Hong Kong: Overview

Hong Kong: An Economy-wide Competition Law on the Back Burner?

Hong Kong, unlike other international economies, does not have a general, economy-wide, competition law regime. In comparison to other developed economies, Hong Kong has been slow to adopt competition laws and it was not until 2000 that it first introduced competition laws on a sectoral basis to the telecommunications and broadcasting sectors. Since 2006, the government has conducted a series of public consultations on its proposal to introduce a general, cross-sector competition law in Hong Kong (the Proposed Law).

While the debate has evolved from the issue of whether the Proposed Law should be introduced to the ambit of the Proposed Law, it is interesting that the underlying arguments have not changed substantially. The opponents to the Proposed Law are still referring to concerns arising from difficulties and costs of compliance that small and medium-sized enterprises (SMEs) are likely to be faced with and the broader policy argument that Hong Kong is already one of the most free economies (as measured by factors including ease of foreign direct investment) and hence has very low barriers to entry; the proponents continue to cite benefits of economic efficiency and draw on lessons learned from other jurisdictions (notably Singapore, against which Hong Kong is regularly benchmarked, given the similarity in the size and nature of the economy, and, of course, mainland China, which saw the introduction of the Antimonopoly Law in 2008).

In the absence of any shift in the fundamental policy debate, and given extraneous events such as the financial turmoil witnessed in global markets, it is perhaps unsurprising that the Competition Bill, which the chief executive had pledged to introduce to the Legislative Council in the 2008-2009 session, was struck off the legislative programme for this year, with "technical, legal and policy issues" being cited as the reason for this decision. Accordingly, it is expected that the Competition Bill will be postponed.

This article will be divided into two sections. The first will summarise recent developments, including a summary of the current key components of the Proposed Law. The second section will explore in more depth a number of potentially sensitive issues arising from the most recent consultation and subsequent comments by the Commerce and Economic Development Bureau (the CEDB), namely the feasibility and desirability of a general exemption for all activities undertaken by the government and statutory bodies; and go on to consider some of the technical issues that may have caused the delay in enacting the Proposed Law and the proposed approach to private and representative enforcement.

The key features of the proposed law

The CEDB issued a pubic consultation paper headed Detailed Proposals for a Competitive Law in May 2008 (the Consultation Paper). This was the second public consultation in respect of the Proposed Law following the first in 2006. While respondents generally accepted the need for a competition regime with more general application, there were a number of areas where potentially sensitive issues arose. We look at a selection of these issues below.

Consistent with the previous round of consultation, the Consultation Paper only proposes the introduction of laws governing anti-competitive agreements and abuse of a 'significant market position' (SMP). It does not contain any specific provisions on merger control, although, as was the case in the EU prior to the introduction of the original EC Merger Regulation in 1989, the conduct rules may be applied to merger activity in certain cases.

Anticompetitive agreements

Unlike, for example, under the EU and US regimes, the prohibition on anticompetitive agreements will only regulate horizontal agreements (those that are at the same level of the supply chain), with vertical agreements (upstream and downstream) only potentially falling foul of the legislation where they constitute an abuse of an SMP.

It is envisaged that rather than specifying a 'blacklist' of anticompetitive agreements (which was the approach taken in the first consultation paper), the regulator would issue separate guidelines outlining types of conduct that would be commonly considered as anticompetitive. While it could be argued that this approach may result in less certainty, it offers the advantage of a more flexible, effects-based approach to interpretation, meaning that the particular aspects of each market can be taken into account more easily when assessing whether a given agreement or course of conduct may breach the rules.

Abuses of a significant market position

Similar to many other major jurisdictions, the proposed regime will also prohibit certain types of unilateral conduct, namely where an undertaking with an SMP abuses that position with the purpose or effect of substantially lessening competition in a market.

Interestingly, the Consultation Paper explicitly states that an SMP can be attained at a lower level of market power than would usually constitute dominance in other jurisdictions - it proposes that a market share of around 40 per cent would be sufficient (notably lower than the EU presumption of dominance at 50 per cent market share, and significantly lower than the US presumption of monopoly power at around 70 per cent).

