In June 2012, Hong Kong welcomed the long-awaited Competition Ordinance (the CO), the first competition law that applies to the entire economy of Hong Kong. The CO adopts a ‘three pillars’ approach, prohibiting anti-competitive agreements and abuse of a substantial degree of market power, as well as establishing an antitrust merger control regime (although this will, for the time being, be limited to mergers involving telecommunications carriers). Despite the broad similarities between the CO and legislation in jurisdictions such as the EU, England, Canada and Singapore, it has been drafted to take into account the economic and social circumstances of Hong Kong and therefore takes a different approach to other jurisdictions, in some respects.
Although the CO is now on the statute book, the substantive provisions are yet to take effect and are not expected to be in force before 2014. In the interim, the Commerce and Economic Development Bureau (the CEDB), which sponsored the CO’s passage through the Legislative Council (LegCo) and which is now responsible for bringing its provisions into effect, has announced that the institutions that will enforce and adjudicate on the CO, the Competition Commission (the Commission) and the Competition Tribunal (the Tribunal), will be established in the course of 2013. The Commission will then consult upon and issue guidelines (the Commission Guidelines), which will provide the detailed framework governing enforcement of the CO, before the CEDB brings the prohibitions into force.
In the absence of the Commission Guidelines, there is a degree of uncertainty as to how the provisions of the CO will be applied in practice. In lieu of the Commission Guidelines, several non-binding documents prepared by the CEDB for LegCo (the CEDB Guidelines), during the legislative passage of the CO, provide some helpful insight as to the approach that the Commission and Tribunal may take in enforcing the CO.
This article provides an overview of the CO, highlighting the pitfalls that exist for businesses as they prepare for its enforcement.
The Competition Ordinance
Hong Kong has previously only regulated competition in the telecommunications and broadcasting sectors, under the Telecommunications Ordinance (the TO) and the Broadcasting Ordinance (the BO), respectively. Following a long legislative passage, on 22 June 2012, the CO was published in the Gazette, extending competition law across all sectors of the economy of Hong Kong.
The CO adopts a traditional ‘three pillars’ approach, prohibiting:
- anti-competitive agreements between undertakings (the First Conduct Rule);
- abuse of substantial market power (the Second Conduct Rule) (together, the Conduct Rules); and
- anti-competitive mergers involving telecommunications carrier licensees (the Merger Rule).
These three rules (the Competition Rules), apply to all undertakings inside and outside Hong Kong, where their conduct has the object or effect of restricting competition in Hong Kong.
The Competition Rules are to be enforced by a dedicated enforcement agency, the Competition Commission, an independent statutory body which is expected to be established in the early part of 2013. The appointment of the senior members of the Commission is expected to occur in the coming months and the final nominations will, no doubt, be a closely watched affair, as these individuals will determine the enforcement approach of the Commission. The Commission will additionally be responsible for ensuring that the CO is well publicised, and it is expected that the Commission will conduct a significant ‘outreach’ programme, before the Competition Rules come into force. Adjudication on the Commission’s findings will be undertaken by a specialist tribunal, the Competition Tribunal, to be established after August 2013. The Tribunal will also hear private follow-on actions brought under the CO.
The scope of application of the CO
The Competition Rules apply to the conduct of undertakings that has the object or effect of preventing, restricting or distorting competition in Hong Kong. This applies to any conduct that is entered into by undertakings, regardless as to whether the undertakings are based, or the conduct was undertaken, within or outside of Hong Kong.
The Competition Rules apply to ‘undertakings’. The CO has taken a similar approach to the EU in defining an undertaking as ‘any entity, regardless of its legal status or the way in which it is financed, engaged in economic activity, and includes a natural person engaged in economic activity’. It is expected that Hong Kong will take a similar approach as the EU in defining ‘economic activity’. The CEDB Guidelines, for example, envisage this term as being defined as ‘activity consisting in offering goods or services on a market and which could, at least in principle, be carried on to make profits.’
General exemptions from the Competition Rules
The CO provides for several broad exemptions, to certain bodies, persons and categories of conduct. Statutory bodies are exempted, unless specified by the chief executive, and persons may be specified by a chief executive order as exempted.
