Articles

Control of economic concentration in the CIS and Georgia

June, 2014. Article by Victor Kipiani, partner at MKD and Tamar Tskalobadze, lawyer at MKD

Antitrust Control over Economic Concentration

In May 2012 the Parliament of Georgia adopted a new Antitrust Law (the "Law") based on the recommendations of the European Union. The Law has been in force since 31March 2014. This is a large step forward for Georgia, as during the last six years the government has been exercising no antitrust control whatsoever.

Based on the recommendations of the EU, the Law introduces updated competition regulations and establishes a Competition Agency (the "Agency") which will be responsible for implementing the Law. The new Law is much more sophisticated and comprehensive than those existing previously, although as in old versions only the abuse of monopoly positions are prohibited, not such positions per se.

Definition of economic concentration

According to the Law, an economic concentration means:

A merger of two or more independent economic agents, when one new economic agent is formed;
When a person controlling at least one economic agent acquires direct or indirect control over another economic agent or over a part of its business via the transaction, through the purchase of securities or assets or through other means;
Participation of one and the same person in governing bodies of various economic agents.

The Law also determines that if a joint enterprise is founded that exercises all the functions of an independent economic agent (entities who regardless of their legal structure perform commercial activities, as well as non- entrepreneurial (non-commercial) legal entities and other types of associations which are participants in a market and/or perform a commercial activity) over a long period of time, this is deemed to be concentration.
Concentration is compatible with a competitive environment only if it does not generally restrict effective competition on the market for goods or services in Georgia or a significant part thereof and which results in a dominant position or strengthening thereof.

Control over Concentration

According to the Law, control over concentration is expressed in rights, agreements or other means that jointly or separately create the opportunity to influence an enterprise or its part, particularly:

Possession of the enterprise and/or its assets or the right of total or partial usage of its assets;
A right (including those foreseen under an agreement) that grants influence over the membership of the governing bodies of an economic agent, voting rights or the opportunity to generally influence decisions.

Notification

The Agency is authorized to request information from economic agents acquiring a dominant position as a result of concentration related to those transactions which might substantially restrict competition on the relevant market. This is an additional mechanism of control by the Agency that enables it to prevent the abuse of a dominant position by the economic agent.

Concentration is subject to preliminary notification of the Agency if the value of separate or joint assets or annual turnover (according to the data of the previous financial year of concentration) of its participant economic agent/agents (except economic agents of specially regulated areas of the economy) on the territory of Georgia exceeds the established limited amount by the Rule of Submission and Consideration of the Notification on Concentration (this document has not yet been adopted). The Agency is obliged to consider the notification and inform the applicant of its decision within a month. Based on the possible complexity of a case, this term may be prolonged for a maximum of 2 weeks. Failure of the Agency to respond within the established term will be deemed a positive answer.

The notification on mergers/acquisitions of economic agents must be supported by information on the competitive effect of the envisaged merger/acquisition. A negative conclusion by the Agency shall serve as a ground for the Public Register National Agency to refuse to register the economic agent.

Release from the Obligation of Notification

Activities stipulated under the provisions on concentration shall not be deemed to be a concentration of market power and correspondingly economic agents will not be obliged to give preliminary notification to the Agency if:

The merger/acquisition of economic agents has insignificant market power;
The concentration is a result of insolvency and is exercised in accordance with the procedures provided under the Law of Georgia on Insolvency Proceedings and as part of liquidation procedures, except when a competitor entrepreneur or a group that contains competitors of the bankrupt enterprise gains control through this process;
Control is gained temporarily for the purpose of securing a loan provided that no rights acquired as a result of such possession of assets shall be exercised, except for the right to sell;
The concentration concerns the participants of mutually dependent persons;
A financial institution as part of generally authorized activities purchases shares in another enterprise with its own or its client's funds and gains temporary control over it or acquires assets, provided that a subsequent transaction of its sale takes place within one calendar year of the date of purchase/gaining control. Such institution shall not have rights related to the possession of shares except the right to receive a dividend and it exercises its rights only in preparation for the total or partial sale of assets or shares in the enterprise.

Shortcomings and Recommendations

When no antitrust control was exercised in Georgia, two major monopolized market sectors emerged - pharmaceuticals and oil. However, now that the new Law is applicable, control over these sectors will become stricter and abuse of a monopoly position will not be permitted (according to the Law, a company is considered to be a monopolist if it holds more than 40% of the relevant market).
Recent changes to Georgian antimonopoly legislation now enable the Agency to monitor the market, although antimonopoly control is carried out only when a notification is submitted. However, to improve the activities of the Agency changes to the relevant regulations are required. Such changes should prevent agreements restricting competition. The Agency should actively exercise control over economic concentration, however such control should not entail permanent instructions for or intervention in the activities and interaction between the companies on a market.

The application of antitrust regulations is quite new for the Georgian economy and free market. Taking this into account, the respective authorities should adopt guidelines based on foreign practice which would ensure correct and effective implementation of the Law and would facilitate the process for the actors involved.

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