The Hong Kong Competition Bill

On 14 July 2010, the Hong Kong Government introduced a Competition Bill to the Legislative Council, after two rounds of public consultation in 2006 and 2008. The Bill aims to introduce a cross-sector competition law regime for Hong Kong.

The Bill is currently under review by a dedicated Bills Committee, established by the Legislative Council. The Bills Committee is scheduled to complete its first reading of the Bill by May 2012. During the legislative process, the Government agreed to a number of amendments to the Bill, and is expected to prepare a new draft that will be presented to the Legislative Council’s plenary session in time for its adoption before the end of the current legislature in July 2012. If the Bill fails to pass, it will need to be re-introduced during the next sitting of the Legislative Council.

At the time of writing, the main features of the proposed Bill are as follows:

• A prohibition on restrictive agreements and concerted practices (first conduct rule);
• A prohibition on the abuse of a substantial degree of market power (second conduct rule);
• A judicial enforcement model, where sanctions can only be applied by a Competition Tribunal; and
• Broad exclusions, including for merger activity and for statutory bodies.

This briefing summarises the content of the Bill as of February 2012, taking account of the proposed amendments and the explanations provided by Government during the legislative process.

If enacted, the Competition Ordinance will enter into force at a date that will be set separately by the Secretary for Commerce and Economic Development.

Although the Bill does not say, we understand that the Government intends to adopt a phased-in approach, with the institutional provisions of the Ordinance coming into force first to allow the Competition Commission to be set up and to commence work on guidelines. The substantive provisions would only come into force at a later date, probably some time 2013 or 2014.

The Competition Ordinance will apply to “undertakings”, i.e. any entity, regardless of its legal status or the way in which it is financed, that engages in economic activity.

The notion of undertaking is widely used by foreign competition regimes, including in EU law and in China’s Antimonopoly Law. It has been defined very broadly in EU competition law, and Hong Kong is likely to follow this broad interpretation. Trade associations, mutual insurance funds, banks, law societies, professional associations, sole proprietors and natural persons engaged in independent business activities, even the Government, have all been found to constitute undertakings under EU competition law when they engage in economic activities. Separate businesses and companies under the same control are considered as constituting a single undertaking.

Statutory bodies. The Bill proposes to exclude all “statutory bodies” from the scope of application of the substantive conduct rules, except for those statutory bodies listed in a separate regulation that will be adopted by the Chief Executive in Council. The statutory bodies that will be on that list will be subject in all or in part to the Competition Ordinance. Statutory bodies are persons, corporate or unincorporate, established under an Ordinance, or constituted or appointed by an Ordinance, but do not include companies, trustees, societies, co-operatives and trade unions. It is not clear how soon after enactment of the Ordinance such regulation will be adopted by the Chief Executive in Council: until such regulation enters into force, all statutory bodies are excluded from the Ordinance. Under current proposals, the Government will adopt a regulation that would subject the activities of six statutory bodies to the Ordinance, out of a total of 581 such bodies in Hong Kong.

It is noteworthy that the Ordinance, if enacted, would not exempt Government-owned undertakings unless these are statutory bodies. Commercial undertakings that are wholly or partly owned by the Government will only benefit from the exclusion if they fall within the definition of “statutory bodies”. Furthermore third parties 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, disapply the main substantive provisions of the Ordinance in relation to all or part of the activities of any other person.

Small and medium enterprises are not subject to the prohibition on the abuse of market power. Under current proposals, undertakings whose worldwide annual turnover does not exceed HK$11 million will not be subject to the second conduct rule (the prohibition on the abuse of a substantial degree of market power).

Restrictive agreements and abuses of market power. In line with international practice, the Bill contains the two traditional pillars of competition law. The first conduct rule prohibits agreements and concerted practices among undertakings as well as decisions of trade associations which have as their object or effect the prevention, restriction or distortion of competition in Hong Kong. The second conduct rule prohibits undertakings that have a substantial degree of market power from abusing that power by engaging in conduct that has as its object or effect the prevention, restriction or distortion of competition in Hong Kong. The relevant provisions establish a general standard of conduct and provide some examples of what constitutes prohibited conduct. They also make it clear that the law will apply to conduct that takes place outside Hong Kong if it produces effects in Hong Kong. This is consistent with international practice, except for the use of “substantial degree of market power” as a test for unilateral conduct. A large majority of jurisdictions use a “dominance” test instead, including Mainland China.

Mergers restrictive of competition in the telecommunications industry. The Bill also proposes a sector-specific merger control regime: telecommunications carrier licensees are prohibited from carrying out a merger that has or is likely to have the effect of substantially lessening competition in Hong Kong. In this respect the Bill is not consistent with international practice. Most other competition law regimes include as a third pillar a cross-sector merger control regime. Under current proposals, merger activity outside of the telecommunications sector will be expressly excluded from the scope of the Ordinance.

