Antitrust and Competition in Hong Kong

By David Fleming, Stephen Crosswell and Donald Pan (Baker McKenzie Shanghai and Hong Kong) In June 2012, Hong Kong enacted the Competition Ordinance (Cap. 619) (the Competition Ordinance), Hong Kong’s first cross-sector competition law. The prohibitions in the Competition Ordinance are anticipated to come into force in the second half of 2015. Companies must comply with the prohibitions from the date they come into effect and any arrangements and conduct that continue from that point in time will be subject to the law and at risk (i.e. there are no grandfathering provisions).

1.           Overview of competition laws

1.1         Concurrent jurisdiction: telecoms and broadcasting

Until the Competition Ordinance enters into force, telecommunications and broadcasting are the only industries in Hong Kong subject to competition law. The Competition Ordinance will repeal the competition-related provisions in the Broadcasting Ordinance and Telecommunications Ordinance when the prohibitions in the Competition Ordinance come into force. From that point, broadcasting and telecommunications licensees will be subject to the Competition Ordinance. The Competition Commission (the Commission) is the principal competition authority responsible for enforcing the Competition Ordinance (see Overview of the Competition Ordinance in section 1.2). Under the Competition Ordinance, the Communications Authority (CA) is conferred with concurrent jurisdiction with the Commission to enforce the Competition Ordinance in respect of the conduct of telecommunications and broadcasting licensees. The Commission and the CA are to agree and adopt a Memorandum of Understanding clarifying the responsibilities of each authority.

1.2         Overview of the Competition Ordinance

The text of the Competition Ordinance draws influence from a number of sources, including European Union/United Kingdom, Australian, Singaporean and other competition laws. The prohibitions are general in nature and so further guidance will be essential in order for businesses to predict the scope and application of the law. At the time of writing (February 2015), draft guidelines[1] were under public consultation. The fact that the guidelines remain to be finalised leads to some uncertainty as to how the law will be applied. However, the draft guidelines and various comments made by the Commission give some sense as to the likely approach. The Competition Ordinance has three key prohibitions: (i) the First Conduct Rule, which prohibits anticompetitive agreements, arrangements and concerted practices (applying to both horizontal and vertical arrangements); (ii) the Second Conduct Rule, which prohibits abuse of a substantial degree of market power; and (iii) the Merger Rule, which prohibits mergers that substantially lessen competition (presently restricted to telecommunications carrier related mergers). The prohibitions apply to conduct whether engaged in within or outside Hong Kong, if it impacts on markets in Hong Kong. There are substantial sanctions for breach, including penalties up to 10% of turnover obtained in Hong Kong for each financial year in which the infringement occurred, up to a maximum of three years and disqualification of directors for up to five years. Follow-on private actions are allowed and the Commission will be introducing a leniency regime to encourage self-reporting and whistle-blowing.

2.           Enforcement and administration

The Competition Ordinance has a two-tier enforcement model: (i) a Commission; and (ii) a Competition Tribunal (Tribunal). The Commission has been established to investigate and bring proceedings in relation to alleged breaches of the Competition Ordinance. The Tribunal is a specialist division within the Hong Kong High Court, with primary responsibility to hear competition cases and issue decisions on breach, penalties and other relief. There are no stand alone rights of action. However, persons that have suffered loss or damage as a result of anticompetitive conduct may bring follow-on claims in the Tribunal to claim damages and other relief.

2.1         The Commission

The Commission is responsible for investigation and bringing proceedings in relation to alleged breaches of the Competition Ordinance. The Commission is required to consist of at least five members appointed by the Chief Executive, and drawn from legal, economics and business backgrounds. On 1 May 2013, the Hong Kong government appointed the chair and 13 other members of the Commission. Members of the Commission are drawn from various sectors including law, economics, commerce, accounting, finance and consumer protection. The Competition Ordinance requires the Commission to issue guidelines covering various aspects of substance and procedure, and to consult with the Legislative Council and the public on these. The guidelines cover the legality of many important commercial restrictions. At the time of writing (February 2015), the Commission had published six draft guidelines on:

  • complaints;
  • investigations;
  • exclusions and exemptions;
  • the First Conduct Rule;
  • the Second Conduct Rule; and
  • the Merger Rule.

