14 June, 2012
On 14 June 2012 the Legislative Council (“LegCo“) finally passed the controversial Competition Bill (the “Bill“), which introduces a cross-sector competition law regime in Hong Kong. Agreements, concerted practices and decisions that have the object or effect of preventing, restricting or distorting competition in Hong Kong will be prohibited and businesses with “a substantive degree of market power” may have their conduct curtailed if this amounts to an “abuse of power”. These rules will apply so long as the agreement or the conduct has an object or effect of preventing, restricting or distorting competition in Hong Kong, regardless whether the relevant party is in Hong Kong and whether the agreement or conduct actually takes place in Hong Kong.
The Government intends to implement the Competition Ordinance (the “Ordinance“) in phases to provide for a transitional period of at least a year. By way of analogy, the UK’s Competition Act which introduced sweeping reforms to the UK anti-trust landscape provided for a transitional period of two years. Companies are advised to familiarise themselves with, and prepare for, the new legal requirements during this period.
The new Ordinance has many similarities to the EU and, in particular, the UK anti-trust regimes. The key features of the Ordinance are:
- a cross-sector rule prohibiting anti-competitive agreements and other arrangements between undertakings (the “First Conduct Rule”);
- a cross-sector rule prohibiting abuse of market power by undertakings with a substantial degree of market power (likely to be a 25% market share (see further below)) (the “Second Conduct Rule”);
- merger control, currently restricted to the telecommunications sector;
- de minimis exemptions are available – agreements between undertakings with a combined worldwide annual turnover of HK$200 million or less are exempted from the First Conduct Rule (see further below) and undertakings with a worldwide annual turnover of HK$40 million or less are exempted from the Second Conduct Rule;
- exemption for almost all of Hong Kong’s 581 statutory bodies, including the Hong Kong Trade Development Council;
- a new Competition Commission (the “Commission”) will be established and will have investigative powers and power to bring proceedings before the newly established Competition Tribunal (the “Tribunal”), composed of judges of the Court of First Instance;
- sanctions include pecuniary penalties of up to 10% of the local turnover for each year of the violation up to three years, damages, interim injunctions and director disqualification orders; and
- private actions following on from a determination by the courts or an admission of contravention by an undertaking are available.
First Conduct Rule
The First Conduct Rule prohibits agreements, concerted practices, or the making of or giving effect to decisions of an association (collectively “arrangements”) that have the object or effect of preventing, restricting or distorting competition in Hong Kong.
The Government has clarified that “object” refers to the objective purpose considered in the economic context of the arrangement at issue, and does not mean the subjective intention of the parties.
The Ordinance distinguishes “hardcore violations” of the First Conduct Rule, namely price fixing, market allocation, output control and bid-rigging, from other “non-hardcore violations”. For “non-hardcore violations”, the Commission is required to issue a “warning notice” to the relevant undertakings requiring them to cease and not to repeat the contravening conduct within the “warning period”. If the notice is not complied with, the Commission may bring proceedings in the Tribunal against the undertaking. For “hardcore violations”, the Commission can bring proceedings in front of the Tribunal without issuing the “warning notice”.
Second Conduct Rule
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.
Although the government had decided not to define “substantial degree of market power” in the Ordinance, the Secretary for Commerce and Economic Development set out in his speech at the LegCo that an undertaking with a market share of 25% or below would be considered unlikely to possess a substantial degree of market power. The Ordinance also contains a list of factors that may be considered when determining the market power of an undertaking.
The merger rule prohibits certain mergers relating to licensees under the Telecommunications Ordinance, where they have or are likely to have the effect of substantially lessening competition in Hong Kong. To give effect to the government’s intention of not introducing a cross-sector merger regulation at this stage, the Ordinance contains a section expressly excluding mergers from the application of the two conduct rules.
The Government has indicated that it will consider introducing a cross-sector merger control regime after it has accumulated experience in competition law. The merger rule as presently drafted could be readily adapted for cross-sector application.
Application, exclusions and exemptions
The Ordinance applies to “undertakings” which are entities engaged in economic activities, regardless of their legal status and method of financing, and includes natural persons engaged in economic activities.
Despite its apparent broad application, the Ordinance also provides a wide range of exemptions and exclusions. Below is a summary of the key relevant provisions.
- Persons exempt from the application of the Ordinance include:
- as regards the main substantive provisions of the Ordinance (including the two Conduct Rules and the merger rule), statutory bodies other than those specified in a regulation by the Chief Executive (“CE”) in Council;
- as regards the main substantive provisions of the Ordinance (including the two Conduct Rules and the merger rule), persons/activities specified in a regulation by the CE in Council;
- as regards the two Conduct Rules, undertakings entrusted by government with the operation of services of general economic interest in so far as the Conduct Rule would obstruct the performance of the particular tasks assigned to it; and
- as regards the Second Conduct Rule, any undertaking whose worldwide annual turnover does not exceed HK$40 million for the turnover period.
