Hong Kong’s first generally applicable competition law, the Competition Ordinance (the “Ordinance”), was enacted on June 14, 2012. The law brings about a major change to the legal landscape in Hong Kong by introducing a broad prohibition against agreements and abuse of market power that prevents, restricts or distorts competition in Hong Kong. Merger control under the new law will continue to be limited to the telecommunications sector. Any contravention of the law may attract significant penalties including pecuniary penalties of up to 10% of the offender’s Hong Kong local turnover for up to three years of the period of infringement, directors’ disqualification order for up to five years, and criminal liability for obstructing enforcement.
The Ordinance has extra-territorial reach and applies regardless of where the relevant agreement, conduct or merger takes place, and regardless of where the parties to the agreement, conduct or merger are located.
This alert provides an overview of the new law and describes its principal consequences for businesses operating in Hong Kong. We also identify potential areas of uncertainty where the competition regimes of the other jurisdictions on which the Ordinance is based may be instructive.
THE COMPETITION ORDINANCE
The Ordinance in its current form merely sets out the basic framework of the law. The prohibitions under the Ordinance are closely modelled on Articles 101 and 102 of the Treaty Establishing the European Union, which also served as the model for the competition laws of jurisdictions such as the United Kingdom (the “UK”) and Singapore. As such, the prohibitions are drafted broadly in generic terms, and do not describe in detail the specific activities which are intended to be prohibited.
Whilst the Ordinance was published in the Gazette on June 22, 2012, the commencement date has yet to be appointed by the Secretary for Commerce and Economic Development. We also await the publication of substantive guidelines (the “Commission Guidelines”) by the Competition Commission (the “Commission”) detailing the scope of prohibitions and the way in which the law will be enforced.
It is anticipated that the Commission Guidelines will pay heed to prior guidelines issued by the Hong Kong government during the legislative stage (the “Government Guidelines”) as well as the practices of other jurisdictions such as the European Union (the “EU”), the UK and Singapore, which served as the models for the Ordinance.
The objective of the Ordinance is to prohibit and deter “undertakings”1 in all sectors from participation in unilateral or concerted conduct which has the object or effect of preventing, restricting or distorting competition in Hong Kong. The prohibitions under the Ordinance are divided into three major categories:
Agreements Restricting Competition - First Conduct Rule
- The Ordinance prohibits undertakings from engaging in agreements, concerted practices or decisions by associations of undertakings with the object or effect of preventing, restricting or distorting competition in Hong Kong. This prohibition does not apply to (i) agreements that contribute to improving production or distribution or promote technical or economic progress, while allowing customers a fair share of the resulting benefit and (ii) non-serious conduct if the combined turnover of the relevant undertakings in the preceding financial year does not exceed HK$200 million.
- The First Conduct Rule is not expressly limited to agreements between competitors, and therefore could capture vertical arrangements (such as those between entities operating at different levels in a supply chain, for example distributorship arrangements). The Hong Kong government has, however, indicated that the Commission may consider issuing block exemption orders to exempt certain categories of agreements having regard to the circumstances in Hong Kong after enactment of the Ordinance.
- The Ordinance distinguishes between serious anti-competitive conduct, which always infringes the First Conduct Rule, and conduct which may constitute anti-competitive conduct depending on the particular facts and circumstances.
“Serious” Anti-Competitive Conduct“
- Price fixing
- Market allocation
- Output control
- Bid rigging
Non-Serious” Activities Which May Be Anti-Competitive (Non-Exhaustive List)2
- Fixing trading conditions
- Joint purchasing or selling
- Directly or indirectly exchanging competitively sensitive information with competitors
- Restricting advertising
- Setting technical or design standards
- Terms of membership and certification
Abuse of Market Power - Second Conduct Rule
- The Ordinance also prohibits undertakings with a “substantial degree of market power” from abusing that power by engaging in conduct which has the object or effect of preventing, restricting or distorting competition in Hong Kong. This Second Conduct Rule captures purely unilateral conduct but does not apply if the turnover of the undertaking in the preceding financial year does not exceed HK$40 million.
- The Ordinance highlights “predatory behaviour towards competitors” and “limiting production, markets or technical development to the prejudice of consumers” as particular instances of conduct that could comprise a breach. However, this is not an exhaustive list.