Additionally, the chief executive has the power to exempt categories of agreement and categories of conduct, for reasons of public policy and to avoid conflict with Hong Kong’s international obligations.
In addition to the general exemptions listed above, several specific exclusions are applied to each of the Competition Rules. These are addressed in more detail in the discussion on the Competition Rules below.
The Competition Rules
The First Conduct Rule
The First Conduct Rule prohibits agreements between undertakings (whether based in or outside of Hong Kong) that have the ‘object or effect of preventing, restricting or distorting competition’ in Hong Kong. The general scope of the First Conduct Rule is, therefore, similar to that of article 101 on the Treaty of the Functioning of the European Union (the TFEU).
‘Serious’ anti-competitive agreements distinguished from other anti-competitive agreements
Throughout the legislative passage of the CO, small and medium-sized enterprises (SMEs) had been concerned that a strict application of the First Conduct Rule would damage their ability to compete. To assuage these concerns, de minimis exclusions were introduced to exclude SMEs from the Conduct Rules. However, reflecting the government’s concerns over certain agreements, certain ‘serious’ agreements were carved out of the exclusion under the First Conduct Rule. These include price fixing, market allocation, limiting production or supply and bid rigging.
Beyond the ‘serious’ conduct listed above, the CO is vague as to what other conduct would be caught under the First Conduct Rule, allowing the Commission and the Tribunal discretion in their interpretation of this rule. The CEDB Guidelines provide some examples of other agreements that would be potentially caught under the First Conduct Rule, including sharing price or non-price-related information, joint purchasing or selling, and fixing terms and conditions. It may be that the Commission Guidelines will include these and other examples.
While the CO is silent on the position of vertical agreements, the CEDB Guidelines do note that vertical agreements are less likely to give rise to competition concerns. However, the CEDB Guidelines do note that certain vertical agreements could be caught under the CO, particularly where a supplier has a substantial degree of market power. It remains to be seen whether the Commission Guidelines will clarify the status of vertical arrangements, or whether the Commission will issue a block exemption.
‘Object’ and ‘effect’ of anti-competitive agreements
To constitute a breach of the First Conduct Rule, the ‘object or effect’ of the conduct must be to prevent, restrict or distort competition in Hong Kong.
The CO provides that the anti-competitive object of a party in entering an anti-competitive agreement may be ‘inferred’ by the Commission and the Tribunal. It is also notable that the CEDB Guidelines envisage that the ‘object’ of an undertaking will be measured as the ‘objective purpose’, rather than as the ‘subjective intention of the parties’ to an agreement.
One issue that may arise in enforcement and adjudication of a case involving an anti-competitive object, may be proving an anti-competitive object was present in a non-serious anti-competitive agreement, such as an agreement to share non-price-related commercial information.
In determining the effect of an agreement, the CEDB Guidelines suggest that it will be necessary for the Commission to demonstrate an anti-competitive effect through an effects analysis.
It is expected that the Commission’s approach to ascertaining an anti-competitive object and effect will be elaborated upon in the Commission Guidelines.
Exclusions from the First Conduct Rule and block exemptions
Agreements between smaller companies (ie, those with a turnover of less than HK$200 million) that do not represent ‘serious’ anti-competitive conduct are excluded from being caught under the First Conduct Rule. Beyond this, companies may enter into anti-competitive agreements to comply with a requirement of Hong Kong law, where the agreement is in the interests of economic efficiency, or where the agreement facilitates the provision of ‘services of general economic interest’. Furthermore, the Commission may exclude certain categories of agreements under block exemptions to be issued in the future.
The Second Conduct Rule
Similarly to the prohibition under article 102 of the TFEU, the Second Conduct Rule prohibits single undertakings from ‘abusing’ their ‘substantial market power’ by engaging in conduct that has as its object or effect the prevention, restriction or distortion of competition in Hong Kong.
Substantial market power
Conduct can only be caught under the Second Conduct Rule where an undertaking holds ‘substantial market power’. The CO provides that an undertaking’s market power may be measured through, inter alia, its market share, its decision-making power relating to pricing and other decisions, and barriers to entry in a market. The CEDB Guidelines also emphasise that the Commission may take into account a variety of factors in determining market power, beyond market share. This is also the position under the TO and the BO, and their respective guidelines.
