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2017 Merger Control Survey: Hong Kong

Mark Jephcott and Adelaide Luke, Herbert Smith Freehills

Regulatory framework

1.1 What is the applicable legislation and who enforces it?

The Competition Ordinance (Chapter 619 of the Laws of Hong Kong) (the Ordinance) is the main competition legislation in Hong Kong. The Ordinance was fully implemented on December 14 2015. It implements a cross-sector antitrust regime and a merger control regime for the telecommunications sector. The merger control regime prevents undertakings from directly or indirectly carrying out a merger that has, or is likely to have, the effect of substantially lessening competition in Hong Kong (the Merger Rule). Currently, only the telecommunications sector is subject to the Merger Rule.

The Competition Commission and the Communications Authority have concurrent jurisdiction to enforce the Merger Rule in Hong Kong. Under a Memorandum of Understanding published on December 14 2015, the Communications Authority will ordinarily take the lead in considering mergers due to the specific function of the Communications Authority of regulating the telecommunications sector. References to the Competition Commission in the remainder of this chapter should be read as including the Communications Authority for the telecommunications sector.

Jurisdictional test

2.1 What types of mergers and joint ventures (JVs) are caught?


Currently, the merger control regime is only applicable to transactions involving one or more undertakings that directly or indirectly hold or control a carrier licence within the meaning of the Telecommunications Ordinance (Chapter 106 of the Laws of Hong Kong).

Under the Competition Ordinance, a merger takes place if:

  • two or more undertakings previously independent of each other (of which one or more undertakings must hold or control a carrier licence) cease to be independent of each other;
  • one or more persons or undertakings acquire direct or indirect control of the whole or part of one or more other undertaking (one or more undertakings must hold or control a carrier licence). Note that this includes the creation of a joint venture to perform, on a lasting basis, all the functions of an autonomous economic entity; or
  • an asset (including goodwill) is acquired leading to the acquiring undertaking replacing or substantially replacing the target in the business in which the target was engaged immediately before the acquisition (one or more undertakings must hold or control a carrier licence, and the relevant business conducted by the acquired undertaking immediately before the acquisition must have been conducted under a carrier licence).

2.2 What are the thresholds for notification, how clear are they, and are there circumstances in which the authorities may investigate a merger falling outside such thresholds?


The Ordinance does not specify any numeric filing thresholds but mergers that substantially lessen competition in Hong Kong are prohibited.

Under the Guidelines on the Merger Rule published by the Competition Commission, there are two indicative safe harbours, which suggest that a merger is unlikely to substantially lessen competition. The first involves a test based on a four-firm concentration ratio, and the second is based on the Herfindahl-Hirschman Index (HHI).

The Competition Commission has indicated that any horizontal merger creating a combined market share of 40% or more is generally likely to raise competition concerns and would therefore likely lead to a detailed investigation of the transaction by the Competition Commission.

2.3 Are there circumstances in which a foreign-to-foreign merger may require notification, and is a local effect required to give the authority jurisdiction?


The Merger Rule applies to a transaction that has, or is likely to have, the effect of substantially lessening competition in Hong Kong even if:

  • the arrangements for the creation of the merger take place outside Hong Kong;
  • the merger takes place outside Hong Kong; or
  • any party to the arrangements for the creation of the merger, or any party involved in the merger is outside Hong Kong.

Note that the current regime applies only to mergers involving persons or undertakings licenced to establish or maintain telecommunications networks under the Telecommunications Ordinance.

Pre-notification and filing

3.1 Is filing mandatory or voluntary and must closing be suspended pending clearance? Are there any sanctions for non-compliance, and are these applied in practice?


There is no obligation to notify the Competition Commission of a merger falling within the Merger Rule. However, parties may:

  • approach the Competition Commission for informal, non-binding advice in relation to a proposed merger; or
  • make an application that the merger shall be excluded from the Merger Rule: under section 8 of Schedule 7 of the Ordinance, on the basis that economic efficiencies that arise or may arise from the merger outweigh the adverse effects of any lessening of competition; or under a specific exemption under section 3 or 4 of the Ordinance.

There is no obligation to suspend the closing pending clearance, as there is no clearance requirement. However, the Competition Tribunal has wide-ranging powers in relation to anticipated mergers. For example, it can order a person not to proceed with the merger or a part of it.

3.2 Who is responsible for filing and what, if any, filing fee applies?


The filing fee payable for an application that the merger shall be excluded from the Merger Rule is prescribed under a subordinate regulation of the Ordinance made by the Chief Executive of Hong Kong. The fee is currently HK$500,000 ($64,460).

3.3 What are the filing requirements and how onerous are these?


An application for a decision that a merger shall be excluded from the Merger Rule must be made using Form M (available on the Competition Commission's website) and the procedure involves a public 30-day consultation.

The filing can be made on basis that:

  • the economic efficiencies of the merger outweigh the adverse effects caused by any lessening of competition; or
  • the statutory bodies or specified persons or activities exclusions apply (see sections 3 and 4 of the Ordinance).

There are no prescriptive requirements for obtaining informal advice from the Competition Commission. However, the Competition Commission has indicated that parties should have regard to the types of information required in Form M (to the extent applicable) when submitting a voluntary notification for informal advice.

3.4 Are pre-notification contacts available, encouraged or required? How long does this process take and what steps does it involve?


As a merger may be subject to investigation by the Competition Commission, parties are advised and encouraged to contact the Competition Commission at an early stage to discuss a proposed merger that falls within the Merger Rule.

The Competition Commission has stated that it is prepared to provide non-binding and confidential informal advice to parties.

The Competition Commission has also stated that there is no timetable for providing such informal advice, but it will try to deal with requests in an efficient and timely manner and within the parties' requested timeframe, where that is possible.

