On Friday 2 July 2010 the Government gazetted the Competition Bill setting out its proposal for a competition law in Hong Kong. If enacted, the competition law will have far reaching ramifications for business.
Agreements and other arrangements that are legal now might be prohibited if they are considered to impact detrimentally on competition in Hong Kong. Businesses with market power will also have their conduct open to attack by the competition regulator, other competitors and the general public arguing that their market power is being ‘abused’ with the ‘object or effect’ of damaging competition in Hong Kong. These rules will apply to conduct undertaken inside or outside Hong Kong and whether or not the parties engaging in the conduct are in Hong Kong.
The Bill provides for general prohibitions divided into three categories: (i) the first conduct rule; (ii) the second conduct rule; and (iii) the merger rule.
The first conduct rule would prohibit agreements, arrangements or understandings that have the object or effect of preventing, restricting or distorting competition in Hong Kong.
This prohibition would apply to such concerted practices even if engaged in or given effect to outside Hong Kong. It would also apply to parties who are outside Hong Kong, so long as competition within Hong Kong is affected in a proscribed way.
The first conduct rule would not apply to agreements that enhance overall economic efficiency or which are made to comply with a legal requirement (sections 1 & 2 of Schedule 1). Parties that have made or are proposing to make agreements can apply to the Competition Commission for a decision confirming that such agreements are exempt (section 9 of the Bill). There is also a process for block exemptions where agreements are regarded as enhancing overall economic efficiency (Subdivision 3 of the Bill).
Clients should be giving consideration to existing agreements, including long-term supply contracts, exclusive territory agreements and any existing or proposed arrangements with competitors, including trade associations. These may come under scrutiny and potentially expose undertakings to the unwinding of those arrangements and severe penalties if the Competition Bill is introduced into law.
The second conduct rule would prohibit 'undertakings' with a substantial degree of market power from 'abusing' that power by engaging in conduct that has the object or effect of preventing, restricting or distorting competition in Hong Kong. This prohibition would apply to undertakings even if they are outside Hong Kong or engaging in conduct outside Hong Kong.
Hong Kong is a small economy with a high degree of economic concentration in a number of sectors. The Government is not proposing that the law would have the power to attack existing business structures. However, clients operating in sectors where they have high market share or which have significant barriers to entry should be giving very careful consideration to the potential impact of the Competition Bill on their business operations. Clients based outside Hong Kong or engaging in conduct outside Hong Kong should also be giving careful consideration to the potential impact of this proposed prohibition.
The merger rule is of more limited scope and would apply to certain mergers relating to licensees under the Telecommunications Ordinance. This rule would prohibit such mergers where they have or are likely to have the effect of substantially lessening competition in Hong Kong. It is important for any business operating in that sector or looking to merge with a licensee in that sector to closely scrutinise and understand the potential ramifications of this prohibition and whether it is broader than the existing sectoral merger rule in the Telecommunications Ordinance.
One of the most controversial aspects of the Competition Bill is the proposed exemption of statutory bodies (section 3). There are hundreds of statutory bodies in Hong Kong, many of which engage in economic activity competing against the private sector. Concern has been expressed that if they are exempted the government sector will be on the uphill side of an un-level playing field competing with, and potentially crowding out, the private sectors.
The Government had initially proposed that the statutory bodies to be exempted would be made clear in the Competition Bill. The Government is now saying it will address this issue through regulations made by the Chief Executive in Council (see section 5(1)(a)) and is yet to say which bodies it is proposing to exempt.
The Chief Executive in Council would also have the power to exempt agreements or conduct on public policy grounds (section 31) or to avoid conflict with international obligations (section 32).
It is proposed that a Competition Commission would be established to investigate and bring proceedings before a Competition Tribunal. The Competition Commission’s powers would include being able to require the production of documents and information and attendance before the Commission to give evidence and power to enter and search premises and to seize and retain evidence and property under a court warrant. Non-compliance with the Commission’s powers in the absence of a reasonable excuse would be subject to criminal penalties.
The Commission could, instead of investigating suspected breaches, issue infringement notices against undertakings offering not to bring proceedings if they pay a sum up to HK$10 million to the Government, refrain from the specified conduct and admit to the contravention. The Commission could also take commitments from undertakings and enter into leniency agreements with them.
The Competition Tribunal would be established within the Court System as a superior court of record and would be empowered to apply a wide range of remedies to contravention of the competition rules. These include penalties up to 10% of annual turnover for the year in which the contravention occurred, damages to aggrieved parties, interim injunctions during the investigation or proceedings, termination or variation of an agreement or merger and disqualification orders against directors. In cases where the Commission is not seeking pecuniary or financial penalties, it is proposed that the Tribunal will not be bound by the normal rules of evidence.
The Bill also provides for private action. Any person who considers they have suffered loss or damage as a result of a contravention of the conduct rules could bring action seeking a judgment and remedies (but not pecuniary penalties). Private parties could bring such claims even if the undertaking in question has entered into a commitment or leniency agreement with the Commission.
The Court of First Instance would have the power to hear composite claims and could transfer any aspect of a claim within the Tribunal’s jurisdiction to the Tribunal. The Court would also have the power to refer matters to the Commission for further investigation.
The Bill proposes that the Broadcasting and Telecommunications Authorities retain the power respectively to perform the functions of the Commission under the Competition Bill in relation to broadcasting and telecommunications licensees. These Authorities are to enter into a memorandum of understanding with the Commission to co-ordinate their activities.
The first reading of the Competition Bill before the Legislative Council is scheduled for 19 July 2010. It is expected that a Bills Committee will then be formed to scrutinise the Bill. However, given that the Legislative Council will soon be taking its summer recess, any debate on the Competition Bill is not expected until a subsequent Legislative session.