Strengthening the Impact of Governmental Bodies

The role of the state in regulating economic activity has been increasing recently. These changes are driven by the needs of today’s realities and the rapid pace of convergence between Ukrainian and EU legislation after Ukraine acquired EU candidate status.

In this article, we have reviewed two examples of the expansion of powers and influence of state authorities exerted on business, namely the expansion of the influence and authority of the Antimonopoly Committee of Ukraine and the National Securities and Stock Market Commission. 

Antimonopoly Committee of Ukraine

On 1 January, 2024 Law of Ukraine No 3295-IX On Amendments to Certain Legislative Acts of Ukraine Concerning Improvement of Legislation on Protection of Economic Competition and Activities of the Antimonopoly Committee of Ukraine came into force, which contributes highly-anticipated amendments into Ukrainian competition legislation. The respective Law, 3295-IX, was expected to be approved much earlier, but the full-scale Russian invasion shifted its adoption to more suitable time.

Generally, such amendments are aimed at harmonizing Ukrainian competition legislation in line with EU competition laws and regulations, as well filling procedural gaps, which were widely discussed by business and the legal environment. The main nouvelles of Law 3295-IX can be segmented into the following sections, in particular:

• Merger control regime;
• Investigation timeline;
• Leniency procedure;
• Settlement procedure;
• Inspection;
• Other procedural issues.

Merger control regime

In accordance with Law 3295-IX, the merger control regime was strengthened and amended in the following aspects:

1. Change in the financial thresholds.

The previous iteration of competition legislation prescribed that under the Test 2 the total value of assets or total turnover of sale of goods in Ukraine of the target company (including control relations) shall exceed 8 million EUR. The updated version of Test 2 now also applies to the acquirer (including control relations). This means that under Test 2 merger control approval will be required also when only the acquirer`s financial figures in Ukraine are exceeded. Such change in the calculation of financial thresholds once again confirms that the regulator has the intention to tighten merger control regime that will lead to an increase in the number of transactions that will fall under the merger control requirements.

2. Acquisition of control.

In accordance with the updated legislation, under the term “concentration” now fall agreements, as a result of which a legal entity or individual will acquire control over an undertaking. This means that transactions with respect to acquisition of 25% or more of shares/parts of the statutory capital of an undertaking that will not lead to the establishment of control relations will not be required to obtain merger control approval.

3. Several stages transactions.

The transactions which are executed within a period of 2 years between the same parties and fall under the term “concentration” will be treated as single transaction as of the date of the latest. In other words, the financial thresholds of the parties with respect to the transactions which were executed in the course of 2 years will be summarized. Should they fall under the financial thresholds prescribed by effective competition legislation, such transaction will require receipt of merger control approval.

4. Full-function JV.

The establishment of a joint venture by several undertakings will require merger control approval only in the event when such joint venture will solely conduct business activity over the course of a long period of time.

5. Exclusion of seller’s financial figures.

The seller’s financial figures could be excluded form the calculation of financial thresholds if the target has no assets in Ukraine and did not conduct any business activity in Ukraine during the previous two financial years, as well as during the present period. Such an amendment will cut some transactions from the necessity to obtain merger control approval due to the absence of nexus in Ukraine. 

Investigation timeline

According to Law 3295-IX the investigation timeline shall not exceed 3 years. However, the respective timeline could be extended for 2 more years in the event that additional information is required. Thus, the maximum timeline for investigation, including the extension period, will be 5 years. 

Leniency procedure

The Law 3295-IX enhances the leniency procedure by introducing the possibility of liability reductions for subsequent applicants who cooperate with the AMCU. These subsequent applicants can potentially receive the following reduction of liability, in particular:

• up to 50% for the first applicant;
• up to 30% for the second applicant;
• up to 20% for other subsequent applicants.

Given that the extent of the reduction will depend on the sequence of undertakings applications, such instrument shall encourage parties to come forward and cooperate with the AMCU. 

Settlement procedure

Law 3295-IX implements a settlement procedure which proposes to cut the investigation timeline and to decrease fines by 15%. In order to start the respective procedure, the parties have to initiate a settlement procedure and to agree in advance to pay the fines. Such initiation shall take place prior to the receipt of preliminary conclusions by the parties to the investigation. The settlement procedure may take place only after the receipt of approval from the AMCU and shall be executed in the form of an agreement between the AMCU and the respondent.

At the same time, it would be reasonable to highlight that the settlement procedure could not be applied to cases in which violation could not be ceased and its reasons and the aftermath could not be eliminated as a result of the respondent’s actions.

Similar to the leniency procedure the settlement procedure will encourage parties to cooperate with the AMCU in order not to fall in the “deep waters” of investigation, which may lead to graver consequences. 

