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Hong Kong's Competition Bill—More Questions than Answers?

December 2010
Mayer Brown Article

On July 2, 2010, a new Competition Bill was introduced in Hong Kong's Legislative Council, moving the region one step closer to adoption of its first comprehensive cross-sector competition law. This Bill follows years of debate and public consultation regarding the appropriate competition law model for Hong Kong, and failure by the government to fulfill an earlier commitment to introduce the Bill during the 2008/2009 legislative session.

A first reading of the new Competition Bill was conducted on July 14, 2010, just three days prior to the annual summer recess of the Legislative Council. A Bills Committee has now been established to scrutinize and debate the Bill.

While the contents of the Bill generally are in accord with previous government proposals, key details relevant to understanding the true scope and potential impact of the Competition Bill on the business sector are still to be provided. These missing details are likely to be a major focus of public and legislative debate.

In this article, we outline the key features of the Competition Bill and some of the uncertainties and concerns that have arisen in relation to it.

Objects of the Bill

According to its Explanatory Memorandum, the Competition Bill aims to prohibit conduct that prevents, restricts or distorts competition in Hong Kong.  Interestingly, and in contrast to the usual practice of new competition regimes, the Bill does not include a more general statement of overarching objectives (such as the promotion of economic efficiency and advancement of consumer interests) which could serve to guide the future development of enforcement principles for the Bill's key prohibitions.

The Proposed Competition Commission

The Competition Bill provides for the establishment of an independent statutory Competition Commission that will be charged with investigating (but not adjudicating) alleged violations, bringing public enforcement actions for anticompetitive conduct and promoting public understanding on competition matters.  

The Commission's investigation powers are quite broad, and they include a power to request information and documents, to question business operator representatives and, after obtaining a court warrant, to enter and search a premises.

Business operators can also apply to the Commission for a decision on whether an agreement or conduct qualifies for one of the exemptions to the proposed law.  However, the Commission  appears to have a wide discretion regarding whether or not to make a decision in such cases.

Interestingly, the Commission may also conduct market studies into matters affecting competition in Hong Kong.  It remains to be seen whether this power is intended to be used in a similar manner to (and as commonly as) the market study powers held by bodies such as UK competition regulator the Office of Fair Trading.   If the power is similar, it is anticipated that there may be calls for the Commission to examine (and press the government to make changes to) some of Hong Kong’s unique market structures and arrangements that have long been a focus of competition concerns. These include a government land sales system which has been criticised for favouring powerful incumbent property developers over new market entries.

Key Prohibitions Under Two “Conduct Rules”

As expected, the Competition Bill sets out two main ”conduct rules” of cross-sector application—a prohibition of agreements, decisions and concerted practices that prevent, restrict or distort competition in Hong Kong (the "first conduct rule") and a prohibition of the abuse of a substantial degree of market power (the "second conduct rule").    Both of these rules have extra-territorial reach and are focused on whether relevant agreements or conduct have the object or effect of preventing, restricting or distorting competition in Hong Kong, wherever the parties participating in the agreement or engaged in the conduct are located.

The clauses that set out the two main conduct rules also include a non-exhaustive list of examples of the types of behaviour which may breach the rules.  For example, price-fixing and market-sharing behaviour are listed as examples of activities that may breach the first conduct rule, while predatory behaviour toward competitors is listed as an example of an activity that may breach the second conduct rule. 

According to Schedule 1 of the Competition Bill, the first conduct rule will not apply to agreements or conduct that "enhance overall economic efficiency," and criteria for establishing such efficiencies are referenced in the Bill.  Specifically, the exclusion will apply where the relevant agreement or conduct (i) improves production or distribution or promotes technical or economic progress, (ii) does not impose on the relevant business operators restrictions that are not indispensable to attainment of those efficiencies and (iii) does not afford the business operators the possibility of eliminating competition for a substantial part of relevant goods or services.

Notably, a broadly analogous exclusion under Europe's primary competition law also includes a fourth requirement—that a fair share of the benefits resulting from the agreement or conduct accrues to consumers.  Omission of this requirement from the test for application of the Hong Kong exemption suggests that it may have a wider scope of application than the European exclusion.

Several important questions arise from the wording of the conduct rules in the Bill, including the following:

  • Are vertical agreements reviewable under the first conduct rule?

