Today Hong Kong’s first cross-sector substantive competition law regime was published in the official gazette, bringing with it a new regulator ready to change business practices in the Asian region, and armed with extensive enforcement powers, including the ability to conduct dawn raids and levy significant fines for anti-competitive conduct once the changes come into force.
The Competition Ordinance will prohibit cartel conduct, abuses of market power and other forms of anti-competitive conduct, subject to the availability of a number of exemptions, including exemptions based on efficiencies, Block Exemptions and minimum turnover. Merger control will continue to be limited to the telecommunications sector.
The Hong Kong Competition Commission will have a range of investigatory and enforcement powers, including the ability to issue Infringement Notices, to accept commitments, to confer immunity on whistle blowers and to commence litigation for penalties and issue orders banning individuals from holding management positions.
In this alert, we explain the potential impact of the key provisions of the Competition Ordinance, suggest preparatory steps for businesses that will be subject to the new laws, and outline the investigatory and enforcement powers of the new Hong Kong Competition Commission.
The new regime
After several years of discussion and debate, the Legislative Council has passed into law the Competition Ordinance, Hong Kong’s first substantive competition law regime. The passage of the Competition Ordinance has been a long journey, beginning with public consultation rounds in 2006 and 2008, and followed by the introduction of the Competition Bill to the Legislative Council in July 2010. Since then, the Bills Committee has met to consider the draft legislation on no less than 37 different occasions. Please refer to past KWM alerts for background information by clicking here and here.
On the last occasion, in April 2012, the Government moved to amend key provisions of the Bill in response to ongoing lobbying by the business community. Substantial concessions were made by the Government, including:
- Adoption of a minimum market share threshold of 25% with respect to the application of the Second Conduct Rule: below this threshold, an undertaking will be considered unlikely to possess substantial market power; and
- Changes to the de minimis threshold for both the First and Second Conduct Rules: with the exception of serious anti-competitive conduct, the First Conduct Rule will not apply to undertakings whose turnover is less than HK$200 million. The Second Conduct Rule will not apply to undertakings whose turnover is less than HK$40 million.
Notwithstanding these concessions, the Competition Ordinance will result in a significant change to the commercial and economic life of Hong Kong and will require businesses to pro-actively review their practices to ensure they will not result in breaches of the Ordinance.
First Conduct Rule
The first Conduct Rule will apply to competitors who enter into an agreement, or who engage in a concerted practice, that has the object or effect or preventing, restricting or distorting competition in Hong Kong.
In contrast, “agreements of lesser significance”, whether between competitors or between suppliers and customers or distributors whose turnover will be less than $HK200 million will be subject to a different regime. Agreements of lesser significance will also likely benefit from the application of any Block Exemption Notices issued by the HKCC. This is reflects the fact that these kinds of commercial arrangements are much less likely to result in harm to competition in Hong Kong. The following table details how the First Conduct Rule will apply.
First Conduct Rule - Serious Anticompetitive Conduct
This refers to the most egregious forms of anti-competitive conduct:
- price-fixing
- market sharing
- output restrictions
- bid-rigging
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The rule will only apply to agreements or concerted practices that involve competitors.
There will be no warning notice issued by the HKCC prior to prosecution.
However, in appropriate circumstances the HKCC may issue Infringement Notices, which will provide an opportunity for the recipients of the Notice to negotiate with the HKCC and offer a commitment to stop or remedy the offending practice. |
This is likely to be a key focus of the HKCC’s enforcement efforts. We expect the majority of enforcement actions to be in this category.
There is likely to be a particular focus on bid rigging – regulators across Asia are increasingly targeting this type of conduct.
There is no exemption from prosecution for SMEs.
Statutory bodies will be exempt.
Currently it is unclear in what circumstances the HKCC will opt to prosecute or use Infringement Notices for serious anticompetitive conduct.
Businesses should assess the risk that a one of their competitors could notify the HKCC seeking immunity for its conduct, leaving other firms vulnerable to enforcement action by the HKCC. |
First Conduct Rule - Other Agreements - Horizontal and Vertical
Examples of horizontal conduct are:
- joint ventures
- R&D arrangements
- joint procurement
- commercialisation agreements
- joint standard-setting
Examples of vertical conduct are:
- exclusive dealing
- tying and bundling
- franchise agreements
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This refers to “non-hardcore” arrangements between competitors, as well as arrangements between firms at different functional levels of the market.
HKCC will issue a warning notice in the first instance of contravening conduct.
Resale price maintenance: is not listed as serious anticompetitive conduct, although it is strictly prohibited in many other countries. Query how resale price will be treated by the HKCC. |
There will be an automatic exemption for SMEs with annual turnover < $HK 200 million.
Statutory bodies will also be exempt.
We expect the HKCC to issue Block Exemptions that will have the effect of shielding “non-hardcore” arrangements from prosecution under the new laws. Businesses may wish to make submissions to the HKCC about the scope of any Block Exemptions.
If no Block Exemption or other automatic exemption applies, participants in “non-hardcore” arrangements may be able to obtain the benefit of an exemption based on public policy grounds, which may be granted by the Chief Executive of the HKCC.
We expect the HKCC to publish guidelines to assist businesses to assess whether their arrangements would be likely to result in a breach of the prohibitions. |
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Second Conduct Rule
The Second Conduct Rule will prohibit businesses with substantial market power from abusing that power by engaging in conduct with the object or effect of restricting competition.
