UAE Competition Law - Merger Control and Dominant Market Position Thresholds Announced
Authored by: Nicholas Jennings
- In-depth assessment of UAE merger control
- Considers areas of uncertainty, both from an interpretive and a practical perspective
- Briefly looks at the role of the Competition Committee
Recent UAE Cabinet Resolutions established the thresholds applicable to notifiable economic concentrations and what constitutes a dominant market position for UAE competition law purposes.
As reported in previous Hadef & Partners competition law updates, Federal Law No. 4 of 2012 on the Regulation of Competition (“Competition Law”) specified certain prohibitions on anti-competitive practices and introduced controls on economic concentrations having an effect on competition, to be overseen by the Competition Regulation Committee of the Ministry of Economy (“Competition Committee”).
The Competition Law came into force on 23 February 2013 and the Implementing Regulations (Cabinet Resolution No. 37 of 2014), which came into force on 27 October 2014, set out detail of the regulatory procedures for seeking approvals and exemptions. However, prior to the publication of the Cabinet Resolution No. 13 of 2016, no applicable thresholds had been specified and, accordingly, the full effects of the Competition Law were not able to be fully understood. In addition, Cabinet Resolution No. 22 of 2016 now also sets out the definition of small and medium-sized enterprises (“SMEs”), to which the Competition Law does not apply.
Notifiable economic concentrations and merger approval process
Proposed economic concentrations are defined to encompass transactions taking place by way of acquisition of shares and/or assets, as well as rights that would enable one person (or group of persons) to control another person (or group of persons).
Application for approval is mandatory for any proposed economic concentration that would result in a market share in excess of 40% of the relevant market (determined with reference to the total transactions in the relevant market of the parties concerned) that may, if consummated, affect the level of competition in the relevant market or create or enhance a dominant position. This requirement will apply to domestic M&A transactions as well as any international M&A transactions creating a notifiable (i.e. greater than 40%) economic concentration in the UAE.
The concerned parties are required to make an application for merger approval no later than 30 days prior to completing the relevant transaction. The Competition Committee then has 90 days (extendable by a further 45 days) to review the transaction and issue a resolution, in terms of which it may:
- approve the proposed merger if it does not negatively affect competition or if the positive economic effects on competition outweigh the negative effects;
- approve the proposed merger subject to the parties giving undertakings to meet conditions or obligations specified by the Competition Committee; or
- reject the proposed merger.
If no resolution is issued by Competition Committee prior to the expiry of the 90 day review period (or as extended), the proposed transaction is deemed approved.
During the review period, the concerned parties may not carry out any actions to complete or integrate the proposed merger.
Neither the Competition Law, nor the Implementing Regulations, indicate what the fees of the Competition Committee will be for dealing with an application or how they are to be calculated. The Competition Law stipulates fines for failing to comply with the mandatory referral regime, in the range of 2% to 5% of the total UAE revenue of the offending party in the previous financial year.
As stated in the Competition Law, the provisions of the Competition Law do not apply to:
- entities owned (at least 50%-owned) or controlled by the Federal Government or the Government of any Emirate; and
- certain sectors specified as exempt (which are subject to sectoral regulation), namely telecommunications, financial services, cultural activities (written, audio, visual), oil & gas, pharmaceutical, postal services, water & electricity, waste disposal & sanitation, and transport.
Potential areas of uncertainty
Although Cabinet Resolutions Nos. 13 and 22 now complete the basic framework required to understand and apply the Competition Law, a number of uncertainties remain at both an interpretive and practical level.
Determining the “relevant market”
The Competition Law concept of the relevant market is based on goods and/or services (or a combination of one or more goods and/or services) which, based on their price, characteristics and application (usage) are substitutable with one another in order to fulfil a consumer need within a certain geographical area. The notion of the relevant market is used to calculate market share (see further below: Determining “the total transactions in the relevant market”).
Defining the relevant market is a central tool in identifying situations where there might be competition concerns, however it is rarely a straightforward exercise. Typically, a competition law determination of a relevant market not only involves an analysis of the products or services being consumed (the “product market”), but also the geographical area (or areas) in which market conditions (in relation to the products or services) may be differentiated from other geographical areas. The geographic area in which the products or services in question are consumed (relevant to the Competition Law) could potentially encompass the whole of the UAE, one or more Emirates or parts of one or more Emirates.
