Hong Kong: Hong Kong Government Releases Consultation Paper On Proposed Competition Ordinance

Originally published May 8, 2008

Keywords: Hong Kong, Commerce and Economic Development Bureau, Competition Ordinance, horizontal agreements, price-fixing, bid-rigging, market allocation, de minimus, economic benefit, block exemption, Competition Tribunal, Competition Commission, Court of Final Appeal, civil penalties, Telecommunications Authority, Broadcasting Authority

Hong Kong's Commerce and Economic Development Bureau has published a new Consultation Paper including significant details of the proposed Hong Kong 'Competition Ordinance' (hereafter referred to as the "Law"), affirming the Hong Kong government's commitment to introduce the Law during the 2008/09 legislative session.

Feedback from the business sector and the wider community is invited. A summary of key aspects of the proposed Law, as revealed in the Consultation Paper, is provided below.

1. To whom will the Law apply?

It is proposed that the Law will apply to any individuals, companies or other entities (referred to as "undertakings") when they are engaged in economic activities, except as noted below:

• Government and statutory bodies would be excluded from the Law
  Few justifications for this exclusion are provided, although the Consultation Paper states that such an exclusion will "help ensure that the operation of Government and statutory bodies would not be affected by unfounded and misconceived complaints".
  
  

• Undertakings "entrusted with the operation of services of general economic interest, such as essential public services of an economic nature" would be excluded from the Law
  Public transport and suppliers of power and water are likely to come within this exclusion.
  
  

2. What conduct will the Law prohibit?

It is proposed that the Law will:

• prohibit undertakings from participating in agreements and concerted practices that have the purpose or effect of substantially lessening competition; and
  
  

• where an undertaking has a substantial degree of market power, prohibit the abuse of that power with the purpose or effect of substantially lessening competition.
  
  

According to the Consultation Paper, specific examples of conduct which might commonly breach these prohibitions will not be included in the Law, but instead may be referenced in associated guidelines. Further details in relation to the two key prohibitions are set out below:

• The proposed prohibition on agreements and concerted practices by an undertaking that have the purpose or effect of substantially lessening competition
  The focus of this prohibition will be "horizontal agreements" (agreements between competitors who provide similar products or services in the same market); and the practices of price-fixing, bid-rigging, market allocation and limiting production or sales volumes are all referenced as examples in the Consultation Paper.
  
  

However, the Consultation Paper suggests that no form of 'horizontal agreement' will be prohibited 'per se' (that is, prohibited outright). Instead, such agreements would only be prohibited where it can be shown that they had the purpose or effect of substantially lessening competition - although certain serious forms of cartel practices may raise a presumption that the necessary purpose exists.

The Consultation Paper indicates that "vertical agreements" (being agreements made between one party in its capacity as a supplier of goods or services and another party in its capacity as an acquirer of those goods or services) will likely be made a 'block exemption' from this prohibition, and will instead be dealt with (where applicable) under the prohibition relating to abuse of substantial market power.

De minimis' rule to be applied, except for 'hardcore' cartel conduct

The Consultation Paper also proposes that the Commission would be required not to prohibit an agreement where the aggregate market share of the parties to the agreement fell below a specified threshold (perhaps around 20%), except where those parties were engaged in "hardcore cartel conduct" (such as price-fixing, bid-rigging and market allocation).

• Abuse by an undertaking of its substantial market power
  Although the Consultation Paper avoids making a clear statement on this issue, it suggests that where an undertaking possesses a market share of 40% or more, it may be presumed to hold substantial market power. Other factors are also noted as relevant considerations, including the number and size of other competitors in the market, and the level of any 'barriers to entry'.
  
  

The Consultation Paper does not elaborate on the forms of 'vertical' conduct that may be considered to be 'abusive' when engaged in by an undertaking with substantial market power.

Exclusions and exemptions

The Consultation Paper proposes that appropriate criteria and mechanisms for granting the following kinds of exemptions and exclusions from the above prohibitions should be established:

• Exemptions on the grounds of economic benefit
  An agreement may be exempted from the prohibition on anti-competitive agreements if it yields economic or efficiency benefits (such as a contribution to improving production or distribution, or promote technical or economic progress) that outweigh the potential anti-competitive harm.
  
  

• Block exemptions
  According to the Consultation Paper, it should be open for 'block exemptions' to be granted in respect of any category of agreement that is very commonly likely to yield economic benefit that outweighs any anti-competitive harm (removing the necessity to have it assessed every time, on a case by case basis).
  
  

• Exclusion on grounds of public interest
  The Consultation Paper also suggests the Chief Executive-in-Council should be able to exclude certain activities from the ambit of the prohibited conduct on the basis of overriding "public policy considerations".
  
  

3. Who would enforce the Law, and how?

It is proposed that two new bodies be established to administer the Law, an independent Competition Commission and a separate Competition Tribunal. Their composition and responsibilities are outlined below.