Quite apart from the fact that the level at which an undertaking can attain a SMP deviates from international norms (which have been derived from years of enforcement experience), setting such a relatively low threshold may prove to have unintended adverse consequences on the market, potentially hindering perfectly legitimate competitive behaviour of many larger corporations. As with the measures governing anticompetitive behaviour, the Consultation Paper proposes a flexible, effects-based approach based on Guidelines to be promulgated separately by the regulator.

Merger control

In terms of merger control, three options were put forward in the Consultation Paper:

  • introduce merger provisions in the new law that would be suitable in the Hong Kong context;
  • introduce merger provisions but delay enforcement until after a review of the effect of the law (the so-called 'incremental approach'); or
  • not to include merger provisions initially but reconsider their necessity after a review of the effect of the law.

Following the consultation, the CEDB has decided not to include merger regulation at this stage given opinion remains divided on its necessity. If that is the case, the continued application of the merger control provisions, which only apply to telecommunications carrier licensees under the sectoral competition law, would seem incongruent with the spirit of the Proposed Law and the government should consider addressing the asymmetry in the level of regulation.

Establishment of appropriate agencies

The proposals recommend that a Competition Commission (the Commission) would be established to oversee public enforcement of the Proposed Law. It will possess powers of investigation and adjudication, and operate in a two-tier structure with an appointed board of Commission members overseeing a full-time executive arm. Internally, the Commission will have strict separation between investigation and adjudication powers to ensure fairness and accountability.

A specialist Competition Tribunal (the Tribunal) would also be constituted to hear applications for administrative review of the Commission's decisions - such decisions will be capable of being appealed to the Court of Appeal on points of law and the remedy applied. Much like the equivalent appeal body under the telecommunications sectoral competition regime, the Telecommunications (Competition Provisions) Appeal Board, the Tribunal will be less formal in nature, with judicial as well as non-judicial members on the panel. It will have the power to strike out any action that it considers to be without merit or vexatious, in an attempt to curb any proliferation of claims.

Notably, existing sector-specific competition laws will be repealed where they overlap with provisions in the Proposed Law, although the telecommunications and broadcasting authorities will have concurrent jurisdiction with the Commission. Consistency of approach and effective inter-agency cooperation would be crucial in this regard.

Leniency programme

Reflecting the benefits seen by other major jurisdictions, a leniency programme will be introduced. It will operate such that any party who is aware of their own breach of competition laws can come forward to provide information on their or others' breach in exchange for a reduction or waiver of any applicable fines. The extent of the relief granted will depend, inter alia, on the informant's 'position in the queue' (it is not made clear whether, in line with other major jurisdictions, the first successful applicant would generally be granted full immunity), degree of cooperation and whether it was an instigator of the anticompetitive behaviour.

The Consultation Paper makes it clear that leniency will not extend to any form of protection from civil prosecution by third parties who have suffered loss or damage as a result of the anti-competitive behaviour, although the information provided to the Commission will not be discoverable in private proceedings.

Penalties

It is envisaged in the Consultation Paper that infringement of the conduct rules should be subject to civil, not criminal penalties. Fines of up to HK$10 million could be imposed by the Commission, with the Tribunal being able to impose more serious penalties such as higher fines and disqualification of directorship for a breach of the conduct rules. The potential severity of the penalties, while consistent with other major jurisdictions, continues to be a sensitive issue for many in Hong Kong's business community.

In this context, it should perhaps be borne in mind that, in the UK for example, the recently introduced power to disqualify directors for an infringement of competition law provisions (by virtue of section 204 of the Enterprise Act 2002) has only been exercised on one occasion to date: in the marine hoses case, where the directors concerned were found guilty of the criminal offence of dishonestly participating in hard-core cartel activity. However, the Office of Fair Trading in the UK envisages that such power serves as a strong deterrent and it would seem likely that its use may be increased in the future.

