The Hong Kong Government has proposed key changes to the Competition Bill that is currently before the region’s Legislative Council. The proposed changes are significant, and may be seen as an effort by the government to show that it is willing to compromise to address business sector concerns that had threatened to derail support for the Bill ahead of an anticipated vote on its passage in the second calendar quarter of 2012.

The proposed changes:

  • distinguish between “hardcore” and “nonhardcore” violations of the so-called ‘First Conduct Rule’, and effectively provide for business operators to receive a warning and an opportunity to adjust their conduct before they face any more rigorous enforcement action for the non-hardcore violations;
  • introduce exclusions for business operators whose annual worldwide turnover (considered in conjunction with the annual worldwide turnover of relevant trading partners, in some cases) falls below specified thresholds;
  • remove the right of persons who have suffered loss or damage as a result of a contravention of a Conduct Rule to bring stand-alone private actions in relation to such contraventions;
  • reduce the maximum penalty for violations of the proposed law from 10% of global turnover during the period of the contravention to 10% of local turnover for up to three years; and
  • expressly limit the scope of challenges to M&A activity to certain transactions impacting telecommunications licensees.

In this legal update, we provide a comprehensive outline of all the key changes that have been proposed, and provide comments on what these latest developments mean for the Bill’s prospects.

Background

The Competition Bill was introduced into the Legislative Council in July 2010, and has been under consideration by a Bills Committee for the last twelve months.

In order to understand the significance of the changes that have been proposed to the Bill, it is necessary to note the following key aspects of the original Bill:

  • The main rules applicable to business operators

The original Bill contains two main ‘Conduct Rules’ of cross-sector application, being the First Conduct Rule (a general prohibition of agreements, decisions and concerted practices that prevent, restrict or distort competition in Hong Kong) and Second Conduct Rule (a prohibition of the abuse of a substantial degree of market power).

While the original Bill does provide for some business operators to be exempt from the Conduct Rules (such as certain statutory bodies), it includes no exemption specific to small and medium sized enterprises (SMEs). The Government has previously indicated support for such an exemption, but also expressed the view that it was best left to the Commission to formulate it.

The Bill also includes a “Merger Rule” that would permit challenges to certain M&A transactions in, or affecting control of relevant licensees in, Hong Kong’s telecommunications sector.

  • Enforcement bodies and mechanisms

The original Bill provides for the establishment of a new Competition Tribunal to hear and adjudicate on competition cases brought by the Competition Commission. It also empowers the Tribunal to apply a full range of remedies for contravention of the Conduct Rules and Merger Rule, including pecuniary penalties not exceeding 10% of the total global turnover for the year(s) in which a contravention occurs.

The Commission would be empowered to issue an ‘infringement notice’ to business operators where it has reasonable cause to believe that a contravention of a Conduct Rule has taken place, and it has not yet brought proceedings in the Tribunal in respect of the alleged contravention. The infringement notice would describe the alleged infringing conduct, the evidence on which the Commission has formed its view and the terms in which the Commission would be prepared to settle the matter, including the payment of a specified amount not exceeding HK$10 million. Business operators who receive the infringement notice could choose not to accept the notice without any adverse inferences being drawn, in which case the Commission could proceed to institute proceedings before the Tribunal.

The original Bill also permits private actions to be brought by persons who have suffered loss or damage as a result of a contravention of a Conduct Rule. Such private actions could either follow on from a determination of a contravention by the court, or could be “stand-alone” actions seeking a judgment on particular conduct and remedies.

Proposed amendments to the Bill

As reported in our legal update of 2 September 2011, there has been broad business sector opposition to the Bill, not just from ‘big business’ but also from many SMEs and their representative organisations.

On 12 October 2011, Chief Executive Donald Tsang said in his annual policy address that he was aware of the business sector concerns about the Bill, and announced that amendments would be forthcoming. Those amendments have now been outlined in a public document, and include the following:

  1. Distinguishing how enforcement of the First Conduct Rule will apply in respect of “hardcore” and “non-hardcore” conduct

In response to concern about the scope of the First Conduct Rule being too broad and uncertain, the Government now proposes that the Bill will identify four types of “hardcore” cartel activities that will be considered to always adversely impact on competition and will therefore be subject to the full range of existing enforcement options in the Bill. The “hardcore” activities are proposed to be price-fixing, bidrigging, market allocation, and output control.

For other activities that do not fall within the “hardcore” categories referenced above, but which may still be caught by the general wording of the First Conduct Rule, it is proposed that a different enforcement option (and only that option) will be available to the Commission. This would apply to activities such as where competitors:

  • make a collective decision not to trade with prospective trading partners; or
  • develop standardisation agreements in relation to the products or services they sell, and where the Commission considers that such arrangements relevantly restrict or eliminate competition in a relevant market in Hong Kong.