 While the government has previously indicated that only horizontal agreements (i.e., agreement between competitors) may be targeted by the first conduct rule, and that is a focus of the examples provided, the relevant section of the Competition Bill appears on its face to be equally applicable to vertical agreements such as distribution or downstream supply agreements.    However, there is still some expectation that the government will follow the approach adopted by Singapore when implementing its Competition Act earlier this decade, by introducing an exemption to the first conduct rule for all or most vertical agreements.

  • How will assessment of ”substantial market power” occur?

While government representatives have previously suggested that a market share of 40 percent may be considered indicative of substantial market power, the Competition Bill does not contain any language referencing such indicative or presumptive market share thresholds.   However, the Bill does provide that the Competition Commission must issue guidelines to indicate how it will interpret and give effect to the first and second conduct rules, and it is anticipated that such guidelines will explain the Competition Commission's preferred methodology for assessing market power.

  • Can abuse of substantial market power occur by reference to purpose rather than effects?

It is notable that the Competition Bill contemplates there may be contraventions of the second conduct rule by ”object,” whereas in many other jurisdictions unilateral conduct may only be challenged it if is shown to have a relevant anticompetitive "effect."  There is some expectation that the government may be requested to revisit this issue during debate on the Bill, as concerns have been raised about the difficulty of distinguishing anticompetitive intent from an intent to simply engage in robust competitive (and ultimately lawful) market behaviour.

  • Does  the second conduct rule apply to "collective market power” cases?

The wording of the second conduct rule suggests it may only be applied to challenge conduct by a single business operator, whereas broadly analogous prohibitions in most mature competition law regimes contemplate that relevant abuses of market power may also occur through the collective action of more than one business operator.  Again, it is expected that the government will be encouraged to address this issue before seeking final passage.

Key Prohibitions under a Sector-Specific “Merger Rule”

The Competition Bill also includes provisions prohibiting mergers or acquisitions that have the effect (or likely effect) of substantially lessening competition in Hong Kong,  unless they give rise to efficiencies that outweigh adverse competition effects or are exempt from the merger rule on the grounds of public policy.  However, this "merger rule" will only apply in cases where at least one party holds a carrier licence or controls a business operator that holds a carrier licence, at least until such time as the government may determine that it is appropriate to broaden the scope of application of the prohibition.

There is no mandatory pre-notification for such mergers under the Competition Bill.  Instead, the regulator is empowered to investigate mergers within 30 days ”after the  day on which it first became aware, or ought to have become aware, that the merger had taken place.”  After such time, the regulator may no longer initiate an investigation into a merger under the proposed law.

Notwithstanding the sector-specific nature of the merger rule, it seems from the broad wording of the Competition Bill that merger and acquisition (M&A) agreements involving business operators in other industry sectors may also potentially be challenged as agreements that violate the first conduct rule.   However, as this seems contrary to previous government proposals, it is expected that the business sector will lobby the Hong Kong government to expressly exempt M&A deals from such review.

If this does not occur, many business operators who previously lobbied to have the merger rule confined to the telecommunications sector may in time come to support its
cross-sector application. This is because it would provide clearer procedural mechanisms for obtaining advance approval and certainty for M&A deals, and would potentially subject M&A agreements to a less stringent competition test (determination of
whether such agreements substantially lessen competition) than the test applying under the first conduct rule (determination of whether such agreements prevent, restrict or distort competition).

Judicial Enforcement Model and Private Actions

In accordance with previous government proposals, a judicial enforcement model will apply under the Competition Bill.  Specifically, a Competition Tribunal will be established as a superior court of record and be empowered to hear and adjudicate on competition cases brought by the Competition Commission.  Additionally, the Tribunal will be able to hear private actions brought by persons who have suffered loss or damage as a result of a contravention of the conduct rules. Such actions can either follow on from a determination of the court, or be stand-alone in nature.  

Interestingly, private actions may be brought not only against a business operator that has contravened one of the conduct rules, but also against an individual "involved" in such a contravention (i.e., a person who aids, abets, procures or induces the contravention).

The Competition Tribunal is empowered to apply a full range of remedies for contravention of the conduct rules and merger rule, including:

  • Pecuniary penalties not exceeding 10 percent of the total turnover (including global turnover) for the year(s) in which a contravention occurs.
  • Any order the Tribunal considers appropriate, including an order restraining a person from engaging in any conduct that constitutes the contravention, an order requiring a person to dispose of operations, shares or assets and an order prohibiting a person from making or giving effect to an agreement.

