Type: Client Alerts
The UAE’s first antitrust/competition legislation recently came into effect on 23 February 2013. Federal Law No. (4) of 2012 (Law), primarily regulated by the Ministry of Economy, aim to prohibit and penalise anticompetitive agreements, abuse of dominant position within a given market and provides a framework for merger control and regulation. Enterprises falling within the scope of the Law will benefit from a six month transitional period to review their practices and align themselves within the parameters of the Law.
To begin with, the Law does not apply to the UAE Government or its related entities. Entities operating within the oil and gas, electricity and water, financial services, pharmaceuticals, transportation, telecommunications and waste management sectors are also currently exempt from the Law. Additionally, enterprises with a small market share, or whose agreements would have a negligible effect on the market, fall within a de minimis category, exempting them from the effects of the Law. These exclusions limit the scope of the Law, however, it is understood that amendments, by way of Executive Regulations, are likely to be released shortly and these may enhance its reach.
The Law does apply to any natural or legal persons or consortia of such persons who engage in economic activity and/or hold intellectual property within the UAE. Interestingly enough, the Law also applies to economic activity occurring both within and outside of the UAE which may have the ability to affect competition within the UAE, prompting concerns over extraterritorial reach on group companies with a presence in the UAE.
Scope of the Law
At first glance, the Law bears some resemblance to antitrust legislation of regional counterparts and the key focus is directed toward three areas:
1. Restrictive Agreements: These include (but are not limited to) horizontal collusion, agreements limiting the availability of essential infrastructure to various competitors, price fixing and exclusive distribution agreements. Note however, the exclusive distribution agreements which are governed by the Commercial Agencies Law (Federal Law No. 18 of 1981) continue to enjoy protection under the Commercial Agencies Law even though they contravene the Law’s provisions on restrictive agreements.
2. Abuse of Dominant Position: Per se, the Law does not prevent enterprises from enjoying a dominant position within the market and it is evidently clear that the UAE encourages and promotes superior products and services by vendors and producers alike. The lens of the Law, however, zooms in on those who take undue advantage of their market dominance; such actions having an anticompetitive effect horizontally (i.e. competitors) and ultimately the end consumer. Predatory pricing and trading restraints are examples of where the Law will be concerning itself the most. What is different and perhaps unclear however is determining how one holds a dominant position within the market. EU, Saudi and Kuwaiti competition legislation tend to peg dominance based on a percentage of market share that the enterprise enjoys. The Law does not set out the relevant percentages but instead will position the total number transactions undertaken by that entity against the total number of transactions in the market to determine the degree of dominance it may hold within the relevant market. This may lead to a distortion between volume of transactions as opposed to a greater value of smaller transactions.
3. Merger Control: The Ministry of Economy will now assess potential deals within certain timeframes if they are likely to result in the acquisition of direct or indirect market control via merger or acquisition in equity, shares and assets between enterprises. The Law in this respect affords wide discretion to the Ministry of Economy and potential deals will not only include traditional share acquisitions, but also asset transfers from one enterprise to another. Approval from the Ministry of Economy will also be required if potential deals exceed market share thresholds or affect competition by creating or possibly enhancing a dominant position within the relevant market. At present, there are no numerical thresholds to determine the above possible scenarios, however it is understood that further Executive Regulations may clarify the necessity of seeking Ministry of Economy approval for a potential deal.
Going forward and avoiding penalties
The Law provides a number of mechanisms for imposing fines and penalties if any of the above contraventions take place by an entity falling within the scope of the Law.
Restrictive agreements and abuse of dominant position may result in fines between AED 500,000 – AED 5,000,000, depending on the competent court’s ruling. Additionally, failing to notify the Ministry of Economy of a potential deal requiring approval may result in fines between 2%–5% of the violating entity’s total annual sales revenue for the previous fiscal year. The courts may also temporarily suspend a contravening entity for anywhere between three to six months and may order a publication of its judgement within local newspapers.
It is critical that enterprises conducting business in the UAE take full advantage of the transitional phase (ending 22 July 2013) by carrying out internal assessments on their business practices, agreements, relationships with suppliers and distributors, alliances with competitors and carrying out a business evaluation to determine whether or not they fall within the scope of the Law. International entities, medium sized companies, and longstanding international/local joint ventures are likely to fall within the scope of the Law and whilst the financial penalties may not be considered draconian, there is exposure to reputational damage and the possibility of having trade suspended for an effective period of time.
On carrying out the above legal and business assessments, where anticompetitive behaviour may be identified, it is advisable that enterprises, via legal representation, amend or terminate such agreements or practices or alternatively, if an arguable case exists for such behaviour, make an application to the Ministry of Economy for a waiver of such practices can be made.
The Law serves as an indication of the UAE economy’s continued sophistication, where authorities are keen to take a multi-faceted approach to preventing relapses of the regional 2008-10’ economic downturn. Amongst others, refining competition and preventing abusive business practices by way of competition and consumer protection laws serves as reinforcement of sage practices to those wishing to enter into and carry out business within the UAE.
Client Alert 2013-070