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New Law Takes Aim at Hong Kong’s Oligopolies

27 October 2014
The Asian Lawyer

Nearly two-and-a-half years ago, when Hong Kong passed its Competition Ordinance, many expected it to level the playing field in one of the most entrepreneurial economies in the world.

Although Asia’s financial capital is known for its free flow of information and business-friendly environment, it is also known for having its local economy tightly controlled by several moguls. Perhaps the best known of these magnates is Asia’s richest person, billionaire Li Ka-shing, who controls large property developer Cheung Kong (Holdings) Ltd., one of the two dominating supermarket operators (A.S. Watson & Co. Ltd.), one of two electricity suppliers (Hongkong Electric Co.) and one of four telecom carriers (Hutchison Telecommunications).

The competition law, passed by the Legislative Council in June 2012, was intended to change that. And with the Oct. 9 release of the 100-page draft guidelines on how the law is interpreted by Hong Kong’s Competition Commission, full implementation is one step closer.

Law firms have so far been the biggest beneficiary of the new regulatory regime. Most international firms already have competition lawyers stationed in Hong Kong, although many have been focused on assisting clients on matters in the mainland following China’s implementation of its own Antimonopoly Law in 2008.

Since the passage of Hong Kong’s law, local companies have been engaging law firms for advice on compliance. “At this stage we are engaged in an educative effort with clients to help them understand the consequences and impacts of the law and identify conducts and practices which may be offensive to the provisions in the law,” says John Hickin, Hong Kong partner at Mayer Brown JSM and cohead of the firm’s competition practice in Asia. Because of the similarity to the European Union’s competition laws, global firms have been able to draw on their experience advising clients in Europe.

To enforce the law, the government formed a Competition Commission last year in April and appointed Anna Wu, a former lawyer and former chair of the Hong Kong Consumer Council, as chairperson. In July, the commission appointed Canadian competition lawyer Stanley Wong as chief executive officer, who will be initiating investigations and handling complaints once the law is in force.

Mark Jephcott, Asia head of competition at Herbert Smith Freehills, says he doesn’t expect much litigation immediately after the law is implemented. Instead, the new Competition Commission will likely issue warning notices to stop incidences of price- fixing. Even so, he predicts, lawyers will be needed.

“There will still be a lot of work for us even before the litigation starts,” Jephcott says. “We will help clients do preventative compliance work and deal with the regulator’s investigations.”

Most lawyers agree that the law will force all players to stop price-fixing between competitors or between suppliers and distributors, both practices now considered common among Hong Kong businesses. “There will have to be a change of mindset for business conduct in Hong Kong,” Slaughter and May Hong Kong partner Natalie Yeung says. “The conglomerates also need to change some practices internally and do much more complex analysis, because their behavior in one part of the business may have an impact on competition in other markets.”
Still, lawyers don’t think the new law will have dramatic impact on local oligopolies.

“You can stop price-fixing,” Jephcott says. “But in an efficient market like Hong Kong where information is transparent, they can easily predict their competitor’s price. There is nothing the law can do about that.”

“The mere existence of these large conglomerates is perfectly legal,” he adds, “as long as they don’t abuse their dominance.”

This is where things get tricky. Yeung says that in drafting the law, the government deliberately didn’t use the term “dominance,” and the Competition Commission also chose not to set a market share threshold in the guidelines. Instead, the law only refers to “substantial market power,” which is considered a much broader assessment than the dominance test used in the EU and U.K. In doing so, the government may be taking aim at the oligopolies, says Yeung.

“This way, the oligopolies might get caught with a smaller market share,” she says, adding also that this arrangement will likely cost Hong Kong the ability to benefit from case law in other jurisdictions using a dominance test.

However, Hogan Lovells Hong Kong senior associate Laura Patrick says the term substantial market power will create uncertainty for how the commission will enforce the law: “Some companies will be disappointed because they don’t know if they have substantial market power, while big companies will be more at ease because their market share might otherwise be above specific thresholds for dominance.”
Simon Powell, Asia head of litigation at Latham & Watkins, points out another pitfall: The new law lacks a merger control rule to empower the authority to review mergers and order divestments or forbid transactions when necessary.

“Until the merger control rule applies to all industries, there will be no real breakup of any oligopolies,” he says. (An existing merger control rule under the Telecommunications Ordinance applies only to the telecom and broadcasting sectors.)

Such a rule, included in the original draft, was removed when the law was passed in 2012 after strong opposition from industry groups. “The authority only has the power to go after the anticompetitive behavior when it’s already happened, but won’t be able to prevent it from happening,” says Norton Rose Fulbright Hong Kong partner Marc Waha.

Some argued that Hong Kong doesn’t need merger control regulation because global mergers will be reviewed by other jurisdictions. But the loophole is at the local-market level. “What if two of the local conglomerates decided that if they can’t have an [price-related] agreement, why don’t they just merge?” asks Hogan Lovells Beijing partner Adrian Emch.

Yeung calls the lack of merger control a political trade-off. “It would be a lot more difficult for the law to pass if the ordinance were to include a cross-sector merger rule. For now, it’s better we have a competition law than not having any competition law at all.”
The Competition Commission will likely finalize the guidelines earlier next year and submit them to Hong Kong’s Legislative Council for approval. The law will be implemented, at the earliest, about a year from now.

Waha says it might even take as long as five to 10 years before it shows real effect, citing China’s intensified action after five years into the Antimonopoly Law.

“In Hong Kong, we might be first compliant in 2016, and the first decision might come out in 2017 or 2018,” he says. “Maybe by 2020, we will see a new supermarket.”

Reprinted with permission from the October 27, 2014 edition of The Asian Lawyer © 2014 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.

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