After years of legislative debates and trimming drafts of the Competition Bill to address objections from different interest groups, the Hong Kong Competition Ordinance (the Ordinance) was finally enacted on 14 June 2012. The passage of the Bill was made possible by a final round of concessions to allay fears from Hong Kong’s small-and-medium enterprises (SMEs), by providing for a de minimis protection for businesses with a combined annual turnover of less than HK$200 million and by cushioning the enforcement rigour for less serious violations.
The Ordinance will prohibit anti-competitive agreements and abuses of dominance which have an effect in Hong Kong. It does not introduce general merger control.
It is anticipated that the Ordinance will come into effect in 2014.
What does this new law mean for doing business in Hong Kong?
As a major trading and finance hub, contracts and deals are made around-the-clock in Hong Kong. Entrenched business practices and common contractual clauses will need to be reviewed to ensure that they do not breach the new competition law regime. The Ordinance provides for fines up to 10% of Hong Kong turnover for each year of the infringement, up to a maximum of three years. Directors risk disqualification for up to 5 years. Criminal fines can also be levied for obstructing enforcement.
Even if the parties, agreement or conduct are based, signed or agreed outside of Hong Kong, so long as there is an anticompetitive effect in Hong Kong, the parties, agreements or conduct can be investigated.
More significantly, as Hong Kong is a gateway for the flow of goods in to and out of China and the economies are so intertwined, an anti-competitive contract can be found to have effects in both Hong Kong and China.
What does the new law regulate?
- Anti-competitive agreements – Dealings between competitors or potential competitors
The Ordinance prohibits any kind of agreements or dealings which negatively affect competition in Hong Kong. It applies to formal agreements, and also to any understanding, arrangement or other conduct.
Such anti-competitive activities are divided into two groups;
- The First Conduct Rule: including price fixing, bid rigging, market sharing and output restriction. These constitute “hardcore” violations.
- The Second Conduct Rule: includes other anti-competitive agreements. These violations will be subject to a warning prior to prosecution. It is less clear what kind of behaviour will be caught under this group. But following international precedent it is likely that a wide range of behaviour will be covered, including joint purchasing and selling agreements, exclusivity arrangements, territorial restrictions, participations in trade association activities and improper information exchange.
- Anti-competitive agreements – Distributors and other vertical relationships
Business practices involving distributors, agents and suppliers can also be challenged if there is an anti-competitive effect. Compared to the treatment of “hardcore” violations, the treatment of vertical relationships is less clear with regards to supplies upstream or with sales and distribution channels. In particular, it remains to be seen whether “price-fixing”, which is a “hardcore” violation sanctionable without warning, will be prohibited in the vertical context. Although not explicitly stated, it is likely that such practices, known as resale price maintenance, will be caught. Therefore, a supplier will not be allowed to prescribe the price at which its distributors, wholesalers and others can resell the goods.
- Unilateral Conduct
Companies with a “substantial degree of market power” are barred from abusing their power to prevent, restrict or distort competition in Hong Kong. What exactly constitutes a substantial degree of market power has not been defined. Other jurisdictions, including China, apply quantitative presumptions: for example, a company with a market share exceeding 50% would be deemed to be dominant. “Safe harbours” are provided in some jurisdictions, so for example in China a supplier with less than 10% of market share could come within a statutory exception.
What exactly will constitute an abuse of power is also left fairly open. The Ordinance identifies predatory pricing and production quotas that “limit production, markets or technical development to the prejudice of the consumer”. However, as in other jurisdictions, there may potentially be a wide range of other behaviour that could fall within this section, including discriminatory and fidelity pricing, exclusive dealing, bundling and tying and refusals to supply. Taking an example from China, the antitrust enforcement agency recently designated anti-competitive loyalty rebates, a practice for which Intel was fined €1 billion by the European Commission in 2009, as a form of abusive conduct.
Investigation powers and private action
The investigative and adjucative functions are separate. The investigative power will be vested with a new and independent Competition Commission, which will be able to issue warning and infringement notices, initiate investigations and enter and end legally binding commitments or leniency agreements.
A Competition Tribunal will be established which will be able to review any decisions and commitments made by the Competition Commission and levy fines. It may also make a number of orders against the party found to be in violation, including appointing a third party to take control of property, striking down conditions attached to contracts and prohibiting voting rights attached to shares.
Under the penultimate draft of the Bill it was possible for an aggrieved person to initiate litigation against someone displaying anti-competitive conduct. However, in the Ordinance as enacted this right of private litigation has been removed and it is now only possible to initiate private litigation either after an entity has admitted a violation of a Conduct Rule, or if an entity has been deemed to have violated a Conduct Rule by the Competition Tribunal, the Court of Appeal or the Court of Final Appeal.
As a Hong Kong based company, or a company doing business in Hong Kong, what should you do? And what can we do to help you?
You should review and consider your contacts and business practices to ensure that they are compliant prior to the coming into force of the Ordinance.
There will be a transitional period before the Ordinance comes into effect, giving companies slightly more than a year to prepare and ensure compliance. Our experienced competition team can help review your existing business practices and contracts to assess the risk of non-compliance and carry out antitrust audits. We can assist in implementing new structures that will ensure compliance and mitigate risk.
Companies should also carry out an analysis to determine whether they have “market power” and are thus vulnerable to being challenged under the Second Conduct Rule. We can also assist with this.
In addition, because most businesses and trading in Hong Kong are China-related, competition law compliance and audit should cover both jurisdictions to avoid triggering infringements in either or both legal systems. A holistic approach is recommended.
In due course after the Ordinance has come into effect, our experienced litigation team can represent your company in bringing or defending proceedings before the competition authorities.