Hong Kong: Overview

In a landmark move that marked the beginning of Hong Kong’s journey towards introducing a general, economy-wide competition law, the government introduced the Competition Bill (the Bill) to the Hong Kong Legislative Council (LegCo) in July 2010. The Bill has led to intense public debate and widespread concerns among the business community, particularly small and medium enterprises (SMEs). If adopted, the Bill will overhaul the existing competition law landscape in Hong Kong to replace Hong Kong’s sector-specific competition laws that currently apply only to the telecommunications and broadcasting sectors, and would bring Hong Kong into line with international laws.

Following intense public scrutiny, the government introduced a set of proposed amendments to the Bill which, if adopted, would significantly cut back various aspects of the Bill. While it was initially thought that the Bill may be adopted as early as 2012, this now seems unlikely given that these proposed amendments only surfaced in the last quarter of 2011.

Except for the lack of a general merger control regime, the Bill draws references from international norms, including, in particular, the competition laws of the European Union (EU) and the United Kingdom (UK). The Bill seeks to prohibit undertakings from adopting anti-competitive conduct in the form of either agreements or concerted practices (First Conduct Rule), or unilateral conduct that abuses a corporation’s substantial degree of market power (Second Conduct Rule). The relevant jurisdictional test is whether that conduct has the object or effect of preventing, restricting and distorting competition in a market 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) that 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 pecuniary penalties of up to 10 per cent turnover and other civil orders, although there is no provision for criminal penalties. Follow-on private court actions relating to a regulatory infringement decision may also be brought. This article will summarise the latest proposed amendments in response to the key issues surrounding the Bill, as well as providing an update on the existing sectorial competition law.

Main features of the latest proposed Bill

Prohibition

The latest proposed 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 First Conduct Rule

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.

There have been concerns by SMEs that the first conduct rule, which is a broadly worded prohibition, does not on its face draw the line between hardcore anti-competitive activities (namely, price-fixing, bid rigging, market allocation and output control) and other non-hard-core anti-competitive activities. The SMEs argued that under the terms of the prohibition, an inadvertent breach of a less serious nature could lead to the consequences identical to that of a more serious breach. As such, there has been support for the so-called Canadian approach which provides for specified categories of horizontal agreements and minimal deterrent for other forms of anti-competitive agreements. Although the government considers the general prohibition approach, which is the mainstream international practice adopted by the EU and the UK, more suitable for Hong Kong, the government has recently proposed a lighter enforcement approach for non-hard-core activities, subject to review as it gains more experience in enforcing the new competition law in Hong Kong.

Under the October proposals for the four types of hardcore activities (namely, price fixing, bid rigging, market allocation and output control), the Commission will be able to exercise the full range of enforcement options available under the Bill such as to issue infringement notices or institute proceedings in the Tribunal that could lead to a maximum penalty of 10 per cent turnover. For non-hard-core activities the Commission will first issue a warning notice to the concerned undertaking requiring it to cease the contravening conduct within a prescribed period. To avoid enforcement action by the Commission, the concerned undertaking may simply cease the contravening conduct or offer a commitment to address the Commission’s concern. Failure to comply may then result in the Commission instituting proceedings in the Tribunal.

The Second Conduct Rule

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.

The Bill does not specify the relevant market share threshold for determining whether an undertaking holds a substantial degree of market power. The Guidelines on the Second Conduct Rule, published in June 2011, stress that market share cannot on its own determine whether an undertaking has a substantial degree of market power. This is in line with other jurisdictions such as the EU, UK and Singapore, where a specific percentage threshold of market share is not specified under their competition law but can be found in case law and guidelines issued by the competition authorities.

Once the Bill is passed, public consultation on the guidelines will still need to be carried out before they are adopted. Once adopted, these guidelines will not have the force of law but rather act as a set of explanations to the Bill. The government has also explained that given the relatively small size of the Hong Kong market, it may not be appropriate to set a specific threshold as it is possible that an undertaking with a market share lower than 40 per cent may still hold a dominant position. This is a curious argument, as one would have thought that a higher market-share threshold would be more appropriate for a small economy. Singapore, which has a similar-sized economy, adopts a 60 per cent market-share threshold.