The Commission has committed to publish further guidelines on:

  • rights and responsibilities of small and medium-sized enterprises;
  • leniency policy; and
  • enforcement policy.

The Commission is also actively issuing other publications such as leaflets and booklets to promote competition law compliance. The Commission is empowered to investigate suspected infringements of the Conduct Rules, both on its own initiative and in response to complaints. The Commission has wide powers to obtain relevant documents and information in the course of an investigation, including the power to enter and search premises (if a search warrant has been obtained) and to seize documents. It is a criminal offence to obstruct the Commission in its investigations. If the Commission identifies a possible infringement, it may:

  • decide that there is insufficient justification for action;
  • accept a commitment which addresses the Commission’s concerns (the commitment process may be initiated either by the Commission or the undertaking being investigated at any stage in an investigation or proceedings); or
  • commence enforcement action.

The Commission must issue a Warning Notice before it can commence an action in the Tribunal in relation to a suspected contravention of the First Conduct Rule that does not involve Serious Anticompetitive Conduct (see succeeding paragraphs). The Warning Notice will provide parties under investigation with an opportunity to cease the conduct within a specified period. Where the Commission has reasonable cause to believe that there has been a contravention of the First Conduct Rule involving Serious Anticompetitive Conduct and/or the Second Conduct Rule, the Commission may issue an Infringement Notice, although it is not required to do so. In the Infringement Notice, the Commission will offer not to bring proceedings on condition that the undertaking under investigation makes a Commitment to comply with the requirements of the notice within a specified compliance period. At any stage, the Commission may refer a complaint to a Government agency. In addition, the Commission has the power to undertake market studies, which may be commenced whether or not an investigation has been commenced.

2.2         The Tribunal

The Tribunal was established on 1 August 2013. It is a specialist court established within the High Court to hear competition cases. All judges of the High Court are members of the Tribunal as of right. The Judiciary, on 16 July 2013, announced the appointment of the Honourable Mr Justice Godfrey Lam Wan-ho as President of the Tribunal and the Honourable Madam Justice Queeny Au-Yeung Kwai-yue as Deputy President each for a term of three years with effect from August 1, 2013. The Tribunal is empowered to hear competition cases and issue decisions on breach, penalties and other relief. The Tribunal is empowered to impose interim orders, pending a final decision of the Commission or Tribunal. The Tribunal will also hear appeals in relation to Commission exemption, exclusion and enforcement decisions. Decisions of the Tribunal may be appealed to the Court of Appeal and, where appropriate, to the Court of Final Appeal. There are no stand alone rights of action. However, persons that have suffered loss or damage as a result of anticompetitive conduct may bring follow-on claims in the Tribunal for damages and other relief.

3.           Anti-competitive agreements and other conduct

Conduct rules

The prohibitions in the Competition Ordinance apply to “undertakings”, defined as any legal entity or natural person engaged in an economic activity. The Competition Ordinance also applies to associations of undertakings. All industry sectors are covered unless expressly excluded. To date, the Commission has not issued any sector-specific exemption from the Competition Ordinance. There are, however, numerous statutory body exemptions proposed and the Hong Kong government has announced that it proposes to exempt Hong Kong Exchanges and Clearing, the operator of Hong Kong’s stock market and futures market, and six of its subsidiaries from the Competition Ordinance.

3.1         First Conduct Rule

The First Conduct Rule prohibits any agreement, concerted practice or decision where the object or effect is to prevent, restrict or distort competition in Hong Kong. Within this, two types of conduct are identified:

  • Serious Anticompetitive Conduct (price-fixing, bid-rigging, market sharing and output restrictions); and
  • other anticompetitive conduct, which comprises any agreement, concerted practice or decision which is not Serious Anticompetitive Conduct, but which nevertheless has the object or effect of preventing, restricting or distorting competition in Hong Kong.

