The implementation of the new Competition Ordinance (Chapter 619 of the Laws of Hong Kong) (the Competition Ordinance) on 14 December 2015 will mark the first time that Hong Kong has a general and cross-sector competition law.

Background

The Competition Ordinance was enacted on 14 June 2012 as a general and cross-sector competition law to curb anti-competitive conduct, and will come into full effect on 14 December 2015. In this issue, we will provide some practical tips to assist you with ensuring compliance with the Competition Ordinance.

Risk Identification

Companies must first conduct a thorough review of its existing operations, business practices, business arrangements and contracts to identify aspects of the Competition Ordinance that are of particular relevance. Such a review will assist with the determination of an appropriate compliance strategy and the priority of compliance measures to be undertaken.

As a starting point, companies should be wary of and avoid "high risk" conduct as set out below:

High Risk Conduct
Price Fixing
  • Agreements or concerted practices with competitors with the aim of fixing, maintaining, increasing or otherwise controlling prices.
  • For example, direct agreements on matters of price or any element of price (e.g. discount, rebate or concession), or agreements between undertakings who are competitors not to quote a price without consulting each other.
Market Sharing
  • Agreements or concerted practices with competitors that seek to allocate sales territories, customers or markets for the production or supply of particular products.
  • For example, even a mere understanding that parties will not supply a competitor's existing customers, and/or will encourage such customers to stay with their existing supplier if the customer seeks to switch suppliers can be considered as market sharing.
Output Limitation
  • Agreements or concerted practices with competitors which fix, maintain, control, prevent, limit or eliminate the production or supply of products.
  • For example, production or sales quota arrangements limiting the volume or type of products available in the market.
Bid Rigging
  • Agreements or concerted practices with competitors not to compete for particular projects.
  • For example, any agreement not to submit or to withdraw previously submitted bids (bid suppression), or any agreement to take turns at being the winning bidder (bid rotation).
Joint Buying
  • A joint buying arrangement may be considered by the Competition Commission as having the object of harming competition if it is a disguised buyers' cartel.
  • An example of a buyers' cartel would be where buyers collude in secret on the prices they will pay for purchases made individually.
Information Exchange with Competitors
  • Concerns may rise arise where competitors exchange information and in particular, competitively sensitive information.
  • Generally, information relating to price and quantities (e.g. information concerning sales, market shares, sales to particular customer groups or territories) is most competitively sensitive.
Group Boycotts
  • An agreement or concerted practice amongst competitors not to do business with targeted individuals or undertakings may be considered an anti-competitive group boycott.
Resale Price Maintenance Risk
  • Vertical agreements where suppliers control or attempt to control the price at which buyers may resell goods will be considered as having the object of harming competition if there is evidence that such arrangements were implemented by a supplier:
    1. in response to pressure from a distributor seeking to limit competition with other distributors at the same level; or
    2. to foreclose competing suppliers.

If a company has a substantial degree of market power, it should also be wary of and avoid further "high risk" conduct as follows:

High Risk Conduct
Predatory Pricing
  • Imposing prices below cost with an aim to eliminate a competitor from the market, or to make it difficult for new competitors to enter the market.
  • For example, pricing below average variable cost, pricing below long run average incremental cost, pricing below average avoidable cost or pricing below average total cost.
Tying & Bundling
  • Making the purchase of a product in respect of which it has substantial market power (the tying product) conditional on the purchase of other products (tied products).
Margin Squeeze
  • Reducing or "squeezing" the margin between (i) the price it charges for the input to its competitors on the downstream market and (ii) the price its downstream operations charge to their own customers, such that the downstream competitor is unable to compete effectively.
Refusal to Deal
  • Refusing to supply an input to another undertaking, or supplying that input only on objectively unreasonable terms thereby preventing that undertaking from operating or competing effectively in the market.
  • For example, unduly delaying or degrading supply of, or imposing excessive prices for certain input.
Exclusive Dealing Arrangements
  • Arrangements requiring a customer to purchase, directly or indirectly, all or a substantial proportion of its requirements of a particular product from a particular undertaking.
  • For example, the imposition of exclusive purchasing obligations, or provision of conditional or loyalty rebates.

For companies that are holders of carrier licenses under the Telecommunications Ordinance (Chapter 106 of the Laws of Hong Kong), they should be alert whenever they are in a "dominant position"1 and/or considering a merger transaction.

Risk Mitigation

Given the difference in nature and size of each business, companies will need to consider the actual impact of the Competition Ordinance on its practices and formulate a compliance strategy suitable to the size and risk profile of its business.

For reference purposes, we set out below a list of non-exhaustive measures that companies can adopt in order to mitigate and manage potential or identified risks:

Measures Actions
Cease or modify business practices
  • Existing business practices that are likely in breach of the Competition Ordinance should be ceased or modified.
  • Keep records of how identified risks have been dealt with.
Provide training
  • Organise training seminars or workshops to educate officers and employees about business practices or conduct that may constitute unlawful anti-competitive activity.
  • Targeted training may be necessary for "higher risk" staff (e.g. front line sales staff. staff that often participate in events where competitors will be present, senior management involved in making pricing decisions etc.).
Prepare a compliance manual
  • Prepare a compliance manual to remind employees of the key restrictions and requirements under the Competition Ordinance, the company's compliance policy and key do's and don'ts that are particularly relevant to the company's business.
  • Consider issuing specific guidelines on matters such as dealing with competitors and trade associations, resellers and customers, handling competition investigations etc.
Appoint a compliance officer
  • Designate a member of staff as a compliance officer responsible for overseeing the implementation of the company's compliance strategy.
  • In the event that a member of staff has queries about the company's compliance policy and compliance manual, the compliance officer may serve as the first point of contact.
Seek legal advice
  • For issues that are unclear or complex, consider seeking legal advice.

Regular Reviews

Competition compliance is an on-going process. Companies should regularly review its policies and practices (which, in light of changing market conditions or new legal developments, may change from time to time) and where necessary, update and refine its compliance measures to ensure continuing compliance with the Competition Ordinance.

Outlook

This imminent implementation of the Competition Ordinance marks a significant step in the evolution of Hong Kong's fledgling antitrust regime. Multinational enterprises doing business in Hong Kong can no longer afford to dismiss the Special Administrative Region as a jurisdiction that has no competition regime or antitrust enforcement.

Understanding and complying with competition law principles is therefore more important than ever.

Footnotes

1. See What you need to know about Hong Kong Competition Law (Part 4: The Merger Rule and the Telco Rule)
( http://www.cadwalader.com/uploads/cfmemos/8ec74d645416f99dbb6e47327182e95c.pdf)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.