The Merger Rule

Instead of providing for a general merger control regime, the Bill will continue to regulate mergers involving telecommunications carrier licensees only. The government will consider 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.

There have been concerns that the first and second conduct rules could potentially catch merger activities outside the telecommunications sectors given that a merger is essentially an agreement between undertakings, and an undertaking having a substantial degree of market power may also engage in a merger. The government has recently reaffirmed its stated intention of not introducing a cross-sector merger control regulation through the ‘back door’ means of the first and second conduct rules, and have proposed to exclude merger activities from the application of the first and second conduct rules.

Scope of the prohibition: de minimis arrangements

As the Bill does not set a materiality threshold for the conduct rules, there were concerns that this could lead to an overly expansive prohibition covering conduct that, in reality, should not give rise to competition concerns. The government’s response, which references the de minimis rules in overseas jurisdictions such as the EU, is as follows:

• First Conduct Rule: The government proposed that all agreements between undertakings with a combined turnover in Hong Kong or outside Hong Kong not exceeding HK$100 million in the preceding financial year will be excluded from the application of the first conduct rule. This threshold is based on the average annual turnover of SMEs, which has consistently been around HK$11 million throughout 2005 to 2009. The proposed threshold would thus exclude agreements between most average-sized SMEs. In line with the de minimis rules in other jurisdictions, the proposed exclusion does not apply to agreements involving hardcore anti-competitive activities (namely, price fixing, bid rigging, market allocation and output control) that are widely recognised to always have an adverse impact on competition.
• Second Conduct Rule: Using the average SME business turnover of HK$11 million as the threshold, the conduct of an undertaking with a turnover in Hong Kong or out of Hong Kong that does not exceed HK$11 million will be excluded from the application of the second conduct rule. The government’s rationale is that an SME with less than HK$11 million turnover is unlikely to have a substantial degree of market power in a market and its conduct would be unlikely to cause an appreciable effect on competition.

Exclusions and exemptions

The latest proposed 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 pertain to conduct that otherwise infringes the First or Second Conduct Rules or both;
• 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; and
• the 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’) that are similar to those available to 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, as explained in the section entitled ‘Sanctions’ following; 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 make the 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 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 will be 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 or make orders, or both, against parties that have contravened a competition rule, as explained in the section entitled ‘Sanctions’ following.

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.

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. One key challenge likely to be faced by Hong Kong will be the recruitment of locally based members with appropriate qualifications and experience. Competition law is a specialised and technical area that calls for expertise in a range of areas besides law, including micro and macro economics, finance and industry. It may be necessary for the government to trade off local knowledge with international competition exposure and to recruit from outside Hong Kong. However, this may prove difficult given that the current Bill does not contain eligibility requirements on the members of the Commission and there have been suggestions that Hong Kong permanent residency should be necessary to ensure members will have sufficient knowledge of the market.

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. Certain segments of the Hong Kong public (in particular, the SMEs) have long held the view that the Bill, if adopted, could 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 the operating and dealings of SMEs in appointing Commission members. It remains to be seen whether the proposed selection mechanism will suppress the likely dissidence the law will face.

Similarly, Tribunal members (comprised of CFI judges - some of whom will be specialised in commercial matters), are unlikely to have significant experience in dealing with competition matters. While the Tribunal can appoint appropriately qualified assessors (who could, for example, assist in matters such as competition economics), nevertheless, given the specialised nature of competition matters, Tribunal members should be also provided with regular competition law and economics training. The Tribunal may also consider following the approach of the UK Competition Appeal Tribunal (CAT), which is comprised of both legal members and lay members with specialist knowledge in areas such as economics, accountancy and business.

