Member Article

In our December 2011 newsletter we reported on Hong Kong's Competition Bill. Subsequent to that newsletter, further revisions were made to the original Bill and we outline below the provisions now to be enacted. The Bill was passed on 14 June 2012 and will come into effect on a day to be appointed by the Secretary for Commerce and Economic Development. It will probably be a year or so before that happens, given that the new Competition Commission and Competition Tribunal have to be set up. Who will the Competition Ordinance apply to?  It will apply to any entity (regardless of its legal status or the way in which it is financed) engaged in economic activity, including individuals.

Exemptions and Exclusions

Statutory bodies are to be largely 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 will also have wide powers to exempt:-

i. a specified agreement (or class of agreements) from the First Conduct Rule; or

ii. specified conduct (or a specified class of conduct) from the Second Conduct Rule,

1. if satisfied that there are exceptional and compelling public policy reasons for doing so; or
   
2. to avoid a conflict between the Competition Ordinance and an international obligation relating to Hong Kong;

The following are also exempt:-

1. from the First Conduct Rule, agreements which contribute to improving production or distribution or promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit;
   
2. from the First and Second Conduct Rules, undertakings entrusted by the Government with the operation of services of general economic interest in so far as the conduct rule would obstruct the performance, in law or fact, of the particular tasks assigned to it.
   
3. from the First and Second Conduct Rules, agreements made for or conduct engaged in 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).

The Competition Commission will be able to issue a block exemption order 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.

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 Ordinance excludes from the First Conduct Rule an agreement between undertakings with a combined worldwide turnover not exceeding HK$200 million in the preceding financial year. This exclusion does not apply to agreements involving the four types of serious anti-competitive conduct i.e. price fixing, bid rigging, market allocation and output control, since such activities almost always have an appreciable adverse effect on competition. Undertakings with annual worldwide turnover of HK$40 million will be excluded from the Second Conduct Rule.

What is prohibited?

First Conduct Rule

The "First Conduct Rule" prohibits anti-competitive agreements and concerted practices and decisions, having the object or effect of preventing, restricting or distorting competition in Hong Kong. A distinction is made between "serious anti-competitive conduct" and other types of conduct which may, depending on the facts and circumstances of that particular case, amount to anti-competitive conduct.

"Serious anti-competitive conduct" includes price fixing, bid-rigging, market allocation and output control.

Second Conduct Rule

The "Second Conduct Rule" prohibits an undertaking that has a "substantial degree of market power" in the 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 in particular constitute such an abuse if it involves predatory behaviour towards competitors or limiting production, markets or technical development to the prejudice of consumers. There is no definition of what constitutes a "substantial degree of market power" in the Ordinance, although it does contain a list of factors that may be considered in determining whether an undertaking has a substantial degree of market power in the market, namely:-

1. the market share of the undertaking;
   
2. the undertaking's power to make pricing and other decisions;
   
3. any barriers to entry to competitors into the relevant market; and
   
   
4. any other relevant matters specified in guidelines issued.

Territorial Application of the Rules

The First Conduct Rule applies 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

A Competition Commission ("the Commission") will investigate conduct that may contravene the Ordinance and enforce its provisions. The Commission will consist of 5 to 16 members, appointed by the Chief Executive. Such members are expected to have expertise or experience in industry, commerce, economics, law, small or medium enterprise or public policy. The Commission may initiate proceedings in a Competition Tribunal ("the Tribunal"), which will consist of judges of the Court of First Instance. Decisions of the Commission will be reviewable by the Tribunal. Decisions of the Tribunal (with a few limited exceptions) will be appealable to the Court of Appeal.

Investigative Powers of the Commission

The Commission may conduct an investigation of its own volition, where it has received a complaint or where the Court of First Instance, Tribunal or Government has referred any conduct to it for investigation. It may only conduct such investigation if it has reasonable cause to suspect that contravention of competition rule has taken place, is taking place or is about to take place.

The Ordinance gives the Commission extensive investigative powers, including requiring a person to produce documents or information, or attend before the Commission to answer questions. It also has the power (upon obtaining a warrant from the court) to enter and search premises and seize documents, computers and or any other things on the premises, reasonably believed to be evidence of contravention of a competition rule.

