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Reform in the Sphere of M&A Legal Regulation Has Gained a New Momentum

Date of publication: 2 June 2021

Oleksandr Fefelov, Attorney at Law, Partner, Head of Antitrust and Competition Practice

Olga Samoilenko, Lawyer

Source: Yuridecheskaya Praktika

Although the draft law on the competition and antitrust reform has suggested the obviously positive innovations, a number of issues remain unresolved.

The discussions around the global competition and antitrust reform have persisted from the moment of signing and coming into force of the Association Agreement between Ukraine and the EU back in 2014. In accordance with Articles 255 and 256 of the Agreement, Ukraine has assumed the obligations to harmonize its competition legislation and the practices of its enforcement with the EU laws, particularly, to bring the process of exercising control over the M&A to conformity with the EU standards, established by the EU Regulation No. 139/2004 on control over the corporate M&A (the EU Regulation on mergers).

While the reform process is underway

Taking into account the fact that legislation in the sphere of control over the M&A has remained largely unchanged since 2001 (with the exception of certain changes, adopted in 2005), the changes, introduced to the Law of Ukraine On Protection of Economic Competition (hereinafter referred to as the Law) in May 2016 were supported with great satisfaction and enthusiasm both by the professional community of experts, employed in this sphere and by business circles alike. In fact, this was the first large legislative transformation, when the new approaches towards determining the M&A that had been subject to authorization by the Antimonopoly Committee of Ukraine (hereinafter referred to as the AMCU) were introduced to the Law, those approaches having been connected with raising the margin indicators for such M&A, certain facilitation of the authorizations retrieving procedure, etc.

However, despite the obviously positive effect, the innovations were still of a rather fragmented kind, whereas by no means all aspects of this competition law sphere were brought to conformity with the EU Regulation on mergers and for reasons unknown not all the issues that had popped up by 2016 were fixed.

Since 2019, the process of reforming the legal standards in the sphere of M&A gained the new momentum. For the time being, several draft laws are being reviewed by the Verkhovna Rada of Ukraine. Two of them, the No. 2730 and the No. 2730-2, envisage the truly global changes of the regulatory framework applicable to the competition policy of the state. Among other things, they also dwell on the issues that are pertinent to the M&A. We believe that this deserves considering in greater detail, because the Parliament is most likely to get back to reviewing these draft laws in the near future and the chances of possible adopting either of them are rather high. We shall focus on the issues that are of general interest.

What tomorrow will bring…

Let us start with a statement that according to the draft law No. 2730 (and the alternative one No. 2730-2), a new test is suggested that is complimentary to the readily existing criteria for determining the M&A, which require the AMCU’s authorization to be conducted — the transaction value (or the aggregate value of transactions, as the case may be), that is certain alternative to the margin financial indicators. It is planned that the interim authorization for the M&A shall be required also in case when the transaction value (or the aggregate value of transactions, as the case may be) would exceed the amount, equivalent to EUR 20 million according to the official exchange rate of the National bank of Ukraine (hereinafter referred to as the NBU) as of the last day of the appropriate financial year and whereby (1) a business entity, in relation to which the control or assets are acquired or shareholdings (shares) whereof are beneficially acquired or transferred for management and use, or if at least one the founders of the newly set up business entity, taking into account the relations of control, would conduct material business in Ukraine and (2) the volume of goods sold in Ukraine, featured by at least one another party to a M&A, taking into account the relations of control would exceed the amount, equivalent to EUR 4 million over the course of the previous financial year.

Here we must make a little remark.

To start with, the EU Regulation on mergers does not say a word about such a criterion of M&A that are subject to authorization/notification as the transaction amount. Herewith, the explanatory notes to the draft laws do not contain any justifications for the introduction of a new test for the M&A either. That is, we may only guess the reasons for its introduction by the draft law authors. Probably, they implied the M&A in relation either to the newly incorporated business entities that did not have any considerable assets or the performed M&A, envisaged by the first two tests in the year that precedes the transaction performance or in relation to those subjects which, despite having existed previously, not only did not have any considerable assets but, having a considerable economic potential, for some reasons did not feature any considerable sales of goods in the year that precedes the M&A performance (for instance, the mentioned test could apply to an industrial enterprise that was undergoing a reconstruction in the previous year).

Further, the “considerable business” in the meaning of the draft law No. 2730 implies any business pertinent to the sale of goods in Ukraine, into which such business entity would invest, over the course of the previous five years in a row, more than the equivalent of EUR 4 million according to the official exchange rate of the National bank of Ukraine as of the last day of the financial year that precedes the investment of the appropriate monies. This innovation looks rather interesting, but is at the same time hard to understand. We believe that the term “considerable business” has not been set out in the draft law in as sufficiently clear, transparent and understandable manner as required by the constitutional principle of the rule of law, legal certainty being an integral element whereof. Such a situation may result in the difficulties of its interpretation in the legislation compliance and enforcement practices.

Besides, it is worth mentioning that when calculating the transaction value (or the aggregate value of transactions, as the case may be), within the framework whereof the M&A is being performed, the aggregate of prices, attributable to the entirety of such transactions, executed by and between the same business entities would be used, taking the relations of control into account, over the course of the previous two years. This rule is a logical compliment to the new test, which would allow excluding the possibility of evading the requirement of retrieving the AMCU’s authorization when acquiring control over a business entity by performing the “split” transaction, whereby no authorization from the AMCU would be required in order to perform any particular portion of the transaction.

The draft law No. 2730 may impose some of the new rules for calculating the value indices in relation to parties to the M&A.

Thus, the most important of all, in our opinion, is the clause stating that it is suggested to except the financial indices when performing calculation of the aggregate value indices of parties to the M&A (assets value and turnover) of a business entity, with which the relations of control would terminate due to the M&A. That is, finally the seller’s “margins” would not be taken into account. However, on the other hand, the draft law No. 2730 also provides for the rule, according to which the goods turnover of a party to the M&A shall be calculated in a new manner. If currently the entirety of monies, received from sale of the goods within a single group of business entities, i. е., the entities, connected with the relations of control are not taken into account, then in accordance with suggested version of the Law, the monies, received from selling of goods by the business entities, the relations of control with which would terminate due to the M&A, shall become the exception from this rule. That is, when determining the turnover of the target company, revenues, received by the latter as a result of sales to the selling company or to the companies that belong to the seller’s group, the aggregate turnover of such target company shall also be taken into account.

It is also important to consider the material difference in determining the criteria for M&A that are subject to the authorization procedure found both in the currently enforceable Law and in the draft law No. 2730 from those, envisaged in the EU Regulation on mergers. Whereas we still take the amount of assets into account, then the EU would only consider the aggregate turnover, which, in principle, is better logically justified.

Let us also mention that the draft law No. 2730 suggests differentiating and raising the official duty for submitting the applications at the same time.

Thus, instead of currently applicable amount of duty payable for submitting the applications worth 1200 tax exempt minimum incomes of citizens (TEMIC), it is suggested to deduct such duty worth 4500 TEMIC for submitting the M&A authorization applications under a regular procedure and 2500 TEMIC for submitting the M&A authorization applications under a facilitated procedure. It is also suggested raising the official duty payable for granting the interim conclusions from 880 TEMIC up to 1500 TEMIC.

In our opinion, the suggested core draft law No. 2730 requires further upgrading, while alongside with the obviously positive innovations, a number of issues remain unresolved, among which are the expediency of introducing the third test for determining whether it is necessary to retrieve a M&A authorization and setting out the term “considerable business” in a sufficiently clear, transparent and understandable manner.