The Competition Ordinance

INTRODUCTION

The Competition Ordinance (“Ordinance“), enacted on 14 June 2012, introduces a cross sector competition law in Hong Kong for the first time. The institutional provisions of the Ordinance will come into force first to enable the establishment of the Competition Commission (“Commission”), Competition Tribunal (“Tribunal“) and preparation of guidelines. The substantive provisions of the Ordinance are not expected to come into force until at least late 2013.

The Ordinance prohibits conduct that prevents, restricts or distorts competition in Hong Kong and prohibits mergers that substantially lessen competition in Hong Kong but the merger rules presently only apply to the telecommunications industry.

THE INSTITUTIONS

The Commission and the Tribunal will be established to enforce the Ordinance.

The Commission’s main role is to investigate suspected breaches of the Ordinance. The Commission may commence investigations on receipt of complaints, on its own initiative, or on referral from the Government or a court. The Commission will be vested with a full range of investigative powers to enable it to effectively apply the Ordinance. It will have the power, amongst other things, to require production of documents and information, and will be able to conduct “dawn raids” on business premises.

The Tribunal will consist of judges of the Court of First Instance and will, amongst other things, determine cases brought before it by the Commission.

THE CONDUCT RULES

The Ordinance provides for:

• the prohibition of anti-competitive agreements, concerted practices and decisions (known as the First Conduct Rule);
• the prohibition on the abuse of market power (known as the Second Conduct Rule); and
• the prohibition of mergers that substantially lessen competition in the telecommunications industry (known as the Merger Rule).

The Ordinance applies to “undertakings” which is broadly defined to mean “any entity, regardless of its legal status or the way in which it is financed, engaged in economic activity, and includes a natural person engaged in economic activity“. However, “statutory bodies” are excluded from the Conduct Rules except for those which will be listed in a separate regulation to be adopted by the Chief Executive in Council.

1. First Conduct Rule

The First Conduct Rule provides that: “An undertaking must not make or give effect to an agreement, engage in a concerted practice, or as a member of an association of undertakings, make or give effect to a decision of the association, if the object or effect of the agreement, concerted practice or decision is to prevent, restrict or distort competition in Hong Kong”.

The term “agreement” is broadly defined and will include horizontal agreements (agreements between undertakings operating at the same level of the production or distribution process) and vertical agreements (agreements between undertakings that do not operate at the same level of the production or distribution process). Although certain exemptions may be introduced by the Commission in respect of certain categories of agreements.

The First Conduct Rule applies whether or not the conduct took place in Hong Kong or overseas. So long as the object or effect is to prevent, restrict or distort competition in Hong Kong, it will be prohibited.

2. Second Conduct Rule

The Second Conduct Rule provides that: “An undertaking that has a substantial degree of market power in a market must not abuse that power by engaging in conduct that has as its object or effect the prevention, restriction or distortion of competition in Hong Kong”.

In this respect, the Ordinance provides that conduct may, in particular, constitute such an abuse if it involves (a) predatory behavior towards competitors, or (b) limiting production, markets or technical development to the prejudice of consumers.

Also, whilst “substantial degree of market power” is not defined in the Ordinance, the suggestion is that an undertaking with a market share of 25% or below would be considered unlikely to possess a “substantial degree of market power”.

In addition, the Second Conduct Rule applies whether or not the undertaking engaging in the conduct is outside Hong Kong or the conduct is engaged in outside Hong Kong. If the object or effect of the conduct is to prevent, restrict or distort competition in Hong Kong, it will be prohibited.

3. Merger Rule

The Merger Rule prohibits an undertaking from directly or indirectly carrying out a merger that has, or is likely to have, the effect of substantially lessening competition in Hong Kong.

The Merger Rule will only apply to the telecommunications industry in the first instance. Also, the Merger Rule applies to a merger even if the arrangements for the creation of the merger take place outside Hong Kong, or 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.

4. Serious anti-competitive conduct

In respect of the First Conduct Rule, the Ordinance set out certain, what is considered to be, “serious anti-competitive conduct” (or hard core violations). Such conduct consists of one or more of the following:

• fixing, maintain, increasing or controlling the price for the supply of goods or services;
• allocating sales, territories, customers or markets for the production or supply of goods or services;
• fixing, maintaining, controlling, preventing, limiting or eliminating the production or supply of goods or services; and
• bid rigging.

Where there is a non-hardcore violation the Commission is required to issue a “warning notice” to the relevant undertakings requiring them to cease and not to repeat the contravening conduct within the “warning period” before bringing proceedings in the Tribunal. This requirement does not apply where there is “serious anti-competitive conduct”.

5. Exclusions and Exemptions

The Ordinance provides for certain exclusions and exemptions from the prohibitions.

First Conduct Rule

Agreements satisfying the specific conditions for exclusions in Schedule 1 of the Ordinance will not be subject to the First Conduct Rule despite their possible anti-competitive effects. Such exclusions include, for example, where agreements enhance overall economic efficiency, or where an agreement is made for the purpose of complying with legal requirement and agreements of lesser significance. Undertakings may either conduct a self-assessment as to whether their proposed agreements meet the conditions of for exclusion or they may apply to the Commission for a decision in respect of the agreement.

In addition to the general exclusions in Schedule 1 of the Ordinance, the Ordinance provides for two specific exemption grounds but these are not automatic and an order by the Chief Executive is required for such an exemption to apply. The Chief Executive may exempt a specific agreement or class of agreements if there are exceptional and compelling reasons of public policy, or if the Chief Executive is of the view that by granting an exemption a conflict with an international obligation that directly or indirectly relates to Hong Kong will be avoided.

Further, the Commission may introduce block exemptions which will apply to certain categories of agreements.

Second Conduct Rule

Exclusions from the Second Conduct Rule are the same as for the First Conduct Rule except that the exclusion of agreements enhancing overall economic efficiency is not available in respect of the Second Conduct Rule, and undertakings whose worldwide annual turnover does not exceed HK$40 million during the last financial year will not be subject to the prohibition on the abuse of a substantial degree of power.

In respect of the Second Conduct Rule, the Chief Executive may also exempt a specific conduct or class of conduct if there are exceptional and compelling reasons of public policy, or if the Chief Executive is of the view that by granting an exemption a conflict with an international obligation that directly or indirectly relates to Hong Kong will be avoided.

6.Sanctions

Where there is a contravention, the Tribunal may impose a pecuniary penalty and make any other order it deems appropriate including all or any of the orders specified in Schedule 3 of the Ordinance which include the following:

• disgorgement orders;
• awards of damages to aggrieved parties;
• interim injunctions during investigations or proceedings; and
• injunctions and disqualification orders against directors.

Where a “pecuniary penalty” is to be imposed, the penalty will be capped at 10% of the total gross revenues obtained in Hong Kong for each year of the infringement, up to a maximum of three years. If the contravention has lasted for more than three years, the Tribunal may choose the three years of contravention with the highest turnover for the purpose of the penalty.

It is recommended that businesses and companies doing business in Hong Kong familiarise themselves with the law, and ensure that staff are trained to not undertake any conduct, or enter into arrangements or agreements, which may contravene the Ordinance.

If you are seeking guidance, ou should consult our solicitors, who can provide you with the advice that you need, for your specific circumstances:

Eddie Look Partner | E-mail

Tim Drew Partner | E-mail

Edmond Leung Partner | E-mail

River Stone Partner | E-mail

Pádraig Walsh Partner | E-mail

Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.