Joint ventures must be properly structured and managed to ensure they do not breach Hong Kong’s new competition law. Agreements that breach the law may be declared void and participants may be fined up to 10 per cent of their annual turnover. It is therefore essential that companies assess new and existing joint ventures in light of the competition law. In this article, we provide tips on how to make sure your joint ventures comply with the Competition Ordinance.
A quick outline of the competition rules
The Ordinance prohibits conduct that harms competition in Hong Kong. It applies to all agreements in effect after 14 December 2015 – even if the agreement was entered into before that date.
First Conduct Rule
The First Conduct Rule prohibits any agreement or co-operation between companies that has the object or effect of preventing, restricting or distorting competition in Hong Kong. For example, companies may breach the rule if they:
- agree with competitors to fix prices, share markets or restrict output; or
- exchange confidential information with competitors about business plans, dividing markets, future prices, marketing strategies or production output.
Second Conduct Rule
The Second Conduct Rule prohibits undertakings that have a substantial degree of market power in a market from abusing that power by engaging in conduct that has the object or effect of preventing, restricting or distorting competition in Hong Kong. Examples of conduct that may be abusive include predatory pricing, exclusive dealing, refusal to deal, and tying and bundling.
The First and Second Conduct Rules do not apply to the relationship between participants in a joint venture that meets the definition of a merger.
Is the joint venture a merger?
The impact of the competition rules on a joint venture depends on whether the joint venture amounts to a “merger” under the Competition Ordinance. A joint venture will be a merger if it is created to perform, on a lasting basis, all the functions of an autonomous economic entity.
The table below sets out examples of joint venture features that may indicate whether or not a joint venture is a merger under the Ordinance. The assessment does not depend on the legal form or name of the joint venture chosen by the parties.
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“Non-merger” joint ventures
Competition law risks
If a joint venture is not a merger under the Ordinance, then the First and Second Conduct Rules apply to the relationship between the participants. These joint ventures must be properly structured and managed to ensure they do not breach the rule.
In many cases, joint ventures have pro-competitive effects and will not raise concerns under the First Conduct Rule. However, many joint ventures have features that may raise competition concerns, such as an agreement between the parties to:
- the prices they will charge for products or services offered by the joint venture;
- which customers or geographic areas they will service;
- the volume of product they will produce; and
- share information and discuss business plans, future pricing plans, marketing strategies, etc.
Joint ventures between competitors create the most risk under the competition law. Joint ventures between parties that provide complementary goods or services, and who are not competitors, are less likely to contravene the law.
Joint venture compliance tips
A competition assessment should be carried out to determine whether existing or proposed joint venture agreements contravene the First Conduct Rule.
The table below sets out examples of potential pro- and anti-competitive effects of joint ventures that may be relevant to the assessment. The market power of the parties and the competitive structure of the market in which the joint venture operates will also be relevant to the assessment.
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If the joint venture agreement viewed as a whole does not have the object or effect of harming competition, restrictions which are directly related to and necessary for implementing the joint venture will also fall outside the First Conduct Rule. Ancillary restrictions should be limited to those that are strictly necessary to operate the joint venture and proportionate to it.
For example, a non-compete clause between the parent companies and their joint venture might be regarded as directly related to and necessary for implementing the joint venture for the lifetime of the joint venture.
Conduct of joint venture parties
A joint venture may create a situation where the parties are co-operating for the purpose of the joint venture, but competing on other projects. Any co-operation and exchange of information should be limited to what is required to operate the joint venture. In particular, the exchange of confidential information regarding prices, markets, business plans, etc. should be carefully controlled. This may be achieved by putting in place information sharing protocols and training relevant staff.