Antitrust Dispute Resolution In Kazakhstan

PRESENTATION for the SEMINAR
Current Issues In Kazakh Law – An Update for Foreign Investors and Their Advisers

Rustam Ilzhanov, Senior Partner
Sayat Zholshy & Partners Law Firm

The legislative act governing protection of competition in the Republic of Kazakhstan (Kazakhstan) is the Law of Kazakhstan On Competition enacted in 2008 (the "Law"). It should be noted here that the Law has an exterritorial effect which means that, in addition to the actions of performed by a market entity within Kazakhstan, the provisions of the Law also apply to its actions performed outside Kazakhstan, if such actions:

• either directly or indirectly affect fixed assets and/or intangible assets located within Kazakhstan or shares/participatory interests in the authorized capital of market entities, or property or non-property rights with respect to Kazakhstan legal entities; or
• restrict competition in Kazakhstan.

It should be also noted here that Kazakh law does not have a definition of "restriction of competition" (!).

The government authority overseeing competition-related matters in Kazakhstan is the Agency for Protection of Competition (the Antimonopoly Agency). It is a separate body and not a part of any Ministry or any other government authority and is directly accountable to the President of Kazakhstan.

Currently, the Agency is one of the most active government agencies in the country, which can be illustrated by some statistics: as of the current date, 30 market entities are undergoing investigations and 2005 applications for consent to economic concentration have been filed and considered for the eight first months of 2011, etc.

Primary activities of the Agency that have attracted most interest and coverage in the press are:

• combating monopolistic practices; and
• supervision of economic concentration.

Monopolistic Activities

Pursuant to the Law, monopolistic activities are:

• anticompetitive agreements between market entities;
• anticompetitive concerted practice of market entities; and
• abuse of a dominant or monopolistic position.

Anticompetitive agreements between market entities are agreements which result or may result in a restriction of competition. Such agreements are prohibited and are held invalid.

Anticompetitive agreements include:

• setting up and/or maintaining agreed prices or other conditions for purchase/acquisition or sale/realization of goods;
• division of goods markets based on geographical criteria, range of goods or other criteria; and
• unreasonable restriction of production or sale of goods, etc.

Concerted actions or practices of market entities aimed at restricting competition (which is the second type of monopolistic activities) are:

• setting up and/or maintaining prices or other conditions for purchase/acquisition or sale/realization of goods;
• unreasonable restriction of production or sale of goods;
• unreasonable refusal to enter into contracts with certain vendors (suppliers) or buyers;
• use of different (or discriminating) conditions in equivalent agreements with other entities.

The third type of monopolistic activities, as has been mentioned before, is abuse of a dominant or monopolistic position.

A dominant position of a market entity is a position where its share in a respective goods market is ≥35%.

A monopolistic position is a position where the dominating market share of a natural monopoly, state monopoly or a market entity in a respective goods market is 100%.

As such, one of the primary goals of the Agency is to prevent, discover and investigate and suppress violations of Kazakhstan antimonopoly legislation mentioned before.

According to the Agency, they are currently investigating 30 market entities with the majority of investigations in the following markets.

• Oil/Petroleum products;
• Electricity supply;
• Cement wholesale;
• Communications services (Roaming, Internet, etc.); and
• Agriculture.

In 2010-2011, Sayat Zholshy & Partners represented its clients operating within different markets in connection with the following charges:

• abuse of dominant position by a leading Kazakhstan fuel and lubricants distributor by reducing sales volumes (fine threatened against the client – EUR ≈58 mln.);
• abuse of dominant position by a mobile operator by setting up unreasonably high rates fr roaming services (fine threatened against the client ≈ EUR 57 mln.);
• abuse of dominant position by a tea supplier (fine threatened against the client – no information);
• anticompetitive concerted actions of a dairy producer by setting up concerted prices together with other market entities (fine threatened against the client – no information);
• anticompetitive concerted actions by a vegetable oil producer (fine threatened against the client – no information).

Control over Economic Concentration

In order to prevent creation or strengthening of a dominant or monopolistic position and/or restriction of competition, the Agency exercises government control over economic concentration ("EC") by a requirement for obtaining consent from the Agency for certain transactions (actions).