Sanctions

The Commission can issue infringement notices to impose punishments on infringing parties without resorting to the Tribunal. The infringement notice will contain an offer not to bring legal proceedings if the undertaking makes a commitment to comply with the requirements in the notice. Hence, acceptance of the notice is not compulsory and the undertaking concerned is not obliged to comply. The Commission may impose requirements such as refraining from taking certain actions or admitting to a contravention of a relevant conduct rule. It was originally envisaged that the Commission could also require an undertaking to pay up to HK$10 million under the infringement notice. This led to concerns that, not only would this amount put an unreasonable burden on SMEs, it would also be too low a penalty to act as a real deterrent for larger undertakings. It was feared that in practice, SMEs would be pressured into settling and complying with the notice due to lack of resources to defend themselves in the Tribunal. In response, the government is now proposing to remove the payment requirement of up to HK$10 million.

The Tribunal can also impose a range of civil sanctions on undertakings that have contravened a relevant prohibition. Specifically, the Tribunal may disqualify a director of a company from holding directorships or otherwise promoting or managing a company for up to five years where that director’s conduct contributed to the contravention of a conduct rule, or where he or she knows or ought reasonably 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.

Maximum pecuniary penalty

It was originally provided that 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, which is in line with the maximum penalties seen elsewhere, for example in the EU.

This has been a contentious issue and some legislators have expressed concern that the penalty is disproportionately severe and may drive multinational companies away from Hong Kong. In response, the government has recently proposed that the maximum pecuniary penalty be amended to 10 per cent of the local turnover (down from the originally envisioned fine based on global turnover) for each year of infringement, up to a maximum of three years. If the infringement exceeds three years, the penalty will be the three years of infringement with the highest turnover. It should be noted that this provision sets out only the maximum penalty, which penalty is not available as a matter of course: the Commission will need to convince the Tribunal in full judicial proceedings to impose such fines.

The government’s recent proposal departs from 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 and Australia) have introduced criminal penalties. In this light, it would seem that the maximum penalty proposed under the Bill is rather weak in comparison, particularly with the procedural safeguard of requiring that the Commission bring the claim for penalties in Tribunal proceedings.

The proposed scope of reduction in maximum penalties appear to be the government’s attempt to placate the concerns of various pockets of the economy.

Private actions

In addition to public enforcement through the Commission, the Bill had originally provided that persons who have suffered loss or damage as a result of a contravention of a conduct rule would have the right to bring private actions before the Tribunal or the CFI, or both, (if the action also involves non-competition claims). It was originally envisaged that such actions would be brought either as follow-on proceedings or stand-alone actions.

SMEs were concerned that allowing stand-alone actions may give rise to vexatious litigation by large corporates despite the government noting that this has not been the case in other jurisdictions. Overseas experience shows that large companies are usually the defendants in private litigations and, in fact, the success rates of stand-alone actions in other jurisdictions (such as the UK and China) are low. However, to address the SMEs’ concerns, the government has recently proposed that, at the initial stage, enforcement will be carried out by the Commission and supplemented by the follow-on right of action for determined contraventions. The government will review the need to introduce a stand-alone right of private action in a few years’ time as the business community acquires more experience with the new competition regime.

Existing sectoral competition update

The Telecommunications Authority (TA) continues to enforce the Telecommunications Ordinance with vigour, and the TA has published sound and timely guidance such as the guidelines relating to applications for licences, and well-reasoned decisions in line with international practices. While there has not been any competition cases in the broadcasting sector, the TA is currently party to two related appeals in relation to a decision it made in November 2010, in which the TA dismissed SmarTone’s complaints in respect of the increase of the fixed-mobile interconnection charge tariff of PCCW, a major telecommunications provider in Hong Kong.

Conclusion

2011 saw continued public debate on various points of the Bill accumulating in the latest package of proposed amendments that trimmed down the Commission’s powers in terms of pecuniary fines and penalties reduced. It remains to be seen whether those in the government who supported the introduction of a comprehensive competition regulation regime will continue to support the Bill if these latest amendments are indeed adopted. 2012 will prove to be an interesting year as LegCo continues its debate on the Bill and will have to vote on the Bill before the end of the current legislative session, namely, July 2012, after which the Bill will lapse. Even if the Bill is adopted, along with the latest proposed amendments, it is expected that the impact on business would not be as significant as originally thought.