Where conduct falls within the category of “Serious Anticompetitive Conduct”, the Commission may take enforcement action against it without warning. Where conduct is not Serious Anticompetitive Conduct, a Warning Notice must first be issued before enforcement action can be taken. If the undertaking complies with the Warning Notice, it is protected from prosecution. If the undertaking does not comply with the Warning Notice within the specified time, the Commission may commence enforcement proceedings and the undertaking may be held liable if found to be in breach of the Competition Ordinance, but only for conduct that continued as from the date of the Warning Notice. The distinction between Serious Anticompetitive Conduct and other anticompetitive conduct under the First Conduct Rule therefore has important ramifications for businesses. The draft guidelines state that the Commission will consider the following conduct to typically have the “object” of harming competition:

  • directly or indirectly fix prices or any other trading conditions;
  • limit or control production, markets, technical development or investment;
  • share markets or sources of supply;
  • big-rigging;
  • exchange of future price and quantity information;
  • group boycotts; and
  • resale price maintenance.

Where conduct falls into these categories, the Commission states that it will be regarded by its very nature to be so harmful to the proper functioning of normal competition in the market that there will be no need to examine its effects. In other words, such conduct will be presumed to be anticompetitive. It is important to note that the Commission reserves the right to supplement the above list. Other conduct may be considered by the Commission to have the effect of harming competition. For such conduct, the Commission will apply a rule of reason analysis to assess whether, in the circumstances, such arrangements are anticompetitive. The draft guidelines give the following examples of conduct that might fall into this category (although this list is not exhaustive):

  • joint purchasing agreements;
  • exchange of information other than future price and quantity information;
  • standard terms and standardisation agreements;
  • membership and certification restrictions;
  • certain joint ventures;
  • exclusive distribution or customer allocation agreements; and
  • recommended and maximum resale price restrictions.

Agreements can be exempted from the First Conduct Rule by the Commission on an individual basis or via a “block exemption” (see Exceptions in section 5). In a departure from the practice in a number of established competition law jurisdictions, the Commission is not proposing any “safe harbours” or block exemptions for companies with low market shares. Accordingly, undertakings generally need to self-assess the potential competition impact of agreements where they are concerned that they might have an anticompetitive effect and they can, in certain circumstances, seek decisions from the Commission to get some clarity. The draft guidelines specifically provide that exclusive distribution or customer allocation agreements will generally be subject to an effect-based analysis by the Commission. In making the assessment, the Commission stated that it will consider factors including how intra-brand and inter-brand competition is affected, the extent of the territorial and/or customer sales limitations, and whether exclusive distributorships are common generally in the markets impacted by the agreements.

4.           Abuse of dominant position

4.1         Second Conduct Rule

The Second Conduct Rule prohibits the abuse of a substantial degree of market power where the object or effect of the conduct is to prevent, restrict or distort competition in Hong Kong. The draft guidelines provide that in general an analysis of market share may be useful as an initial screening device for an assessment of whether an undertaking has a substantial degree of market power, and that undertakings are more likely to have a substantial degree of market power where they have high market shares. However, there has been no guidance from the Commission as to a specified market share safe-harbour or presumptive threshold over which a substantial degree of market power might be presumed. The Competition Ordinance provides that the following matters (among other relevant matters) may be taken into consideration when making a determination:

  • the market share of the undertaking;
  • the undertaking’s power to make pricing and other decisions; and
  • any barriers to entry to competitors into the relevant market.

The Competition Ordinance expressly refers to two examples of “abuse”, namely:

  • behaviour to exclude competitors (such as predatory pricing, refusal to supply, exclusive dealing, margin squeeze conduct, or tying/bundling of products); and
  • behaviour that harms consumers (such as, limiting production, markets or technical development).

