Hong Kong: A Cross-Sector Competition Law For Hong Kong

China Insight - Issue 19

After several years in preparation, the Hong Kong Government published its Competition Bill on 2 July 2010. The Bill, which aims to introduce a cross-sector competition law regime in Hong Kong, was formally introduced in the Legislative Council on 14 July, but will not be debated before the autumn.

The publication of the Bill comes after several years of policy debate which culminated in a 2006 recommendation from the Competition Policy Review Committee to establish cross-sector competition legislation for Hong Kong, and two subsequent rounds of public consultation. It is understood that the Government intends to use a phased-in approach, with the institutional provisions coming into force first to allow the authorities to be set up and to commence work on enforcement guidelines. The substantive provisions would only come into force at a later date, probably not before 2012, by which time guidelines should have been finalized.

Scope of the Bill

The scope of the Bill is in many respects in line with foreign competition law regimes:

  • The Bill makes provision for the two main traditional pillars of competition law. The first conduct rule prohibits restrictive agreements and concerted practices while the second conduct rule prohibits abusive conduct by undertakings with market power. Restrictive agreements and practices that enhance economic efficiency are nevertheless permitted and the Competition Commission has the power to adopt block exemption orders.
  • The conduct rules will apply to undertakings. The notion of undertaking is defined to include any entity, regardless of its legal status or the way in which it is financed, that is engaged in economic activity. Although not stated in the Bill, it is likely that separate businesses and companies under the same control will be considered as constituting a single undertaking.
  • The law has extraterritorial application. Even where anticompetitive conduct is carried out outside Hong Kong, an undertaking will still be caught if the conduct has the object or effect of preventing, restricting or distorting competition in Hong Kong.
  • Undertakings providing services of general economic interest. The Bill excludes from the two conduct rules all undertakings which have been entrusted by the Government with the operation of services of general economic interest, in so far as the competition rules would obstruct the performance of the particular tasks assigned to them.

The Bill also displays some differences from the law found elsewhere:

  • Merger control is limited. The Bill proposes a telecoms sector-specific merger control regime only; merger activities outside the telecommunications sector are not subject to merger control requirements.
  • Statutory bodies are exempted unless subordinate legislation provides otherwise. Under the current proposal, the Government contemplates exempting all "statutory bodies" unless they are specified in a separate regulation yet to be adopted by the Chief Executive in Council.
  • Sanctions are heavier. Contrary to the case in most foreign regimes, the Competition Tribunal will have the power to impose fines of up to ten per cent of an undertaking's annual worldwide turnover for each year in which the contravention has continued. The theoretical maximum of fines in the EU is ten per cent of one year of turnover. In addition, the current proposal contemplates imposing fines on any "person" (including natural persons) who has been involved in the contravention of the rule. While this may be due to ambiguous drafting in the Bill, this would result in a much more far-reaching power than is found in established competition law regimes.

The conduct rules

The first conduct rule

The first conduct rule prohibits agreements and concerted practices among undertakings, as well as undertakings' involvement in decisions of trade associations which have as their object or effect the prevention, restriction or distortion of competition in Hong Kong. The notion of agreement is broadly defined to include any arrangement or understanding, whether express or implied, written or oral. The relevant provisions provide a non-exhaustive list of restrictive agreements.

The prohibition does, however, not apply to agreements that enhance overall economic efficiency, that are made for the purpose of complying with other legal requirements, or that are necessary for the provision of services of general economic interest.

The second conduct rule

The second conduct rule prohibits undertakings with a substantial degree of market power from "abusing that power" by engaging in conduct that has the object or effect of preventing, restricting or distorting competition in Hong Kong. The relevant provisions establish a general standard of conduct and provide a non-exhaustive list of abusive conduct. The second conduct rule only refers to abuses by an "undertaking" while some other jurisdictions – notably Singapore, the EU and the UK – apply the prohibition to an abuse "by one or more undertakings". This suggests that the second conduct rule may not cover collective dominance situations, i.e. where several independent undertakings hold together a "substantial degree of market power."

Contrary to what is the case under the first conduct rule for restrictive agreements, the Bill does not contemplate permitting abusive conduct on account of redeeming economic efficiencies. The only available grounds for exclusion are compliance with a legal requirement and the operation of services of general economic interest.

Merger control

Under the Bill, telecommunications carrier licensees will be prohibited from carrying out a merger that has or is likely to have the effect of substantially lessening competition in Hong Kong. Merger activities outside the telecommunications sector are not subject to merger control requirements.