The CO does not provide a market share threshold at which an undertaking would be viewed as holding ‘substantial market power’ and it is expected that this issue may be addressed in the Commission Guidelines. Notably, the CEDB suggests that Hong Kong may adopt a relatively low safe harbour threshold of around 25 per cent, which would be significantly lower than the dominance thresholds in other jurisdictions such as the EU.
The CO does not exhaustively list the conduct that would constitute abusive behaviour but it does provide a partial list including: predatory behaviour, and; limiting production, markets or technical development to the prejudice of consumers. It is expected that prohibited conduct will be addressed in more detail in the Commission Guidelines. In the interim, the CEDB Guidelines note that the Commission and Tribunal may consider conduct such as tying and refusal to deal as abusive. Certainly, under the existing TO guidelines, refusal to deal is likely to amount to abuse.
Currently, there is no defence, such as ‘objective justification’, available under the CO. It remains to be seen whether this will be addressed in the Commission Guidelines.
Exclusions from the Second Conduct Rule
As with the First Conduct Rule, certain conduct may be excluded from the provisions of the Second Conduct Rule. This includes an exclusion for any business with a turnover of less than HK$40 million. Additionally, conduct that is necessary for compliance with legal requirements under Hong Kong law, and the performance of services of ‘general economic interest’, are not caught. Unlike the First Conduct Rule, there is no economic efficiency defence for contraventions of the Second Conduct Rule.
The Merger Rule
The CO prohibits direct and indirect mergers (meaning an acquisition, joint venture or change of control) involving telecommunications carrier licensees that have, or are likely to have, the effect of substantially lessening competition in Hong Kong.
Although the Merger Rule only applies to mergers in the telecommunications sector, the CEDB has previously stated its intention that the scope of the Merger Rule’s application should be reviewed, following the initial period of enforcement of the Ordinance.
Enforcement and adjudication
The Commission and the Tribunal
The CO provides for the establishment of the Competition Commission and the Competition Tribunal. The Commission does not have the power to levy fines or other punishments for breaches of the CO but may bring proceedings before the Tribunal, which is empowered to determine breaches of the CO and to impose sanctions. On 23 November 2012, the CEDB issued a commencement notice that provides for the establishment of the Commission on 18 January 2013, and for the establishment of the Tribunal on 1 August 2013.
The constitution of the members of the Commission will be an important development, as these individuals, particularly the chairperson, will set the priorities of the Commission with regard to enforcement.
Enforcement by the Commission
Applications to the Commission for a decision
Where an undertaking is unsure as to the legality of its conduct, it may apply to the Commission for a decision regarding a contemplated or existing agreement, merger or conduct. Although the Commission is under no obligation to provide a decision, where the case involves unsettled law, the Commission may decide to exempt certain conduct or agreements from the prohibitions contained in the Conduct Rules.
Complaints and investigations
The Commission has the power to hear complaints, regarding an alleged infringement of the CO, from any person, or, where the Commission ‘has reasonable cause’, it may instigate an investigation into an alleged contravention of a Competition Rule, on its own accord. The Commission has broad powers, including the power to require an undertaking to provide any documents or information pertinent to its investigation, including evidence in breach of confidentiality agreements. Upon obtaining a warrant from the Court of First Instance, the Commission may also conduct dawn raids and confiscate documents.
‘Warning’ notices, ‘Infringement’ notices, and proceedings before the Tribunal
If the Commission discovers anti-competitive conduct, it has a range of tools at its disposal. For non-serious violations of the First Conduct Rule, the Commission must issue a warning notice to the undertakings in question, prior to launching an action before the Tribunal.
Where the Commission suspects that an undertaking has conducted a serious infringement of the First Conduct Rule, or has violated the Second Conduct Rule, it may issue an infringement notice, offering not to bring proceedings before the Tribunal, in return for a commitment and/or an admission of the infringement. Alternatively, the Commission may proceed directly to bring proceedings before the Tribunal.
Where the Commission suspects a possible breach of the CO, it may require an undertaking to enter a commitment to alter its behaviour, and will, upon receipt of this commitment, not launch proceedings before the Tribunal.