Inspection

This instrument is not new for Ukrainian competition legislation, however the cases in which inspections were executed by the AMCU are extremely rare. In accordance with new Law 3295-IX the inspection procedure was slightly revised. In order to initiate an inspection, it is required to obtain the decision of commercial court, as well as an order from the AMCU. In addition, new Law 3295-IX authorizes the AMCU’s representatives with additional powers, e.g. possibility to receive extracts or copies from documents, to arrest assets and documents, to make photos, videos and audio recordings as well as to receive comments and explanations from officials of undertakings.

At the same time, the AMCU’s officials assure that the inspection instrument will be applied only towards those parties, which are not willing to voluntary provide the AMCU with the information and create obstacles for the investigation process. If the parties to an investigation process cooperate with the AMCU in the course of an investigation it is unlikely that the regulator will apply an inspection towards them. 

Other procedural issues

Last but not least, the list of other procedural aspects implemented by Law 3295-IX:

• Joint responsibility that will not allow undertakings to avoid their penalties going into a bankruptcy procedure;
• Extended access to the registers will provide AMCU officials with additional instruments, which will help to disclose violations related to completion of concentrations without prior approval from the regulator;
• Additional requirements to the process of collection of evidence will provide business with additional measures of control regarding the correctness of collection, which in future may serve as an additional argument in the course of appeal;
• Status of an executive document granted to the decisions of the AMCU will simplify the process of imposition of a fine.

National Securities and Stock Market Commission

On 22 February 2024, the Verkhovna Rada of Ukraine adopted Law of Ukraine No. 3585-IX On Amendments to the Law of Ukraine On State Regulation of Capital Markets and Organized Commodity Markets and Certain Other Legislative Acts of Ukraine on Improving State Regulation and Supervision of Capital Markets and Organized Commodity Markets.

The history of Law 3585-IX dates back to 2021, as in the previous case of the Law 3295-IX, the Russian-Ukrainian war delayed its approval by more than 2 years. Law 3585-IX has had and continues to have significant resonance among the professional community. On the one hand, its provisions are aimed at enhancing the institutional capacity of the NSSMC, which has been a more than a pressing issue for years in light of comprehensive reforms of corporate law regulations, as well as capital markets and organized commodity markets legislation – approval of the new version of Law of Ukraine No. 2465-IX On Joint Stock Companies and the Law of Ukraine No. 3480-IV On Capital Markets and Organized Commodity Markets.

Despite this active development of the legal framework, Law of Ukraine No. 448/96-ВР On State Regulation of Capital Markets and Organized Commodity Markets (hereinafter – Law 448/96-ВР) remained largely unchanged, and the amendments that were made to it were more cosmetic than substantive. On the other hand, the novelties of Law 3585-IX are often criticized by the professional community.

Law 3585-IX is expected to enter into force on 27 April, 2024. However, it should be noted that the coming into force of this law has been prolonged in time, and certain provisions will come into force only on 1 January, 2030 (e.g., provisions on regulation fees, provisions on large financial sanctions, on whistleblowing, etc. are postponed until 2026, 2030).

Procedurally, Law 3585-IX only amends Law 448/96-ВР, though in fact it approves a completely new and much broader version of the latter, with only a few articles left unchanged.

Below, we have summarized several important aspects of Law 3585-IX, namely:

• Changes in the work of the NSSMC;
• Market oversight and control;
• Enforcement.

Changes in the operation of the NSSMC

1. Chairman, Members and Employees of the NSSMC

Law 3585-IX defines several criteria for persons who may be appointed as members of the NSSMC. According to the new rules, NSSMC members will be elected through a public competition, for which a special commission will be formed called the Selection Commission. It is rather surprising that the Selection Commission will be formed exclusively from Ukrainian citizens, while the work of the Commission and the selection process will be financed by international technical support.

The changes have not spared employees of the NSSMC, as they are no longer considered government officials. At the same time, a number of requirements are set for NSSMC employees, in particular, they are prohibited from entering into transactions with financial instruments, and these requirements also apply to the immediate family members of NSSMC employees. The new law also provides a mechanism for lifting the relevant prohibitions.

The new version of Law 448/96-ВР provides for a mechanism of disciplinary sanctions for the Chairman and Members of the NSSMC. This mechanism will be implemented by a decision of the President of Ukraine. The remit of the Chairman and Members of the NSSMC includes issuing remarks, reprimands, as well as compensation in the form of recourse for damage caused by them to individuals/legal entities. It is worth noting that the new version of Law 448/96-ВР states that when determining the amount of compensation for damages, the personal wealth of the Chairman or a Member of the NSSMC, the ratio of the amount of damage to their salary, as well as other circumstances in connection with which full compensation by the Chairman or a Member of the NSSMC would be unreasonable, shall be taken into account.

