Hong Kong: Overview

Unveiling its First Cross-Sector Competition Bill

Following two rounds of well-participated consultations in 2006 and 2008, the long-awaited Competition Bill (Bill) was finally introduced to the Hong Kong Legislative Council (LegCo) in July 2010. This marks a significant milestone in a long process that began well over a decade ago, which may cumulate in the adoption of the first cross-sector competition law regime in Hong Kong (the Competition Law).

The Bill is currently being heatedly debated in the LegCo and has received extensive media attention due to a number of factors, the least of which being the fact that the Bill would revolutionalise regulation of companies’ competitive behaviour in Hong Kong. It is currently believed that the Bill may be adopted in as early as 2012, although it would not take effect until at least 2014.

Save for the lack of a general merger control regime, the Bill is largely in line with international norms, including, in particular, the competition laws of the European Union (EU) and the United Kingdom (UK). The Bill seeks to prohibit undertakings in all sectors from adopting anti-competitive conduct in the form of either agreements or concerted practices, or unilateral conduct that abuses a corporation’s substantial degree of market power. The relevant jurisdictional test is whether that conduct has the object or effect of preventing, restricting and distorting competition in Hong Kong, even where such conduct is carried out outside Hong Kong.

The Bill envisages a judicial enforcement model. The Law will be enforced by a Competition Commission (Commission), which will investigate anti-competitive conduct and bring infringement proceedings before a Competition Tribunal (Tribunal), whose decisions are in turn reviewable by the courts. The Tribunal is empowered to impose potentially significant pecuniary penalties of up to 10 per cent turnover in the relevant year(s) and other civil orders, although no criminal penalties are provided for. Private court actions may also be brought, whether or not a related regulatory infringement decision has been rendered.

This article will first summarise the main features of the Bill and then discuss the key issues that have crystallised following its introduction to the LegCo.

Main features of the Bill

Prohibition

The Bill contains three general prohibitions (being the First and the Second Conduct Rules, and the Merger Rule). In a welcomed clarification, the LegCo brief which is attached to the Bill makes it clear that there would be no per se prohibitions under the Bill.

The Conduct Rules

The First Conduct Rule prohibits agreements, concerted practices or decisions that have the object or effect to prevent, restrict or distort competition in a market in Hong Kong. The Bill contains a non-exhaustive list of the types of conduct that would “in particular” be captured by this Rule, and this includes price-fixing, agreements that limit technical development or investments, and market-sharing arrangements.

The Second Conduct Rule prohibits abuse by an undertaking of its substantial degree of market power by engaging in conduct that has the object or effect to prevent, restrict or distort competition in a market in Hong Kong. The Bill provides examples of conduct that may be considered to be abusive, which includes conduct that is predatory and that limits production, markets or technical development to the prejudice of consumers.

Although the Bill does not specify the relevant market share threshold for determining whether an undertaking holds a substantial degree of market power, it appears that the government considers such a position can be attained at a relatively low market share of 40 per cent, based on the second consultation paper.

The Merger Rule

Instead of providing for a general merger control regime, the Bill proposes to continue to regulate mergers involving telecommunications carrier licensees only, with a view to extending the rule on a cross-sector basis a few years after the Bill comes into effect. The Merger Rule prohibits telecommunications carrier licensees from carrying out mergers that have, or are likely to have, the effect of substantially lessening competition in a market in Hong Kong.

Exclusions and exemptions

The Bill contains a wide range of exclusions and exemptions. For the public sector, there exists a complete exclusion for the 500 or so statutory bodies in Hong Kong, unless the chief executive expressly specifies otherwise.

There are a number of exclusions and exemptions applicable to the private sector, the details of which are summarised below:

• Exemption on the ground of economic efficiency: this is available by way of either Commission decision or through self-assessment, and pertains to conduct that otherwise infringes the First Conduct Rule only;
• Exemption on the ground that the undertaking complies with a legal requirement and exclusion for businesses entrusted with operating ‘services of general economic interest’: these exemptions and exclusions are available by way of either Commission decision or through self-assessment, and pertains to conduct that otherwise infringes the First and/or Second Conduct Rules;
• Block exemptions: the Commission is empowered to issue ‘block exemptions’ that are available to categories of agreements that would otherwise infringe the First Conduct Rule. Undertakings may attain the benefit of block exemptions either via Commission decision or by way of self-assessment;
• Chief executive’s order to exempt conduct that otherwise infringes the First or the Second Conduct Rules on the basis of public policy grounds, or on the basis that the conduct had been entered into to avoid conflict with international obligations.

Regulatory framework

It is envisaged under the Bill that a two tier system of judicial enforcement will be established, with the Commission taking the role of the enforcer and the Tribunal assuming the role of the adjudicator, whose decisions are in turn reviewable by the Court of Appeal (CA).

Competition Commission

The Commission plays a critical role in ensuring the effectiveness of the Competition Law. Its central mandate is to enforce the Law, and it has a number of tools at its disposal:

• it is equipped with extensive powers to carry out civil investigations (including to conduct ‘dawn raids’) which are similar to those enjoyed by competition regulators elsewhere in the world;
• the Commission is able to settle with undertakings under investigation by way of a commitments procedure;
• it can issue infringement notices and impose a fine of up to HK$ 10 million; and
• it can also enter into leniency agreements with persons to seek cooperation from them in exchange for providing them with immunity from financial penalties.

