Key Points:

  • Proposed legislation aims to prohibit conduct and mergers that impede competition in Hong Kong
  • New independent statutory Competition Commission will have broad investigative powers
  • New rules expected to have more of an impact on local businesses not yet familiar with competition rules

Hong Kong’s Competition Bill (Bill) was published on 2 July 2010. The Bill was tabled in Hong Kong’s Legislative Council on 14 July 2010. When the Bill becomes law, it will be known as the Competition Ordinance (Ordinance).

The primary objectives of the Bill are twofold:  

  • To prohibit conduct that prevents, restricts or distorts competition in Hong Kong; and
  • To prohibit mergers that substantially lessen competition in Hong Kong.

The Bill also provides for the establishment of an independent statutory Competition Commission, which will be charged with investigating complaints, bringing public enforcement actions in respect of anticompetitive conduct and promoting public understanding on competition matters. The Competition Commission may also conduct market studies into matters affecting competition in Hong Kong, which could lead to calls for it to examine (and press the government to make changes to) arrangements such as the land sales system in Hong Kong.

The Bill prohibits three categories of conduct:

  • The First Conduct Rule prohibits undertakings (a broad term encapsulating any entity engaging in commercial or economic activities) from engaging in agreements, concerted practices or decisions with the object or effect of preventing, restricting or distorting competition in Hong Kong.
  • The Second Conduct Rule prohibits undertakings with a substantial degree of market power from abusing that power by engaging in conduct that has the object or effect of preventing, restricting or distorting competition in Hong Kong.
  • The Merger Rule prohibits undertakings from directly or indirectly carrying out a merger that has, or is likely to have, the effect of substantially lessening competition in Hong Kong. The Merger Rule will apply only to undertakings that are licensees in respect of the telecommunications industry. This is a continuation of the current merger regime applicable to telecommunications licensees in Hong Kong, although as the government has said, the Merger Rule has been “modernised.”1

The First Conduct Rule and the Second Conduct Rule are known collectively as the Conduct Rules. The First Conduct Rule, the Second Conduct Rule and the Merger Rule are collectively known as the Competition Rules.

Currently, the Merger Rule will apply only to telecommunications licensees until such time as thegovernment may determine that it is appropriate to broaden the scope of the prohibition.

Notwithstanding the sector-specific nature of the Merger Rule, it seems that M&A agreements in other sectors may also be challenged on the basis of the First Conduct Rule. In this context, many business operators who previously lobbied to have the Merger Rule confined to the telecommunications sector may in time come to support its cross-sector application, as this would provide clearer procedural mechanisms for obtaining advance approval and certainty for M&A deals and would potentially subject M&A agreements to a less-stringent competition test (determining whether such agreements substantially lessen competition) than the test applied under the First Conduct Rule (determining whether such agreements prevent, restrict or distort competition).  

The clauses that set out the two main Conduct Rules also include a non-exhaustive list of examples of the types of behavior that may breach the rules. For example, price-fixing and market-sharing are listed as examples of activities that may breach the First Conduct Rule, while predatory behavior towards competitors (which may in practice include such activities as below-cost predatory pricing) is listed as an example of an activity that may breach the Second Conduct Rule. Notably, while the government has previously indicated that only horizontal agreements (that is, agreements between competitors) may be targeted by the First Conduct Rule, and that is a focus of the examples provided, the relevant section of the Bill appears to be equally applicable to vertical agreements such as distribution or downstream supply agreements.

Enforcement  

The Commission will be vested with a full range of investigative powers including the power to require production of documents and information, the power to require persons to attend an interview before the Commission and the power to enter and search premises under a court warrant. The Commission may conduct an investigation only if it has reasonable cause to suspect that a contravention of a Competition Rule has taken place, is taking place or is about to take place. There are criminal penalties for noncompliance with the Commission’s investigative powers. In accordance with previous government statements, a judicial enforcement model is provided under the Bill. A Competition Tribunal will be established to hear and adjudicate on competition cases brought by the Competition Commission, and the Tribunal will be able to hear private actions, which can either follow a determination of the court or be standalone in nature.  