Topical issues arising out of the consultation

Exemptions and exclusions

The Consultation Paper sets out a number of exemptions and exclusions from the proposed competition law. The majority of these are broadly in line with international norms:

  • exemption on the grounds of economic benefit that outweigh the potential anticompetitive harm (broadly reflecting Article 81(3) of the EC Treaty);
  • block exemptions in respect of a category of agreements that is likely to yield economic benefits that outweigh the potential anti-competitive harm (again, similar exemptions exist under the EC regime, including the Technology Transfer Block Exemption); and
  • ad hoc exclusions granted by the chief executive-in-council on public policy grounds (again, a similar provision is found in a number of other jurisdictions, including the UK, where an exclusion was recently granted to permit Lloyds TSB's acquisition of HBOS on the grounds that the "stability of the UK financial system" should be a public interest consideration).

Moreover, the proposed exclusion on the grounds of public interest is also similar to exclusions in many other jurisdictions (including the UK), although the Consultation Paper suggests that it may apply to a broader range of industries than is the case under other mature jurisdictions, such as public transport, water supply, power supply and postal services.

However, more contentiously, the Consultation Paper also proposes that government or statutory bodies should be subject to a wholesale exemption from the competition law, to help ensure that the operation of the government would "not be affected by unfounded and misconceived complaints". The Consultation Paper further justifies this approach on the basis that Hong Kong has a relatively small public sector and many services are provided by the private sector which are usually provided in other economies by the public sector.

The Consultation Paper states clearly that the Proposed Law will only apply to undertakings "engaging in economic activities" - assuming that this is interpreted in accordance with other jurisdictions such as the EU and the UK, it is clear that where the government acts as public sector provider, it will not in any event fall within the scope of the proposed laws. Where the government acts as a commercial undertaking (ie, it engages in economic activities), it seems counterintuitive (and out of step with most other major jurisdictions worldwide) that it should be permitted free rein to act as it pleases, potentially putting it at a significant competitive advantage over private organisations that will nevertheless be subject to such a law.

Further, no cross-sector competition law should be introduced without a consideration of the unique land regulation system in Hong Kong, and the implications of that system on the design of the Proposed Law.

Since the reunification in 1997, the government continues to enjoy the sole right to grant land use rights in Hong Kong (with the exception of the land on which St John's cathedral is situated, which is the only parcel of freehold property). Hong Kong's unique land grant system means that it has the potential to distort the competitive landscape and possibly efficient outcomes.

This issue is illustrated by the findings presented in an independent study commissioned by the Economic Development and Labour Bureau in 2005 into the state of competition in the auto-fuel retail market. While the independent consultant was not able to find evidence that oil companies might have engaged in

anticompetitive practices, the consultant nevertheless discussed at some length the potentially distortionary effects brought about by the manner in which the government conducted land auctions that could arguably result in higher costs of establishing new petrol filling sites and thereby raising barriers to entry.

To date, the system of land regulation in Hong Kong and the corresponding implications for potential competitive distortions have yet to be properly considered in the course of the public debate. Given the possible limitations such a land system could have on the effectiveness of the Proposed Law, it would seem that it is an area that urgently needs addressing.

Technical difficulties experienced in introducing the Competition Bill

In a Legislative Council meeting held in December 2008 to consider the progress of the introduction of the Proposed Law, the under secretary for the CEDB briefed the Panel on Economic Development of the latest challenges met by the administration in introducing the Competition Bill. Two key issues that are being faced by the CEDB are set out below.

Implications of two recent judgments

Immediately before the publication of the Consultation Paper the Court of Final Appeal, which is the highest court in Hong Kong, rendered a judgment that carried significant implications for the standard of proof of competition law proceedings before the Commission and the Tribunal as envisaged under the Proposed Law.

In the Court of Final Appeal case of Koon Wing Yee v Insider Dealing Tribunal and Financial Secretary (2008) 3 HKLRD 372, the court held that even though the powers granted to the Insider Dealing Tribunal were civil in nature, because the system allowed the tribunal to impose serious penalties of a punitive and deterrent nature (in particular the court found that a penalty of up to three times the amount of profit an insider dealer made was comparable to a fine), the court considered that feature to give rise to the criminal standard of proof (ie, beyond reasonable doubt) that applied for the purposes of human rights legislation embodied in the Hong Kong Bill of Rights.