Specifically, in relation to such “non-hardcore” conduct, it is proposed the Commission will have the option of issuing a “warning notice” requesting the relevant business operator(s) to cease the relevant conduct within a specified period. During that period, the Commission will not take enforcement action against the business operator(s) if it does cease the contravening conduct or otherwise comes to an agreement with the Commission about adjusting the relevant behaviour to eliminate the competition concern. However if the conduct continues or is repeated after the specified period, the Commission may institute proceedings against the relevant business operator(s) in the Tribunal - but only in respect of the alleged contravention against which a warning notice has been issued and of such alleged contravention that has occurred after the commencement of the specified period.

  1. Dispensing with the monetary payment aspect of Infringement Notices

While the Government intends to retain the Infringement Notice mechanism in the Revised Bill, it has proposed removing the requirement for business operators to pay a specified amount to the Commission (up to HK$10 million) as part of this process.

In accordance with the change described further above, the Infringement Notice would not be available in respect of non-hardcore conduct in breach of the First Conduct Rule - in respect of which the ‘warning notice’ would instead be available.

  1. De Minimis arrangements

To provide greater certainty to SMEs, the Government now proposes to introduce a ‘de minimis’ framework into the Bill in the form of an exclusion from the First Conduct Rule for all agreements between business operators with a combined turnover not exceeding HKD 100 million in the preceding financial year (or the preceding calendar year if a relevant business operator does not have a financial year). Technical details of the turnover calculation will be specified in the form of subsidiary legislation.

However the exclusion would not apply to agreements involving the four types of “hardcore” anti-competitive activities mentioned above.

In relation to decisions by trade or professional associations, the de minimis arrangements would only apply if the aggregate turnover of the members did not exceed HKD 100 million.

As regards the Second Conduct Rule, the Government proposes to adopt similar de minimis arrangements, but using turnover of HKD 11 million as the relevant threshold for application to a business operator.

  1. Pecuniary penalty

The Government has proposed to introduce amendments to cap the penalty for a relevant violation of the law to 10% of the total local turnover (for all products, not just those relating to a relevant contravention of the proposed law) for each year of infringement, up to a maximum of three years. If the infringement lasts for more than three years, the three years of infringement with the highest turnover would be chosen.

  1. Removal of stand-alone right of private action

Noting that SMEs were concerned that large companies could make use of the stand-alone right of private action to harass SMEs, the Government has proposed to remove the right of stand-alone private actions. Instead, all initial enforcement will be carried out by the Commission, supplemented by the follow-on right of action for determined contraventions.

The government has however signalled that it may revisit the issue of permitting stand-alone private actions “in a few years’ time”, once the business community acquires more experience with the new competition regime.

  1. Merger Rule

Although the specific Merger Rule in the Bill is confined in application to certain M&A transactions relating to telecommunications licensees, the broad wording of the Conduct Rules meant it was conceivable that those rules could be used to challenge M&A activity in other sectors.

The government has now confirmed that its policy intention is for the Bill not to regulate such other M&A activities, and thus proposes to amend the Bill to reflect this.

Next steps and prospects for the Bill

The Government has prepared a revised draft of the Bill reflecting the above changes, which is scheduled to be presented to the Bills Committee for discussion on 25 October 2011. The Government has also scheduled meetings with key chambers of commerce and political organisations to explain the proposals and their rationale.

The proposed changes are likely to satisfy some, but not all, critics of the Bill. Already it has been reported that at least three of the four major chambers of commerce in Hong Kong are not satisfied with the changes. Amongst other things, it is likely that ongoing criticism of the Bill is likely to focus on areas such as the following - which have been controversial from the time the Bill was first introduced:

  • The fact that the Government has refused to carve out ‘vertical agreements’ (such as distribution agreements that are considered to unduly restrict competition) from potential challenge under the First Conduct Rule, notwithstanding that the Government has indicated it would expect the Commission to consider introducing its own exemptions for some such conduct and that as such agreements would not qualify as “hardcore” and thus would be dealt with via the ‘warning notice’ mechanism explained above if they were challenged by the Commission.
  • The fact that calculation of the maximum penalty applicable to contraventions of the Conduct Rules is still proposed to be conducted by reference to all of the relevant business operator’s turnover in Hong Kong, rather than just turnover relating to the specific products or services that are the subject of the identified contravention.
  • The fact that the Second Conduct Rule applies to business operators with “substantial market power”, rather than the more common threshold of “market dominance” that must be satisfied before similar prohibitions in many other mature competition laws jurisdictions apply.

If the Government proceeds with submitting the revised draft of the Bill to the Legislative Council, it will also need to consider issuing a revised set of the ‘illustrative’ and non-binding guidelines that it issued in June this year to explain how it considers key aspects of the Bill should be applied - as those guidelines do not reflect the content of the revised Bill.

The government continues to claim that there is broad consensus and support within the wider community for the introduction of a cross-sector competition law, however these latest developments indicate that it is concerned that the current level of business sector opposition to the Bill is significant enough to raise doubts about the Bill’s prospects.

With just eight months remaining until the end of the current legislative session and appointment of a new Chief Executive, time is running out for the Government to secure the support it needs in order to pass the Bill and avoid having to re-start the whole legislative process under the new Administration. While the proposed changes to the Bill will be welcomed by many observers, it remain to be seen whether they will be considered sufficient by the most vocal critics of the proposed law, or will only embolden them further in their opposition to it.