Hong Kong: What You Need To Know About Hong Kong Competition Law (Part 4) - The Merger Rule And The Telco Rule

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 had 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.

Three major forms of anti-competitive conduct are prohibited under the First Conduct Rule, the Second Conduct Rule (collectively referred to as the Conduct Rules) and the Merger Rule. Come 14 December 2015, the current competition provisions in the Telecommunications Ordinance (Chapter 106 of the Laws of Hong Kong) (the Telecommunications Ordinance) and the Broadcasting Ordinance (Chapter 562 of the Laws of Hong Kong) (the Broadcasting Ordinance) will be repealed (subject to transitional arrangements) and replaced by the Conduct Rules, and a new section 7Q prohibiting exploitative conduct (the Telco Rule) will be added to the Telecommunications Ordinance.

In this issue, we will discuss the rules that specifically apply to the telecommunications sector, namely the Merger Rule and the Telco Rule.

What is the Merger Rule?

The Merger Rule1 prohibits a merger involving a carrier licensee under the Telecommunications Ordinance that (whether directly or indirectly) creates the effect of substantially lessening competition in Hong Kong. This rule applies even if:

  • the arrangements for the creation of the merger take place outside Hong Kong;
  • the merger takes place outside Hong Kong; or
  • any party to the arrangements for the creation of the merger, or any party involved in the merger is outside Hong Kong.

In general, changes in the control of undertakings which are not of a lasting nature are less likely to have any effect on competition in the relevant market, and the Competition Commission will be less concerned about these changes.

A flowchart illustrating how the Merger Rule works is set out in Appendix 1.

Key terms used in the Merger Rule

Merger
  • A merger takes place if:

    • two or more undertakings previously independent of each other cease to be independent;
    • one or more persons or other undertakings acquire direct or indirect control of the whole or part of one or more other undertakings (including creation of a joint venture to perform on a lasting basis one or more of the functions of an autonomous economic entity); or
    • an acquisition by one undertaking of the whole or part of the assets (including goodwill) of another undertaking that results in the former undertaking being in a position to replace (or substantially replace) the latter undertaking in the business (or part thereof) concerned.
Substantially lessening competition
  • Matters that may be taken into consideration include:

    • the extent of competition from competitors outside Hong Kong
    • whether the acquired undertaking, or part of it, has failed or is likely to fail in the near future
    • the extent to which substitutes are available or are likely to be available in the market
    • the existence and extent of any barriers to entry into the market
    • whether the merger would result in the removal of an effective and vigorous competitor
    • the degree of countervailing power in the market
    • the nature and extent of change and innovation in the market

Indicative safe harbours

The Competition Commission has identified two safe harbour measures, which are based on (a) concentration ratios2; and (b) the Herfindahl-Hirschman Index (HHI)3 respectively. In general, for a horizontal merger, if the combined market share of the parties post-merger is 40% or more, it is likely that the merger will raise competition concerns.

If a merger falls outside the safe harbour measures, the Competition Commission may make further inquiries to assess the extent of its potential anti-competitive effects. That said, whilst the Competition Commission is unlikely to further assess any mergers which fall below the thresholds, it does not categorically rule out intervention.

Exclusions and exemptions from the Merger Rule

The Merger Rule does not apply to statutory bodies unless they are specifically brought within the scope of the Rule, nor does it apply to persons or activities specified in a regulation made by the Chief Executive in Council.

Further, the Merger Rule does not apply to a merger if the economic efficiencies that arise or may arise from the merger outweigh the adverse effects caused by any lessening of competition in Hong Kong4, or if there are exceptional and compelling public policy reasons for granting an exemption.5

The Merger Rule is a voluntary regime and it is not compulsory to notify the Competition Commission of a merger which falls within the Merger Rule. The Competition Commission may commence an investigation when it becomes aware (through monitoring the media and/or information or complaints from third parties such as competitors) that a merger has taken place and, if it has reasonable cause to believe that the merger contravenes the Merger Rule, bring proceedings in the Competition Tribunal to unwind/stop the merger. It may therefore be in the interest of the parties concerned to seek informal advice from the Competition Commission on a proposed merger which may fall within the Merger Rule to understand whether the Competition Commission has any concerns about the transaction.

What is the Telco Rule?

