After years of discussions, the Hong Kong Legislative Council finally passed a comprehensive competition law (the "HK Competition Law").
The HK Competition Law includes the classic prohibitions of anticompetitive agreements and abuses of market power, as well as a merger control regime (with limited scope). It also includes some features that are specific to Hong Kong, some of which reflect the pro-business approach that has characterized Hong Kong over the years, as well as the small size of the economy. However, other features could actually go beyond mainstream competition law and, notably, apply more stringent obligations on companies with relatively large market shares.
The new provisions are not expected to come into force before the end of 2012. This transition period will give businesses the opportunity to adapt their practices to the new legislative framework. In particular, companies should review any possible relationship with competitors, including agreements but also any contacts through trade associations. They should also put in a place a robust compliance program to prevent or detect any illegal behavior.
Prohibition of Anticompetitive Agreements
The HK Competition Law prohibits agreements and concerted practices that have the object or effect of preventing, restricting or distorting competition in Hong Kong. This prohibition does not apply to agreements that enhance overall economic efficiency.
A distinction is made between "serious anticompetitive conduct" – price fixing, market allocation, output control and bid-rigging – and other (non serious) anticompetitive conduct. It remains to be seen how the Commission will regard legitimate joint selling agreements between competing companies, as such agreements may result in price fixing.
The Competition Commission has the power to pursue serious anticompetitive conduct directly before the Competition Tribunal. However, for other types of anticompetitive conduct, the Competition Commission must, prior to bringing proceedings before the Competition Tribunal, issue a "warning notice," requesting that the company cease its anticompetitive behavior within a certain period of time. Only if the company fails to comply with the warning notice, the Competition Commission may pursue the case before the Tribunal.
Abuse of Market Power
The HK Competition Law prohibits companies 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. There is no definition of “substantial degree of market power” in the Competition Bill but the following factors will be taken into account: the market share of the company, its power to make pricing and other decisions, and any barriers to entry to competitors into the relevant market.
The Government considered that it was not appropriate to adopt the concept of "dominance," that is found in many jurisdictions, inspired by European competition law, given that, under overseas case law, dominance required market shares of at least 50%. However, according to the Government, in a small economy such as Hong Kong’s, the conduct of companies with a market share below 50% could have a major effect on competition. Therefore, the Government adopted the concept of "substantial degree of market power" that is found in many non-EU jurisdictions.
According to the Secretary for Commerce and Economic Development Bureau, market shares below 25% are unlikely to reflect the existence of a substantial degree of market power. There is therefore a risk that companies with market shares as low as 25% could be considered as having a substantial degree of market power, and therefore would have to adapt their conduct.
Limited Merger Review
The HK Competition Law prohibits any merger or acquisition that has, or is likely to have, the effect of substantially lessening competition in Hong Kong. However, the merger review system will remain only applicable to telecommunications operators, which makes the HK merger review regime quite unusual. The Government has indicated that it would be in a better position to review the effectiveness of the law and assess whether cross-sector merger provisions are suitable for and needed in Hong Kong after it has gained more experience and expertise under the new competition regime, but no specific timetable was given by the Government.
Further, the HK Competition Law explicitly provides that the anticompetitive agreement and abuse of substantial degree of market power prohibitions do not apply to mergers.
The Competition Commission
A new body, the Competition Commission, will be established to conduct investigations into any anticompetitive conduct. The Commission’s investigative powers include powers to obtain documents and information, require any person to attend before the Commission to answer questions, enter and search premises, and take possession of any relevant document and computers upon a warrant issued by the court.
Parties subject to an investigation from the Competition Commission can offer commitments to terminate its investigation. When the alleged anticompetitive conduct involves agreements qualifying as "serious anticompetitive conduct" or abuses of a substantial degree of market power, the Commission has the ability to issue an “infringement notice” setting out the commitments that the alleged violator must enter into if it wants to avoid a procedure before the Competition Tribunal. The Commission may also enter into a leniency agreement with a person in exchange for that person’s cooperation in an investigation or proceedings, whereby the Commission will not bring proceedings.
Finally, the Competition Commission has the power to bring cases before the Competition Tribunal, to obtain the imposition of fines or orders to stop the anticompetitive conduct.
The Competition Tribunal
Upon finding anticompetitive conduct, the Tribunal may impose a fine that may not exceed 10% of the total gross revenue in Hong Kong for each year of contravention, up to a maximum of 3 years. The Tribunal can also declare any agreement to be void, order defendants to pay damages, as well as prohibit a person to be a company director.
The HK Competition Law includes a significant limitation on the ability to bring private lawsuits for alleged anticompetitive conduct. Indeed, private actions can only be brought after the Competition Tribunal has ruled that there has been anticompetitive conduct. The originally proposed stand-alone action was removed from the HK Competition Law in view of the general concern of local companies, in particular SMEs, that this would become an oppressive remedy against them. The Government will reconsider the need for the introduction of stand-alone action a few years after the implementation of the HK Competition Law.
Entry into Force
The HK Competition Law has been published in the Government Gazette on 22 June 2012. It is however unclear at this stage when the law will enter into force. The Government plans to implement it in phases to allow the public and business sectors to become familiar with the new legal requirements. In the meantime, the Government will proceed to establish the Competition Commission and the Competition Tribunal. Once established, the Competition Commission will conduct publicity campaigns and public education activities and prepare guidelines. The whole preparatory process is expected to take at least one year to complete.
In the meantime, companies doing business in Hong Kong should review the compatibility of their current practices with the new law. In particular, companies should review their relationships with competitors, including all agreements but also any contacts they or their employees may have, including through trade associations. They should also put in place robust compliance programs to prevent or detect illegal behavior. Moreover, companies with a market share above 25%, or in highly concentrated industries, should review whether their practices do not involve any abuse of market power.