The CEDB is also considering the implications of the more recent High Court case of Luk Ka Cheung v Market Misconduct Tribunal (Unreported, HCAL 49/2008), which involves a constitutional challenge of the jurisdiction of the Market Misconduct Tribunal (MMT). The case considers whether the powers granted to the MMT offend the doctrine of separation of powers in that the MMT is exercising 'judicial' powers that are reserved exclusively to the judiciary under the Basic Law. The court found that the MMT is indeed no more than a regulatory body and does not exercise judicial powers.

The case of Luk Ka Cheung has potential implications for the characterisation of the Commission and the Tribunal, and whether the powers proposed to be granted to them would offend the constitutional principle of separation of powers. One of the factors the court in Luk Ka Cheung considered in determining whether the MMT is a judicial body relates to whether the MMT is an "adjudicator of civil liability or of the primary facts necessary to found such civil liability". Given adjudicatory powers are proposed to be granted to both the Commission and the Tribunal, the government would need to consider, as a matter of the design of the Proposed Law, whether the procedures before the Commission and the Tribunal indeed comply with the fundamental guarantees of due process under the Basic Law and if not, whether the powers to be granted should be amended to ensure the constitutional validity of the jurisdictions of the Commission and the Tribunal.

Although these two cases are concerned with a different regulatory regime from the competition law proceedings under the Proposed Law, nevertheless there are some issues that the government will need to resolve and reflect in the Proposed Law. It has been speculated that this issue may have been the primary reason for the delay in the introduction of the Competition Bill to the Legislative Council.

Private actions

The public consultation proposes that both 'follow-on' and 'stand-alone' private actions should be made available for those suffering loss or damage due to anticompetitive conduct.

From a practical perspective, since the Commission would not be able to investigate all potential cases of anticompetitive conduct, the availability of stand-alone actions provides an effective supplementary means of competition law enforcement. International experience illustrates that the right to stand-alone actions increases the deterrent effect on businesses breaching competition law, since the potential likelihood of detection and financial penalty is greatly increased. As a safeguard against the inappropriate use of private enforcement, the Tribunal will possess the power, on its own motion or upon application by the Commission, to strike out any claims that it considers to be without merit or vexatious.

In addition, representative actions will also be available. These are where one body acting for the interests of a defined group that has been affected by an alleged unlawful practice is authorised to bring an action on behalf of the group. Experience in other jurisdictions shows that consumers and SMEs affected by anticompetitive conduct are reluctant to bring court cases on their own, because of time and cost issues. Representative actions provide a solution for them to pursue cases in a manner that would minimise their concerns. The availability of representative actions may also act as an additional deterrent, since infringing corporations may find themselves liable to pay damages to a sizeable affected group. However, recent experience in the UK has shown how difficult it can be to bring a meaningful representative action, particularly when, as is often the case, the actionable event took place many years earlier.

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This article has summarised the primary components of the competition law as currently proposed by the Consultation Paper, as well as exploring some of the key issues raised as a result of the most recent consultation and subsequent statements by CEDB.

Hong Kong undoubtedly has a unique economic and constitutional framework, such that a tailored competition law regime is clearly necessary to ensure that the needs of all interested parties are adequately addressed. In general, the Proposed Law achieves this difficult balancing act, although there are one or two areas (in particular, the blanket exemption for government activity) where the Proposed Law may be considered to go further than is absolutely necessary, and equally some other areas (for example, merger control) where perhaps it does not go far enough. While it is disappointing that the Competition Bill has been withdrawn from the Legislative Council agenda this year, there have been a number of substantial steps in the past 12 months towards the implementation of a cross-sector competition law regime in Hong Kong, helping to ensure that Hong Kong continues to compare favourably against its international peers.

* The authors would like to thank Wilson Chan for his contribution.

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