The Tribunal may also disqualify directors where it determines that a company has contravened a conduct rule or the merger rule and it considers the director unfit to oversee the management of a company as a result of his or her conduct.

While the Competition Commission does not have adjudicative powers, it is empowered to accept commitments from business operators to take (or refrain from taking) action to remedy the anticompetitive effect of an alleged infringement of the previously mentioned rules.   

Additionally, the Competition Commission may issue an infringement notice where it has ”reasonable cause” to believe that a contravention of a conduct rule has occurred.  Here, the Competition Commission may, instead of bringing proceedings in the Competition Tribunal, give the business operator the option to admit to the contravention and pay a sum not exceeding HK$10 million, refrain from any specified conduct and/or take any action required by the Competition Commission.

Exclusions and Exemptions

Various exclusions and exemptions are provided for in the Competition Bill, in addition to the general exclusion under the first conduct rule for conduct achieving net economic benefits (discussed further above).  These exclusions and exemptions broadly resemble aspects of, and utilise terminology found in, the European competition law regime.

For example, the Competition Commission can grant block exemptions to particular categories of agreements that it is satisfied would generally benefit from the above-mentioned exclusion. 

Additionally, conduct by business operators entrusted with the operation of services that have general economic interest will be excluded from challenge under the conduct rules in circumstances where application of those rules would impede provision of those services.

Conduct undertaken in compliance with a legal requirement is also immune from challenge under the Bill, and the Chief Executive-in-Council can also provide immunity to a business operator or certain of its practices where it is determined that there are exceptional and compelling reasons of public policy to do so, or in order to avoid conflict with an international obligation.

Finally, the conduct rules will not apply to the government or statutory bodies, unless such bodies (or certain of their activities) are specified in relevant regulation(s) that may be made by the Chief Executive-in-Council. This is a departure from previous government indications that certain statutory bodies that will be subject to the law would be listed in a schedule to the Competition Bill, and indicates that the government's protracted review of this issue is continuing.

Leniency

The Competition Bill contemplates the introduction of a leniency regime administered by the Commission, whereby business operators can receive immunity from fines in exchange for their cooperation with an investigation.    The regime is only sketched broadly in the Bill, and it is expected that the Competition Commission would introduce detailed guidance on how applications for leniency will be made and considered in practice.

Concurrent Jurisdiction of the Existing Sectoral Regulators

If passed in its current form, the Competition Bill would provide two existing sectoral competition regulations in Hong Kong with concurrent jurisdiction alongside the Competition Commission: the Broadcasting Authority and the Telecommunications Authority.  The current adjudicative powers of the existing sectoral regulators for competition law matters relating to their respective industry sectors would, however, be transferred to the Competition Tribunal.

Crucial Guidelines Still to Be Drafted

The Bill contemplates that the Competition Commission will draft guidelines that will provide further clarity on the scope and manner of application of the conduct rules and the merger rule. The experience of foreign competition regimes such as those in Europe and Singapore suggests such guidelines will need to include a detailed explanation of how the broadly worded conduct rules will be applied in practice and clearly identify the enforcement priorities of the Competition Commission.

Conclusion

After years of debate and consultation, Hong Kong now appears to be firmly on the path to introducing a cross-sector competition law.  If the Competition Bill is enacted, the region will be the latest in a long line of Asian jurisdictions that have only recently joined (or are in the process of joining) the ranks of jurisdictions with  comprehensive competition regimes—such as China, Malaysia and Singapore.

It is important that businesses operating in Asia are attuned to the proliferation of new competition law regimes in the region, and seek advice on how the developing regimes may impact existing and future business strategies and agreements.  Businesses with operations or customers in Hong Kong may also wish to be involved in the ongoing debate and any future consultation processes relating to the new Competition Bill to ensure the final product is in line with international standards and does not create undue uncertainty or interruption of standard business practices.

For now, much of the public debate concerning the Bill is likely to focus on its broad range of exclusions and exemptions. Detailed discussion on the appropriate scope of the conduct
rules, and where the Competition Commission's enforcement priorities for such rules will lie, may need to wait until the Commission begins work on guidelines related to these matters. The government has previously committed to ensuring that a public consultation process is held in relation to the development of such guidelines.

Finally, there is some expectation that a grace period will apply between passage of the Bill and commencement of the conduct rules,  giving the business sector time to prepare for compliance with the law and the Competition Commission time to draft the above-mentioned guidelines.

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