The Hong Kong Government has announced a package of proposed amendments to the Competition Bill (Bill) to address concerns from the business community, especially SMEs.  The Secretary for Commerce and Economic Development Greg So will brief the Legislative Council (LegCo) Competition Bill Committee (Bills Committee) on the amendments next Tuesday, 25 October 2011.

The proposed amendments are timely, as LegCo will need to vote on the Bill before the mid-2012, when the current legislative session is scheduled to end and the Bill will lapse. 

Summary of the six amendments proposed

  • Reduction of the proposed maximum penalty from 10% of global turnover of every year of contravention to 10% of the local turnover for each year of infringement, up to a maximum of three years;
  • Introduction of a 'warning notice' for non-hardcore activities/conduct;
  • Removal of the ability of the future Competition Commission (Commission) to impose a payment requirement when issuing infringement notices;
  • Introduction of a de minimis framework in the Bill;
  • Removal of the stand-alone right of private action; and
  • Introduction of a new provision explicitly excluding merger activities from the application of the First Conduct Rule1 and the Second Conduct Rule2.

Reduction of the proposed penalty cap

Of most significance is the proposed amendment to the cap on pecuniary penalties.  Since the Bill was tabled in LegCo on 14 July 2010, the proposed cap on pecuniary penalties has been widely criticised by both LegCo Members and the business sector as being disproportionately severe in comparison to the European Union (EU), United Kingdom (UK) and Singapore. 

The Government's proposal reduces the maximum penalty – from 10% of global turnover of every year of contravention to 10% of the local turnover for each year of infringement, up to a maximum of three years.  Where an infringement lasts for more than three years, the three years of infringement with the highest turnover will be chosen.

Introduction of a warning notice for non-hardcore activities

In response to concerns that the general prohibition against anti-competitive agreements (i.e., the First Conduct Rule) would be too difficult for SMEs to understand and comply with, the Government proposes to distinguish between hardcore activities (to be defined as 'serious anti-competitive conduct') and non-hardcore activities.

Where an undertaking's conduct contravenes the First Conduct Rule but does not constitute a hardcore activity, the Commission must issue a 'warning notice' to the concerned undertaking prior to bringing proceedings in the Competition Tribunal (Tribunal).  The warning notice would describe the contravening conduct and identify the evidence that the Commission relies on in support of its allegations.  The warning notice will require the undertaking to cease the contravening conduct within the prescribed 'warning period' and will indicate the manner in which the contravening undertaking may cease the contravening conduct.  The undertaking could offer a commitment to address the Commission's concerns.3

During the warning period (the length of which is determined by the Commission), the Commission cannot take enforcement action against the undertaking.  However, at any time after the expiry of the warning period, if the Commission has reasonable cause to believe that the contravening conduct is still ongoing or repeated, it may institute proceedings in the Tribunal.

In its Discussion Paper, the Government has indicated that it 'will review this differential treatment of hardcore and non-hardcore activities as we gain more experience in enforcing the new competition law in Hong Kong.'4

Removal of payment requirement in infringement notices

The existing Bill currently provides that an infringement notice would describe the alleged infringing conduct, the evidence on which the Commission has formed its view and the terms in which the Commission would be prepared to settle the matter, including the payment of a specified sum not exceeding HK$10 million (approximately US$1.3 million). 

Members and the business sector have been critical of the Commission's ability to specify the payment of a sum noting that it placed unreasonable burden on SMEs and would not act as a real deterrent for larger undertakings.  In light of the concerns raised, the Government proposes to remove the ability of the Commission to impose a payment requirement when issuing infringement notices.

The proposed amendment reduces the enforcement options available to the Commission.  Moreover, following amendment, infringement notices will resemble and have a similar effect as warning notices. 

Introduction of de minimis arrangements

It had been the Government's intention that the Commission draw up guidelines on de minimis arrangements which would generally not be treated as breaching the conduct rules, as is the case in the EU and Singapore. 

However, in response to concerns raised by Members and sectors of the Hong Kong business community, the Government proposes to provide for a de minimis framework in Schedule 1 to the Bill in the form of an exclusion from the First Conduct Rule. This will allow undertakings to self-assess their agreements.

Under the Government's proposal, all agreements between undertakings with a combined turnover not exceeding HK$100 million in the preceding financial year will be excluded from the application of the First Conduct Rule.5  In its Discussion Paper, the Government notes that this threshold can be amended when circumstances change.6  Consistent with other competition law jurisdictions, there is a carve-out for hardcore activities (i.e., the exclusion will not apply to agreements involving price-fixing, bid-rigging, market allocation and output control). 

Importantly for associations, the Government has stated that insofar as a decision of an association of undertakings is concerned, the de minimis arrangements will only apply if the aggregate turnover of the undertakings that are members of the association does not exceed HK$100 million. 

A similar approach to de minimis arrangements is proposed for the Second Conduct Rule. The Government's proposal provides that conduct of an undertaking the turnover of which does not exceed HK$11 million will be excluded from the Second Conduct Rule.7

Removal of stand-alone right of private action

The Government's package includes a proposal to remove the stand-alone right of private action currently provided for in Part 7 of the Bill.  In light of the concerns voiced by the SMEs,8 the Government is of the view that a gradual approach to private rights of action is more appropriate for Hong Kong.  Initially, enforcement will be carried out by the Commission, supplemented by the follow-on private right of action (i.e. damages and other remedies) for determined contraventions.

Accordingly, private actions to be brought by persons who have suffered loss or damage as a result of a contravention of the First and Second Conduct Rules can only be brought by a private party, following on from a Tribunal determination and not independently of a Tribunal determination. 

The Government has indicated that it will review the situation once the business community in Hong Kong is more familiar with the competition regime.

Merger rule

The merger rule contained in the Bill will only apply to undertakings that are licensees in respect of the telecommunications industry.  This is a continuation of the current merger regime applicable to telecommunication licensees in Hong Kong. 

To alleviate concerns raised by Members and the business community that the First and Second Conduct Rules as currently drafted could potentially catch merger activities, the Government proposes to insert a provision explicitly excluding merger activities from the application of the First and Second Conduct Rules.  This proposed amendment clarifies the Government's policy intention that the Bill will not regulate merger activities beyond licensees in the telecommunications industry. 

Conclusion

The Competition Bill has been the subject of intense debate in Hong Kong – and some of the concerns about the impacts of competition law seem overstated given the experience in other comparable jurisdictions.  While the Government's concessions are substantial, the core of the Competition Bill remains.  The proposed amendments for the most part put in statutory form the working approach which an appropriately restrained competition authority would take in practice to enforcement.