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Legal Update

Hong Kong's Competition Bill - More Questions Than Answers?

5 July 2010
Mayer Brown JSM Legal Update

The Hong Kong government has published its new Competition Bill, which is set to be introduced into the Legislative Council within the next fortnight. While the contents of the Bill largely accord with previous government announcements, key details relevant to understanding the true scope and potential impact of the Bill on the business sector remain to be provided.

Objects of the Bill and role of the new Competition Commission

According to its Explanatory Memorandum, the 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 in respect of the Bill's key prohibitions.

The Bill also provides for the establishment of an independent statutory Competition Commission, which will be charged with investigating complaints, bringing public enforcement actions in respect of anti-competitive conduct, and promoting public understanding on competition matters. Interestingly, the Competition Commission may also conduct 'market studies' into matters affecting competition in Hong Kong, which could lead to calls for it to examine (and press the government to make changes to) arrangements such as the land sales system in Hong Kong.

Key prohibitions - Two 'conduct rules' and a sector-specific 'merger rule'

As expected, the 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 in a market (the "second conduct rule"). While government representatives have previously suggested that a market share of 40% may be considered indicative of substantial market power, the Bill does not contain any language referencing such indicative or presumptive market share thresholds.

The Bill also includes provisions prohibiting mergers or acquisitions that have the effect (or likely effect) of substantially lessen competition in Hong Kong - however this "merger rule" will only apply to telecommunications licensees until such time as the government may determine that it is appropriate to broaden the scope of application of the prohibition.

Notwithstanding the sector-specific nature of the merger rule, it seems that 'M&A' deals in other sectors may also potentially be challenged as involving agreements that violate the first conduct rule. In this context, 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 - on the basis that this 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 lessening competition) than the test applying under the first conduct rule (determination of whether such agreements prevent, restrict or distort competition).

The clauses which 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 towards competitors (which may in practice include such activities as below-cost 'predatory pricing') is listed as an example of an activity that may breach the second conduct rule. Notably, while the government has previously indicated that only 'horizontal' agreements (that is, 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 Bill appears on its face to be equally applicable to vertical agreements such as distribution or downstream supply agreements.

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 - and 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.

Using the aforementioned concept of 'predatory pricing' (in violation of the second conduct rule) as an example, the guidelines will need to spell out details such as:

  • how the costs of a business operator with substantial market power should be calculated; and
  • whether, to establish a violation of the second conduct rule, it will be necessary to show that a relevant business operator engaged in below-cost pricing will be likely to raise their prices and claim monopoly profits after it eliminates relevant competitors.

Different jurisdictions take different approaches to such matters, and accordingly until further guidance is forthcoming it will be difficult for relevant business operators to determine in advance whether particular forms of conduct such as temporary below-cost pricing (and the many other activities which may fall for review under the conduct rules) may be deemed to violate the proposed law.

Judicial enforcement model

In accordance with previous government statements, a judicial enforcement model is provided under the Bill. A Competition Tribunal will be established to hear and adjudicate on competition cases brought by the Competition Commission and the Tribunal will also be able to hear private actions - which can either follow on from a determination of the court, or be stand-alone in nature.

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% of the total turnover (including global turnover) for the year(s) in which a contravention occurs; award of damages to aggrieved parties; interim injunction orders; and termination or variation of an agreement.

Exclusions and exemptions

Various exclusions and exemptions are provided for in the Bill.

For example, the Competition Commission can decide whether to grant immunity from the conduct rules to an agreement or conduct that, in its opinion, enhances economic efficiency (and satisfied related criteria set out in the Bill), is performed by an undertaking entrusted with the operation of services of general economic interest, or is made in compliance with a legal requirement. The Chief Executive In Council can also make exceptions if there are exceptional and compelling reasons of public policy to do so.

Additionally, the Bill will not apply to the government or statutory bodies, unless such bodies (or certain of their are 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 who will be subject to the law would be listed in a schedule to the Bill, and indicates that the government's protracted review of this issue is continuing.

Next steps

The Competition Bill is scheduled to have its first reading in Hong Kong's Legislative Council on 14 July 2010, and further textual revision of the bill may be expected during the legislative process.

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 should lie in respect of such rules, 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 - to allow the business sector time to prepare for compliance with the law and the Competition Commission to draft the above-mentioned guidelines.

Mayer Brown JSM will soon be circulating invitations for a comprehensive in-house counsel seminar on the new Competition Bill.

For inquiries related to this Legal Update, please contact:

John Hickin ( )

Hannah Ha ( )

Gerry O'Brien ( )

Learn more about our Hong Kong office and Antitrust & Competition practice.

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