The Second Conduct Rule will not apply to approximately 95% of SMEs in Hong Kong, by virtue of the application of the new 25% threshold and the revised de minimis threshold.
Second Conduct Rule - Abuse of Substantial Market Power
Examples of abuse:
- Predatory pricing
- Price discrimination
- Target or loyalty rebates
- Bundling & tying
- Exclusive dealing
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Following much debate, the threshold to be applied is “substantial market power” rather than “dominance”, following the precedent of countries such as Australia.
The test for substantial market power involves more than an assessment of market share. The HKCC will also consider other factors, such as the power to make pricing decisions and height of barriers to entry.
No warning notice will be issued by the HKCC prior to prosecution.
The HKCC may issue Infringement Notices, which will provide an opportunity for businesses to negotiate and offer a commitment to stop or remedy the offending practice. |
Two exemptions for SMEs apply:
Where an SME’s market share <25%, it is generally considered not to have market power (while this is not referred to in the Ordinance, it was discussed by the Bill Committee and it is anticipated that this market share threshold will be included in non-statutory guidelines).
Where an SME’s annual turnover < $HK40 million (under this threshold approximately 95% of SMEs would be exempt from the Second Conduct Rule). |
Investigation and enforcement powers of the HKCC
The HKCC will be granted a number of investigative powers to enable it to effectively apply the new law.
The Competition Ordinance includes a range of severe sanctions against undertakings that contravene the new law. These include pecuniary penalties of up to 10% of annual turnover, directors’ disqualification orders, divestiture of assets, shares or businesses, voiding of agreements, criminal sanctions for obstruction, as well as injunctive relief and the availability of third party damages.
In common with the regimes of many other countries, the HKCC will have the power to conduct “dawn raids” on business premises. In exercising these powers, the HKCC may obtain a warrant to enter and search a business’ offices if it has reasonable grounds to believe that documents relating to an investigation may be found.
Given the significant impact of dawn raids, it is most important that companies give consideration to how to implement practical procedures for dealing with a unscheduled visit from the HKCC. These should include creating checklists for employees to follow when dealing with the HKCC’s investigators, including requests by the HKCC’s forensic team to take mirror images of servers which may contain privileged information. These checklists should include details of who to contact in senior management and the legal department, as well as guidance on the extent of the investigators’ powers, e.g. what documents the investigators may seize and whether they can to interview employees.
In addition, the HKCC will be granted a range of enforcement powers, enabling it to take action against businesses whose conduct it considers to contravene the Competition Ordinance.
These enforcement powers will include the issuing of warning notices and infringement notices, the ability to accept legally binding commitments from companies, as well as the ability to accept cartel leniency applications.
In relation to cartel leniency applications, we might expect the HKCC to implement a program similar to those which exist in other countries. These reward companies that proactively approach the regulator with evidence of unlawful conduct: the earlier anti-competitive behaviour is reported, the better the prospect of receiving more lenient treatment.
Availability of follow-on actions
The Competition Ordinance provides that a person who has suffered loss or damage as a result of conduct that a Court or the Tribunal has determined to be a contravention of a conduct rule or in certain other cases may commence a follow-on action.
Mergers
A separate merger rule applies to firms that
hold a carrier licence. Otherwise, there is no obligation to apply to the
HKCC for clearance of mergers, unlike the position under many other
regimes.
The next 12 months
We anticipate that subsequent to the enactment of the Competition Ordinance, a transition period of approximately 12 months will follow. During this period, we expect a number of administrative processes will be introduced, including the establishment of the bodies responsible for enforcement of the law, the HKCC and the Competition Tribunal. We also anticipate the HKCC will publish guidance to provide more information about how it intends to enforce the Competition Ordinance, including policy statements and Block Exemption Notices.
These are likely to be subject to public consultation, which will allow companies likely to be affected by the Competition Ordinance to have an opportunity to seek to influence the HKCC’s approach.
Practical steps for compliance
It is likely that there will be a “grace period” before the conduct rules come into force which will also allow businesses time to prepare themselves for the new regime.
In the first instance, firms should consider whether, and to what extent, their operations will be affected by the Competition Ordinance.
In this regard, firms will need to take account of the extraterritorial application of the new law. As well as applying to agreements made or business conduct engaged in within Hong Kong, the HKCC will also have jurisdiction where the parties are located, or the conduct occurs, in another country (e.g., on mainland China) and it has the object or effect of preventing, distorting or restrictive competition in Hong Kong.
Consequently, the Competition Ordinance may have an impact on commercial arrangements such as joint ventures which span a number of different jurisdictions. Parties to arrangements of this nature will also need to ensure they comply with the Hong Kong law.
What steps can you take?
It will be important for firms to understand the implications of the regime and introduce compliance processes. You should be planning along the following lines:
- Assess the applicability of the regime to your business, including the applicability of any exemptions;
- Develop a competition compliance policy or if you have one in place, check whether any amendments are now required;
- Raise awareness of the new regime within your organisation;
- Form a compliance committee comprising both legal and commercial stakeholders to work together to ensure business’ awareness of the new regime within your organisation, and to assist in a review of whether the current practices of your organisation will comply with the Ordinance, and to assist with the implementation of any necessary changes;
- Review existing business practices, particularly with respect to areas where there is a risk that serious anticompetitive conduct may arise, for example, participation in industry or trade associations;
- Review current commercial contracts and arrangements to determine whether there are any “red flag” provisions that need to be assessed against the new law, for example, in distribution agreements;
- Take steps to build a culture of compliance, including through training of frontline staff.
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