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Between 2005 and 2014, there were more than 300 received complaints on unfair competition and 54 cases requiring pre-merger consultation. Also, 78 cases in multiple industries regarding cartels and abuses were pre-investigated. This indicates heightened awareness of competition law among businesses. Pre-merger consultation plays a necessary role in the consideration of whether to notify or request an exemption.
First, in the National Assembly 2010–2015 session, the bill on competition to reform the current legislation was not successfully included in the legislative programme.
Second, concerning Decision 848/QD-BCT, the head of the Vietnam Competition Authority (VCA) is now accountable to the Ministry of Industry and Trade.
Third, Decree 71/2014 was promulgated to replace Decree 120/2005/ND-CP on the method of sanctioning to reflect the reality in the market.
Finally, approval of the competition authorities is now a mandatory requirement for M&A transactions under the new Law on Enterprise 2015. This change encourages improved communications between authorities and businesses, so authorities can be better manage and prevent any unnecessary risk of violations.
Practical shortcomings of the competition regime
The provisions on determining the relevant market under article 4 of Decree 116/2005/ND-CP (Decree 116) were pretty general and unrealistic, and meant that enterprises always faced difficulties applying the provisions. For instance, in the case of Megastar a few years ago, there were several arguments about how to determine the relevant market but the competition authorities gave no guidance.
Currently, most enterprises seek reputable companies conducting market research to identify the market share and level of competition in the market. But the result of such surveys cannot be used according to the criteria set out in article 4 of Decree 116. This makes it difficult for enterprises to correctly identify their market share. Accordingly, it would be more efficient and give greater clarity to create methods for determining market share. In the future, the VCA could consider applying the hypothetical monopolist test (HMT), which is popularly used in many countries, including China.
The Law on Competition also needs to give more specific guidance about ‘foreign enterprises operating in Vietnam’ as stipulated in its article 2. These may or may not include representative offices operating in Vietnam. In some commercial sectors, foreign investors still face restrictions on establishing companies with foreign capital and goods through third parties (importers, distributors or commission agencies in Vietnam) but still comply with price and sale policy for foreign companies. In such case, the question arises whether foreign companies are governed by Vietnamese law or not. Whether foreign companies that implement economic concentration with revenues (via the importer) reaching the notification threshold in Vietnam, but with representative offices only in Vietnam, would have to notify is still entirely ambiguous.
Agreements on restraint of competition
Article 8 of the Law on Competition only lists eight forms of competition restriction agreements, but there has not been any definition of ‘agreements’ or precisely what action evidences an agreement. These obstacles mean enterprises face several difficulties in implementation. The following issues should be clarified: Must the agreement be made in writing? Can other evidence such as e-mails, text messages, recordings be accepted? Is a competition restriction agreement considered to be formed from the time enterprises begin to contemplate the agreement or from the time the agreement is performed?
Although these are key factors in helping enterprises avoid the risks of breaking the law, the above issues have not yet been clarified. For example, in situations where employees have been found to have attended meetings or exchanged e-mails relating to fixing prices with competitors’ employees, enterprises need to know if such behaviour is considered an offence or not. It depends on the seriousness of the offence as to whether a report should be made to the regulator or it should be investigated internally.
Second, with reference to article 8, the scope of regulation may also need clarification: do agreements restricting competition include both types of agreements or horizontal agreements only? According to the explanatory report of the Drafting Committee on the Law on Competition, article 8 is designed to include horizontal agreements; vertical agreements are covered under the provisions of article 13. However, in accordance with the Law on Competition and Decree No. 116, this distinction is not clear. Meanwhile, it is important to determine scope because the application of article 13 cannot be made unless the imposed elements (of the party with a dominant position on the signing of the contract) are proved.
