By Natalya Morozova

Federal Law “On Protection of Competition” dated July 26, 2006 N 135-FZ, as amended (the “Competition Law”) is the principle law that governs protection of competition in Russia. The latest amendments known as “the second antimonopoly law package” took effect on August 23, 2009. The basis for the extraterritorial application of the Competition Law is established in its article 3(2). According to this provision, the Competition Law applies to any agreements made or actions taken by or among Russian and/or foreign persons outside of Russia with respect to: (i) fixed production assets and/or intangible property located in Russia, or (ii) shares (participation interests) in business entities or rights in relation to commercial organizations which are conducting activities in Russia or otherwise affecting competition in Russia.

For the purposes of its potential extraterritorial application, the main criterion the Competition Law utilizes is the object of an M&A transaction. Contrary to the previous wording of article 3(2), the amended wording makes clear that M&A transactions may be covered by the Competition Law even if: (i) they do not involve Russian companies, or (ii) the ultimate target companies are not incorporated in Russia. Importantly, however, according to the current wording of the Competition Law, the target company must conduct operations or otherwise affect competition in Russia. Thus, an M&A transaction between two non-Russian companies with a target company also located outside Russia may well fall under the requirements of the Competition Law, provided the target company conducts operations or otherwise affects competition in Russia.

The Competition Law does not establish any guidance as to whether there are any numeric thresholds applicable to the foregoing transactions, what particular activities of a target company qualify under the Competition Law, or how a target company must affect competition to trigger the application of the Competition Law.

In its chapter on state control over economic concentration, the Competition Law provides the thresholds that trigger a pre-closing filing requirement (article 28) and a post notification filing requirement (article 30), which include, inter alia, the percentage of shares (participation interests) to be acquired in the target companies and the aggregate amount of revenues of both the buyer and its group and the target company and its group for the latest calendar year. (The relevant thresholds are 10 billion rubles and 400 million rubles, respectively.) However, the Competition Law is silent as to whether the revenues-related threshold has any territorial restrictions. In the absence of such guidance, a conservative reading of the Competition Law suggests that the threshold is global and that the volumes of sales in Russia (i.e., whether the turnover of the target just in Russia is significant) are irrelevant for a determination of whether the Competition Law applies to non-Russian target companies acquired outside of Russia.

Unfortunately, the competition regulator, Federal Antimonopoly Service (FAS) has not developed any directly applicable guidance on the calculation of turnover or how it interprets “conducting activities” in Russia. In the absence of such guidance and in the absence of enforcement history of the new rule, the views of competition lawyers in Russia vary significantly. An aggressive approach restricts such activities to regular commercial activities in Russia, especially through registered branches or employees located in Russia (such as manufacturing products, selling goods from warehouses located in Russia, or rendering services). A more conservative approach expands to mere imports of goods into Russia, especially direct sales to Russian customers. Notably, FAS takes the view that the Competition Law reserves the right to FAS, not the parties, to determine whether the target company affects competition.

FAS has also provided some guidance regarding the type of transactions covered by the Competition Law. FAS has concluded that the notion of “rights in relation to commercial organizations” is identical to the notion of “rights allowing to determine terms of business activities by a commercial subject or conduct of functions of its executive body” given in para 8 of article 28(1) and para 8 of article 29(1). Such guidance was given in relation to the previous wording of article 3(2) of the Competition Law where an ultimate target company was Russia-located. Under the Competition Law, if the substance of an M&A transaction is direct or indirect control over a Russian company of sufficient size, such transaction would clearly trigger the FAS filing requirement. Notably, if a non-Russian company happens to hold a controlling stake of shares (participation interest) in a Russian subsidiary, the same filing requirement (in respect to acquisition of control) would be triggered.

We believe that FAS is likely to interpret its jurisdiction broadly. It appears that a good argument that a filing with FAS is not required is if the non-Russian target company does not have direct sales to Russian customers and does not affect competition in any other way. For example, it appears that a German company would not be viewed as having activities in Russia if it sold products to a distributor located in Ukraine and the distributor resold products into Russia independent of the German company. It is also possible to argue that its sales are insignificant. However, these arguments have not been tested in a Russian court.

We are not aware that FAS has brought an action against parties in foreign-to-foreign transactions with non-Russian targets for failing to make a merger filing since the amendments to the Competition Law came into force and based on such amendments. Most of the FAS enforcement history involves wholly domestic companies or non-Russian companies having registered branches and significant presence and operations in Russia on violations other than merger control (e.g., unfair competition). We cannot exclude the possibility that in the future FAS would view a failure to file a prior application or post-transaction notification in regard to the above M&A transactions with FAS as a violation of article 3(2) of the Competition Law and attempt to impose fines. To do so, however, under the Competition Law and certain regulations, FAS must commence a process and will inevitably face technical difficulties in following the rules of such process if the place of offence and an offender are not in Russia.

For more information, please contact Vinson & Elkins lawyers Natalya Morozova or Billy Vigdor. Visit our website to learn more about V&E's Russia/CIS and Antitrust practices, or e-mail one of the Russia/CIS or Antitrust practice contacts.