Warning Notices

If the Commission has reasonable cause to believe that there has been a contravention of the First Conduct Rule, but that the contravention does not involve "serious anti-competitive conduct", before bringing proceedings in the Tribunal against the undertaking concerned, it must issue a warning notice. The warning notice will describe the contravening conduct (and evidence of it) and request that it stop within a specified period, failing which the Commission may institute proceedings in the Tribunal.

Infringement Notices

Where the Commission has reasonable cause to believe that the First Conduct Rule has been contravened and the contravention involves "serious anti-competitive conduct" or the Second Conduct Rule has been contravened, it may issue an infringement notice, rather than initially bringing proceedings in the Tribunal. The infringement notice will contain an offer not to initiate proceedings in the Tribunal if the undertaking in question agrees to comply with requirements specified in the notice, such as refraining from the conduct in question and admitting contravention of the relevant conduct rule.

Leniency Agreements

In exchange for a person's co-operation in an investigation or proceedings under the Ordinance, the Commission may make a leniency agreement with them, that it will not bring or continue proceedings before the Tribunal for a pecuniary penalty in respect of an alleged contravention of a conduct rule.

Commitments

The Commission may accept a commitment from a person to take any action or refrain from taking any action that the Commission considers appropriate to address its concerns about a possible contravention of a competition rule. If the Commission accepts a commitment, it may agree not to commence or continue an investigation or not to bring or continue proceedings in the Tribunal.

Pecuniary Penalties

If after carrying out its investigations, the Commission considers it appropriate, it may apply to the Tribunal for a pecuniary penalty to be imposed on any person it has reason to believe has contravened or been involved in the contravention of a competition rule. If the Tribunal is satisfied that a person has contravened a competition rule, it may order that person to pay the Government a pecuniary penalty, of an amount it considers appropriate. In deciding the amount, the Tribunal may have regard to the nature and extent of the conduct in question, the loss or damage caused by the conduct, the circumstances in which the conduct took place and whether the person has previously been found by the Tribunal to have contravened the Ordinance.

The amount of the pecuniary penalty in relation to conduct which constitutes a single contravention cannot exceed 10% of the turnover (gross revenues obtained in Hong Kong) of the undertaking concerned for each year in which the contravention occurred or, if the contravention occurred in more than 3 years, 10% of the turnover of the undertaking concerned, for the 3 years in which the contravention occurred that saw the highest, second highest and third highest turnover.

The Tribunal may also order any person who has contravened a competition rule to pay to the Government an amount equal to the costs incurred by the Commission in investigating and bringing proceedings for the contravention.

In addition to pecuniary penalties, the Tribunal can make numerous other types of orders, including for example, awarding damages to any aggrieved person, granting injunctions, prohibiting a person from making or giving effect to an agreement, modifying, terminating or declaring an agreement to be void or voidable and making disqualification orders against directors for up to five years.

Private Actions

A person who has suffered loss or damage as a result of any act that has been determined by the Tribunal (or Court of First Instance in proceedings transferred to it by the Tribunal or Court of Appeal on an appeal from a decision of the Tribunal) as being a contravention of a conduct rule can bring a follow on action against any person who has contravened or been involved in the contravention. The original Competition Bill contained provisions allowing private, stand alone actions (i.e. not following on from a determination of contravention by the Tribunal). These provisions have now been removed, but the Government intends to review the need to introduce such in a few years' time.

Mergers

The "Merger Rule" prohibits mergers that have or are likely to have the effect of substantially lessening competition in Hong Kong. The "Merger Rule" will initially only apply to undertakings holding (or controlling an undertaking that holds) a carrier licence issued under the Telecommunications Ordinance. Mergers are specifically excluded from the First and Second Conduct Rules, although the merged undertakings would still be subject to such.

What should businesses be doing now?

Businesses should:-

1. Familiarize themselves with the provisions of the Competition Ordinance and identify any potential areas of risk in respect of their current activities;

2. Promote in-house awareness and training to ensure that key decision-makers know what:-

1. types of agreements and practices may breach the Ordinance;
   
2. types of agreements and practices are exempt from the Ordinance, or could be exempt, upon application to the Commission;
   
3. the extra-territorial reach of the Ordinance and implications of such;

3. Devise and implement internal policies and procedures to ensure compliance with the Ordinance.