Has it been worth the wait?
As companies started to become larger and more powerful in the twentieth century, the concern they would band together to raise prices and exert market influence gave rise to competition laws, first in the USA (where they are usually called anti-trust laws) and then in Europe. By 2008, 111 nations had enacted competition laws; but Hong Kong, with its traditional laissez-faire economy, was not one of them.
With the enactment of the Competition Ordinance (the Ordinance) on 22 June 2012, the long wait for a competition law in Hong Kong has ended. The Ordinance is designed to ensure that Hong Kong remains a competitive, fair and free market by prohibiting anti-competitive arrangements and misuse of market power.
The Ordinance will be phased in over the next 12 to 18 months. During this time, the Government will put in place the regulatory structures to administer the Ordinance and businesses will have an opportunity to ensure their practices comply with the new requirements.
The Ordinance contains the following key provisions:
- a prohibition against anti-competitive agreements, practices or decisions;
- a prohibition against the abuse of market power to prevent or restrict competition;
- exceptions for statutory bodies, small- and medium-sized enterprises and for certain types of agreements;
- the establishment of a Competition Commission with power to issue guidelines on the Ordinance, investigate suspected anti-competitive conduct and issue infringement notices;
- the establishment of a Competition Tribunal to hear and adjudicate cases brought by the Commission; and
- pecuniary penalties and other enforcement mechanisms for breaches of the Ordinance.
The Ordinance prohibits two kinds of anti-competitive conduct:
- anti-competitive agreements, practices or decisions (known as the “first conduct rule”); and
- the abuse of market power to prevent or restrict competition (the “second conduct rule”).
First conduct rule: Anti-competitive agreements, practices and decisions
The first conduct rule states that an entity or person must not make or give effect to an agreement, engage in a concerted practice or, as a member of an association, make or give effect to a decision of that association, the object or effect of which is to prevent, restrict or distort competition in Hong Kong.
The first conduct rule differentiates between two classes of anti-competitive activities:
- “serious anti-competitive conduct”, which is defined as price-fixing, bid-rigging, market allocation and output control; and
- other conduct, which includes restrictions on advertising, collective refusal to supply and the development of standardisation agreements.
The Commission will have comprehensive enforcement options (including pecuniary penalties, injunctions and damages) to deal with “serious anti-competitive conduct”. For other conduct, the Ordinance includes a ‘warning mechanism’ whereby a notice may be issued to an entity or person engaging in other conduct before any further action is taken.
Second conduct rule: substantial abuse of market power
Under the second conduct rule, an entity or person that has a substantial degree of market power in a market must not abuse that power by engaging in conduct that has the object or effect of preventing, restricting or distorting competition in Hong Kong. This conduct could include predatory behaviour towards competitors or limiting production, markets or technical developments to the prejudice of consumers.
While the Ordinance does contain a rule in relation to mergers, this only applies in relation to the telecommunications industry and is substantially similar to the requirements for the merger of telecommunications licensees already set out in the Telecommunications Ordinance.
Exclusions and exemptions
While the prohibitions an anti-competitive behavior are broadly drafted, there are a number of exemptions. These include exemptions for:
- agreements which: contribute to economic efficiency while allowing consumers a fair share of the resulting benefit; do not impose unnecessary restrictions; and do not eliminate competition for the relevant goods and services;
- agreements which are made or conduct which is undertaken for the purpose of complying with a Hong Kong legal requirement;
- agreements between, or conduct by, small- and medium-sized enterprises (based on the worldwide turnover for the preceding financial year); and
- statutory entities.
The Competition Commission can also issue “block exemptions”, exempting an entire category of agreements or conduct from the first or second conduct rules, while the Chief Executive can specify classes of agreements as exempt on public policy grounds, although this later exemption is likely to be rare.
An entity may apply to the Competition Commission for a decision as to whether an agreement or conduct falls under any of the above exemptions. If the Commission decides that the agreement or conduct is exempt, the entity will be immune from prosecution under the Ordinance in relation to that agreement or conduct.
The penalties for breach of the Ordinance are potentially severe. The maximum pecuniary penalty which the Competition Tribunal may impose is 10% of the entities’ Hong Kong turnover for each year of the contravention, up to a maximum of three years. It can also disqualify a director of a breaching company for up to five years. Persons affected by anti-competitive conduct may also bring actions for damages following an infringement finding.
The Ordinance was always going to have to balance competing interests; promoting enhanced efficiency and free flow of goods through competition, protecting consumer interests and ensuring that businesses (particular SME’s) are not disadvantaged by a lack of certainty, insufficient knowledge of the key requirements and by unduly high penalties.
In our view the Ordinance achieves the right balance. It does so by adopting the international general ‘prohibition’ approach used in jurisdictions such as the European Union, the United Kingdom and Singapore. This means that rather than strict penalties and minimal deterrents being imposed on anti-competitive activities (as is the case in Canada) the Competition Commission and Competition Tribunal will have a full range of enforcement options and penalties to deal with serious and non-serious anti-competitive activities on a case by case basis.
One further point to note is that while the prohibitions in the Ordinance are primarily intended to catch practices that are anti-competitive, they are broadly drafted. They might then catch business practices which are not traditionally thought of as unfair. An example would be insurers who are part of a trade association or industry representative organisations; while the association itself is not anti-competitive, decisions of the association which may have the effect of preventing, restricting or distorting competition in Hong Kong might be anti-competitive.
What should you do now?
While there will be a transitional period, it is important for all businesses in Hong Kong to take steps now to ensure they are compliant when the Ordinance becomes effective. We are advising clients to:
- track the establishment of the Competition Commission and the Competition Tribunal (which should happen soon) and note what they say about how they propose to enforce the Ordinance and the industries which are likely targets for enforcement action;
review their business practices to determine whether any may be in breach of the Ordinance and in particular whether they:
- have substantial power in a market;
- have agreements or arrangements in place with competitors;
- start to prepare the necessary training and compliance procedures for employees to ensure they are aware of the new rules and any changes in business practices which may be required.