Agreements enhancing economic efficiency. Restrictive agreements that breach the first conduct rule but also improve production or distribution, or promote technical or economic progress, will still be permitted if certain conditions are met. Parties to such agreements will have the choice of a self-assessment or to ask for a decision from the Competition Commission. The Commission will however not be obliged to offer formal guidance unless the application 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 meet the conditions for exclusion set forth in the Ordinance.

Certain agreements among SMEs are excluded. Restrictive arrangements that would otherwise violate the first conduct rule (the prohibition on agreements and concerted practices) will be permitted if two conditions are met: (i) the arrangement involves parties whose combined aggregate worldwide annual turnover is below HK$100 million; and (ii) the arrangement does not constitute a serious “hardcore” anticompetitive agreement or concerted practice (defined as price fixing, market sharing, output limitation and bid-rigging).

Conduct required under other legal requirements. Conduct that breaches the first or second conduct rules will be permitted if it is 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, parties may apply to the Chief Executive in Council for an exemption.

Services of general economic interest. The proposed legislation also excludes 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 reasons. Finally, the Chief Executive in Council may also disapply the two conduct rules for “exceptional and compelling reasons of public policy”.

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”.

Competition authorities. A Competition Commission will be set up to investigate and prosecute infringements before a Competition Tribunal. In the telecommunications and broadcasting sectors, the Commission will have concurrent jurisdiction with the Communications Authority.

While adjudicative power rests with the Tribunal, all infringements investigated by the Commission will not necessarily be brought before it. The Commission can accept commitments to settle cases.

Leniency. The Bill also contemplates the introduction of a leniency regime where undertakings, in exchange for their co-operation in an investigation, would not face pecuniary penalties. Detailed conditions for the grant of leniency will likely be spelled out by the Commission when it adopts implementing guidelines. It is to be regretted, however, that the Bill appears to consider the conclusion of written leniency agreements. This contrasts with most other leniency regimes that allow for an oral process. A written process entails significant risks of disclosure in civil litigation, which renders a leniency regime very unattractive for prospective applicants.

Investigations. The Commission will have wide-ranging investigating powers, including the power to request information and documents, the power to request explanations, and, after obtaining a warrant from the Court of First Instance, the power to enter and search premises.

Guidelines. The Bill sets out very clear requirements for the Competition Commission to adopt a variety of guidelines concerning its enforcement of the conduct rules as well as on procedural issues. There is also a requirement that all guidelines be put to public consultation. If it follows international practice, the Commission would be expected to explain in guidelines its policy on materiality thresholds, the definition of relevant markets, the factors used to establish the existence of a significant degree of market power, detailed conditions for the grant of leniency, etc. During the legislative process, the Government provided the Legislative Council with illustrative guidelines on the enforcement of the conduct rules and on market definition.

Persons who have suffered loss or damage as a result of a contravention of the conduct rules will have a right of action. However, proceedings may only be brought after a contravention has been established (“follow-on actions”). Under the current Government proposals, it is not entirely clear whether parties to a contractual dispute could invoke a violation of the Competition Ordinance in support of their claim that a contractual clause (for example, an exclusivity provision) is void or voidable, without first having to wait for a decision from the Competition Commission or the Competition Tribunal.

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

A range of remedies are available to the Tribunal for contravention of a competition rule, including pecuniary penalties, award of damages, and interim injunctions during investigations or proceedings.

The maximum penalty in relation to a “single contravention” is 10 per cent of the turnover of the undertaking concerned in Hong Kong, for each year the infringement lasted, with a maximum of three years. A party may also be ordered to pay the costs of the Commission’s investigation.

Two features of the proposed sanctions regime under the Competition Bill are uncommon in foreign competition law regimes:

• The Competition Tribunal may, on its own motion, award damages to any person who has suffered damage as a result of a contravention. The Tribunal can also confiscate any illegal profits or any “loss avoided” and order them transferred to the Government or to any other person the Tribunal sees fit.
• Sanctions for “non-hardcore” anticompetitive agreements and concerted practices can only be imposed if parties ignore a warning notice issued by the Competition Commission. It is only if the parties continue their involvement in the practice after the expiry of a warning period, or if they repeat the conduct at a later stage, that the Competition Commission may seek the imposition of sanctions by the Tribunal - and in any case, proceedings may only be brought before the Tribunal in relation to the conduct which continued after the expiry of the warning period and not in respect of the conduct that preceded it.