Hong Kong’s New Competition Law Takes Effect – Are You Compliant?

Hong Kong’s first cross-sector competition law has come into effect and is likely to have a significant impact on the legal and commercial landscape in Hong Kong.

The Competition Commission has revealed that its enforcement efforts will focus on cartel conduct and other agreements that cause significant harm to competition in Hong Kong.

Penalties for failing to comply with the new law can be severe – a company group may be fined up to 10 percent of its annual turnover in Hong Kong for each contravention. Individuals involved in a breach may also be penalised. It is therefore vital that businesses are aware of and comply with the new law.

What is Competition Law?

There are three key competition rules under the Competition Ordinance (Cap.619), known as the First Conduct Rule, Second Conduct Rule and Merger Rule.

The competition rules apply to all entities engaged in economic activity, including companies, partnerships, sole traders and trade associations (collectively referred to in the Ordinance as “undertakings”).

First Conduct Rule

The First Conduct Rule prohibits agreements and arrangements between undertakings that have the object or effect of preventing, restricting or distorting competition in Hong Kong.

The rule is particularly concerned with preventing cartel conduct, which occurs when competitors agree to do one or more of the following activities:

(a) Bid-rigging: Agreeing strategy when bidding for (or considering whether or not to bid for) projects or when responding to invitations to tender.

(b) Market sharing: Allocating sales, territories, customers or markets for the production or supply of goods or services.

(c) Output limitation: Fixing, maintaining, controlling, preventing, limiting or eliminating the production or supply of goods or services.

(d) Price fixing: Fixing, maintaining, increasing or controlling the price for the supply of goods or services.

Other agreements and arrangements that may breach the First Conduct Rule include:

(a) Group boycotts: Where competitors agree not to do business with targeted individuals or businesses.

(b) Resale price maintenance: Where a supplier establishes a fixed or minimum resale price to be observed by the buyer of a product.

Businesses also need to assess the competition law risks for arrangements involving exclusive distribution, exclusive customer allocation, franchising, joint buying and joint ventures.

The First Conduct Rule applies to written and oral agreements, together with informal arrangements (eg, cooperation between undertakings) and decisions of trade associations.

The exchange of confidential information between competitors may also breach the First Conduct Rule, particularly if the information relates to price, quantities, sales plans or bidding strategy.

Second Conduct Rule

The Second Conduct Rule prohibits undertakings that have a substantial degree of market power in a market from abusing that power. An abuse will occur when the undertaking engages in conduct that has the object or effect of preventing, restricting or distorting competition in Hong Kong.

Examples of conduct that may amount to an abuse of market power include:

(a) Exclusive dealing: Occurs when a supplier requires a customer to exclusively or largely acquire a good or service from the supplier or incentivises a customer to do the same.

(b) Predatory pricing: Occurs when a business sets the price of its goods or services so low that it is deliberately forgoing profit in order to force a competitor out of the market or to “discipline” the competitor.

(c) Refusal to deal: Occurs when a business with substantial market power refuses to supply a product or service or refuses to supply the good or service on reasonable terms.

(d) Tying and bundling: Tying occurs when a supplier makes the sale of one product conditional on the purchase of a different product. Bundling occurs when two products are discounted if they are purchased together.

A substantial degree of market power arises where an undertaking does not face sufficiently effective competitive restraints in the relevant market. There is no single test to determine whether an undertaking has a substantial degree of market power. Factors taken into account include the market share of the company and any barriers to entry into the relevant market.

Merger Rule

The Merger Rule prohibits mergers that have, or are likely to have, the effect of substantially lessening competition in Hong Kong. The rule only applies when one or more of the parties participating in the merger holds a “carrier licence” within the meaning of the Telecommunications Ordinance (Cap.106).

There is no requirement to notify the Commission of a merger or proposed merger. However, parties to a proposed merger may approach the Commission to discuss the transaction and seek informal advice on a confidential basis. The parties may also apply to the Commission for a decision on whether the merger is excluded from the application of the Merger Rule.

Exemptions and Exclusions

The First Conduct Rule does not apply to agreements that enhance overall economic efficiency. These are agreements that contribute to improving production or distribution, or promote technical or economic progress, and meet several other criteria.

A person may apply to the Commission for a block exemption order declaring that a category of agreements is excluded on the basis that it enhances overall economic efficiency.

The First Conduct Rule is also excluded if the combined turnover of the parties to a relevant agreement does not exceed HK$200,000,000. However, the exclusion does not apply to agreements involving cartel conduct.

