Hong Kong’s new competition law explained

Author: Ashley Lee | Published: 26 Jun 2012
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Hong Kong's Legislative Council last week enacted the city-state's long-awaited Competition Ordinance. While MNCs will be unaffected, practitioners say that Hong Kong businesses should begin reviewing their practices.

Though the Competition Ordinance has more than 170 provisions, only a few deal with restrictions. The vast majority set out procedures for two regulatory bodies, the Competition Commission and the Competition Tribunal.

The two conduct rules in Part 2 of the Competition Ordinance designate restrictions, and are very broadly drafted. According to John Hickin, a partner at Mayer Brown JSM, this is deliberate because it will give the Commission some latitude in determining what sort of behavior it wants to crack down on.

But the general quality of the conduct rules concern businesses. Shirley Yuen, CEO of the Hong Kong General Chamber of Commerce, said, "the Chamber believes that the law still leaves much to be desired in terms of clarity, and although a rough framework has now been put in place, it needs to be shaped to best suit and serve Hong Kong’s needs."

The first conduct rule generally prohibits agreements that prevent, restrict or distort competition. However the Commission will decide whether the rule will cover vertical arrangements, such as those between entities in a supply chain or distributorship arrangements.

Yuen said that it is critical to remove this uncertainty as soon as possible. Currently businesses do not know whether, and to what extent, distribution, franchising, joint purchasing, R&D, commercialisation, resale price maintenance, exclusive dealing and other agreements will be treated under the law.

The second conduct rule specifies abuse of market power rather than market dominance. Hickin said that this is because there is a lower threshold for the Tribunal and the Commission to determine if a business has substantial market power.

Marc Waha, partner at Norton Rose Hong Kong, said that he has seen concern about the definition of market power. "The government has said it wants to refer a low percentage of market share because it wants to go after supermarkets and retailers," he said. "Clearly the rest of the business community is uneasy because there is a lot of missing guidance."

But the Hong Kong law goes further than most competition laws. Sébastien J. Evrard, an antitrust partner at Jones Day’s Beijing office, said that in other jurisdictions, substantial market power laws generally require at least a 40% market share threshold.

But the threshold is lower in Hong Kong. Multinational corporations with market shares between 25 to 40% are not subject to abuse of dominance provisions around the world, but they may be in Hong Kong. However, Evrard clarified that the law does not prohibit having large market shares or a monopoly. Instead, they only become illegal when there is a monopoly that applies unfair prices or bundles products.

Noncompliance can incur a penalty of up to 10 percent annual turnover obtained in Hong Kong, based on the gross turnover of the undertakings concerned, for each year of infringement up to a maximum of three years. Individuals can be disqualified for up to five years from acting as a director or being directly or indirectly involved in the management of a company.

Other sanctions can include forcing divestiture of business operations, assets or shares or appointing a third party to take control of property.

However Yuen said that the penalty cap to 10 % of Hong Kong turnover does not go far enough to make the law proportionate. Instead, the cap should be on the local turnover in the goods or service concerned.

But Waha said that law-abiding corporates, especially listed companies, do not need the prospect of high sanctions to take the Competition Ordinance seriously. "If they are perceived as non-compliant, then they will be sanctioned by shareholders before any competition authority is involved," he added.

Exemptions

"As in all jurisdictions that have introduced a competition law (except for China), there will be a rush for exemption applications," said Waha.

The ordinance provides for several exemptions. Practitioners noted that there is effectively an exemption for government entities, which is unusual.

Statutory authorities are also exempt, but the government can bring certain statutory authorities back within the scheme of the law if nominated. The Chief Executive can also grant exemptions if there are public policy reasons. This is often available to entities entrusted with the provision of services of general economic interest, such as utilities.

The Competition Ordinance specifies a procedure to apply for block exemptions, which will be determined by the Commission in due course. In other jurisdictions, block exemption orders have been made available to the insurance sector, shipping lines and other businesses where there is justification, said Hickin.

Other exemptions are specified in Schedule 1 of the law. Companies are exempt from the first conduct rule if its undertakings in any calendar year do not exceed HK $200 million. They are exempt from the second if its undertakings do not exceed HK $40 million. However, Hickin warned that these exemptions are not absolute. "It does not apply to hardcore cartel activity," he said.

Impact

Practitioners agree that the law’s impact on MNCs is limited. MNCs are subject to competition laws around the world, and tend to adopt a consistent policy, Evrard said.

But compliance could be more difficult for Hong Kong companies. Yuen said that the Competition Ordinance will impact the cost of doing business, as companies hire legal and compliance experts to ensure that their contracts and business operations do not breach the law.

"Many practices that have been ingrained in how people have done business will no longer be viable," said Hickin. "By way of example, the competition law will have a real impact on the way businesses make pricing decisions, and even the extent to which they can share information with competitors."

However corporates have time to comply. Waha predicted that it will be six to ten months before appointments to the Commission are made, and does not expect enforcement until 2014. "It will be maybe five to ten years before we start seeing market changes due to the Competition Ordinance," he said.