The countdown to the commencement date of the Competition Ordinance (“the Ordinance”) officially begins. On 14 December 2015, the key prohibitions under the Ordinance will take effect. Businesses will be familiar with the range of penalties the Competition Tribunal (“the Tribunal”) has power to impose under the Ordinance, notably fines of up to 10% of group turnover in Hong Kong.
Recently, the focus of public commentary on the Ordinance has shifted to the personal liability of directors and officers of businesses found to have infringed the law.
On 19 November 2015, the Competition Commission (“the Commission”) published its enforcement policy, setting out its intention to prioritise taking action against (1) cartel conduct1; (2) other violations of the First Conduct Rule which caused significant harm to competition in Hong Kong; and (3) abuses of substantial market power involving exclusionary behaviour by incumbent businesses. In investigating and prosecuting such conduct, the Commission may also prioritise taking action against officers and directors of businesses who had “contravened or been involved in a contravention of a competition rule”.
The Ordinance empowers the Tribunal to impose any of the following penalties on directors and officers:
- Pecuniary penalties.
- Payment of damages.
- Restitution orders.
- Prohibitory or mandatory injunctions.
- Other orders under Schedule 3 of the Ordinance.
Directors may be disqualified for up to five years from being a director, liquidator or provisional liquidator, receiver or manager of a company, or in any way be concerned or take part in the promotion, formation or management of a company.
In addition to penalties imposed by the Tribunal, directors and officers may potentially be exposed to private follow-on actions.
The Honourable Mr. Justice Godfrey Lam, president of the Tribunal, commented that personal consequences were necessary to change the rational calculus of directors and officers, who may be tempted to adopt anti-competitive strategies to capture short-term profits for the business and boost their personal income. He noted, however, that while the knowledge requirement for directors and officers to be held liable for business conduct is uncertain, the Tribunal will seek to elucidate the standard of knowledge that may justify personal liability.
There is so far little guidance on how pecuniary penalties will be calculated. According to the Commission’s Enforcement Policy and the factors set out in section 93(2) of the Ordinance, the Tribunal will consider the following matters in deciding the appropriate level of penalties:
- The nature and extent of the conduct that constitutes the contravention: cartel conduct, and exclusionary abuses by incumbent businesses with substantial market power may attract bigger fines.
- The loss or damage caused by the conduct: conduct that causes significant harm or affects a larger segment of the market, and carried on for a longer duration, will likely justify a significant fine.
- The circumstance in which the conduct took place: according to the Enforcement Policy, deliberate contravention and contravention under the direction of senior management (as opposed to the conduct of a rogue employee) will be considered severity factors.
- Repeat contravention: where the person, or business, had previously been advised by the Commission of concerns about certain conduct, was issued a warning notice or infringement notice, or had previously entered a commitment under the Ordinance regarding similar conduct, the Commission may consider such conduct a repeat contravention. It has also been made clear that cooperation with the Commission (whether by way of a leniency application or subsequent cooperation) will lead to reductions in fines.
A disqualification order may be made against directors who are deemed unfit to be concerned in the management of a company. A director may be deemed unfit if:
- The director has been connected with another contravention of a competition rule.
- The director’s conduct contributed to the contravention of a competition rule.
- The director had reasonable grounds to suspect that the conduct of the company constituted the contravention but took no steps to prevent it.
- The director did not know, but ought to have known, that the conduct of the company constituted the contravention.
How Should You Protect Yourself?
Directors and officers will not be able to hide behind the protection of insurance to cover their liability for contravention of the competition rules, or offences in relation to obstruction of investigations. Section 168 of the Ordinance expressly excludes from the scope of directors and officers liability insurance any indemnity for pecuniary penalties, or the costs incurred in defending an action, in which a director or officer is ordered to pay a pecuniary penalty, or convicted of contempt of the Tribunal or any offence under the Ordinance in relation to investigations under Parts 3 and 12 of the Ordinance. Attempts to circumvent section 168 constitute a separate offence punishable by an additional penalty up to twice the value of the relevant indemnity.
The only real safeguard against liability under the Ordinance remains an effective compliance programme. Investing in compliance generates reputational, operational and financial benefits for the business. In the long run, the business will reap concrete savings in reduced costs spent on defence and fire-fighting, greater operational efficiency, and less need to spend on defensive and remedial measures and advice. Importantly, having better control over operations and strategy and the ability to demonstrate integrity will inspire shareholder and investor confidence.
To protect themselves from personal liability under the Ordinance, directors and officers should establish an effective competition law risk management framework. Competition law compliance should be instinctive to staff and there should be a top-down culture of compliance within the business that begins with the recognition that prevention is better than cure. Business activities that have particular exposure to competition law risk should be regularly monitored and audited to ensure potential issues are swiftly addressed.
Are you ready for the Competition Ordinance?