Yesterday the Hong Kong Government ("Government") briefed lawmakers on various proposals to address the concerns of businesses, especially those of small and medium-sized enterprises (SMEs), in a determined push to put the legislative schedule for Hong Kong's first competition law back on track.
Six changes are being proposed by Government to make the proposed competition law more acceptable to the business community, in particular, the SMEs who have been worried about the effect of a competition law on them. The Government has kept the core framework - outlawing anti-competitive (the first conduct rule) and market abuse (the second conduct rule) activities - but now plans to dilute a few key provisions.
It appears, from the mood and comments made after the proposals were issued, that the concessions have achieved this aim (although some lawmakers are still saying that the concessions have not gone far enough). Hong Kong should expect a competition law to be in place this time next year, although its final scope - but not its essential provisions and key features - may well change in the next few months.
In this Alert, we discuss the proposed changes and how they may affect you. For a refresher on the Competition Bill ("Bill"), please see our client alert from October 2010: Hong Kong's Competition Bill : The Beginning of the End.
Change #1: Specifying 4 types of activities for the first conduct rule
Hardcore anti-competitive conduct
Businesses have expressed concern about breaching the first conduct rule1 because of the lack of specificity about what may constitute prohibited anti-competitive behaviour. Hence, the Government proposes to specify 4 kinds of hardcore anti-competitive activities that will be caught:
- market allocation
- output control
These are now termed "serious anti-competitive conduct". The first three activities have been defined2 to mean:
- fixing, maintaining, increasing or controlling the price for the supply of goods or services;
- allocating sales, territories, customers or markets for the production or supply of good or services; and
- fixing, maintaining, controlling, preventing, limiting or eliminating the production or supply of goods or services.
Bid-rigging has been given a more substantial definition, in summary being:
- an agreement between two or more undertakings3, whereby one or more of them agrees to submit, not submit or withdraw a bid or tender, unbeknownst to the caller of the bid or tender; or
- a submission arrived by agreement made between two or more undertakings in relation to a call or tender, unbeknownst to the caller of the bid or tender.
The Government believes that these activities are widely recognised and accepted as always having an adverse impact on competition and therefore the full range of enforcement powers will be available to the regulators to take action against these activities.
The Government believes that these activities are widely recognised and accepted as always having an adverse impact on competition and therefore the full range of enforcement powers will be available against these activities.
Non-hardcore anti-competitive conduct
The Government proposes that where an undertaking engages in so-called non-hardcore activities covered by the first conduct rule - in effect any other potential anti-competitive activity4 that does not fall into one of the four categories above - a "cease and desist" warning notice by the Competition Commission ("Commission") may be issued. If the conduct continues after the time period stipulated by the Commission or is repeated after the expiry of the time period, the Commission may institute proceedings in the Competition Tribunal.
The approach towards more certainty by further defining anti-competitive conduct should be welcomed by businesses; however it is not clear that the use of a warning notice5for non-hardcore anti-competitive behaviour will materially reduce compliance costs. It also remains to be seen whether this new structure will be supported by lawmakers and the Hong Kong community.
Change #2: Significant reduction in maximum penalty
The issue of the maximum penalty that can be imposed under the Bill has generated much debate, and the previous maximum penalty of 10% of worldwide turnover has been criticised as disproportionately severe. The Government now proposes that this be revised downwards to 10% of local turnover up to a maximum of three years. If the infringement lasts for more than three years, the three years of infringement with the highest turnover will be chosen. The Singapore6 competition regime has a similar maximum penalty based on local turnover, whereas other regimes, notably the European Union, base maximum penalties on global turnover.
Many businesses will welcome a reduction in the maximum penalty, especially in the early years of the new competition regime.
