The Hong Kong Government has issued 3 new regulations that take Hong Kong another step closer to fully implementing its new competition law, which is expected to come into full force later this year.

How to calculate Turnover

The Hong Kong Competition Ordinance ("Ordinance") uses the concept of “turnover” in a number of areas:

  • The first conduct rule (the prohibition on anti-competitive arrangements) does not apply to arrangements between undertakings if their combined turnover during the “turnover period” does not exceed HK$200,000 (so called “agreements of lesser significance”)
  • The second conduct rule (relating to abuse of market power) does not apply undertakings whose turnover during the “turnover period” does not exceed HK$40,000 (so called “conduct of lesser significance”); and
  • Pecuniary penalties are capped at 10% of the turnover of an undertaking for each financial year (or if it doesn't have a financial year, each calendar year) that a contravention occurred (and where the contravention occurred over more than three years, the three years with the highest turnover).

The Competition (Turnover) Regulation clarifies how turnover is to be calculated. 

Turnover of an undertaking will be the revenues derived by the undertaking from its ordinary activities in Hong Kong, less sales rebates and less taxes directly related to the revenues.  Unfortunately, there is no guidance in the regulations as to what would (or would not) constitute an undertaking’s “ordinary activities”.  The Regulation also clarifies that grants and subsidies (or similar financial assistance) in return for goods or services provided under contract should be included for the purposes of calculating turnover and that revenue resulting from transactions between two undertakings whose revenues are combined for the purposes of the relevant thresholds is not to be included as turnover.

The Regulation also provides how to determine the turnover period in circumstances where an undertaking does not have a financial year that ends in the preceding calendar year, has a financial year that is less than twelve months or does not have a financial year and was not engaged in economic activity for 12 months in the preceding calendar year.

Application and Disapplication

Two of the regulations relate to who the Ordinance will apply to. 

Generally certain key provisions of the Ordinance (including the Conduct Rules and the Merger Rule) will not apply to statutory bodies.  However, the Ordinance permits the Chief Executive in Council to specify that the Ordinance will apply fully to certain statutory bodies.  The Competition (Application of Provisions) Regulation specifies a number of such statutory bodies.  Not surprisingly, these are statutory bodies engaged in what may be considered ordinary commercial activities where it may be difficult to justify an exemption from the competition laws that will apply to competitors engaged in similar activities.  The statutory bodies are: Ocean Park Corporation, Matilda and War Memorial Hospital, Kadoorie Farm and Botanic Garden Corporation, The Helena May, the Federation of Hong Kong Industries and the general committee of the Federation of Hong Kong Industries.

In addition, the Competition (Disapplication of Provisions) Regulation specifies that the Conduct Rules and the Merger Rule, the enforcement powers of the Commission and the enforcement powers of the Tribunal will not apply to the companies involved in the operation of the Hong Kong stock and futures markets (Hong Kong Exchanges and Clearing Limited and certain of its subsidiaries). In essence, this recognises that the Hong Kong stock exchange and futures market may continue to operate as a monopoly, exercising monopoly powers in Hong Kong.

It is a positive sign that the government is putting such regulations in place, so as to minimise any potential delay to the Ordinance coming into full effect once the Commission’s guidelines are finalised.  Drafts of those guidelines were published in October last year and the Ordinance is currently expected to be fully effective early in the second half of 2015.