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Competition - Russia

 

Introduction

 

Antitrust clearance of mergers and reorganizations has attracted considerable attention from Russia's legislature in recent years. In 2006 amendments to the Law on Joint Stock Companies were adopted to regulate reorganization procedures in greater detail and in September 2007 the Ministry of Economic Development and Trade submitted to the government a draft law on such procedures.

 

The draft law aims to consolidate all rules relating to the various elements of reorganization and to regulate the relations between the participants. It would affect the relations between an entity undergoing reorganization and:

  • its creditors;
  • any entity created as a result of the process (eg, in a spin-off); and
  • state bodies which participate in reorganization processes.

Unified and consistent provisions on reorganizations would benefit the parties involved. However, the process of drafting such provisions is lengthy and complex. For example, the Order on the Approval of the Administrative Regulation issued by the Federal Anti-monopoly Service on the Performance of Official Functions related to the Coordination of the Process of Establishing and Reorganizing Commercial Organizations in Cases Specified by Antitrust Laws was issued by the Federal Anti-monopoly Service on January 1 2007. However, it has not yet been registered with the Ministry of Justice. Until it is officially enacted, companies contemplating a reorganization that would trigger a notification requirement must presumably follow Order 276/1999, containing the provisions which the Ministry for Anti-monopoly Policy issued on August 13 1999.(1)   

 

However, antitrust officials have so far failed to explain which of the two bodies of rules must be followed when preparing an antitrust notification. According to the letter of the law on the entry into force of legislative norms, it appears that companies which have already started the reorganization process must use the 1999 provisions when preparing an application, whereas companies contemplating reorganization as a potential future development should consider the main antitrust approval measures in the new regulation.

 

Triggering a Notification Requirement

 

The Competition Law regulates the exercise of official control over economic concentrations. As applied to commercial organizations, it covers approval granted by an antitrust body for both mergers and acquisitions. Furthermore, reorganization is subject to antitrust control based on certain parameters relating to:

  • the parties' turnover;
  • the value of their assets;
  • the persons or groups of persons with an interest in the entities; and
  • whether one of the entities involved is listed in an official register and has a share of over 35% in a relevant market.

If a reorganization meets at least one of these criteria, the parties must request preliminary approval from the competent antitrust body.

 

The Competition Law does not provide for a simultaneous spin-off and merger (termed 'combined reorganization') as specified by the Law on Joint Stock Companies. The Competition Law's provisions on the submission of applications and notifications does not describe the procedure to be followed for combined reorganizations, nor does the text of the new regulations - developed by an antitrust body and available on the service’s website - contain specific provisions on how documents relating to combined reorganizations must be submitted or on the information they must contain. It seems logical that regulations which codify the submission and composition of an antitrust notification should give specific details of such procedure.

 

Notifying Party

 

The most fundamental factor in the legislation on antitrust control of combined reorganizations is that no more than one entity is relevant to the consideration of a reorganization within the meaning of the relevant articles.

 

For instance, in the event of a merger (or other reorganization involving at least two entities), the resulting entity is not yet incorporated at the moment when the application is submitted to the antitrust body, nor is it registered in the relevant state register. An application to an antitrust body for clearance of a combined reorganization can be submitted only by a party which has control over an entity created as a result of the separation or division of another entity. An application in respect of a merger may be submitted only by a party merging with a party created as the result of such a separation or division.

 

Notification and Accompanying Documents

 

A further aspect of combined reorganizations is also omitted from existing legislation: no allowance is made for the fact that a standard list of documents and information cannot be presented in such cases. Where a legal entity is created by a spin-off from a larger entity and is simultaneously incorporated into a third entity, it does not acquire an independent identity; thus, such an entity does not possess the corporate documentation (eg, articles of association or a registration certificate) which must be presented to an antitrust body.

 

The Competition Law sets out requirements relating to the documents to be presented with a clearance application; the requirements are listed in greater detail in the 1999 provisions.

 

A merger is deemed complete when the resulting legal entity is registered with the state. Other reorganizations involving two or more entities are deemed complete once an entry in the Uniform State Register of Legal Entities records the cessation of activity of the company created by a spin-off and the simultaneous entry in the register of the new legal entity created by the merger.

 

The question of how an application is submitted and what documentation must accompany such an application is decided on the basis of the companies' individual circumstances. Most recent practice has involved reorganizations of power generation companies. For example, when OAO Ivanovskaya Generatsiya separated from OAO Ivanovskaya Generirouyushaya Kompaniya and simultaneously became part of OAO Ivanovskoye PGU, only OAO Ivanovskoye PGU applied to the relevant antitrust body in respect of the merger. The antitrust body did not receive:

  • a certificate confirming the entity's registration;
  • articles of association;
  • balance sheets;
  • information about production volumes; or
  • other economic indicators.

The merger control mechanism for combined reorganizations was developed in order to simplify the restructuring of electricity company OAO RAO UES Rossii. However, it appears that companies operating in other sectors of the economy may also choose to use this mechanism.

 

Commercial organizations applying for antitrust clearance for a combined reorganization must act on the basis of formal logic and cannot present the antitrust body with accompanying documents which they do not possess. However, in order to minimize the risk of litigation resulting from failure to present the necessary documentation, it would be helpful if the authorities were to include in the new regulations an exhaustive list of documents which must accompany such an application.

 

Decisions

 

The 1999 provisions state that an antitrust body may either reject or approve a clearance application. When notifying an applicant of its approval, the antitrust body may require the applicant to mitigate the anti-competitive effects of the transaction by modifying its reorganization plan, taking certain action or complying with behavioural requirements.

 

Once it has considered the applicant's notification, the antitrust body may decide to initiate an in-depth investigation or require the applicant to take additional measures to preserve or restore the necessary competitive conditions.

 

The new regulations contain various statements on the results of an antitrust body's consideration of applications and notifications. The antitrust body may approve or reject the application or extend the assessment period. However, the regulations do not explicitly allow it to make its approval conditional on the performance of actions aimed at preserving competition. The antitrust body may impose such a requirement only in response to its consideration of the relevant notification.

 

Restructuring large companies involves the development of a business model, internal corporate approval at many levels and a considerable budget; the outright rejection of an application for antitrust clearance may result in serious losses, in terms of both actual expenditure and the loss of future profits. However, the regulations allow companies to anticipate a potential rejection. An antitrust body may inform the applicant of its planned decision and its reasons, thereafter allowing the applicant seven days to submit additional written information which the applicant considers crucial to the decision-making process. However, a company planning a reorganization can hardly influence the competitive environment in its sector in seven days.

 

The absence of conditional approval provisions may result in antitrust bodies failing to follow the regulations, as the Competition Law explicitly allows them to issue such a decision. However, competition practitioners may reasonably assume that, in the interests of uniform application of antitrust procedures, the regulations will be brought into line with the Competition Law.

 

Comment

 

In general, the regulations describe the procedures within the framework of antitrust approval, including procedural time limits and detailed provisions on the division of authority between federal and other antitrust bodies.

 

A significant new element is the description of a procedure for consulting antitrust bodies. However, the regulations fail to reflect many of the finer details of antitrust control in practice, such as specific points relating to combined reorganization. However, given the current dynamic development of antitrust law, commercial organizations which plan to apply for antitrust clearance in the future should be confident that the regulations will take account of trends in antitrust control and offer sufficiently clear guidance on the relevant measures.

 

International Law Office