Food And Drinks Client Alert - September 2012 - Trade Regulation & Practices

ANTIMONOPOLY COMMITTEE OF UKRAINE INVESTIGATES RETAILERS' ACTIVITIES

The AMCU's ongoing investigation into the food industry

Following our policy of supporting current and potential clients at all stages of their activity in Ukraine, we would like to draw your attention to the investigation into the wholesale and retail food industry actively conducted by the Antimonopoly Committee of Ukraine (hereinafter - the "AMCU").

Also, please be informed that according to the AMCU's Report 2011 published on the AMCU's website on March 14, 2012, the AMCU's attention is as always focused on the food industry (including milk and dairy products, meat products, vegetables, chicken eggs, grain, sunflower oil, bakery products, buckwheat, sugar, food concentrates, mineral water, juice, tea and coffee), where it conducts comprehensive audits.

Investigation into retailers' activities

As of September 2012 the AMCU has been investigating the retail industry. In particular, the AMCU analyzes the activities of large retailers in respect to their compliance with the requirements of antitrust and competition law.

The ground for the AMCU's investigation was the retailers' use of mechanisms similar to those that could have led to an economically unjustified rise in food prices.

In the AMCU's opinion, such activities of retailers may contain signs of anti-competitive concerted actions. Under Ukrainian law, anticompetitive concerted actions shall mean similar actions (omissions) of business entities on the commodity market, which have led or may lead to prevention, elimination or restriction of competition in the event that the analysis of the situation on the commodity market denies any objective reasons for committing such actions (omissions).

For instance, in 2011 the AMCU conducted an investigation to determine whether the actions of the buckwheat market operators had signs of anticompetitive concerted actions. The said high-profile case was concerned with the politically sensitive and socially important grain market, which unexpectedly suffered a shortage of buckwheat at the beginning of 2011. In such cases, it is important for the defense to present its opinion unambiguously based on expert's reports and relevant economic market research. The said approach is aimed at refutation of AMCU's suspicions and accusations and proving that a simultaneous increase in prices has been due to the actual market factors.

Liability for anticompetitive concerted actions

For breach of competition law in the form of anticompetitive concerted actions, business entities shall pay a fine in the amount of up to 10% of their income (revenue) from the sale of commodity (goods, works, and services) for the last reporting year preceding the year in which the fine is imposed. In this regard, the amount of fine for breach of competition law is calculated as a percentage of income (revenue) of the whole group of business entities related in terms of control. According to the Law of Ukraine "On Protection of Economic Competition", "business entity" means a legal entity, regardless of its legal form and ownership, or an individual involved in manufacturing, selling or purchasing goods or other business operations, including those that control other entities or individuals; as well as a group of business entities, if one or more of them exercise control over others.

Tougher sanctions for competition violations

In 2012 the AMCU tends to impose tougher sanctions for breach of competition law. In the past, antitrust authorities, though having fairly extensive powers, mostly used to impose quite symbolic fines. At the same time, the recent developments indicate that the AMCU has already started to use its legitimate powers to a greater extent.

For instance, in May 2012 the AMCU fined the state enterprise "Ukrspirt" (the largest state alcohol producer holding 92 alcohol producing plants) almost EUR 20 million (the AMCU's largest fine ever imposed on a single company) for abuse of dominance. The Committee found that the State Enterprise "Ukrspirt" set monopolistically high selling prices for ethanol.

Какую информацию использует АМКУ?

При исследовании рынка пищевых продуктов АМКУ использует как информацию, полученную от операторов рынка в рамках запросов АМКУ о предоставлении информации, так и информацию из открытых источников, в том числе иностранных, с целью определения корпоративных прав нерезидентов (иностранных холдинговых компаний) и их связей с субъектами хозяйственной деятельности на украинском рынке.

What information is used by the AMCU?

While studying the food industry the AMCU uses both information disclosed by market participants within the AMCU's information requests, as well as information from public sources, including foreign ones, in order to determine the corporate rights of non-residents (foreign holding companies) and their relations with stakeholders on the Ukrainian market.

What is in the focus of the AMCU's attention?

The AMCU attaches much importance to the definition of relations of control within a group of companies, as fines for breach of competition law are calculated as a percentage (10%) to the income (revenue) of the whole group of entities related in terms of control. Percentage is calculated from the sale of commodity (goods and services) for the last reporting year, preceding the year in which the fine is imposed.

In addition, on June 18, 2012 the AMCU gave an official warning notice of the inadmissibility of mergers without receiving a relevant permit that is obligatory: "Starting from July 1, 2012 the AMCU will impose the maximum penalties for breach of Article 50 clause 12 of the Law of Ukraine "On Protection of Economic Competition". Besides,, the amount of fine makes up to 10% of the group's income (revenue) of the whole group of entities related in terms of control and is calculated as described above.

Наши рекомендации:

Given that the AMCU, based on the results of its investigation into the food industry, proceeds to prosecution and investigations as to specific market participants, we recommend our clients taking appropriate actions in order to comply with competition law (i.e. to implement the so-called "competition compliance programs") and to mitigate the risks of substantial penalties for breaches of antitrust law, in particular:

1) Before submitting requested documents and information to the AMCU, to scrutinize their scope and content in terms of risks of violation of Ukrainian competition law (to prevent the AMCU's deeper investigation of the industry and possible prosecution);

2) To bring the company's existing policies, procedures, contracts and other documents in compliance with the applicable competition law;

3) To arrange trainings for the company's employees of as to their conduct during AMCU's inspections and investigations.

At the same time, please be advised that failure to provide information to the AMCU within the set term, providing incomplete or false information are deemed as separate competition infringements that entail a fine of up to 1% of a business entity's income (revenue) from sales of commodity (goods, works, and services) for the last reporting year preceding the year in which the fine is imposed.

Also, it is necessary to determine whether the company belongs to a group of companies related in terms of control (the fines for competition infringements being calculated as a percentage of income / revenue of the whole group of companies related in terms of control).