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Amendments to Estonian Competition Act effective as of 1 July 2006

05.10.2006

The amendments to Estonian Competition Act (Konkurentsiseadus) (hereinafter the „CA”) which took effect on 1 July 2006, covered the whole act and the regulations of Minister of Economics and Communication enacted based on CA, but involved particularly the regulation concerning control of concentrations. In addition to that, substantial change introduced is the abolishment of the possibility for undertakings to apply for individual exemptions to their arrangements which would be permitted under § 6 CA.

The main reasons for the amendment was the harmonization of the Estonian regulation with respective EU regulation as well as the need to resolve certain problematic issues which had appeared during the exercise of the CA in administrative practice. Below you will find a bulleted list of some of the main amendments.

Self assessment replaces individual exemptions

Principally, this amendment means that an undertaking must now evaluate itself whether its arrangements are outside the prohibition of § 4 as qualifying for exemption on grounds set forth in § 6 CA, and the Competition Board will not clear such agreements with formal decisions anymore. According to § 6 (1) the prohibition enacted in § 4 (prohibited agreements) shall not be applied to an agreement, activity or decision which:

contributes to improving the production or distribution of goods or to promoting technical or economic progress or to protecting the environment, while allowing consumers a fair share of the resulting benefit;
does not impose on the undertakings which enter into the agreement, engage in concerted practices or adopt the decision any restrictions which are not indispensable to the attainment of the objectives specified in previous paragraph;
does not afford the undertakings which enter into the agreement, engage in concerted practices or adopt the decision the possibility of eliminating competition in respect of a substantial part of the goods market.
It should be stressed that an undertaking whishing to rely on § 6 must be able to prove the fulfillment of all conditions necessary for the application of such exemption to its respective activity.

Thresholds triggering control of concentrations have been changed

Another material change involves the criteria for the applicability of control of concentrations. The current redaction of the CA sets out that a concentration shall be subject to control in case the turnovers in Estonia of the parties to a concentration together exceed EEK 100 million (approximately EUR 6.4 million) and the turnovers in Estonia of each of at least two parties to a concentration exceed EEK 30 million (approximately EUR 1,9 million). Thus, the former pre-requisite of having ‘business activity' in Estonia is replaced with a requirement of having turnover in Estonia which exceeds the above thresholds.

It should be noted, that the place of generation of turnover is determined by the location of the purchaser at the time of transaction. This is mainly the place where the turnover was generated for the seller and where the seller was in competition with other sellers. The place does not include the place of consumption of the respective product or service. It is also important to mention that the turnovers of the parties to the concentration are calculated based on the guidelines for the calculation of turnover established by the Minister of Economics and Communications.

The primal reason for abolishing the ‘worldwide turnover thresholds' was the fact that such criteria for control tended to leave out such concentrations which could have had material effect on local Estonian markets and could have lead to very high market shares. Such transactions were out of reach of the merger control by Competition Board due to low worldwide turnovers regardless of the transaction's importance to Estonian relevant markets. In addition, the precondition that one of the merging undertakings or an undertaking (or part of an undertaking) over which control is acquired has ‘business activity in Estonia', loaded the Competition Board with notifications which did not have any effect on Estonian markets as large amount of such concentrations had only one party active in Estonia due to what no overlaps in parties' activities could have arisen.

Definition of ‘concentration' is complemented

In addition to merger of undertakings and acquisition of control over undertaking or part of an undertaking, the new definition includes the merger of parts of undertakings and the acquisition of control over several undertakings. According to the law, a part of an undertaking is considered to be the assets of the undertaking or an organizationally independent part of the undertaking, including an enterprise or a plant which constitutes a basis for business activities and to which market turnover can be clearly attributed. For explanation, a plant or an installation is a part of an enterprise which is an organizational whole (for example a department of a factory). The assets on the other hand may also include trade marks, licenses, etc.

There is no fixed term for notifying a concentration

The previous redaction of CA obliged the parties to a concentration to submit their notification within one week as of the conclusion of an agreement which established the acquisition of control or a merger. Current law foresees that a concentration is notified before the carrying into effect of the concentration and after either: (i) conclusion of the merger agreement or an agreement for the merger of parts of undertakings; (ii) conclusion of the agreement for acquisition of control; (iii) announcement of the public offer of securities.

Hence, the faster notification is solely in the interests of the parties to the concentration as they cannot effect their transaction before the decision for clearance has been made. However, the CA provides for a possibility to apply for an exception from that requirement in order to carry out certain procedures related to the enforcement of the transaction. This means that the parties can submit a grounded application to the Competition board (preferably together with the notification) and ask for the permission to make certain arrangements already before the concentration has been cleared. The Competition Board shall evaluate the effects of the respective procedures on the parties to the concentration as well as on the third parties and estimates the possible threat to competition which could be created through such arrangements.

Related issue is the introduction of a possibility to file a notification already before the relevant agreement has been made. For such a notification to be acceptable, the parties must be able to prove adequately their intention to conclude the relevant agreement or make the public offer of securities.

Possibility for a short form notification

The new regulation clearly sets out the conditions on which the parties may submit a shorter version of the full notification. The short form notification can be filed upon presence of at least one of the following conditions: (i) there are no horizontal or vertical overlaps in the parties' activities (including on groups' level); (ii) the joint or individual market shares of the parties after the concentration would not exceed 15% on horizontally affected markets and 25% on vertically affected markets; (iii) a new joint venture is established which will not be active and does not intend to be active in Estonia; (iv) a party to the concentration acquires control over an undertaking where it already holds a joint control with another undertaking.

The information to be included to the notification is set forth in relevant guidelines, i.e. Regulation No. 69 of Minister of Economics and Communications from 17 July 2006. The information to be provided in either full or short form notification is described in more detail compared to the previous guidelines. In practice, this should be of greater assistance to the parties who gather the respective data and also help the Competition Board who will have a better starting point to its analysis regarding the respective concentration.

The substantive appraisal test for concentrations is now corresponding to that of EC Merger Regulation (Council Regulation (EC) No 139/2004)

The previous ‘dominance test' was not sufficient in order to cover such concentrations which should have been prohibited because they restricted competition but which did not create or strengthen dominant position in the market. The respective clause has now been changed and the current test is much broader. According to § 22 CA the Director General of the Competition Board or his or her deputy shall prohibit a concentration as a result of which competition is substantially restricted in the goods market, in particular through the creation or strengthening of a dominant position.

Thus, the current wording clearly establishes that a concentration may be prohibited even if it does not create or strengthen dominant position in case a significant impediment to effective competition is established. The referral to the creation or strengthening of dominant position still enables to use the previous practice and case law.

A concentration can also be prohibited as not being in compliance with § 6, if the aim or effect of a concentration is the coordination of the activities of the respective undertakings.

Inclusion of criteria for the assessment of the activity of joint venture

Further criteria for appraisal, in addition to the general test involve the joint ventures. In order to detect possible coordinated activity between the undertakings establishing a joint venture, it is evaluated, whether: (i) two or more undertakings which formed the joint venture continue an activity on the same market with the joint venture or on upstream or downstream markets of the joint venture; (ii) the coordination of activity enables the undertakings forming the joint venture to substantially eliminate competition on the market or on material part of it.

State duty has been raised to EEK 30,000

The state duty to be paid for the merger control procedure has been raised from EEK 20,000 (approximately 1,282) to EEK 30,000 (approximately EUR 1,917).

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