September 2009

In July, changes were introduced to Russian competition laws that may impact corporate transactions.

First, the Federal Law on Protection of Competition (the “Competition Law”), the main competition law in Russia, was amended on July 17, 2009. These amendments took effect on August 23, 2009.

The amendments, among other things, broadened the scope of extra-territorial application of the Competition Law; clarified certain definitions; increased thresholds for merger clearance by competition authorities and excluded certain transactions from the list of transactions subject to prior clearance; introduced certain new procedures, including audits and searches by competition authorities; and set the statute of limitations for claims regarding competition law violations.

Second, the Code on Administrative Violations was amended on July 17, 2009, and the Criminal Code was amended on July 29, 2009, adding more severe sanctions for competition law violations. The amendments take effect on August 22, 2009 and October 29, 2009, respectively.

Competition Law

Extra-Territorial Application

In essence, the Competition Law now contains a “catch-all” provision, which can arguably apply to any agreement or action made outside Russia with respect to: (i) either Russian companies/assets or (ii) foreign business entities doing business in Russia or otherwise affecting competition in Russia.

Previously, the Competition Law applied to agreements between Russian and/or foreign persons or organizations made outside of Russia provided that such agreements: (i) pertain to key production assets and/or intangible assets located in Russia, or shares or equity interests in, or rights with respect to, Russian business entities; and (ii) restrict or may restrict competition in Russia.

The amended Competition Law broadens the scope of its extra-territorial application to include, inter alia, actions taken outside of Russia, rather than only agreements. Further, the Competition Law now covers agreements and actions in respect of foreign companies to the extent that such companies affect the competition environment in Russia. Previously, the Competition Law was meant to apply to agreements entered into outside of Russia, but only with respect to Russian assets and companies.

Dominant Position

Abuse of a dominant position is prohibited.

The Competition Law lists certain criteria to determine whether a business entity is “dominant” in the relevant market. Usually, an entity is treated as dominant if it has, on a stand-alone basis, more than a 50 percent share in the relevant market, or, together with other entities, either a 50 percent or 70 percent share, under certain conditions.

The Competition Law further says that no entity is dominant on a stand-alone basis if it has a less than 35 percent share, unless specified otherwise in a federal law. For example, under the Federal Law on the Electricity Industry, a generating entity can be deemed dominant if its share is above 20 percent.

Under the amended Competition Law, the antimonopoly authorities can declare an entity dominant if it has a less than 35 percent share, subject to certain conditions (for example, if such entity can unilaterally affect price levels, or the goods it sells cannot be replaced with other goods).

Monopoly Prices

Setting and maintaining monopolistically high or low prices constitutes the “abuse of a dominant position” and is prohibited.

The rules for determining what are “monopolistically high or low prices” have been amended significantly. The Competition Law now lists some specific, relevant examples.

For example, under certain circumstances, the price for goods manufactured as the result of an innovation cannot be viewed as monopolistically high, and a price for goods that is within the range of state-regulated tariffs or does not exceed prices on comparable markets cannot be viewed as monopolistically high or low. A definition of “comparable markets” is also introduced.

Increased Merger Control Thresholds

Under the Competition Law, prior approval of the competition authority (the Federal Antimonopoly Service, or the “FAS”) is required for certain merger and acquisition transactions if the aggregate assets or annual revenues of the acquirer and the target company (or in certain cases, all parties to the transaction) and their groups of persons exceed certain thresholds. (In other cases, only notification of the transaction is required).

The amended Competition Law increases certain thresholds. For creation of new companies and acquisitions, the level of aggregate assets of the relevant companies is increased from 3 billion rubles (approximately $95 million) to 7 billion rubles (approximately $220 million); and the revenue thresholds rise from 6 billion rubles (approximately $190 million) to 10 billion rubles (approximately $315 million).

The thresholds for mergers remain the same: the level of aggregate assets of the relevant companies is 3 billion rubles (approximately $95 million); and the revenue threshold is 6 billion rubles (approximately $190 million).

The thresholds for notification double from their previous levels.

Excluded Intra-Group Transactions

In general, under the Competition Law a separate FAS approval should be obtained for each relevant transaction. However, there are two exceptions applicable to intra-group transactions whereby, instead of seeking prior approval, an acquirer can file a notification after the transaction is completed:

• The first exception, which existed already, applies to transactions entered into within a group of persons, provided information on such group of persons was filed with the FAS and then publicly disclosed by the FAS through posting this information on its website. We note that some acquirers still prefer to file for a prior approval for intra-group transactions, since in this case the group structure is not publicly disclosed.
  
• The second exception is new, and applies to transactions between a business company (subsidiary) and a person (the parent) which controls, via equity participation or by powers conferred by other persons, more than 50 percent of the company’s voting rights, regardless of whether the subsidiary-parent relationship is disclosed to the FAS. Based on a literal interpretation of the amended Competition Law, this exception clearly applies only to transactions where the subsidiary in question is a Russian company. However, we cannot exclude that it may also apply to transactions between foreign parents and foreign subsidiaries.

Broadened Disclosure Rules

A person applying for prior approval or filing a post-transaction notification must provide the FAS with information about, inter alia, (i) business entities owning more than a 5 percent equity interest in the applicant company; (ii) business entities in which the applicant has more than a 5 percent equity interest; (iii) persons which comprise one and the same group of persons with the applicant; and (iv) information on beneficial owners with more than 5 percent equity interest in the applicant company, including those with beneficial owners that are off-shore companies.

Previously, the Competition Law did not require such information to be disclosed, although in practice the FAS started to require the provision of information concerning beneficial owners in 2007.