Unlike the EU, UK, Singapore and the People’s Republic of China where a “dominant” level of market power test is adopted, the Ordinance adopts the test of “substantial degree of market power” which the Hong Kong government views as more appropriate given the small and geographically concentrated economy in Hong Kong. There is no definition of “substantial degree of market power” but the Ordinance sets out a list of matters that may be taken into consideration in determining whether an undertaking has a substantial degree of market power in a market. These matters are:
- the market share of the undertaking;
- the undertaking’s power to make pricing and other decisions; and
- entry barriers to the relevant market.
- The Government Guidelines made reference to case law and guidelines issued by competition authorities in the EU, UK and Singapore which suggest that “dominant level of market power” should be a market share in the range of 40% to 60%. It may therefore be deduced that “substantial degree of market power” would likely refer to a market share threshold below 40%.
Merger Control Rule
- The merger control rule prohibits undertakings from directly or indirectly merging that has, or is likely to have, the effect of substantially lessening competition in Hong Kong.
- The merger control rule applies only to undertakings which hold carrier licences granted by the Hong Kong Telecommunications Authority.
The Hong Kong government intends for the Ordinance to only regulate merger and acquisition activities in the telecommunications industry and, as such, the Ordinance expressly states that the First Conduct Rule and Second Conduct Rule do not apply to mergers. However, whilst mergers outside the telecommunications sector are not regulated by the Ordinance, the merged entities, with an increased market share, would be subject to regulation under the Second Conduct Rule if the merger results in a substantial degree of market power.
EXCLUSIONS AND EXEMPTIONS
The Ordinance does not apply to statutory bodies. The First Conduct Rule and Second Conduct Rule do not apply to undertakings that are entrusted by the Hong Kong government to serve Hong Kong’s general economic interest or if the agreement in question is made or the activity engaged in is for the purpose of complying with a legal requirement.
In addition to the above-mentioned exemptions, the Chief Executive has the discretion to exempt certain types of agreement and conduct from the prohibitions if (i) there are exceptional or compelling reasons of public policy for doing so, or (ii) it is appropriate to do so in order to avoid a conflict between the Ordinance and an international obligation that directly or indirectly relates to Hong Kong.
Many of the exemptions will be subject to substantial discretion and it remains to be seen whether the Commission will follow precedents adopted in respect of similar areas by the EU or other jurisdictions.
The Ordinance provides for a judicial enforcement model, under which the Commission and a Competition Tribunal (the “Tribunal”) will be established.
The Commission’s primary role is to investigate and bring proceedings before the Tribunal in respect of anti-competitive conduct either upon receipt of complaints, on its own initiative, or upon referral from the government, the Court of First Instance (the “CFI”) or the Tribunal. The Commission will consist of not less than 5 and not more than 16 members appointed by the Chief Executive. Commission members are expected to have expertise or experience in industry, commerce, economics, law, small and medium enterprises or public policy.
The Tribunal will be established within the Judiciary as a superior court of record to hear and adjudicate competition cases brought by the Commission, and follow-on private actions as well as reviews of determinations of the Commission. Decisions of the Tribunal are, subject to leave of the Court of Appeal (the “CA”) or the Tribunal in some circumstances, reviewable in appeals to the CA. Every judge of the CFI will, by virtue of his or her appointment as a CFI judge, be a member of the Tribunal.
The Commission is vested with extensive investigative powers under the Ordinance, including the power to require production of documents and information, the power to require persons to attend before the Commission to give evidence, and the power to enter and search premises (so-called “dawn raids”), as well as the power to seize and retain evidence and property under a court warrant.3 The Commission may conduct an investigation if it has reasonable cause to suspect that a contravention of a competition rule has taken place, is taking place or is about to take place. Non-compliance with the Commission’s investigative power in the absence of reasonable excuse will result in criminal penalties.
In relation to non-serious conduct under the First Conduct Rule, the Commission will issue a warning notice requesting the relevant undertaking(s) to cease the infringing conduct within a specified period. Only if and when the conduct fails to cease or is subsequently repeated, can prosecution before the Tribunal occur.
