On 14 June, the Hong Kong Legislative Council, by a bare one vote margin, finally passed the long-anticipated Competition Ordinance ("CO"). The new law, which was published on 22 June 2012, represents the territory's first economy-wide competition law regime, with general prohibitions of both anti-competitive agreements and abusive conduct. This structure, as well as many of the basic concepts of the regime, closely follow European Union ("EU") competition law, albeit with the addition of some distinctive local characteristics.
The CO will come into force on a day to be appointed. No timeframe has yet been set, but it is likely that the CO will be implemented in phases, with the substantive provisions coming into force sometime late in 2013 or 2014.
The CO provides for the establishment of two new institutions:
- The Competition Commission ("Commission"), which comprises 5 to 16 members appointed by Hong Kong's Chief Executive. Its main role is to investigate suspected violations of the CO, and provide guidance by issuing guidelines and decisions on individual and block exemptions. The Commission has no power to impose sanctions.
- The Competition Tribunal ("Tribunal"), made up of existing High Court judges, will adjudicate claims of violations of the CO, hear appeals of the Commission's decisions and try follow-on actions by private claimants.
The First Conduct Rule
This prohibits agreements and concerted practices among undertakings that have the object or effect of preventing, restricting or distorting competition in Hong Kong. An 'undertaking' includes any individual or entity engaged in economic activities, regardless of its legal status or how it is financed.
The CO does not specify whether the First Conduct Rule applies to agreements between undertakings at different levels of the supply chain (vertical agreements) as well as arrangements between competitors (horizontal agreements). However, the government indicated during the legislative process that the objective of the CO would be to catch anti-competitive agreements between competitors and that, with some exceptions, it considered vertical agreements to be generally legitimate. Ultimately, it will be up to the Commission to decide the extent to which the First Conduct Rule will apply to vertical agreements.
Schedule 1 of the CO provides for five general grounds of automatic exclusions, and the First Conduct Rule does not apply to these agreements or types of conduct:
- Agreements that enhance overall economic efficiency;
- Agreements required for compliance with legal requirements imposed by Hong Kong law or by PRC national laws applying to Hong Kong;
- Agreements by undertakings entrusted by the Hong Kong government with the operation of services of general economic interest;
- Agreements to implement a merger; and
- Agreements of lesser significance: agreements between undertakings with combined annual turnovers that do not exceed HK$200 million (about US$25 million) are exempt from the First Conduct Rule unless the agreement or concerted practice involves 'serious anti-competitive conduct'. Serious anti-competitive conduct includes price fixing, limiting or controlling production or supply of goods or services, sharing markets and bid rigging.
The Second Conduct Rule
This rule prohibits an undertaking with a 'substantial degree of market power' from abusing such power by engaging in conduct that has as its object or effect the prevention, restriction or distortion of competition in Hong Kong.
Under the CO, conduct will constitute an abuse if it involves predatory behavior towards competitors, or the limiting of production, markets or technical development to the prejudice of consumers.
While 'substantial degree of market power' is not defined, matters such as market share, power to make pricing and other decisions, and entry barriers are considered in making a determination. During the legislative process, the government suggested that a market share of 40% would be indicative of a 'substantial degree of market power', whilst an undertaking with a market share of under 25% would unlikely be caught by the Second Conduct Rule. Overall, the concept appears to by very close to that of dominance in EU law. As a result, the Commission and Tribunal will be able to draw on extensive European case law in this area.
Note that the Second Conduct Rule refers only to abusive conduct by a single undertaking and, unlike some other jurisdictions, not to conduct by several independent undertakings who together hold a 'substantial degree of market power'.
The five general exclusions available in respect of the First Conduct Rule are also available as grounds for exclusion from the application of the Second Conduct Rule, with two differences:
- The exclusion for agreements that enhance economic efficiency is not available; and
- Agreements of lesser significance: an undertaking whose annual turnover does not exceed HK$40 million (about US$5 million) is exempt from the Second Conduct Rule provided that the agreement or concerted practice does not involve serious anti-competitive conduct.
Statutory bodies are exempt from the First and Second Conduct Rules (the "Conduct Rules"). However, the Chief Executive in Council may issue a regulation to apply provisions of the CO to specified statutory bodies and statutory bodies engaged in specified activities.
The Commission may make block exemption orders for particular categories of agreements on its own or upon the applications of undertakings.
The Chief Executive in Council may also exempt specified agreements or conduct from the Conduct Rules on public policy grounds, or to avoid conflicts with Hong Kong's international obligations.
Extraterritorial application of the Conduct Rules
The Conduct Rules are breached whether the agreement or concerted practice is made or took place in or outside of Hong Kong, so long as its objective or effect is to prevent, restrict or distort competition in Hong Kong.
The Merger Rule
The Merger Rule prohibits a merger if it has or is likely to have the effect of substantially lessening competition in Hong Kong. Currently, the Merger Rule only applies to mergers involving a holder of a carrier license granted by the Telecommunications Authority. However, it may be expanded to cover other industries as well in the future.
Enforcement and Sanctions
The Commission will have power to conduct investigations of suspected breaches of the CO, and to prosecute infringements before the Tribunal, with wide-ranging investigatory powers under the CO including the power to request documents or information, power to request explanations, and power to conduct 'dawn raids'.
For violations of the First Conduct Rule that do not involve 'serious anti-competitive conduct', the Commission must first issue a warning notice to the parties under investigation. In these cases, it is only if the parties continue or repeat the anti-competitive conduct after the expiration of the warning notice that the Commission will be permitted to bring proceedings before the Tribunal.
Following a prosecution by the Commission, the Tribunal may impose, in relation to a single contravention of a competition rule, a maximum penalty of up to 10% of the gross revenue of the undertaking obtained in Hong Kong for each year in which the contravention occurred. If the contravention occurred in more than 3 years, the maximum penalty is 10% of the annual turnover for the three years during the period of contravention which saw the highest turnover.
In exchange for co-operation, the Commission may make a leniency agreement with a person whereby the Commission agrees that that person will not face pecuniary penalties, or face reduced penalties.
A party suffering loss or damage as a result of a contravention of one of the Conduct Rules has a right to bring a follow-on action against the infringing party. Interestingly, however, and likely as a concession to the concerns of small and medium-sized enterprises over excessive litigation, this is only a right to bring a follow-on action after contravention of a Conduct Rule has been established before the Tribunal and the CO expressly rules out competition law court actions where there is no prior infringement decision (so-called 'standalone' actions).