and the buyer could not commence management of the auctioned object. Buyers were forced to apply to AMCU for permit, leading to months-long delays in acquiring control over the object. At times, it seemed as though the state was not interested in quickly transferring the responsibilities of maintaining non-operational or “highly problematic” enterprises to private hands, and the budget, during such challenging times, missed out on much-needed tens of millions of hryvnias.

On 29 February 2024, the AMCU issued Recommendation Clarification No. 4-rr, Regarding the Application of the Provisions of Parts One to Five of Article 24 and Clause 12 of Article 50 of the Law of Ukraine On Protection of Economic Competition to Relations in the Sphere of Privatization of State and Communal Property. This clarification was prepared in response to an appeal from the State Property Fund.

In the clarification, the Committee references, among other things, Article 20(3) of the Law On the Privatization of State and Communal Property. This provision stipulates that obtaining a permit for concentration is not required if the value of the assets of the business entity, share package, or single property complex being privatized, including control relations, does not exceed the equivalent of EUR 4 million for the last financial year. It also states that the volume of goods sales in Ukraine by the business entity, share package, or single property complex being privatized, including control relations, for the last financial year, as well as the sale price of the privatization object, must not exceed this amount. The equivalent is determined according to the official exchange rate established by the National Bank of Ukraine (NBU) effective on the last day of the fiscal year.

The question of determining the presence or absence of a “control relationship” is critical here. For instance, when an object that is part of a state-owned enterprise like Ukrspirt is privatized, I believe the thresholds for such a privatization object should be determined by considering the indicators of other enterprises within that state-owned enterprise. Conversely, the threshold indicators for a privatization object managed by a territorial community, a specific region, city, or ministry should be determined without including the indicators of other economic entities controlled by the community or ministry. This approach was confirmed several years ago in previous AMCU conclusions under similar circumstances. Determining which state body (AMCU, SPFU) or the buyer should evaluate these aspects, including the presence or absence of control relations, is a rhetorical question. It should, of course, be the AMCU.

In its Clarification, the AMCU correctly outlined the powers of state bodies, noting that legislative, executive, and judicial authorities exercise their powers within the limits established by the Constitution and in accordance with the laws of Ukraine (Article 6(2) of the Constitution of Ukraine). Furthermore, state authorities and local self-government bodies, along with their officials, are obliged to act solely on the basis, within the scope of authority, and in the manner prescribed by the Constitution and laws of Ukraine (Article 19(2)).

In contrast to the AMCU, whose powers include determining the presence or absence of control between economic entities or their parts, as well as defining the composition of a group of economic entities that constitutes a single economic entity and providing conclusions or preliminary conclusions on the necessity of obtaining a concentration permit, the Law of Ukraine On the State Property Fund of Ukraine does not directly grant the SPFU similar powers.

Notably, Clause 11 of the Clarification specifies that concentration does not require AMCU permit if the characteristics of the business entity, share package, or single property complex being privatized exceed the values specified in Article 20(3) of the Law of Ukraine On the Privatization of State and Communal Property. However, this is conditional on the value indicators of another participant in the concentration (the buyer) and/or the combined value indicators of all participants in the concentration (the object of privatization and the buyer together) not exceeding the limits established by subsections 1 and 2 of Part 1 of Article 24 of the Law. These limits are the equivalents of EUR 4 million, EUR 4 million and EUR 30 million, or EUR 8 million and EUR 150 million, respectively. Recently, we have observed that the Fund’s branches have been signing acts when neither the thresholds of the object nor the sale price exceed the equivalent of EUR 4 million.

However, it appears that these departments have not been analyzing potential control relationships of the relevant privatization objects. While this trend may be effective in terms of simplifying and accelerating the privatization process, it raises concerns regarding compliance with the law.

Thus, the issue of applying to the AMCU for a concentration permit, or seeking preliminary conclusions about the necessity of such an application, remains pertinent. If the threshold indicators of the privatization object are not assessed in light of possible control relationships, this may lead to violations of the requirements of the Law. Consequently, the AMCU could impose sanctions as provided for in Articles 50 and 52 of the Law On Protection of Economic Competition, which would ultimately affect the buyer (investor).