In addition to the Merger Rule, holders of licences under the Telecommunications Ordinance will also be subject to the Telco Rule6, which prohibits licensees who are in a dominant position from engaging in conduct which may be exploitative. The exclusions and exemptions under the Competition Ordinance will not apply to this rule.

A flowchart illustrating how the Telco Rule works is set out in Appendix 2.

Key terms used in the Telco Rule

Licensee
  • A holder of a licence under the Telecommunications Ordinance.
Dominant Position
  • A licensee is in a dominant position if, in the opinion of the Communications Authority, it is able to act without significant competitive restraint from its competitors and customers.
  • Relevant factors for consideration include:

    • the market share of the licensee;
    • the licensee's power to determine pricing and other decisions;
    • any barriers to enter into the relevant telecommunications market;
    • the degree of product differentiation and sales promotion; and
    • any other relevant matters.
Exploitative
  • The Communications Authority may consider the following conduct to be exploitative:

    • fixing and maintaining prices or charges at an excessively high level; and
    • setting unfair trading terms and conditions
    for or in relation to the provision of interconnection of the type referred to in section 36A(3D) of the Telecommunications Ordinance.

Relationship between "substantial degree of market power" and "dominant position"

The relevant factors for determining whether a licensee is in a dominant position under section 7Q(3) of the Telecommunications Ordinance are very similar to those for determining whether an undertaking has a substantial degree of market power under the Second Conduct Rule.

Clarification regarding the relationship between the two thresholds were sought during the consultation process on the Guidelines7. Whilst it is generally understood that a "substantial degree of market power" is a lower threshold than that of the "dominance" test adopted in other jurisdictions, the Competition Commission and the Communications Authority have not so far included any guidance on the interpretation of section 7Q of the Telecommunications Ordinance.

Relationship between "abusive conduct" and "exploitative conduct"

During the consultation process on the Guidelines, there were queries on whether "exploitative conduct" as used in the Telco Rule, such as the imposition of unfair prices or other unfair trading conditions, also falls within the scope of the Second Conduct Rule.

As explained in Part 3 of this series8, the category of abusive conduct is an open one, and any conduct which has the object or effect of preventing, restricting or distorting competition in Hong Kong may be regarded as abusive. Hence, if an exploitative conduct has an anti-competitive object or effect (for instance, the imposition of unfair prices or other unfair terms leading to anti-competitive foreclosure in the market), this may also fall within the scope of the Second Conduct Rule.

Whilst an exploitative conduct may fall within the scope of the Second Conduct Rule, the Competition Commission has clarified that its main enforcement focus under the Second Conduct Rule will be abusive conduct which is exclusionary, i.e., conduct which may result in competitors, actual or potential, being denied access to buyers of their products or to suppliers9.

What next?

The imminent implementation of the Competition Ordinance is a significant step in the evolution of Hong Kong's fledgling antitrust regime and multi-national enterprises doing business in Hong Kong can no longer afford to ignore the Special Administrative Region as one that has no competition regime or antitrust enforcement. Understanding and complying with competition law principles is therefore more important than ever. In the next issue, we will discuss the enforcement of the Competition Ordinance in greater detail.

Appendix 1

Merger Rule – How it works

Appendix 2

Telco Rule – How it works

Footnotes

[1] Section 3 of Schedule 7 to the Competition Ordinance provides that "an undertaking must not, directly or indirectly, carry out a merger that has, or is likely to have, the effect of substantially lessening competition in Hong Kong."

[2] Concentration ratios measure the aggregate market shares of leading firms in the relevant market.

[3] HHI measures market concentration by adding together the squares of the market shares of all firms in a market.

[4] Section 8(1) of Schedule 7 to the Competition Ordinance

[5] Section 9 of Schedule 7 to the Competition Ordinance

[6] Section 7Q of the Telecommunications Ordinance provides that "a licensee in a dominant position in a telecommunications market must not engage in conduct that in the opinion of the Authority is exploitative."

[7] On 27 July 2015, the Competition Commission and the CA jointly issued 6 guidelines to provide guidance on how they intend to interpret and apply the provisions of the Competition Ordinance.

[8] See What you need to know about Hong Kong Competition Law (Part 3): The Second Conduct Rule ( http://www.cadwalader.com/uploads/cfmemos/beb7bfc2b4e997b39c94f711b62ebfbc.pdf) for further details.

[9] See Competition Commission and Communications Authority, Guide to the Revised Draft Guidelines Issued under the Competition Ordinance, paragraph 94.

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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