LEGISLATIVE BACKGROUND

Under the On Protection of Economic Competition Act of Ukraine of 11 June 2001 obtaining into management, lease, concession or obtaining otherwise the rights to use assets in the form of a real property complex is considered "economic concentration", which requires prior antimonopoly clearance when certain financial criteria are met by participants thereto.

The management of the hotel will require prior antimonopoly clearance as far as the manager obtains control over the hotel as a real property complex and manages the hotel at his/her sale discretion. It is not so long ago that the Ukrainian hospitality market experienced professional management by international hotel managing companies. Due to the robust growth of the Ukrainian hospitality market in the last few years the practice of obtaining antimonopoly clearance was extended to hotel management projects. At present there is an established practice of applying to the Antimonopoly Committee of Ukraine (the AMCU) for antimonopoly clearance to obtain a hotel in management (in case the financial thresholds are met).

Thus, the above approval is required if the parties (including all persons/ entities connected with them by relations of control) meet the following financial thresholds:

Either the aggregate value of assets, or aggregate volume of sales over the last financial year, including those abroad, by participants to the transaction, taking into account their relations of control (id est together with all affiliates, including non-residents), exceeded an amount equivalent to EUR 12 million under the exchange rate of the National Bank of Ukraine effective on the last day of the preceding financial year, and, simultaneously:

- value (aggregate value) of assets OR volume (aggregate volume) of sales, including those abroad, by at least two participants to the transaction, taking into account their relations of control, exceeded an amount equivalent to BUR I million under the exchange cote of the National Bank of Ukraine effective on the last day of the preceding financial year, and

- value (aggregate value) of assets OR volume (aggregate volume) of sales, in the territory of Ukraine by at least one participant to the transaction, taking into account its relations of control, exceeded an amount equivalent to BUR I million under the exchange rate of the National Bank of Ukraine effective on the last day of the preceding financial year.

The above thresholds of financial performance are one of the lowest thresholds and, probably, one of the key problems in the enhancement of Ukraine's investment attractiveness. Thus, almost every transaction requires approval with Ukrainian antitrust authorities.

While applying to the AMCU the parties to the contemplated transaction are required to disclose the information on assets/sales in respect of the entire group (i.e. persons connected by relations of control).

Failure to obtain clearance when it is required may lead to the imposition of a fine in the amount up to 5% of annual worldwide turnover of the Manager, including turnover of all entities connected with it by "relations of control~ The AMCU announced that starting from 1 July 2012 its policy will become more aggressive and the amount of fines will rise substantially through imposition of the maximum extent of a penalty.

Furthermore, the Highest Commercial Court of Ukraine recently ruled out in its Resolution On Practice of Implementation of Antimonopoly Laws of26 December 2011 that validity of the transactions executed in breach of the antimonopoly law may be challenged by either participant thereto. Based on the same principle the validity of the transaction may be challenged by any third party (e.g. competitors), provided such third party proves the transaction has violated its rights. This is very important in the court ruling since in such case any hidden transaction may be revealed owing to any "'well -wishing" competitor.

AMCU approval should be obtained prior to transfer of the hotel into management. At the same time, it is possible to execute the Hotel Management Agreement before approval is obtained subject to respective condition precedent.

Subsequent Manager's Transactions

The AMCU follows the normal approach in assessing each subsequent transaction of the business entity on the Ukrainian market. This means that every subsequent transaction is considered as an individual separate event, not related to the previous one, even if the letter was approved thereby. Therefore, In respect of each subsequent transaction on the territory of Ukraine, if the latter falls under the On Protection of Competition Act of Ukraine and the parties thereto meet the financial thresholds set forth by the law, the manager shall obtain new antimonopoly clearance every time. This means that every time the hotel manager wants to launch a new hotel management project in Ukraine, if the financial thresholds set forth by the law are met by the parties thereto, the manager shall obtain new antimonopoly clearance.

In respect of the foreign -to-foreign transactions of the manager and the manager's affiliates, the latter may require antimonopoly clearance in Ukraine in case they affect or may even potentially affect economic competition in Ukraine. This is a very subtle definition of the law and is interpreted very broadly in practice. Thus, while entering into a foreign -to-foreign hotel management transaction the hotel manager shall assess whether:

- the transaction has affect or may potentially have effect on competition on the Ukrainian market, i.e. either of the parties to the transaction has a subsidiary in Ukraine through which competition may be affected, or if either of the parties have sales/export of goods/services to Ukraine, or possesses/manages assets in Ukraine, through which their competition in Ukraine may be affected;

- the financial thresholds mentioned above are met, especially the most important one is that at least one participant (taking into account its relations of control) shall have the value (aggregate value) of assets, or volume (aggregate volume) of sales, in the territory of Ukraine, in the amount exceeding the equivalent of EUR 1 million.

CONCERTED PRACTICES UNDER HOTEL MANAGEMENT AGREEMENT

In addition to the economic concentration aspect, certain provisions of the Hotel Management Agreement may be considered as anticompetitive concerted practices, such as: (a) the provision under which the manager is obliged to refrain from owning, managing another accommodation property within a specified geographic area around the hotel, (b) a non-compete clause, under which the hotel owner is obliged to refrain from direct or indirect engagement or investment into any hotel business within a specified geographic area of the hotel, as well as granting the same into management of any third party other than the manager and/or manage the same as franchisee under the brand other than the brand of the manager, (c) any other provisions, which imply restriction of investments and access to the market of the parties to the Hotel Management Agreement and may cause restriction or limitation of competition. In case the provisions of the Hotel Management Agreement will de facto fall under the definition of anticompetitive concerted practices, then the parties will have to obtain respective approval from the AMCU on condition that financial criteria are met.

The approval of the AMCU will not be required if the total market share of both parties to the Hotel Management Agreement, taking into account their relations of control, does not exceed 5% on a relevant hospitality market. The geographical market boundaries shall be defined by the parties based on the peculiarities of the rendered services, ability to replace supply and demand for these services. Therefore, it is the responsibility of the parties to calculate their market share and determine whether this 5% criterion is applicable thereto. At the same time, the parties shall at all times consider its liability for inaccurate or misleading information. Thus, the AMCU is entitled to impose a fine in the amount up to 1% of annual worldwide turnover on the hotel's manager, including turnover of all entities connected by relations of control.

RECENT LEGISLATIVE TRENDS

Covering the question on recent trends in amendment of effective legislation in this domain, Draft Act No.3436 sets the threshold up to EUR 50 million for all parties to the transaction and up to EUR 4 million for at least 2 of them. Hopefully, Ukrainian legislators will make positive amendments, which are very much anticipated by business representatives.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.