The Commission has indicated in the draft guidelines that as a general matter, competition concerns will only arise in vertical agreements (other than resale price maintenance) where there is some degree of market power at either the level of the supplier, the buyer or at the level of both. Based on these comments, one would expect the Commission to take the view that vertical agreements between small and medium-sized enterprises would rarely be capable of harming competition. Based on the language of the draft guidelines, it is likely that non-price related vertical restraints will be subject to an effect-based analysis on a case by case basis to determine whether they have the effect of harming competition.

5.           Exceptions

5.1         Statutory bodies

The Competition Ordinance does not apply to statutory bodies, except those specified in a separate list that are subject to approval by the Chief Executive in Council. Statutory bodies are persons, incorporated or unincorporated, established under an Ordinance, or constituted or appointed by an Ordinance, but do not include companies, trustees, societies, co-operatives and trade unions. The Hong Kong government reviewed 581 statutory bodies and recommended that six statutory bodies are subject to the Competition Ordinance, namely: the Federation of Hong Kong Industries, Federation of Hong Kong Industries General Committee, Helena May, Kadoorie Farm and Botanic Garden Corporation, Matilda and War Memorial Hospital and Ocean Park Corporation. The Competition Ordinance includes a mechanism through which the Chief Executive may revoke the general exclusion for a particular statutory body and/or specific activities they undertake. It has been stated that this will only take place where the body in question competes with other undertakings in an area not directly linked to the provision of public services, is damaging economic efficiency, and there is no public policy reason to maintain the exclusion.

5.2         Other exclusions

The Ordinance also contains:

  • an exclusion from the First Conduct Rule for agreements enhancing overall economic efficiency, either by improving production or distribution, or by promoting technical or economic progress, provided that these agreements do not impose unnecessary restrictions and do not eliminate competition in respect of a substantial part of the market in question;
  • an exclusion from the First Conduct Rule for agreements that are made for the purpose of complying with Hong Kong or Mainland Chinese legal requirements; and
  • an exclusion from the First and Second Conduct Rules for undertakings entrusted with the operation of services of a general economic interest, or where the prohibition would obstruct it from carrying out its assigned tasks.

The Ordinance further provides that the Chief Executive in Council may by regulation not apply the Competition Ordinance to any person and/or specific activities they undertake. The Hong Kong government has proposed to introduce subsidiary legislation to exempt Hong Kong Exchanges and Clearing, the operator of Hong Kong’s stock market and futures market, and six of its subsidiaries from the Competition Ordinance.

5.3         De minimis regime for SMEs[2]

Schedule 1 provides a de minimis framework, excluding from the First Conduct Rule all agreements between business operators with a combined annual turnover not exceeding HKD200 million in the preceding financial year. This exclusion does not apply to infringements involving “Serious Anticompetitive Conduct”. Undertakings with an annual turnover of less than HKD40 million are excluded from the Second Conduct Rule.

5.4         Exemptions

The Commission may also grant (i) block exemptions for categories of agreement that enhance overall economic efficiency, and (ii) specific exemptions if there are exceptional and compelling public policy grounds to do so, or in order to avoid conflict with international obligations. Exemptions are limited in duration and scope. To date, the Commission has not issued any such exemption. Restrictive agreements or practices that breach the First or Second Conduct Rule but also improve production or distribution, or promote technical or economic progress, are permitted provided certain conditions are met. Concerned undertakings have the option of a self-assessment or requesting a decision from the Commission. The Commission is not obliged to offer formal guidance unless the application raises novel or otherwise unclear issues. The Competition Ordinance also permits the Commission to charge a fee for such applications.

5.5         Merger control

Under Schedule 1 of the Competition Ordinance, merger activities are specifically excluded from the application of the First Conduct Rule and the Second Conduct Rule.