Further guidance would help to clarify any specific criteria or considerations by which the relevant geographic area should be determined, for example whether this should be based on the same or similar criteria used to assess the product market. Both analyses are complicated and will require specialist economic input.
Determining “the total transactions in the relevant market”
When seeking to ascertain the market share of the parties concerned, it is not yet clear: (a) whether the total transactions of the concerned parties in the relevant market should be determined with reference to the value of those transactions (for example, gross sales) or the volume; and (b) what the ‘look-back’ period applicable to the calculation should be (for example, during the preceding 12 months). Further guidance on these aspects would be helpful.
Total market size and market share can mostly be calculated from the data of research companies or from the studies of professional associations; however the general scarcity of public information in the UAE may challenge the ability of the concerned parties (and possibly the Competition Committee) to determine the total market size and the respective market shares.
Submissions to the Competition Committee and Impact on Sale and Purchase Agreements
Further detail as to the prescribed forms and informational requirements for notifications described in the Implementing Regulations is expected to materialise in due course. At present, it is understood that the Competition Committee has been formed, has met on several occasions and is ready to receive notifications.
Concerned parties will therefore need to familiarise themselves with the possible applicability of the UAE merger control regime in relation to their proposed acquisition early in the deal process, and act accordingly. A merger approval application, if required, can be expected to affect the transaction timetable as well as lead to associated fees and expenses.
The Implementing Regulations require that a “draft contract or agreement” be submitted as part of the merger approval application. Although it is not clear exactly what this term means, the better view is perhaps that it refers to the short form transfer agreement that is submitted to the Department of Economic Development as part of a share transfer process, rather than to the long form sale and purchase agreements (“SPAs”), usually containing the full commercial terms of the deal. As is established practice in many jurisdictions with longer-standing merger control regimes, SPAs can be drafted to contain one or more conditions precedent to completion relating to obtaining merger control approval and other relevant regulatory clearances. As part of the M&A process, the parties will need to carefully consider (additionally, this will be an area of keen negotiation in the SPA) the extent to which each party will commit to go through with a transaction where the Competition Committee’s approval is not only required, but may also be subject to the parties each undertaking to comply with conditions and obligations (as may be specified by the Competition Committee) without a full understanding of the potential conditions or obligations that could be imposed. Typically this is a commercial risk for the buyer, who, for example, may be forced to make a divestment of some or all of the target business or its existing business, while the key concern of the seller is to achieve certainty of completing the transaction and receiving the full purchase price.
Functioning of the Competition Committee
It remains to be seen whether decisions of the Competition Committee will be made public or only issued to the concerned parties privately. In some jurisdictions, such decisions are published in order to assist interested parties and their advisers in understanding the interpretation of the law and the general approach of the Competition Committee, as well as to demonstrate transparency.
It is also hoped that the Competition Committee will make available its policies, procedures and provide further guidance as well as accommodating informal approaches by parties or their advisers seeking a likely view of a particular merger in relation to good faith, confidential transactions (i.e. which are not yet in the public domain). It should not be expected, however, that informal advice can be used in place of notification as a rubber-stamping process to gain confirmation from the Competition Committee that the proposed merger presents no competition issues, as that must remain a matter for formal notification and review.
The issuance of the recent Cabinet Resolutions is a key step, as the basic ingredients required to interpret and apply the Competition Law are now available. As is customary in UAE law and practice, we can expect further resolutions and guidance to be issued in due course to address residual questions and practical matters and to clarify the processes and procedures to be followed in relation to merger approval notifications.
As the UAE’s collective practical experience of the Competition Law develops, greater certainty of its applicability and comprehension of the merger control process will emerge. Meanwhile, it is hoped that these developments will not inhibit UAE M&A transactions in the short-term.
This article, including any advice, commentary or recommendation herein, is provided on a complimentary basis without consideration of any specific objectives, circumstances or facts. It reflects the views of the writer which may, in some cases, differ from those of the firm, especially in the developing jurisdiction of the UAE.