Hong Kong’s Competition Bill – What businesses in Hong Kong need to know

Introduction

Hong Kong’s long awaited Competition Bill had its first reading in LegCo on 14 July 2010. Since then, the business community (including chambers of commerce, trade associations and small and medium enterprises (SMEs), District Councils, academics and professional bodies have been consulted for their views and concerns. On 25 October 2011, the Bills Committee considered the Government’s proposed amendments to the Bill, to take into consideration the concerns raised by the business community, in particular, by the SMEs.

What is the purpose of the new Competition Ordinance?

The purpose of the proposed Competition Ordinance is to:-

1. prohibit conduct that prevents, restricts or distorts competition in Hong Kong;
2. prohibit mergers that substantially lessen competition in Hong Kong; and
3. establish a Competition Commission and Competition Tribunal.

Who will it apply to?

It will apply to any entity, regardless of its legal status or the way it is financed, engaged in economic activity and including individuals. Statutory bodies are to be exempt, but scope is provided for the Chief Executive, in certain circumstances, to apply the provisions to a specified statutory body or a statutory body engaged in a specified activity.

The Chief Executive is also to have wide powers to exempt:-

The Competition Commission will be able to issue a block exemption in respect of particular categories of agreement either of its own volition or upon application by an undertaking. An undertaking will be able to apply to the Competition Commission for a decision as to whether a particular agreement qualifies for an exemption under the Ordinance.

The First and Second Conduct Rules will not apply to agreements made for the purpose of complying with a legal requirement (any enactment in force in Hong Kong or imposed by a national law applying in Hong Kong).

What is prohibited?

First Conduct Rule

The original Bill contains a “First Conduct Rule”, generally prohibiting anti-competitive agreements and concerted practices and decisions, having the object or effect of preventing, restricting or distorting competition in Hong Kong. Businesses, and SMEs in particular, have expressed concern about the lack of certainty about the type of conduct that would be caught by this catch-all, general prohibition, which could result in them unwittingly breaching the Ordinance and incurring heavy fines. In response to these concerns, the Government now proposes that a distinction be made between “hardcore” and “non-hardcore” activities and that the types of “hardcore activities” be specified.

“Hardcore activities” are to include price fixing, bid-rigging, market allocation and output control. “Non-hardcore activities” are to include things such as restrictions on advertising, collective refusal to supply and development of standardization agreements, in relation to which there will be no hard and fast rule as to whether they breach the Ordinance and it will be for the Competition Commission to conduct a competition analysis, based on the facts and circumstances of each case. In respect of non-hardcore activities, it is proposed that the Competition Commission send a warning notice to the undertaking in question requesting them to stop the contravening conduct within a specified period, failing which the Commission may institute proceedings in the Competition Tribunal.

In respect of hardcore activities (to be called “serious anti-competitive conduct”), it is proposed that the Commission will be able to take enforcement proceedings immediately, without issuing a warning notice and giving the undertaking an opportunity to take remedial steps.

Second Conduct Rule

The “Second Conduct Rule” prohibits an undertaking that has a substantial degree of market power in a market from abusing that power by engaging in conduct with the object or effect of preventing, restricting or distorting competition in Hong Kong. Conduct may constitute such an abuse if it involves predatory behaviour towards competitors. At present, there is no definition of what constitutes a “substantial degree of market power”, but the Competition Commission is expected to issue guidelines which will include clarification of the same.

Territorial Application of the Rules

The First Conduct Rule is to apply to an agreement, concerted practice or decision that has the object or effect of preventing, restricting or distorting competition in Hong Kong even if:-

1. the agreement or decision is made or given effect to outside Hong Kong;
2. the concerted practice is engaged in outside Hong Kong;
3. any party to the agreement or concerted practice is outside Hong Kong; or
4. any undertaking or association of undertakings giving effect to a decision is outside Hong Kong.

The Second Conduct Rule is to apply to conduct having the object or effect of preventing, restricting or distorting competition in Hong Kong even if:-

1. the undertaking engaging in the conduct is outside Hong Kong; or
2. the conduct is engaged in outside Hong Kong.

Regulatory Framework

The Bill provides for the establishment of a Competition Commission to investigate conduct that may contravene the Ordinance and enforce its provisions.

The Competition Commission may initiate proceedings in a Competition Tribunal, to be established by the Ordinance. The Competition Tribunal is to consist of Judges of the Court of First Instance.

Rather than initially proceeding in the Competition Tribunal, the Competition Commission will be able to issue an infringement notice. The infringement notice will contain an offer not to initiate proceedings in the Tribunal if the undertaking in question agrees to comply with certain specified requirements. Under the original Bill, one of the possible requirements was for the undertaking to pay up to HK$10 million to the Government. Many in the business sector considered that such payment would place an unreasonable burden on SMEs and would be too low a figure to act as a real deterrent for big undertakings. In response to such concerns, although the Government intends to retain the infringement notice procedure in the revised Bill for hardcore contravention of the First Conduct Rule and contravention of the 2nd Conduct Rule, it proposes to remove the requirement of payment of the sum of up to HK$10 million.

De Minimis Arrangements

Competition laws in other jurisdictions, commonly provide de minimis arrangements so that agreements below certain thresholds are not subject to any enforcement action by the competition authorities. The original Bill did not contain any such de minimis provisions. In response to concerns of SMEs, the Government now proposes to introduce a de minimis framework to exclude from the First Conduct Rule all agreements between undertakings with a combined turnover not exceeding HK$100 million in the preceding financial year. This exclusion will not apply to agreements involving the four types of hardcore anti-competitive practices (i.e. price fixing, bid rigging, market allocation and output control) since such activities almost always have an appreciable adverse effect on competition.

Pecuniary Penalties

The original Bill provides for a penalty of up to 10% of global turnover for each year in which the contravention continues. In response to criticism that this is disproportionately severe when compared to penalties in the EU, UK and Singapore, the Government now proposes to revise the maximum penalty to 10% of the local turnover for each year of infringement, up to a maximum of 3 years. If the infringement lasts for more than 3 years, the three years of infringement with the highest turnover would be chosen.

Stand Alone Private Actions

The original Bill provides that private actions could be brought by persons who had suffered loss or damage as a result of contravention of a Conduct Rule. These private actions were to either follow on from determination of contravention of a Conduct Rule or be brought as stand alone actions (i.e. in cases where no such determination had been made). In response to SMEs’ concerns that large companies could make use of the stand alone right of private actions to harass SMEs, the Government now proposes to remove the right to take private stand alone actions. However, it intends to review the need to introduce such in a few years’ time.

Mergers

The original Bill prohibits mergers that have or are likely to have the effect of substantially lessening competition in Hong Kong. The “Merger Rule” currently applies only to cases when one of the parties holds a carrier licence issued under the Telecommunications Ordinance or controls an undertaking holding such licence. In response to concerns that other merger activities could be caught under the First and Second Conduct Rules, the Government now proposes to specifically exclude merger activities from the First and Second Conduct Rules, although the merged undertakings would still be subject to such.

What should businesses be doing now?

With the prospect of the new Competition law coming into effect within the next year or so, businesses should:-