Change #3: Stand-alone right of private action removed
Previously, anyone who suffered loss as a result of a contravention of a conduct rule could bring a private action, as a follow-on to, or independent of, any action by the Commission. Tacitly accepting arguments that such rights could potentially allow large companies to pressure or harass SMEs, the Government proposes to make available only follow-on private actions, that is, a private action can be brought only after an act is found to be, or a person has admitted that its conduct is, in contravention of a conduct rule. This could potentially mean a long wait to bring private action if an undertaking is able to exercise all its rights of appeal, right up to the Court of Final Appeal for final adjudication, although the Tribunal has the discretion to allow private action to commence before final adjudication.
However, the substantial enforcement powers and penalties under the Bill may prove to be a sufficient deterrent, without the additional right of private action on a stand-alone basis being necessary.
Again, this proposal is in line with the Singaporean regime where third parties can only bring an action after a party is found to be in breach of competition law and after the expiry of any appeal period. Other jurisdictions, such as Australia, allow stand-alone private actions.
Change #4: A clear de minimis threshold
A threshold, below which enforcement action is not taken, with reference to market share or turnover, is common in other jurisdictions. The Government proposes specific de minimis thresholds (with reference to turnover in the preceding financial year) of HK$100 million in respect of the first conduct rule and HK$11 million in respect of the second conduct rule.
These threshold amounts were calculated with the SMEs in mind. According to the Government, statistics show that the average annual business turnover of SMEs have held steady at about HK$11 million between 2005 to 2009. Agreements and conduct below these thresholds are likely to involve a small number of SMEs, therefore having an insignificant impact on competition.
The threshold will not apply to the four kinds of hardcore anti-competitive conduct, that is, price-fixing, market allocation, output control or bid-rigging.
Debate has arisen about whether these thresholds are too low; and so it is possible that some upwards adjustment may be made.
Change #5: Undertaking to pay HK$10 million pursuant to an infringement notice removed
This change relates to the issuance of an infringement notice by the Commission, where it believes a conduct rule has been breached.The current proposed regime empowers the Commission in such notice to offer not to bring enforcement proceedings but requiring, amongst other things, a payment of up to HK$10 million.
Many SMEs have argued that this amount would be a burden on SMEs who may not have the resources to contest an infringement notice, whilst being an insufficient deterrent for big companies. The Government now proposes to remove this requirement entirely.
Change #6: Clarity in relation to the merger rule
The change will make it clear that only merger activities relating to carrier licences granted by the Telecommunications Authority will be covered. The Government has no intention to introduce a cross-sector merger rule and amendments will be introduced to make it clear that merger activities are excluded from the first and second conduct rules. This applies to the act of merging only and both the first and second conduct rules apply to the merged organisation in the usual way.
Companies operating in Hong Kong should be taking some preliminary steps to prepare; for example, reviewing existing practices to identify potential risk areas and making plans to establish a compliance strategy to comply with the new obligations. Companies should also continue to monitor developments.
Training and awareness, and a robust compliance structure, as well as understanding the fundamentals of anti-competitive behaviour, will be key to navigating the competition minefield, once the Bill is passed (most likely in 2012) and subsequently takes effect.
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.
1 The first conduct rule prohibits agreements or practices, the object or effect of which is to prevent, restrict or distort competition in Hong Kong.
2 In the current Bill, anti-competitive conduct is not as now specifically defined in the proposals; clause 6(2) of the Bill provides that such conduct includes agreements, concerted practices and decisions that:
- directly or indirectly fix purchase or selling prices or any other trading conditions;
- limit or control production, markets, technical development or investment; or
- share markets or sources of supply.
One cliould see the new definitions as adding more clarity. Please also note that, consequent to the government's proposed changes, new definitions of "price", "supply" and "goods" are also proposed.
3 Defined as any entity, including a natural person, engaged in economic activity. In this Alert, undertakings caught by the Bill are sometimes referred to as businesses or organisations for ease of reading.
4 The Government has mentioned the following examples: restrictions on advertising, collective refusal to supply and development of standardised agreements.
5 This should not be confused with an infringement notice, which will still be used for a contravention (a) of hardcore anti-competitive conduct under thefirst conduct rule; and(b) under the second conduct rule.
6 10% of local turnover for each year of infringement, up to a maximum of 3 years.