It should be noted, however, that some merger activities could still be assessed under the general conduct rules.

Exclusions and exemptions

The Bill proposes to exempt or exclude certain conduct from the conduct rules:

Agreements enhancing economic efficiency

According to Schedule 1, the first conduct rule does not apply to agreements which "enhance overall economic efficiency". This criterion will be met where an agreement improves production or distribution or promotes technical or economic progress, its restrictive effects are unavoidable in order to attain those efficiencies, and the agreement does not result in the elimination of competition in respect of a substantial part of the goods or services in question. The underlying economic objective appears to be to achieve general welfare and economic efficiency, rather than being limited to the welfare of final consumers, as is the case under the EU competition law regime.

Parties can either self-assess whether their proposed agreements meet the above conditions for an exclusion or apply for a binding decision from the Commission. The Commission will, however, not be obliged to consider the application unless it raises novel or otherwise unclear issues. The Commission will also have the power to adopt block exemption orders, in which it confirms that a particular category of agreements meets the conditions so that it may benefit from a general exclusion.

The economic efficiency exclusion set out in Schedule 1 is not applicable in the case of the second conduct rule. If the second rule is interpreted consistently with its counterparts in other jurisdictions, however, conduct will not be considered to be abusive if it is objectively justified. Most objective justifications which have been accepted elsewhere relate to economic efficiency.

Conduct complying with other legal requirements

Conduct that might otherwise breach the first or second conduct rules will be permitted if made for the purpose of complying with other laws applicable in Hong Kong. When conduct is required under an international obligation that directly or indirectly relates to Hong Kong, for example an international arrangement relating to civil aviation, the Chief Executive in Council may choose to exempt such conduct by way of an order.

Services of general economic interest

The proposed law will also exclude from the two conduct rules all undertakings, irrespective of their legal form, which have been entrusted by the Government with the operation of services of general economic interest, but only in so far as the competition rules would obstruct the performance of the particular tasks assigned to them.

Conduct exempted for public policy and other reasons

The Chief Executive in Council may opt not to apply the conduct rules for "exceptional and compelling reasons of public policy" or to avoid conflict with international obligations that directly or indirectly relate to Hong Kong.

The Bill proposes to exempt certain transactions from the merger rule:

Exempted mergers

Mergers involving telecommunications carrier licensees that substantially lessen competition in Hong Kong will still be allowed to proceed if the economic efficiencies that arise from the merger outweigh the merger's restrictive effects. Mergers in the telecommunications sector that would otherwise be prohibited could still be exempted by the Chief Executive in Council for "exceptional and compelling reasons of public policy".

The following persons will also be exempt from the Competition Ordinance:

Statutory bodies

Under the current proposal, the Government contemplates exempting all "statutory bodies" unless they are specified in a separate regulation to be adopted by the Chief Executive in Council, in which case all or part of their activities will be subject to the Competition Ordinance. Statutory bodies are persons, incorporated or not, established under an Ordinance, or constituted or appointed by an Ordinance, but do not include companies, trustees, societies, co-operatives and trade unions.

The Chief Executive may only subject a specific statutory body to the competition rules where (i) it is engaged in an economic activity in direct competition with another undertaking; (ii) the economic activity of the statutory body affects the economic efficiency of a specific market; (iii) the economic activity is not directly related to the provision of an essential public service or the implementation of public policy; and (iv) there are no other exceptional and compelling reasons of public policy against subjecting the statutory body to the competition rules. Until such regulation enters into force, all statutory bodies are exempted from the Bill.

It is noteworthy that conduct involving statutory bodies is not exempted under the Bill. While statutory bodies will be exempted, non-exempted persons (including, arguably, incorporated subsidiaries of statutory bodies) involved in conduct jointly with statutory bodies will still be subject to the general competition rules.

Other persons

The Chief Executive in Council may, by regulation, exempt any other person. The Bill does not provide any criteria for the grant of such an exemption.

Enforcement and investigation

The Competition Bill contemplates the adoption of a judicial enforcement model under which the Competition Commission would investigate and prosecute anticompetitive practices while adjudicative power would be vested in a Competition Tribunal – whose decisions would in turn be reviewable by the Hong Kong Court of Appeal.

