The implementation of the new Competition Ordinance (Chapter 619 of the Laws of Hong Kong) (the Competition Ordinance) on 14 December 2015 will mark the first time that Hong Kong has had a general and cross-sector competition law.

Background

The Competition Ordinance was enacted on 14 June 2012 as a general and cross-sector competition law to curb anti-competitive conduct, and will come into full effect on 14 December 2015.

Three major forms of anti-competitive conduct are prohibited under the First Conduct Rule, the Second Conduct Rule (collectively referred to as the Conduct Rules) and the Merger Rule. Come 14 December 2015, the current competition provisions in the Telecommunications Ordinance (Chapter 106 of the Laws of Hong Kong) (theTelecommunications Ordinance) and the Broadcasting Ordinance (Chapter 562 of the Laws of Hong Kong) (the Broadcasting Ordinance) will be repealed (subject to transitional arrangements) and replaced by the Conduct Rules, and a new section 7Q prohibiting exploitative conduct (the Telco Rule) will be added to the Telecommunications Ordinance.

In this issue, we will discuss the rules that specifically apply to the telecommunications sector, namely the Merger Rule and the Telco Rule.

What is the Merger Rule?

The Merger Rule[1] prohibits a merger involving a carrier licensee under the Telecommunications Ordinance that (whether directly or indirectly) creates the effect ofsubstantially lessening competition in Hong Kong. This rule applies even if:

  • the arrangements for the creation of the merger take place outside Hong Kong;
  • the merger takes place outside Hong Kong; or
  • any party to the arrangements for the creation of the merger, or any party involved in the merger is outside Hong Kong.

In general, changes in the control of undertakings which are not of a lasting nature are less likely to have any effect on competition in the relevant market, and the Competition Commission will be less concerned about these changes.

A flowchart illustrating how the Merger Rule works is set out in Appendix 1.

Key terms used in the Merger Rule

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Relationship between "substantial degree of market power" and "dominant position"

The relevant factors for determining whether a licensee is in a dominant position under section 7Q(3) of the Telecommunications Ordinance are very similar to those for determining whether an undertaking has a substantial degree of market power under the Second Conduct Rule.

Clarification regarding the relationship between the two thresholds were sought during the consultation process on the Guidelines[7]. Whilst it is generally understood that a "substantial degree of market power" is a lower threshold than that of the "dominance" test adopted in other jurisdictions, the Competition Commission and the Communications Authority have not so far included any guidance on the interpretation of section 7Q of the Telecommunications Ordinance.

Relationship between "abusive conduct" and "exploitative conduct"

During the consultation process on the Guidelines, there were queries on whether "exploitative conduct" as used in the Telco Rule, such as the imposition of unfair prices or other unfair trading conditions, also falls within the scope of the Second Conduct Rule.

As explained in Part 3 of this series[8], the category of abusive conduct is an open one, and any conduct which has the object or effect of preventing, restricting or distorting competition in Hong Kong may be regarded as abusive. Hence, if an exploitative conduct has an anti-competitive object or effect (for instance, the imposition of unfair prices or other unfair terms leading to anti-competitive foreclosure in the market), this may also fall within the scope of the Second Conduct Rule.

Whilst an exploitative conduct may fall within the scope of the Second Conduct Rule, the Competition Commission has clarified that its main enforcement focus under the Second Conduct Rule will be abusive conduct which is exclusionary, i.e., conduct which may result in competitors, actual or potential, being denied access to buyers of their products or to suppliers[9].

What next?

The imminent implementation of the Competition Ordinance is a significant step in the evolution of Hong Kong’s fledgling antitrust regime and multi-national enterprises doing business in Hong Kong can no longer afford to ignore the Special Administrative Region as one that has no competition regime or antitrust enforcement. Understanding and complying with competition law principles is therefore more important than ever. In the next issue, we will discuss the enforcement of the Competition Ordinance in greater detail.

Click here to view the table.