- Arrangements or conduct exempted from both Conduct Rules include:
- agreements or conduct to the extent it is made to comply with any legal requirement; and
- agreements or conduct that are exempted by an order published in the Gazette by the CE in Council either on public policy grounds or to avoid conflict with international obligations.
- Arrangements exempted from the First Conduct Rule:
- agreements enhancing economic efficiency;
- arrangements between undertakings whose combined annual worldwide turnover for the turnover period does not exceed HK$200 million (except where the arrangement amounts to a “hardcore violation”); and
- categories of agreements in respect of which the Commission has granted block order exemptions.
One of the most controversial aspects of the Bill was the exemption of statutory bodies. In response to the LegCo’s request, the Government prepared a proposed list of non-exempted statutory bodies which comprised only six (out of 581) of such bodies. The government’s rationale was that most statutory bodies engaged in little or no economic activities and some of them engaged in economic activities that were directly related to the provision of essential public services or the implementation of government policy.
The Government’s proposed list does not form part of the Ordinance but it is likely that the CE in Council will follow the list when drawing up the relevant regulation. Opinions of members of the public and the LegCo were divided on the topic. Despite various suggested amendments in relation to the issue proposed by some LegCo members, the provision was passed in its original form.
Investigation & Enforcement
The Commission, consisting of five to16 members, would be vested with investigatory powers including the power to require the production of documents and information and attendance before it to give evidence and the power to enter and search premises and to seize and retain evidence and property under a court warrant. Non-compliance with the Commission’s powers in the absence of a reasonable excuse would be an offence.
The Commission would also be vested with certain enforcement powers. It would be able to:
- accept commitments from undertakings to take or refrain from taking any action in exchange for the Commission’s agreement not to commence an investigation or bring proceedings or to terminate them;
- issue “infringement notices” against undertakings in respect of a “hardcore violation” of the First Conduct Rule and any violation of the Second Conduct Rule, offering not to bring proceedings if the undertaking makes a commitment to comply with the requirements in the notice including refraining from the specified conduct and admitting to the contravention;
- enter into leniency agreements in exchange for a person’s cooperation in investigations or proceedings; and
- bring proceedings before the Tribunal, either on receipt of complaints, on its own initiative, or on referral from the government or a court.
The Tribunal would be established as a superior court of record to adjudicate competition cases brought by the Commission, private actions and reviews of determination of the Commission. Its decisions are reviewable by way of appeal to the Court of Appeal.
To reconcile the new law with the existing competition regulatory framework in the broadcasting and telecommunications sectors, the Communications Authority would have concurrent jurisdiction with the Commission in respect of the investigation and bringing of proceedings in those two sectors, while its existing adjudicative function would be transferred to the Tribunal.
The Bill provided for private actions to be brought by persons who have suffered loss or damage as a result of a contravention of a conduct rule. Under the Bill, such actions could either be (i) “follow-on actions”, deriving from a determination by the Tribunal or the higher courts that a conduct rule has been contravened, or an admission of contravention by the infringer in a commitment, or (ii) “stand-alone actions”.
The option of stand-alone actions was eventually removed from the Ordinance. However, according to the government, at any time before or after a determination of contravention of a conduct rule, a private party may bring an action based purely on common law causes of action (i.e. independently of the Ordinance), even if the facts of the claim may support a finding of contravention of a conduct rule, so long as the contravention is not pleaded as a cause of action in such claim.
A full range of remedies is available to the Tribunal. These include a maximum pecuniary penalty of 10% of the local turnover of the infringing undertaking for each year of infringement (up to a maximum of three years), damages which may be awarded (on the Tribunal’s own initiative or on application) to any aggrieved persons, an order to unwind a transaction, interim injunctions and director disqualification orders of a maximum of five years.
After an inordinately long gestation period, it is now clear that many Hong Kong businesses will be subject to competition laws similar to those of many jurisdictions throughout the world. It is therefore incumbent on companies to review their current and proposed arrangements and to get their house in order during the transitional period: as noted above, the transitional period could be as short as a year. If the UK experience is anything to go by, there are many issues which will need to be resolved during the early years of the Ordinance including, for instance, the impact of conduct undertaken during the transitional period. However, as a first step, particular attention should be paid to any potential hardcore violations, arrangements with competitors (such as exchange of price information) and involvement in trade associations.
As to the unilateral conduct of companies, given that Hong Kong is a small economy with a high degree of economic concentration in some sectors, companies with a high market share in a sector would do well to review their practices to avoid any allegations of abuses of market power.
Companies which work closely with statutory bodies should also be aware that they are still subject to the substantive provisions of the Ordinance.
A robust compliance programme, and adequate training of business staff, will be essential to prevent any inadvertent and potentially very costly breaches of the Ordinance
For further information, please contact:
Mark Johnson, Partner, Herbert Smith
Gavin Lewis, Partner, Herbert Smith
Gareth Thomas, Partner, Herbert Smith
Mark Jephcott, Partner, Herbert Smith
Peggy Leung, Herbert Smith