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The Dawning of a New Age
Furthering its commitment to providing an encouraging environment for companies to flourish, the UAE Federal Government enacted a new competition law on 23 October 2012 (Federal Law No. 4 of 2012, the Competition Law), which comes into effect on 23 February 2013.
Prior to the enactment of the Competition Law, various provisions dealing with anti-competitive behaviour, disclosure of trade secrets and consumer protection were covered in a number of Federal Laws, e.g. Federal Law No. 18 of 1993 (the Commercial Code), Federal Law No. 4 of 1979 (Suppression of Fraud in Commercial Transactions Law) and Federal Law No. 24 of 2006 and its executive regulations (Consumer Protection Law and Regulations).
This article looks at the key provisions of the Competition Law and how enterprises operating in the UAE are likely to be impacted by its provisions.
Ostensibly, it applies to all entities operating in the UAE, and indeed to entities operating abroad whose operations affect competition in the UAE.
There is, however, a list of sectors and activities that are specifically excluded from the provisions of the Competition Law. The rationale for this is that the excluded sectors already have a regulator. The sectoral exclusions include:
Additionally, the Competition Law will not apply to small and medium-sized enterprises. The definitions of small and of a medium-sized enterprise are not contained in the Competition Law but will be specified at a later date by the UAE Cabinet. The basis on which this will be determined is not yet known, but may include such considerations as the revenue of the enterprise.
Further exclusions are contained in the Competition Law for actions initiated by the Federal Government or the Government of any Emirate and for actions by entities based on authorisations granted by those Governments. The actions of entities governed or controlled by those Governments will also be excluded. These cases will be further detailed in guidelines to be specified by the Cabinet.
In keeping with most international competition regimes, the Competition Law seeks to regulate market behaviour, particularly in relation to:
Again, in line with most existing international competition regimes, it is not the holding of a dominant position in a market of itself that is prohibited, but rather the abuse of that position. A dominant position is achieved where the market share of the company exceeds a percentage to be set by the UAE Cabinet.
Dominant companies in a defined market are prohibited from abusing that position by undertaking activities that reduce or stifle competition. Typical practices where abuse of the dominant position may be found include: price fixing, undercutting prices, forcing customers not to deal with competitors or discriminating between customers of similar contracts without rational justification, resale price maintenance, predatory pricing, discriminatory pricing or conditions, forcing customers not to deal with competitors, refusal to deal, market management, and publishing incorrect information.
Any dominance thresholds in a market are yet to be defined by the UAE Cabinet. The provisions of the Competition Law suggest that any threshold set may be increased or decreased at the discretion of the UAE Cabinet on a proposal from the Ministry of Economy. In very specialised markets, enterprises may find themselves automatically in a dominant position.
The Competition Law will require any mergers exceeding a specified market share to obtain prior approval from the Ministry of Economy. Mergers are broadly defined.
If approval is not sought, then the enterprise will be subject to a substantial fine of 2 - 5% of the relevant turnover, or up to AED 5 million.
Approvals are required to be sought at least 30 days prior to the transaction date. The Ministry of Economy has a period of 90 days, which may be extended by a further 45 days, to approve the application. The enterprise is entitled to assume implicit approval where the Ministry of Economy does not respond timeously.
The Competition Law prohibits restrictive agreements, which may include agreements to fix prices, share customers or share markets. This prohibition could easily cover commercial agreements such as distribution agreements or joint ventures where the potential is for that agreement to reduce or prevent competition in a given market. Agreements that divide up markets or assign clients based on geographic considerations are also prohibited. It is important to note, however, that this aspect of the Competition Law is subject to the provisions of Federal Law No. 18 of 1981 (the Commercial Agencies Law), meaning that agreements under the Commercial Agencies Law will be protected notwithstanding that they may be considered anti-competitive under the Competition Law.
Further, the Competition Law will not apply to what are defined as "weak-impact" agreements. Such agreements will be those where the parties do not exceed certain market share thresholds to be specified by the UAE Cabinet.
It is possible for enterprises to apply to the Ministry of Economy for a specific exemption from the application of these prohibitions. The enterprise must demonstrate that overall the practice, rather than stifling competition, actually enhances it. Executive Regulations, to be produced by the Council of Ministers, are expected to contain detailed guidance on the exemption process.
In order to administer the Competition Law, a new advisory body, the Competition Regulation Committee, will be established. Its remit will be to oversee general policy and, where necessary, to propose additional legislation to combat anticompetitive practices. It is anticipated that further resolutions will be issued setting out the exact competences of the Competition Regulation Committee.
However, the Ministry of Economy will play the key role in monitoring compliance with the Competition Law, including investigating potential breaches.
Breaches of the provisions of the Competition Law with regard to restrictive agreements and abusing a dominant market position carry a fine of between AED 500,000 and AED 5 million.
Breaches of the Competition Law with respect to a merger are punishable by the imposition of a fine of between 2 per cent and 5 per cent of the overall sales of products or services of the violating enterprise in a given financial year. Where this figure cannot be ascertained, then a fine of between AED 500,000 and AED 5 million can be imposed. Incidents of recidivism are punishable by doubling the initial fine, coupled with a possible suspension of the enterprise's activities for a period of up to six months.
The Competition Law comes into effect on 23 February 2013, but enterprises subject to the Competition Law have a period of six months from that date within which to ensure compliance.
A new chapter in the evolution of competition law in the UAE will commence on 23 February 2013. The Competition Law is undoubtedly a significant step in promoting a competitive market by prohibiting anti-competitive practices in an internationally recognised fashion. The exemption of the Government or Government-owned entities and large sections of industry may, however, limit its intended application substantially. The full extent of the effects of the Competition Law will not be completely understood until the UAE Cabinet opines on key issues such as dominant position and all supplemental regulations are issued.
For those entities caught by the provisions of the Competition Law, there must now be a period of internal due diligence in the form of a review of current agreements and practices to identify areas of possible non-compliance. Where potential violations are identified, steps will need to be taken during the transition period, in order to correct the practice or, indeed, to seek a waiver from the Ministry of Economy. The transition period will be a busy one for those affected entities. Given that full compliance, or a waiver in the case of non-compliance, will need to be in place by 23 August 2013 (the end of the transition period), the internal due diligence process must commence without delay.