Third, the grouping of the conditional prohibited acts (paragraphs 1–5 and 8, article 8) and absolute-prohibited acts (paragraphs 6–8, article 8) is not really suited to the general trend in developed countries. Currently, a number of prohibited agreements with a combined market share of 30 per cent or more, in accordance with article 8, including clause 1 (price fixing), clause 2 (market sharing) and clause 3 (controlling the number and volume of the product), have been proved to be contrary to the fundamental principles of the market economy and should be absolutely prohibited.
Finally, the practical application of a competition law in some countries (eg, the United States and Japan) shows that a leniency policy is an effective tool for competition managing agencies in the timely detection and handling of competition restriction agreements. However, Vietnam has not yet applied a leniency policy or issued legal documents on the benefits of notifying the authorities of breaches of competition rules. This makes it hard for enterprises whose staff were involved in competition restricting agreements to know what to do.
The application of the provisions on abusing a dominant or monopoly position on the market are quite rigid in practice. As the main legislation governing competition issues, the Law on Competition describes the superficial signs of abuse without evaluating the characteristics and nature of the abusing acts and remedies provided for in the statute do not address the impacts of these acts on the market.
The Law on Competition does not forbid the business operations of large enterprises, just their unfair abuse of market power. However, some provisions are quite rigid and unsuitable for the business practices of large enterprises.
First, on the subject of provisions in vertical agreements prohibiting counterparties distributing competitors’ products and creating geographical distribution restrictions, article 30 of Decree 116/2005/ND-CP determines certain competition restriction acts as follows: the imposition of conditions on other enterprises to sign contracts for the purchase or sale of products or services is the imposition of the following preconditions before signing a contract:
- restrictions on the production or distribution of other products or the purchase or provision of other services not directly related to the commitments of the agents according to the provisions of law on agency; and
- restrictions on locations for the resale of products, except for goods on the list of those subject to business conditions and goods subject to restricted business according to the provisions of law.
However, large enterprises need to rationalise distribution systems, and the division of the distribution market for distributors is necessary and brings effective business results (as in a franchise contract). Vertical agreements can, consistently with the objectives of the Law on Competition, maximise consumer welfare by efficiently distributing resources and reducing costs to the possible lowest level. An exclusive distribution agreement (two-way) should be prohibited only if ‘damage to the customer’ means that the customer is prevented from accessing and purchasing the same products from other manufacturers and ‘prevent new competitors from participating in the market’ means that new manufacturers are prevented from using the distribution system on the market.
Nevertheless, the current regulations do not consider that this would exempt these agreements.
Second, article 31 of Decree 116/2005/ND-CP stipulates that ‘preventing market participation by new competitors means ... requiring one’s customers not to trade with a new competitor’. From a financial perspective, this provision seems to be inflexible and not logical.
A popular commercial activity in the market, especially as a result of Vietnam’s WTO membership, is for manufacturers to sponsor a retailer to expand their manufacturing distribution channel. The manufacturer would provide the retailer with capital and the facilities to operate and sell the manufacturer’s products. To fulfil the contract retailers could only sell other products if doing so does not affect the recoverability of sponsored capital or the effectiveness of cooperation. An agreement that a retailer shall only sell the manufacturer’s products does not, however, prevent new competitors from participating in the market since they could sell products to other retailers in the same market. In fact, similar manufacturers often have similar contracts with other retailers.
Third, the VCA also needs to explain ‘precondition’ as stipulated in article 30 of Decree 116. This term stems from the fact that the commercial terms of a contract are jointly negotiated, and thus, whether a provision simply stipulated in the contract or associated with certain remedies such as termination of the contract could be considered as a precondition or not.
Finally, a provision on prohibiting the fixing of a minimum reselling price, addressed in paragraph 5, article 13, should also be clarified. Accordingly, when fixing a resale price, does failure to mention the minimum or maximum price violate the Law on Competition? Several enterprises print the resale price on the packaging; is such practice considered a breach of competition law?