Consent to EC is required for:

• mergers and acquisitions;
• acquisition by a person (group of persons) of shares/participator interests/units in a legal entity (the "target") with the right of disposition of over 25% of its authorized capital;
• acquisition of fixed assets/intangible assets if the cost of the assets to be acquired is over 10% of the book value of the seller's assets;
• acquisition of the right to give binding instructions to the target or to perform the functions of its executive body; and
• participation of the same individuals in managing bodies of several market entities.

Provided in all cases that:

- a party to the transaction (or its group of persons) is a dominant/monopolistic market entity;

- the aggregate book value of the assets (including its group of persons) of the buyer and of the target or the volume of sales/realization of their goods for the last year is more than ≈ EUR 15 mln.

I would also like to give you the statistics showing the number of applications for economic concentrations filed for the period 2010 to August 2011:

2010 YEAR:

Total: 330
Consent granted: 151
Rejected: 131
Pending: n/a
No consent required: 3
Review of application ceased: 4
Application withdrawn: 6
Consent denied: 0

JANUARY – AUGUST 2011:

Total: 205
Consent granted: 76
Rejected: 75
Pending: 24
No consent required: 13
Review of application ceased: 16
Application withdrawn: 0
Consent denied: 1

As you can see, quite a large number of applications have been rejected. The reason for this is that the law requires that the applicant when filing an application must provide a lot of information. For instance, applicants are required to provide information on their production and sales volumes and exports and imports volumes to and from Kazakhstan for the previous 2 years, as well as forecasts and estimates for these criteria for each market entity which is a part of the applicant's group of persons for the following 3 years. In addition, it is also required to provide a notarized (and in the case of most countries also apostilled) and translated excerpt from a trade register for each legal entity which is a part of the applicant's group of persons, etc.

Here a particular emphasis should be given to the definition of "group of persons" as provided by Kazakh law.

A group of persons is a group of individuals and/or legal entities who meet one of the following criteria:

1. a person has the right to directly or indirectly (through third parties) dispose of >25% voting shares (participatory interests, units) in the authorized capital of the legal entity;
2. a legal entity or several affiliated legal entities are able to determine decisions taken by another person, including to determine the conditions for such person to carry out its business operations or to perform the functions of its managing body;
3. an individual, his or her spouse, and/or close relatives are able to determine decisions taken by another person, including to determine the conditions for such person to carry out its business operations or to perform the functions of its managing body;
4. persons each of which forms one group of persons with the same person in terms of the criteria in 1-3 above, as well as other persons forming one group of persons with each of such persons in terms of the criteria in 1-3 above.

As such, in accordance with this definition, the Agency requires that in addition to the information related to their parent companies, subsidiaries and sister companies, applicants also provide information related to their ultimate individual beneficiaries. In addition to that, it is also required to provide information related to market entities controlling (over 25%) in legal entities in which anyone of the applicant's group of persons is a member, as well as information related to their group of persons. As such, the Agency requires extremely large amounts of information which can be problematic for large globally represented and operating holding companies

Consequence of a failure to obtain consent for economic concentration

Pursuant to the Law, a failure to obtain consent for economic concentration from the Agency may entail the following consequences:

• imposition of a fine (≈EUR14,000);
• holding of the transaction invalid.

However, in practice, the most common consequences are:

• "impaired relations" with the Agency which may manifest itself in additional future investigations by the Agency against a market entity which has failed to obtain consent for EC;
• problems and obstacles for future transactions (e.g., rejection of future applications, etc.).

To summarize, we can say that the Agency is quite vigorous in exercising its functions as a government regulator of competition in Kazakhstan by carrying out thorough investigations of violations of the antimonopoly laws, as well as in implementing more complicated procedures for acquisition of businesses which are in one way or another related to Kazakhstan and potential investors should be aware of these realities. For the reasons stated above, it is obvious that such transactions always require qualified advice from experienced professionals. Sayat Zholshy & Partners will be happy to provide such assistance and to welcome you as one of our new clients.

Thank you for your attention!

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