The Second Conduct Rule does not apply to conduct by an entity that has an annual turnover not exceeding HK$40,000,000.

Consequences of Breaching Competition Rules

Pecuniary Penalties

The maximum pecuniary penalty for each contravention of the competition rules is 10 percent of the turnover of the undertaking concerned for each year in which the contravention occurred, up to a maximum of three years. “Turnover” in this context means the total gross revenues of the undertaking obtained in Hong Kong.

Even if a company in breach is a small part of a conglomerate, the maximum fine will be by reference to the turnover of the whole group. Individuals involved in a contravention may also be fined.

Other Orders

The Competition Tribunal may make any order it considers appropriate against a person who has breached competition law, including:

(a) disqualifying a person from acting as a director or otherwise being involved in the management of a company for up to five years;

(b) restraining or prohibiting a person from engaging in contravening conduct; and

(c) declaring an agreement to be void or voidable.

Follow-on Actions

A person who has suffered loss or damage as a result of any act that has been determined to be a contravention of a conduct rule may commence a follow-on action against the person who contravened the rule or was involved in the contravention.

Competition Commission

The Commission is responsible for investigating and enforcing the competition rules. It has published guidelines setting out how it intends to interpret and give effect to the Ordinance (see www.compcomm.hk).

The Communications Authority has concurrent jurisdiction in respect of the anti-competitive conduct of certain undertakings in the telecommunications and broadcasting sectors.

Investigation Powers

The Commission has a number of investigation powers, including requiring a person to produce documents or to answer questions relevant to an investigation. It may also apply for a search warrant from a judge of the Court of First Instance.

Enforcement Powers

The Commission has a number of enforcement options if it considers that a person has contravened a competition rule, including:

(a) accepting a commitment from a person to take action or refrain from taking action to address concerns about the contravention;

(b) issuing an infringement or warning notice; and

(c) applying to the Tribunal for pecuniary penalties and other orders in relation to an alleged contravention.

Enforcement Policy

The Commission has published an Enforcement Policy setting out how it intends to exercise its enforcement powers under the Ordinance.

The Commission will focus its resources on conduct that it considers causes the greatest overall harm to competition and consumers in Hong Kong, in particular:

(a) Cartel conduct: breaches of the First Conduct Rule involving bid-rigging, market sharing, output limitation and price fixing; and

(b) Exclusionary behaviour: breaches of the Second Conduct Rule involving conduct that has the object or effect of preventing or limiting the ability of competitors to compete.

Where cartel conduct is suspected, the Commission may prioritise action against both the company and any individuals involved, including company directors.

The Commission will favour remedies that will stop unlawful conduct speedily, undo harm caused by contravening conduct and impose sufficient economic sanctions.

Leniency Policy

The Commission has published a Leniency Policy for Undertakings Engaged in Cartel Conduct. Under the policy, the Commission will agree not to commence proceedings for pecuniary penalty and other orders against the first member of a cartel that comes forward and meets the requirements for leniency. The cartel member will be required to fully co-operate with the Commission in its investigation and prosecution of other cartel members.

A leniency agreement does not provide immunity from follow-on actions brought by persons who have suffered loss or damage as a result of the cartel.
Only the first cartel member that qualifies for leniency will obtain full immunity. However, other members that co-operate with the Commission may also benefit. The Commission may, for example, consider recommending to the Tribunal a reduced pecuniary penalty.

The Tribunal also has the discretion to grant leniency in non-cartel cases.

Competition Tribunal

The Tribunal is responsible for hearing and determining cases brought under the Ordinance. It is a specialist tribunal consisting of all the judges of the Court of First Instance (excluding Justices of Appeal, Recorders and Deputy Judges).

The Tribunal has jurisdiction to hear competition cases including:

(a) applications made by the Commission with regard to alleged contraventions, or alleged involvements in contraventions, of the competition rules;

(b) applications for the review of Commission decisions; and

(c) private follow-on actions by persons who have suffered loss or damage as a result of an act that has been determined to be a contravention of a conduct rule.

If the Tribunal finds that a person has contravened or been involved in the contravention of a competition rule, it may impose pecuniary penalties and make any other order it considers appropriate.

The Tribunal’s practice and procedure is governed by the Competition Tribunal Rules (Cap. 619D) and The Rules of the High Court (Cap. 4A), together with a number of Practice Directions. The Court of First Instance may also hear competition cases in limited circumstances.

Registered Foreign Lawyer, King & Wood Mallesons

Senior Associate, King & Wood Mallesons