The new Hong Kong Competition Ordinance (the “Ordinance”) comes into force on 14 December.
The Ordinance largely mirrors major competition regimes around the world in regulating cartels and anti-competitive agreements, and abuse of substantial market power. Mergers are not regulated unless they involve telecoms or broadcasting businesses.
The Hong Kong Competition Commission (“HKCC”) will enforce the law and is expected to begin active enforcement from day one. The prohibitions apply to behaviour which affects competition in Hong Kong – the activity and/or parties need not be Hong Kong-based.
What does the Ordinance Cover?
The First Conduct Rule
The First Conduct Rule prohibits agreements, concerted practices and decisions of trade associations that have the object or effect of preventing, restricting or distorting competition in Hong Kong.
The Ordinance identifies four categories of so-called “serious anti-competitive” or cartel conduct: price fixing, bid rigging, market allocating and restricting output. Exchange of competitively sensitive information (e.g. forward pricing and strategy) will likely constitute “serious anti-competitive conduct” as well. The HKCC will – as with the EU and UK – take a hard line against Resale Price Maintenance(“RPM”), treating it generally as “serious anti-competitive conduct”.
Various other day-to-day commercial arrangements – including supply and distribution agreements, or commercial partnerships and joint development arrangements – can also raise competition issues under the Ordinance. While there is no definitive list of agreements that could breach the law, some agreements that may require closer examination include:
- exclusive distribution or purchasing agreements with customers and suppliers;
- restricting the freedom of distributors to sell products on their own terms;
- joint ventures or commercial partnerships, especially with competitors;
- exchanging commercial information, especially with competitors; and
- joint purchasing or joint bidding agreements.
The Second Conduct Rule
The Second Conduct Rule only applies to firms that have “substantial market power” – that is, the ability to price and act independently of competitors. Firms with substantial market power must not engage in conduct that has the object or effect of preventing, restricting or distorting competition in Hong Kong.
Market power may arise from superior efficiency and innovation, but it can also be a consequence of control over key assets or technology, such as an electricity transmission or telephone network, or even patents. For example, Qualcomm was fined close to US$1 billion in China earlier this year for abusing its dominant position through its patent licensing practices (see our blog post here Qualcomm Fined Record Amount in China).
Unlike many jurisdictions, Hong Kong does not have an indicative market share above which substantial market power may occur. Instead, it is necessary to examine competitive dynamics in the relevant market to identify potential abuse of substantial market power risk.
In practice, firms with any degree of market power should consider potential competition risk in their commercial decisions. Conduct that might be legal for non-dominant firms can be illegal when firms are dominant. Potential “red flags” include:
- exclusivity, rebate or equivalent provisions in supply or purchase contracts;
- predatory conduct – for example pricing below cost so as to eliminate a competitor;
- refusals to supply crucial inputs to downstream competitors; or
- tying or bundling of “dominant” and “non-dominant” products.
Who Enforces the Ordinance?
The HKCC will investigate suspected breaches and, where required, apply to the Competition Tribunal to impose penalties and/or other remedies. The HKCC has strong investigatory powers, including the ability to conduct “dawn raids” and compel production of documents and testimony.
The key spur for investigations is likely to be formal complaints, or confessions under the cartel leniency regime. Leniency allows cartelists who “blow the whistle” to benefit from immunity from fines in return for cooperating with the HKCC in breaking up the rest of the cartel (see our blog post on the HKCC draft policy here Hong Kong Cartel Leniency Policy. The final policy launched in November 2015).
The HKCC has indicated that it will focus particular effort on cartels and other agreements that cause significant harm to competition in Hong Kong, as well as abuses by dominant incumbent firms. In particular, the HKCC has made statements in relation to the oil and petrol markets, and has signalled its intent to tackle suspected bid rigging and information exchange in the real estate (particularly building management) and construction sectors.
What are the Consequences of Breaching the Ordinance?
If the Tribunal finds a breach, it can impose fines of up to 10% of a company (and its wider group) turnover, as well as ordering payment of damages and disqualification of directors. Competition authorities have a history of imposing significant fines for both cartel and abuse of market power cases. For example, Qualcomm was fined close to US$1 billion in China earlier this year for abusing its dominant position through its patent licensing practices (see our blog post here Qualcomm Fined Record Amount in China).
Third party victims can bring follow-on damages in court to claim compensation for losses caused by the illegal conduct. Leniency applicants are not immune from damages claims – leniency means no fine, but it does not mean no liability.
Mergers and joint ventures – what does the Ordinance not cover?
Only mergers involving telecoms and broadcasting businesses are covered by the Ordinance. This means that any joint venture activity which might qualify as a merger under competition rules in other jurisdictions will be assessed for compliance with the First and Second Conduct Rules in Hong Kong. Depending on the nature of the cooperation envisaged by the joint venture, this could raise potential ongoing compliance issues that businesses may not otherwise face. Certain SMEs will benefit from exemptions from the law.
Exemptions can be sought
The HKCC may issue block exemptions from the First Conduct Rule for specific agreements although no such exemptions have been issued to date. The shipping industry has lobbied hard for a block exemption, albeit without success thus far.
Businesses across sectors should ensure compliance with the Competition Ordinance. Robust internal compliance can also give confidence to deploy competition law arguments in commercial negotiations.