As with the practice of abuse of dominant position, article 16 of the Law on Competition only provides for four types of horizontal economic concentration. However, the provisions on the notification thresholds or situations of prohibited economic concentration are inflexible, and merely focus on market share rather than impact on market.
For instance, an economic concentration between the parent company and its subsidiary does not affect the competition on the market. However, such case would still require notification or a request for exemption if the market share of the parent company is up to 30 per cent. Whereas mixed economic concentrations (Company A’s acquisition of Company C, which is competitor of Subsidiary B) are not caught by the legislation.
The common criteria frequently used to measure the level of economic concentration in other countries, such as the Herfindahl Hirschman Index, and concentration ratios CR3 and CR5, have not been officially used to analyse the impact of an economic concentration on the market. In addition, due to the ambiguous provisions on determining the relevant market, enterprises that conduct an economic concentration always face difficulties in determining the market share while conducting notification or exemption procedures.
The role in legal interpretation of competition authorities
Currently, the competition authorities in Vietnam are divided into two bodies, the Vietnam Competition Council (VCC) and the VCA, whereas there is usually only one competition authority in other countries. Regarding the Law on Competition and following Decrees, the VCA plays a notable role in discovering, collecting and seeking evidence relating to the restraint of competition, and creating investigation reports. The VCC considers whether to decide or resolve competition claims. However, these bodies are not granted powers to promulgate regulations that explain and implement the Law on Competition. Meanwhile, competition cases are not public, so enterprises have no access to information or ideas about how to apply the provisions of the Law on Competition. While the documents and reports of the VCA are useful references for enterprises, they are not official guidance.
For instance, the VCA allows enterprises to unofficially consult before deciding whether to submit economic concentration notification documents. This is a useful and time-saving procedure for enterprises, especially in cases where the combined market share is close to the notification threshold. However, the consultation term is still not regulated and the results of the consultation have no legal validity. Accordingly, enterprises often consult or notify when the Department of Planning and Investment has to consult the VCA.
The future of the Law on Competition
Amending the substantive law, particularly merger control, is the most significant challenge for the future. The investigation capability of the enforcement agencies should be enhanced to implement the Law on Competition more effectively, meaning enterprises will have more experience of understanding and applying the law. One useful measure is to raise public awareness through competition advocacy.
Cartels are the most dangerous practices in the market, and criminalising cartels could decrease the number of violations. Under the draft of an amended criminal code, individuals are subject to fines of between 100 million dong and 1.5 billion dong, non-custodial reform for up to three years or imprisonment of between three months and five years. Corporations are subject a monetary fine of up to 5 billion dong or suspension of operation for up to five years.
From a procedural perspective, the competition authorities must respect fairness and transparency during the whole process. Transparency is fundamental to support the credibility of the law enforcement authorities. Enforcement procedures should be transparent to the parties under investigation, and open and accessible to the public. A sound institutional framework and due process are fundamental in ensuring the effective application of the Law on Competition. Procedures should be transparent, certain, accountable and not unduly burdensome or prohibitive. Due process also requires extensive reform. From the rules of natural justice, certain rights need to be ensured (including the right to be informed of a suspected violation, the right to be heard, and acting on logically probative evidence). Moreover, the appellate body should be independent from the competition authority and the government. The whole or any part of the competition authority’s decision should be judicially reviewed.
Catalyst for change
In October 2015, the ministers of trade of 12 countries participated in the negotiation for a Trans-Pacific Partnership (TPP), while Vietnam announced it had concluded the technical negotiations. The TPP has dedicated chapter 16 to regulate competition policy in which the competitive institution is established and maintained in accordance with other members; transparency and fairness for enterprises competing in the market of Vietnam is an essential requirement. In addition, the ASEAN Economic Community will be officially put into operation in 2015 and Vietnam must complete its AEC commitments in 2016. In particular, the promulgation and enforcement of the Law on Competition is inefficient, and the most important consideration is harmonisation of common policy and competition law with those of other member states.