In addition:  

  • The Commission may accept commitments from a person to take any action, or refrain from taking any action, that the Commission considers appropriate to address its concerns about a possible contravention of a Competition Rule. If the Commission accepts a commitment, it may agree:
    • Not to commence an investigation or, if it has already commenced an investigation, to terminate it; or
    • Not to bring proceedings in the Tribunal or, if it has already brought proceedings, to terminate them2; and
  • The Commission may also enter into leniency agreements with individuals and corporations who have breached the Bill but wish to mitigate their penalties by cooperating with the Commission. The Commission cannot bring proceedings against a party that is the beneficiary of a leniency agreement (which could include employees of a company that has made a disclosure to the Commission).

Penalties

The Competition Tribunal is empowered to apply a full range of remedies for contravention of the Conduct Rules and Merger Rule, including pecuniary penalties not exceeding 10 percent of the total turnover (including global turnover) for the year(s) in which a contravention occurs, award of damages to aggrieved parties, interim injunction orders, and termination or variation of an agreement.

Private Rights of Action

The Bill provides for 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 be brought by a private party, following a Tribunal determination (i.e., a follow-on action); or
  • Could be brought independently of a Tribunal determination by a private party (i.e., a standalone action).

In relation to follow-on actions, private parties do not need to prove that the breach of the Conduct Rule occurred, merely that they have suffered loss or damage as a result of the contravention of the Conduct Rule. In relation to standalone actions, private parties would need to prove that the contravention of the Conduct Rule occurred before any loss or damage assessment could be undertaken.

Exclusions and Exemptions

Various exclusions and exemptions are provided for in the Bill.

For example, the Commission can decide whether to grant immunity from the Conduct Rules to an agreement or conduct that, in its opinion, enhances economic efficiency (and satisfies related criteria set out in the Bill), is performed by an undertaking entrusted with the operation of services of general economic interest, or is made in compliance with a legal requirement. The Chief Executive in Council can also make exceptions if there are compelling reasons of public policy to do so.

Additionally, the Bill will not apply to the government or statutory bodies unless such bodies (or certain of their activities) are specified in relevant regulation(s) that may be made by the Chief Executive in Council. This is a departure from previous government indications that certain statutory bodies that will be subject to the law would be listed in a schedule to the Bill, and indicates that the government’s protracted review of this issue is continuing.

Conclusion

The Bill is in many respects in line with international practice. It discusses the introduction of a cross-sector competition law prohibiting undertakings from participating in restrictive agreements or abusing their market power. However, the Bill also displays some unique features. The proposed merger control regime would apply only to the telecommunications sector. Also, statutory bodies would be exempt from the application of the competition law altogether unless subordinate legislation provides otherwise. Finally, the proposed sanctions for infringements appear to be more stringent than those found in most other jurisdictions. Directors and senior managers can face disqualification orders. In addition, under the draft Bill, fines can be imposed on any person, including natural persons, involved in a competition law infringement.

When adopted, the Competition Ordinance will require certain companies to change their market conduct. However, many multinational businesses already have experience complying with foreign competition laws. The Ordinance is therefore likely to have more of an impact on local businesses that are not yet familiar with competition rules.

One important change the Competition Bill might bring about, if enacted in its current form, relates to the type of protection senior management and board members will want to negotiate to limit their personal exposure to the far-reaching financial penalties the Bill contemplates for any person directly or indirectly involved in a competition law infringement.

The Bill will be discussed in the Legislative Council in September and is likely to pass into law in early to mid-2011. It will then go into effect on a date appointed by the Secretary for Commerce and Economic Development. The substantive provisions are not expected to go into effect before 2012.

For now, much of the public debate concerning the Bill is likely to focus on its broad range of exclusions and exemptions. Detailed discussion on the appropriate scope of the Conduct Rules, and where the Competition Commission’s enforcement priorities should lie in respect of such rules, may have to wait until the Commission begins work on guidelines related to these matters. The government has previously committed to ensuring that a public consultation process is held in relation to the development of such guidelines.