In respect of serious conduct under the First Conduct Rule and breaches of the Second Conduct Rule, the Commission may issue an infringement notice instead of bringing proceedings before the Tribunal. The infringement notice must: (i) identify the alleged infringing conduct; and (ii) inform the undertaking(s) concerned that the Commission may not bring proceedings if it commits to comply with the requirements of the infringement notice (which will usually involve ceasing or modifying the infringing conduct).
The Commission may accept from a person a commitment to take any action or refrain from taking any action that the Commission considers appropriate to address its concerns about a possible contravention of a competition rule. If the Commission accepts a commitment, it may not commence or continue an investigation, or bring or continue proceedings in the Tribunal in relation to the alleged contravention. Notwithstanding the Commission’s decision to not bring any proceedings, this does not preclude any follow-on private actions from aggrieved persons on the basis of the admission of a contravention.
The Commission may enter into leniency agreements with persons who have allegedly contravened the conduct rules in exchange for their co-operation in the Commission’s investigation or in proceedings before the Tribunal. The Commission will not, while a leniency agreement is in force, institute or continue proceedings for a pecuniary penalty against a party who is the beneficiary of the leniency agreement.
The Tribunal is empowered to order a full range of remedies for contraventions of the Ordinance, including pecuniary penalties, disgorgement orders, awards of damages to aggrieved parties, divestiture of assets, shares or businesses, interim injunctions during investigations or proceedings, termination or variation of an agreement or merger, injunctions, and disqualification orders against directors for up to five years.
The Tribunal can only impose pecuniary penalties on application by the Commission. Pecuniary penalty for a relevant violation is capped at 10% of the total turnover of the undertaking concerned obtained in Hong Kong for each year (up to a maximum of three years) of the contravention. If the contravention lasts for more than three years, the maximum will be calculated based upon the three years with the highest turnover.
NO STAND-ALONE PRIVATE RIGHT OF ACTION
Based upon concerns expressed by small and medium enterprises in Hong Kong, the Ordinance does not provide for any stand-alone private right of action for violations of the Ordinance. Private enforcement of the Ordinance is restricted to a follow-on right of action for damages only after a determination of wrong-doing has been made by the Tribunal or court upon enforcement by the Commission or after admission by the wrong-doer.
This limitation may be addressed in the future as the government has indicated that it will subsequently review whether there is any need to introduce a stand-alone right of private action.
WHAT THIS MEANS FOR YOU AND YOUR COMPANY
- The Ordinance will bring about a major change in the law in Hong Kong by making unlawful and subject to severe penalties various types of conduct that to date have not been prohibited in Hong Kong.
- Companies should take note of the broad scope and extra-territorial reach of the law and promptly consider its potential impact on their businesses. Companies should bear in mind that the Ordinance also applies in respect of activities outside Hong Kong which have an impact, directly or indirectly, in Hong Kong.
Companies and their senior management and relevant employees should be aware of the significant penalties that can be levied on the company and even its management for infringement of the Ordinance. These include pecuniary penalties, directors’ disqualification orders, and criminal penalties for obstructing enforcement. It will therefore be essential for companies to do the following:
- Understand the prohibitions and consider whether they could apply to the company’s conduct and, if so, whether any exclusion or exemption applies.
- Review business operations and in particular their standard business terms and commercial policies with regard to matters such as pricing, rebating and requiring exclusivity from counterparties, to identify areas of potential vulnerability and make necessary changes to ensure compliance.
- Review participation in trade associations and other types of cross-industry groupings, as they have often been a particular focus of enforcement action in other jurisdictions.
- Review participation in arrangements with competitors for benchmarking and other types of cross-industry information sharing arrangements.
- Adopt comprehensive compliance policies endorsed by the highest level of management, and set up internal procedures so as to ensure that the company is equipped to deal with a dawn raid and to ensure that the Commission’s enquiries or investigation will be dealt with properly and prudently.
- Roll out training to management and staff that meets the standards in jurisdictions such as the EU, which will serve as the benchmark in Hong Kong.
- Consider getting involved in the public consultation process that the Commission is to engage in, so as to keep up-to-date with the latest developments on the preparation of the guidelines and to better understand the way the law will be enforced.
- Companies should not assume that the Ordinance, including its exemptions, will be interpreted in the same way as similar competition laws of other jurisdictions.
- Relevant businesses in the telecommunications sector should be aware that the current merger control system will be altered by the Ordinance.