Other key roles the Commission will play include promoting public understanding of the Competition Law, advising the Government on competition matters, conducting market studies and issuing guidelines to clarify specific provisions of the Law.

To transition from regulating competition matters on a sectoral basis, the Office of the Telecommunications Authority (OFTA) and the Broadcasting Authority (BA) will share concurrent jurisdiction with the Commission in investigating and prosecuting competition cases involving telecommunications and broadcasting carrier licensees, while their adjudicative function will be transferred to the Tribunal. The regulators will sign a memorandum of understanding clarifying their powers. Competition matters may only be transferred between the regulators by agreement. This echoes the UK approach, whereby complaints may be made to any of the concurrent competition regulators.

Competition Tribunal

The Tribunal will be established within the judiciary and its members will consist of judges of the Court of First Instance (CFI) and headed by a president. The Tribunal may also appoint specially qualified assessors to assist in proceedings. The adjudicative power is vested solely in the Tribunal. It will have jurisdiction to hear and determine infringement cases brought by the Commission, review Commission decisions and hear private actions. The Tribunal is empowered to impose pecuniary penalties on and/or make orders against parties which have contravened a competition rule.

Decisions and orders of the Tribunal are, subject to leave of the CA, appealable to the CA with a possible further appeal on points of law to the Court of Final Appeal. The CA may confirm, set aside or vary the Tribunal’s decisions or orders.

Sanctions

The Tribunal can impose a range of civil sanctions on undertakings which have contravened a relevant prohibition. The Tribunal may, on application by the Commission, impose a maximum pecuniary penalty of up to 10 per cent of the global turnover of the undertaking concerned in the year(s) of contravention.

The Tribunal may also make disqualification orders against senior management and others. Specifically, the Tribunal may disqualify a director of a company from being a director or otherwise promoting or managing a company for up to five years, when a director’s conduct contributed to the contravention of a conduct rule, or when he knows or ought to have known that the company’s conduct constituted a contravention and took no steps to prevent it.

Other orders the Tribunal may make include orders for payment of costs and damages, disposal of operations, assets or shares, and declaration of an agreement to be void or voidable.

Private actions

In addition to public enforcement through the Commission, the Bill also confers on persons who have suffered loss or damage as a result of a contravention of a conduct rule the right to bring private actions before the Tribunal and/or the CFI (if the action also involves non-competition claims). Such actions may be brought either as follow-on proceedings or stand-alone actions.

Key Issues Surrounding the Bill

Since its introduction into the LegCo, the Bill has been publicly debated a number of times and has received great media attention. Below are a selection of some topical issues that have surfaced.

Scope of the prohibition

One oft-heard comment lies in the lack of clarity of the scope of the prohibition given the general nature of the language of the Bill. While it is envisaged that many details would be addressed by the Commission by way of guidelines, nevertheless some drafting issues with the Bill itself may need to be addressed. These issues are set out below.

Materiality threshold

The Bill does not set a materiality threshold for the conduct rules. This could lead to an overly expansive prohibition covering conduct that in reality should not give rise to concern. In contrast, most jurisdictions such as the EU have adopted de minimis rules that exempt agreements which do not have any material effect on competition from the application of the law, except where hard core conduct such as price fixing, bid rigging and output restriction is involved.

Substantial degree of market power

In adopting a ‘substantial degree of market power’ test for the Second Conduct Rule, Hong Kong has not followed the EU-based ‘dominance’ test used in China and Singapore, which apply higher market share thresholds of 50 and 60 per cent respectively. This could cause confusion for businesses whose conduct might straddle multiple jurisdictions, where the same conduct that could be perfectly lawful in one jurisdiction may not be so across the border. Businesses with pan-Asian operations would need to appreciate the subtle differences as these could have significant implications in terms of operational feasibility.

On another note, one point that has frequently been made is that the proposed 40 per cent threshold could potentially capture a disproportionately large number of businesses given the relatively small size of Hong Kong’s domestic economy. Some have argued that this could unduly restrict corporate behaviour and have suggested to follow the Singapore rule, which is to apply a market share threshold of 60 per cent.

Private sector exclusions and exemptions

While there exists a myriad of potential exemptions and exclusions, it would appear that assessing their availability would not be straight-forward given the lack of guidance on what is required to meet these exemptions and exclusions.

Furthermore, even though it may be possible to seek a prior Commission decision on the availability of some of the exemptions and exclusions, a prior Commission exemption is narrowly drafted to cover situations where the application for exemption raises ‘novel or unresolved questions of wider importance or public interest’. It is unclear how this test would be construed by the Commission.

If the test is interpreted narrowly, undertakings would need to assess their agreements and conduct carefully for compliance with the Competition Law, which would provide them a lower level of legal certainty than a prior Commission decision. This would entail undertakings grappling with new concepts such as interpreting what is meant by undertakings entrusted to operate ‘services of general economic interest’ (which is not defined), and the efficiency exemption.