Vertical Agreements

The Competition Law sets forth a general list of anti-competitive agreements and “coordinated actions” that are prohibited per se, such as price-fixing, division of markets and the like. The amended Competition Law excludes so-called “vertical agreements” (such as those between a manufacturer and its distributor, or a seller and a purchaser), from the general list and creates a separate list for prohibited vertical agreements.

“Vertical agreements” which may lead to resale price-fixing or limit the choice of suppliers remain prohibited. Nonetheless, vertical agreements related to the sale of goods under the trade name or trademark of the supplier or manufacturer can contain certain restrictions.

Permitted Agreements

The Competition Law lists specific instances when agreements otherwise prohibited are permitted and contains a provision allowing the Russian government to determine other such instances.

On July 16, 2009, the Russian government adopted its Decree on Instances When Agreements Between Business Persons are Permitted, No. 583, identifying permitted agreements between a seller and a buyer, as well as listing certain terms and conditions which are not permitted (so-called “inadmissible” terms and conditions) in agreements between sellers and buyers.

These rules apply to agreements between a seller and a buyer if three conditions (so-called “general exceptions”) are met:

• The seller sells to two or more buyers and has a less than 35 percent share in the relevant market, or sells to a single buyer whose share in the relevant market is less than 35 percent;
  
• The buyer and the seller do not compete with each other or compete in the market where the buyer buys for further re-sale; and
  
• The buyer does not manufacture substitute goods.

The rules will remain in effect for five years from July 31, 2009, the effective date of Decree No. 583.

Prohibited Terms and Conditions

Decree No. 583 includes among the prohibited terms and conditions of an agreement between a seller and a buyer the following:

• Limiting the buyer's ability to set a re-sale price;
  
• Restricting the buyer to sell to certain customers or only within a certain territory. Such restrictions are permitted, however, when the buyer is a wholesale buyer and the seller has an agreement with another buyer for said territory or when the seller itself sells its goods within said territory;
  
• Limiting the seller to sell spare parts or components;
  
• Limiting the buyer to manufacture or sell or buy substitute goods or imposing on the buyer an obligation to purchase more than 50 percent of the seller's output. If agreements previously entered into contain clauses with such limitation or obligation, such clauses may remain in effect no longer than three years from July 31, 2009, the effective date of Decree No. 583. However, a less-than-three-year agreement with a wholesale buyer can contain such limitation or obligation; and
  
• Imposing on the buyer an obligation to restrict further re-sales.

Mandatory Provisions

Decree No. 583 requires that if a seller and a buyer agree on a territory within which only the buyer may sell the goods, then the buyer may not enter into agreements with sellers of “substitute goods” for the same territory.

Decree No. 583 also lists certain restrictions and mandatory conditions for agreements on the development of new goods and processes, and on joint use of the results of scientific research.

Overall, the amended Competition Law and Decree No. 583 have shed more light on what is permitted and prohibited in agreements between a seller and a buyer, and list a number of provisions that must be excluded from or included in such agreements. These new mandatory provisions must be taken into account by all businesses operating in Russia. Unfortunately, many key issues remain unclear or subject to interpretation, as Russian competition law continues to develop.

Audit Procedures

The amended Competition Law sets forth detailed procedures for audits and searches (including possible “dawn raids”) of companies by the FAS. These rules govern, among other matters, the rights of access to the documents and premises of a company, the duration of audits and the actions that FAS officials may take.

Statute of Limitations

The amendments have introduced a special statute of limitations for competition law violations – three years from the date a violation is committed or, in the event of a continuous violation, from the date the violation is discontinued or detected. After expiration of this three-year period, all claims should be barred and no liability may be imposed.

Previously, the Competition Law did not contain its own statute of limitations, and consequently the general one-year statute of limitations for violations of administrative law violations applied.

Code on Administrative Violations

In certain cases, the Code on Administrative Violations applies to breaches of the Competition Law. The Code on Administrative Violations has now been amended to introduce new penalties for competition law violations, including:

• A fine of up to 15 percent of a company's revenue for improper coordination of economic activities between business entities. (This is the same fine as for abuse of dominant position, anti-competitive agreements and improper coordinated actions.)
  
• A fine of up to 1 million rubles (approximately $31,500) for abuse of dominant position in a market where an entity with a share of less than 35 percent may be viewed as dominant (such as the electric power market).

Notably, the Competition Law also provides that in the event of unfair competition or monopolistic activities, all income derived therefrom may be recovered as a penalty.

Criminal Code

Certain violations of the Competition Law are also criminal offences.

These include agreements and coordinated actions limiting competition, repeated (e.g., more than two times within a period of three years) abuse of dominant position (for example, price-fixing and/or maintenance of monopolistically high or low prices, limitation of access to the market), provided that they cause damages of more than 1 million rubles (approximately $31,500) or generate income of more than 5 million rubles (approximately $157,800) for the offending parties.

The Criminal Code has also introduced more severe punishments for these offenses, including:

• A fine of up to 500,000 rubles (approximately $15,700) or imprisonment for up to three years; and
  
• A fine of up to 1 million rubles (approximately $31,500) and imprisonment for up to six years, if an offence has caused damages of more than 3 million rubles (approximately $94,640) or generated income of more than 25 million rubles (approximately $789,000) or involved violence.

However, if an offender has paid all of the income derived from prohibited practices (including, arguably, as fines under the Competition Law) to the federal authorities or paid full compensation for damages, it will not be subject to criminal prosecution or liability.

This article is intended only as a general discussion of these issues. It is not considered to be legal advice.

© 2009 Dewey & LeBoeuf LLP. All rights reserved. No part of this publication may be reproduced, in whole or in part, in any form, without our prior written consent.