(a) Competition Commission

According to the Consultation Paper, it is proposed that a new Competition Commission be established and empowered to:

• investigate and determine whether an infringement of the Law has taken place;
  
  

• apply relevant sanctions and remedies;
  
  

• conduct other functions, such as the publication of guidelines in relation to the practical application of the Law.
  
  

The Competition Commission would be an independent body corporate, with

• an appointed board of Commission members, overseeing a full-time executive arm; and
  
  

• a distinct Investigation Committee, to ensure formal separation of the investigation and adjudication of infringements.
  
  

Investigation and adjudication by the Commission

It is proposed the Commission would be able to commence an investigation either on its own initiative or in response to a complaint. Broad formal investigation powers would be granted to the Commission, including:

• to require a person to provide information and produce documents it considers relevant to an investigation or to appear before the Commission to give evidence; and
  
  

• to conduct a physical search of commercial or domestic premises (but only where empowered to do so under a warrant issued by a magistrate).
  
  

The Commission would also have the power to enter into binding settlements with a party under investigation.

(b) Competition Tribunal

According to the Consultation Paper, a specialist Competition Tribunal would be established to:

• hear applications for review of decisions by the Competition Commission; and
  
  

• hear private actions relating to the Law.
  
  

The Tribunal would be made up of judicial officers and experts in economics, commerce or competition law.

Tribunal proceedings would be conducted as informally and expeditiously as possible, and the Tribunal would not be bound by rules of evidence.

There would be a further right to appeal against Tribunal decisions in the Court of Appeal (and then, if required, to the Court of Final Appeal). Such an appeal would be limited to points of law or any remedy applied in respect of an infringement, including the amount of any fine.

4. Sanctions and remedies

The Consultation Paper recommends that sanctions be limited to civil penalties.

Specifically, it is proposed that fines of up to $10 million could be imposed by the Competition Commission. More serious penalties, including higher fines and disqualification from holding a directorship or a management role in any company for up to five years, could only be imposed by the Competition Tribunal, on application by the Commission.

The Commission would also have the power to make such directions, including the issue of an interim "cease and desist" order before a decision is made on whether conduct constitutes an infringement.

5. What about 'merger control'?

No specific proposal is made in the Consultation Paper in relation to the issue of whether a merger control regime should be adopted as part of the Law, although one of various options outlined in the Consultation Paper would be to introduce merger control provisions in the Law, but with their enforcement being delayed until after a review of the effect of the Law.

6. Other key matters

A number of other significant proposals are dealt with in the Consultation Paper, including in relation to:

• Private actions
  It is proposed that private actions could be brought before the Competition Tribunal by any person who has suffered loss or damage from a breach of the Ordinance. Such actions could either be "follow-on" actions, seeking compensation for losses suffered as a result of anti-competitive conduct, or "stand-alone" actions, seeking a determination by the Tribunal. To minimise spurious litigation, the Tribunal would have the power not to hear frivolous or vexatious claims.
  
  

• Representative actions
  It is proposed that, with the permission of the Tribunal, actions may be brought by a body on behalf of a defined group that has been affected by an unlawful practice (such as on behalf of consumers or SMEs).
  
  

• A 'leniency programme'
  Under the proposed programme, a party to a prohibited agreement that comes forward with information that is helpful to an investigation may have any subsequent penalty waived or reduced (although this would not prevent rights of private action).
  
  

• Resolution of overlaps with existing sector-specific competition laws
  It is proposed in the Consultation Paper that the competition provisions in the Telecommunications and Broadcasting Ordinances that duplicate those in the Law would be repealed (however the Telecommunications Authority and the Broadcasting Authority could potentially share with the Competition Commission jurisdiction over competition matters in their respective sectors).
  
  

Next Steps

The government is now accepting submissions and comments in relation to the contents of the Consultation Paper. The relevant 'consultation period' runs until 5 August 2008.

The Consultation Paper notes that the government has already begun work on the relevant competition Bill, however it is stated that the Bill will not be finalised until all of the feedback provided during the consultation period is reviewed.

Accordingly, it is important that businesses consider the potential impact of the Law on their operations in Hong Kong, and determine whether they should be making submissions to the government on matters such as:

• the need for certainty in relation to the conduct that may be prohibited under the Law;
  
  

• the need for relevant block exemptions to be formulated and published well in advance of the commencement of the Law, to avoid disruption to business operations;
  
  

• any concerns about the potential for a business to be presumed to hold 'substantial market power' on the basis of a market share of just 40% or more;
  
  

• the need to ensure adequate safeguards against unjustified and malicious private litigation under the Law; and
  
  

• the right approach Hong Kong should be adopting on the issue of merger control.
  
  

How JSM's Antitrust and Competition Team can assist:

JSM has a working relationship with key stakeholders in the development of the proposed competition law in Hong Kong, and is actively involved in the ongoing consultation process regarding the new law. JSM can assist with the preparation of submissions to the government to help ensure the law does not unduly increase the costs and risks of doing business in Hong Kong.

Learn more about our Antitrust & Competition practice.

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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