2. Financing of the NSSMC

The Law 3585-IX stipulates that, as before, the NSSMC’s activities are financed by the State Budget of Ukraine. A novelty of this law is the “regulation fees” to be paid by capital market participants and professional participants of organized commodity markets. Such contributions will be credited to a special fund of the State Budget of Ukraine and will be subsequently directed to the NSSMC.

The law defines two amounts of such contribution, depending on the type of activity, which will either be 15 subsistence minimum for employable persons or 75. Such contributions will be paid annually by July 1. In the event of non-payment, the NSSMC will issue a resolution to recover the unpaid regulatory fee, which, if not executed and not litigated in court, will acquire the status of an enforcement document.

Market oversight and control

Law 3585-IX stipulates that the NSSMC will carry out market oversight in the form of prudential supervision and supervision of market behavior. What is interesting in this context is that, among other things, the oversight will pursue the goals of preserving competition in the market, which is more the competence of the AMCU than the NSSMC.

Law 3585-IX introduces an instrument of inspections that can be carried out by the NSSMC in relation to capital market participants and professional participants of organized commodity markets, as well as investors in financial instruments, i.e., including individuals. The NSSMC will also be able to carry out inspections of the National Bank of Ukraine and certain aspects of its activities.

In addition to inspections, the NSSMC will also be able to conduct investigations, in which it will have the right to access premises and information and will be able to seize financial instruments.

As part of its investigations and inspections, the NSSMC will have the right to conduct so-called “controlled services”, which are imitations of receiving a service in order to confirm whether the law has been violated.

A new tool that the NSSMC has added to its arsenal, and which we believe will have a positive effect, is the settlement agreement. This agreement is a kind of “agreement with the investigation”, which is concluded between the person being held liable and the NSSMC and provides for

• acknowledgment by the person with whom the agreement is concluded that they have committed a violation of the relevant legislation;
• reduction of the amount of financial sanction (fine) specified by the authorized person in the act on the offense or in the draft of such act, and/or non-application of an additional measure of controlling influence;
• voluntary payment by the person with whom the agreement was concluded of the financial sanction (fine) imposed on him/her in accordance with the terms agreed by the parties to the agreement, taking measures by such person to eliminate and/or prevent further violations, prevent the implementation (termination) of prohibited activities, increase the efficiency of functioning and/or adequacy of the internal control system, etc.

In our opinion, this instrument will be actively used. However, after analyzing best world practice of such instruments, it should be noted that Law 3585-IX does not provide for the possibility of making such an agreement confidential, at least in terms of its terms, and also provides for mandatory confession, which may significantly reduce the effectiveness of such an instrument.

Among other things, it introduces the institution of whistleblowers regarding violations taking place in capital markets and organized commodity markets. Law 3585-IX defines the guarantees, rights of whistleblowers and the procedure for working with them and their appeals.

Law 3585-IX regulates the publication of the NSSMC’s law-enforcement practice.

Enforcement

Enforcement will undergo significant changes. Law 3585-IX classifies such measures as:

• corrective measures;
• early intervention measures;
• control measures.

Corrective measures are recommendations to be provided by the NSSMC to the persons in respect of whom it has conducted an inspection or investigation. Early intervention measures consist of sending requests for action to the NSSMC.

Controlling measures provide a wide range of options for influencing the violator, including warnings; financial sanctions; suspension/revocation of licenses/certificates; an obligation to cease the unlawful act (action or inaction) and refrain from such an act in the future; prohibition and restriction of certain activities, operations or transactions; cancellation of the results of the general meeting; ban on voting, etc.

A significant number of the above measures are new to the market, though there are still some that existed before, such as financial sanctions (fines). In the new version of Law 448/96-ВР, such fines have become much higher, sometimes reaching the upper threshold of UAH 340 million. Some of the fines are tied to the annual turnover of the legal entity or the value of the transaction.

At the same time, these fines are not final, as the NSSMC may impose a fine for certain violations of the law up to 3 times the size of illegal profits/avoided losses.

The means of impact and amounts of financial sanctions will be introduced gradually until 2030. Thus, up till 1 January, 2026, the NSSMC will apply virtually the same list of offenses and sanctions for them as is currently in effect, but with minor amendments. Starting from 2026, the financial sanctions provided for in Article 50 of the new version of Law 448/96-ВР, mentioned above, will be applied. However, they will be applied with the use of multipliers, namely: during 2026 with a multiplier of 0.2; 2027 – 0.4; 2028 – 0.6; 2029 – 0.8, and from 2030 without their application.

So, by way of summary, the role of the state in regulating economic activity is increasing significantly. Strengthening this role can have both negative and positive effects, and the key in this case will be the ability to properly use the opportunities and powers provided by the new legislation to the above-mentioned governmental bodies.