6.           Mergers and acquisitions

The Merger Rule provides that an undertaking must not, directly or indirectly, carry out a merger that has, or is likely to have, the effect of substantially lessening competition in Hong Kong. At present, the Merger Rule will only apply where an undertaking that directly or indirectly holds a telecommunication carrier licence in Hong Kong is involved in a merger. Both the CA and the Commission are empowered to review or challenge mergers involving telecommunication licensees (under this section, references to the Commission apply also to the CA). There is no approval requirement since the filing obligation is voluntary. However, the Commission may investigate a merger and take any action considered necessary to ensure compliance with the Merger Rule. The draft guidelines provide that the Commission intends to apply two “safe harbour” thresholds, whereby if a merger falls within one of the two thresholds, it is unlikely to substantially lessen competition in Hong Kong. The first safe harbour measure is based on concentration ratios and the second safe harbour measure is based on the Herfindahl-Hirschman Index (HHI) index (which measures market concentration). In these cases, the Commission will take the view that it is unlikely to further assess a transaction, though it retains the discretion to intervene. First safe harbour threshold:

  • the post-merger combined market share in the relevant market(s) of the four (or fewer) largest firms is less than 75%, and the merged firm has a market share of less than 40%; or
  • the post-merger combined market share in the relevant market(s) of the four (or fewer) largest firms is 75% or more, and the merger firm has a market share of less than 15%.

Second safe harbour threshold:

  • a merger resulting in market(s) with a post-merger HHI of less than 1,000;
  • a merger resulting in market(s) with a post-merger HHI of between 1,000 and 1,800 and the merger produces an increase in the HHI of less than 100 in these market(s); or
  • a merger resulting in market(s) with a post-merger HHI of more than 1,800 and the merger produces an increase in the HHI of less than 50 in these market(s).

7.           Penalties and liabilities

Infringement of the First or Second Conduct Rule is a civil offence potentially resulting in severe penalties. The Commission may invite undertakings to sign binding legal commitments and admissions of liability. The Tribunal may impose fines on companies of up to 10% of turnover obtained in Hong Kong for each financial year in which the infringement occurred, up to a maximum of three years. Lastly, the Commission may recover its investigation and legal costs. Other remedy powers include director disqualification (up to a maximum of five years), unwinding of the transaction, a declaration that the relevant agreement is void, damages for loss suffered as a result of the infringement and paying back the profit gained to the Hong Kong government or any other specified person as a result of the infringement. The Ordinance creates a number of criminal offences relating to misleading and obstructing investigations, as well as violating the terms of commitments. These offences carry substantial fines, as well as imprisonment for a period of up to two years. The limitation period for the imposition of any of the above penalties is five years from the day on which (i) the infringement ceased; or (ii) the Commission became aware of the infringement, whichever is later (i.e. the Commission must complete any investigation within five years). Third parties which have suffered loss can bring private action against the relevant companies. Only follow on actions are permitted (i.e. based on a final infringement decision from the Tribunal / the appellate courts or an admission of contravention accepted by the Commission).

8.           Leniency

The Competition Ordinance also includes a leniency regime. The Commission can agree not to bring or continue proceedings for pecuniary penalties for companies who come forward with information regarding illegal activity, or assist the Commission in their investigation. The Commission has the power to revoke leniency agreements where the applicant has not cooperated fully or has given false or misleading information.

9.           Extraterritorial application

Both Conduct Rules expressly apply to agreements and conduct that have the object or effect to prevent, restrict or distort competition in Hong Kong, even if the undertakings are located outside Hong Kong, and the agreements or conduct takes place in whole or in part outside Hong Kong. The Merger Rule is also extra-territorial in effect, the test being whether the merger substantially restricts competition in a market in Hong Kong. [1] The draft guidelines were issued by the Commission for public comments on 31 October 2014. The Commission is expected to finalise the guidelines in the first half of 2015. [2] The Commission has committed to publish guidelines on rights and responsibilities of small and medium-sized enterprises, which is expected to provide guidance on the de minimis exemption. As of the date of writing (February 2015), these guidelines have not yet been published. [wpdm_package id=’4258′]