The Commission can enter into leniency agreements with people and undertakings, as it sees fit, and may offer full or partial immunity to such people and undertakings.
Adjudication before the Tribunal
Scope of the Tribunal’s jurisdiction
The Tribunal will adjudicate in any proceedings brought before it by the Commission, is able to review certain determinations of the Commission, and will hear private follow-on actions. The Tribunal will not hear criminal proceedings in relation to contraventions of the CO.
Its role in reviewing determinations of the Commission includes reviewing ‘decisions’ of the Commission with regard to agreements or conduct that might be exempted from the Conduct Rules, block exemptions under the First Conduct Rule, and variations to or the rescission of commitments or leniency agreements by the Commission in relation to the Competition Rules.
An undertaking must apply for review by the Tribunal within 30 days of a determination, although the Tribunal may decide to extend this deadline. An application for review may not be made after three years have passed. The Tribunal may either confirm or set aside a determination of the Commission, and may refer it back to the Commission for reconsideration. Questions of the law, in relation to a decision of the Tribunal, can be appealed at the Court of Appeal.
For contravention of a Competition Rule
The Tribunal has a broad-range of sanctions available at its disposal to levy against undertakings that have contravened a Competition Rule. These include fines based on turnover, director disqualifications, and other behavioural and structural remedies.
In terms of turnover fines, where the Tribunal finds that an undertaking has contravened the Competition Rules, it may fine that undertaking up to 10 per cent of its Hong Kong turnover for up to three years in which the contravention occurred that saw the highest, second highest and third highest turnover.
Directors may be disqualified by the Tribunal for a period of up to three years, where their undertaking has been found to have contravened a Competition Rule and where the Tribunal is satisfied that they:
- contributed to the contravention of the rule;
- did not contribute to the contravention of the rule but had reasonable grounds to suspect the contravention and took no steps to prevent it; or
- did not know but ought to have known that the conduct of the undertaking constituted a contravention.
The Tribunal also has a wide range of discretionary powers to impose behavioural or structural remedies on undertakings that have contravened a Competition Rule, and is also able to impose costs orders against infringers for the Commission’s costs.
Various criminal sanctions are available to the Courts, but these are limited to situations where an undertaking or a person has not complied with an investigation into a breach of the Competition Rules or has actively obstructed such an investigation through evidence tampering.
Failure to comply with a Commission investigation may result in a fine of HK$200,000 or imprisonment of one year, for an indictable offence, or, where convicted on a summary basis, with a level 5 fine (currently HK$50,000) and six months’ imprisonment. More serious obstruction, such as the destruction or falsification of evidence, providing misleading evidence, or the obstruction of a dawn raid, may result in a fine of HK$1 million or imprisonment of two years, for an indictable offence; or, where convicted on a summary basis, with a level 6 fine (currently HK$100,000) and six months imprisonment.
While the CO is a welcome first step in bringing regulation of anti-competitive behaviour to Hong Kong, some commentators have challenged CO for not going far enough.
2013 will be a key year for both the regulators and businesses in preparing for the CO. The constitution of the Commission will be a key measure of its likely ability to enforce the Ordinance effectively, and it will be important that the members have sufficient expertise and political clout to successfully ensure adequate resourcing for the Commission.
In terms of enforcement priorities, it may be that, as has occurred in some other jurisdictions, consumer facing industries may face initial scrutiny, to ensure that the Commission attracts sufficient public attention to justify its resourcing and to raise awareness. It is also possible that resources will be directed towards ‘serious’ anti-competitive agreements, which may require fewer resources to pursue.
Companies with extensive business interests in Hong Kong would be well advised to commence their preparations for the CO now, including reviewing contracts and conduct for infringements that may fall into the ‘serious’ category under the First Conduct Rule. Companies would also be well advised to monitor developments at the Commission closely, particularly with regards to any public consultations around the Commission Guidelines, to ensure that they are able to tailor internal compliance programmes accordingly and can take the chance to participate in communicating their views to the Commission.
This article is an extract from The Asia-Pacific Antitrust Review 2013 - a Global Competition Review special report - www.GlobalCompetitionReview.com.