In mitigation of this uncertainty, the Commission guidelines on how it proposes to enforce the Conduct Rules and interpret the scope of the exemptions and exclusions would be very valuable to undertakings seeking to navigate the new competition regime. While guidance from the Commission would go some way to assist businesses in managing their risk, nonetheless businesses would need to accept that there would be a degree of uncertainty with the legality of their agreements and/or conduct.

Regulators’ experience

It is clear that the constitution and staffing of the Commission and the Tribunal are critical to the success of the new Competition Law regime. Competition law is a specialised and technical area that calls for expertise in a range of areas in addition to law, including micro- and macro-economics, finance and industry. One key challenge faced by Hong Kong would be to recruit locally-based members of the Commission and the Tribunal with appropriate qualification and experience. It may be necessary for the government to trade-off local knowledge with international competition exposure and to recruit outside of Hong Kong.

Quite aside from the practical issue of technical expertise and capability of the staff members, another key consideration in staffing is to ensure that the Commission and the Tribunal be headed by individuals who are of a sufficient stature in the Hong Kong community to withstand scepticism towards the Law. This consideration reflects a long-held perception espoused by certain segments of the Hong Kong public (in particular, the small and medium-sized enterprises (SMEs)) that the Bill, if adopted, could in fact hinder competitive rivalry and harm competition. To address this, the Bill provides that the chief executive may have regard to a candidate’s expertise or experience in SME in appointing Commission members. However, this mechanism alone would be insufficient to address SMEs’ concerns: what would also be needed is for the Commission’s senior members to take their educational roles seriously in order for the Law to be properly understood and to gain popular acceptance, particularly given the likely dissidence the Law will face.

Similarly with the Tribunal (which will be comprised of CFI judges - some of whom will be specialised in commercial matters), the Tribunal members would unlikely be sufficiently equipped in dealing with competition matters. While the ability of the Tribunal to appoint appropriately qualified assessors (who could, for example, assist in matters such as competition economics) would go some way to mitigate this issue, nevertheless given the specialised nature of competition matters, perhaps it would be prudent to arrange for regular competition law and economics training to be delivered to the members of the Tribunal. Another option that may be considered would be to constitute the Tribunal with both legal and lay members much in the same way as the UK Competition Appeal Tribunal (CAT). The CATs comprise of three persons for each case, including a chairman who must be legally qualified and two members drawn from a panel of 17 persons with specialist knowledge in areas such as law, economics, accountancy and business.

Stand-alone private actions

SMEs are concerned that allowing stand-alone actions may give rise to vexatious litigation by large corporates. However, stand-alone actions are difficult to establish as one would need to prove contravention of a conduct rule and loss, which would be difficult without the investigatory powers available to the Commission. In fact, the success rates of stand-alone actions in other jurisdictions (such as the UK and China) are low. The figures in the United States (US) are higher, which could be due to the availability of contingency fees, punitive damages and class actions, none of which is available in Hong Kong.

Moreover, a right to stand-alone actions provides an alternative remedy to companies which suffered genuine loss from anti-competitive conduct when the Commission refuses to investigate.

Pecuniary penalty

Another contentious issue is the level of the maximum financial penalty the Tribunal is allowed to impose. The Bill provides that the Tribunal may impose fines of up to 10 per cent of an undertaking’s global turnover for contravention of the competition rules. This is in line with the maximum penalties seen elsewhere, for example in the EU.

Some legislators have expressed concern that the penalty is too severe and may drive multinational companies away from Hong Kong. They suggest that the penalty be referable to local Hong Kong turnover as opposed to global turnover, as is the case in Singapore.

While this concern is understandable given the relative lack of familiarity with competition law in general, it is useful to remind ourselves that this provision sets out only the maximum penalty which is not available as a matter of course: the Commission would need to convince the Tribunal in full judicial proceedings to impose such fines.

Further, it would also be useful to consider international developments on penalties for competition law infringements. In recent years the monetary penalties have risen steadily for serious competition law infringements and a number of jurisdictions (including the UK, US and Australia) have introduced or are considering introducing (for example New Zealand and Canada) criminal penalties. In this light, it would seem that the maximum penalty proposed under the Bill is not excessive, particularly with the procedural safeguard of requiring that the Commission bring the claim for penalties in Tribunal proceedings. Furthermore, it must also be borne in mind that financial penalties are not the only orders the Commission may seek; the Commission has a number of tools at its disposal (such as infringement notices and the commitments mechanism) which it may apply before it decides to seek financial penalties in Tribunal proceedings.

Conclusion

2010 marks a significant turning point in the competition law history for Hong Kong with the introduction of the Bill, which promises to introduce the city state’s first cross-sector competition law. The Competition Law is largely in line with international norms with prohibitions against anti-competitive agreements and abuse of a substantial degree of market power. The limited application of the merger rule to transactions involving telecommunications licensees remains a Hong Kong curiosity. 2011 will prove to be an interesting year with continued public debate on various points of contention. It is anticipated that with more public discussions, and therefore increased awareness of competition law, the government will soon be able to reach consensus with the LegCo, and have the Bill passed into law in the near future.