Competition Commission

The Commission, at the heart of the proposed enforcement model, would be entrusted with different tasks and powers including:

  • Investigating and prosecuting anticompetitive practices. The Commission will have wide-ranging investigatory powers, including a power to request information and documents, a power to request explanations, and, after obtaining a court warrant, the power to enter and search premises. The threshold for commencing an investigation is rather vague (based on a "reasonable cause" test), and will not be clarified until further guidelines are published by the Commission.
  • Accepting commitments and issuing infringement notices. While adjudicative power rests with the Tribunal, not all infringements investigated by the Commission will necessarily be brought before it. The Commission can accept commitments to bring a particular conduct to an end or can issue an "infringement notice" in return for a commitment to comply with the requirements of the notice – which can include admitting an infringement, making a payment of up to HK$10 million, and agreeing to refrain from a specified activity.
  • Making leniency agreements. The Commission will administer the leniency regime and will have powers to conclude leniency agreements with co-operating parties.
  • Conducting market studies. The Commission will be entitled to conduct studies into matters affecting competition in Hong Kong markets.
  • Issuing implementing guidelines. The Commission is explicitly required to issue guidelines covering interpretation and enforcement of the two conduct rules, the granting of block exemptions, the handling of complaints and investigations, and the handling of mergers (including as to notification).

In the telecommunications and broadcasting sectors, the Bill provides that the Broadcasting Authority and the Telecommunications Authority (which are due to be merged into the Communications Authority under a separate Bill) will have concurrent jurisdiction with the Commission in respect of the investigation and bringing of enforcement proceedings of competition cases.

Competition Tribunal

The Tribunal will operate as the adjudicative authority. It will have jurisdiction to hear applications from the Commission, applications for review of relevant determinations, and private actions related to the contravention of conduct rules. It will be the Tribunal, and not the Commission, which will have the power to impose pecuniary penalties on, or make orders against, persons who have contravened a competition rule.

The existing adjudicative functions of the Broadcasting and Telecommunications Authorities will also be transferred to the Tribunal.

Leniency

The Bill contemplates the introduction of a leniency regime administered by the Commission whereby undertakings, in exchange for their co-operation in an investigation, would not face pecuniary penalties. Detailed conditions for the grant of leniency are likely to be spelled out by the Commission in implementing guidelines.

Private actions

Persons who have suffered loss or damage as a result of a contravention of the conduct rules will have a right of action. Proceedings may be brought after a contravention has been established ("follow-on actions"). They may also be brought to seek the establishment of a contravention ("stand-alone actions"). Both actions can be brought in front of the Court of First Instance if there are also allegations other than competition law infringements. The Competition Tribunal will have sole jurisdiction in the event that the plaintiff alleges a competition law infringement as its sole cause of action.

Beneficiaries of leniency agreements will not be shielded from private enforcement. Parties who have admitted to an infringement as part of a commitment or settlement procedure will also not be shielded.

Sanctions

Penalties for substantive infringements

The ambit of the penalty clauses not only includes the undertakings that breached the conduct or merger rules, but also "persons" who have breached the rules or who have assisted or been involved in the anti-competitive conduct. This broad language would allow sanctions to be sought against any legal or natural person involved in the conduct. The penalties that can be imposed for contravention of the conduct rules are all civil in nature and include:

Financial penalty. The maximum amount for a "single contravention" is ten per cent of an undertaking's turnover for each year in which the contravention continued. Therefore, if the contravention has continued for more than a year, the Tribunal may impose a penalty of ten per cent of the turnover for each year in which it occurred. A party may also be ordered to pay the costs of the Commission's investigation.

Damages. The Tribunal may also order payment of damages to those who suffered loss as a result of anticompetitive conduct, even, apparently, absent a private damages action.

Disqualification orders. The Tribunal may disqualify a person from directorship, and from being a liquidator or a receiver or manager of a company's property, for not more than five years. Disqualification could be ordered not only where the person's conduct contributed to the contravention, but also where the person did not know but ought to have known that the conduct constituted a breach of the Bill.

Other orders. The Bill also lists other orders that may be imposed, including a prohibition on voting by virtue of a shareholding and an order or prohibition regarding the disposal of property.

Penalties for obstructing the investigation

Although the penalties for breach of the conduct rules are civil in nature, the Bill provides for certain criminal sanctions including fines and custodial sentences if persons such as directors or employees obstruct the Commission's investigations. Examples of obstructions that may entail criminal sanctions include providing false information or disclosing confidential information to third parties.

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.

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