Clearance

4.1 What is the standard timetable for clearance and is there a fast-track process? Can the authority extend or delay this process?


There is no notification or clearance requirement under the Merger Rule. There is also no timetable for obtaining informal advice from the Competition Commission, or for an application for a decision that a merger shall be excluded from the Merger Rule.

The Competition Commission may conduct an investigation into a merger or an anticipated merger if it has reasonable cause to suspect that the merger contravenes or is likely to contravene the Merger Rule. In this event, the Competition Commission must commence an investigation of a merger within 30 days after it first became aware, or ought to have become aware, that the merger has taken place.

In the case of a completed merger that the Competition Commission has reasonable cause to believe contravenes or is likely to contravene the Merger Rule, proceedings must be brought before the Competition Tribunal within six months after the later of the day on which the merger was completed or the day on which the Competition Commission became aware of the merger. This time limit can be extended by the Competition Tribunal (on application by the Competition Commission) if the Competition Tribunal considers it reasonable to do so.

4.2 What is the substantive test for clearance, and to what extent does the authority consider efficiencies arguments or non-competition factors such as industrial policy or the public interest in reaching its decisions?


The Merger Rule stipulates that an undertaking must not, directly or indirectly, carry out a merger that has, or is likely to have, the effect of substantially lessening competition in Hong Kong. The Competition Commission has further elaborated on this in their Guideline on the Merger Rule, stating that the Competition Commission will generally interpret a substantial lessening of competition by reference to the creation or enhancement of market power. This is not solely determined by market share or concentration: factors that will be considered include whether the reduced competition is likely to encourage one or more firms to raise price, reduce output, limit innovation, or otherwise harm consumers.

Section 6 of Schedule 7 to the Ordinance provides that the following matters can be taken into consideration in determining whether the Merger Rule is applicable:

  • the extent of competition from competitors outside Hong Kong;
  • whether the acquired undertaking, or part of it, has failed or is likely to fail in the near future;
  • the extent to which substitutes are available or are likely to be available in the market;
  • the existence and extent of any barriers to entry;
  • whether the merger would result in the removal of an effective and vigorous competitor;
  • the degree of countervailing power in the market; and
  • the nature and extent of change and innovation in the market.

While the Ordinance has not identified any filing thresholds, the Competition Commission has identified two indicative safe harbour measures in the Guideline on the Merger Rule (see the answer to Question 2.2 above). The parties can also make an application that the merger shall be excluded from the Merger Rule based on efficiency arguments (see the answer to Question 3.3 above).

4.3 Are remedies available to alleviate competition concerns? Please comment on the authority's approach to acceptance and implementation of remedies.


The Competition Commission has discretion to accept a commitment to take, or refrain from taking, any action that the Competition Commission considers appropriate to address their concern about a possible contravention of a competition rule (including the Merger Rule).

Under to the Ordinance, the parties can offer commitments in return for the Competition Commission's agreement to:

  • not commence an investigation;
  • not bring proceedings before the Competition Tribunal; or
  • terminate any investigation or proceedings that have been commenced.

Therefore, there is some flexibility as to when commitments can be offered by the parties.

As the merger control regime in Hong Kong has only been introduced recently, the authority's approach to acceptance and implementation of remedies are yet to be seen.

Rights of appeal

5.1 Please describe the parties' ability to appeal merger control decisions – how successful have such challenges been?


Competition Commission

Certain decisions made by the Competition Commission, including decisions or rescission of decisions to exclude a merger from the Merger Rule, as well as decisions varying or releasing commitments relating to the Merger Rule, are reviewable by the Competition Tribunal. These are defined as reviewable determinations (RD) under the Ordinance.

Interested parties may apply to the Competition Tribunal for leave to review the RD within 30 days after the day on which the determination was made.

Competition Tribunal

Appeals to the Court of Appeal against decisions, determinations or orders by the Competition Tribunal on issues such as liability, the amount of the pecuniary penalty or compensatory sanction can be made as of right. An application for leave should be made within 14 days of the decision.

Appeals against an interlocutory decision, determination or order by the Tribunal require leave of the Court of Appeal or the Tribunal. Application for such leave must be made to the Tribunal in the first instance within 14 days from the date of the decision, determination or order, unless the Court of Appeal allows the application for leave to be made direct to the Court of Appeal.

As of the date of publication, there has been no appeal in Hong Kong in relation to the Merger Rule.

Your jurisdiction

6.1 Outline any merger control regulatory trends in your jurisdiction (i.e., cases, court filings, etc.).

The Communications Authority actively monitors and considers merger activity within the telecommunications sector. During 2016 (up to the date of publication), the Communications Authority has issued decisions not to commence an investigation in relation to two mergers, on the basis that the relevant transactions were unlikely to cause a substantial lessening of competition in Hong Kong.

According to the 2012 Bills Committee report on the Competition Bill (the Bills Committee Report), the government will conduct a review of the operational experience and effectiveness of the Ordinance within a few years of implementation. The exact timing of the review is currently unknown.

The Ordinance currently regulates only the mergers of carrier licensees in the telecommunications sector. The Bills Committee Report notes that the government, as it builds up more experience and expertise under the new competition regime, will revisit the issue as to whether cross-sector merger provisions are suitable for, and needed in, other sectors and industries in Hong Kong. The Merger Rule can be easily adapted for cross-sector application.

About the author

Mark Jephcott
Head of competition – Asia, Herbert Smith Freehills

Hong Kong
T: +852 2101 4027
E: mark.jephcott@hsf.com
W: www.herbertsmithfreehills.com

Mark Jephcott is the head of Herbert Smith Freehills' competition practice in Asia. He is an expert in all aspects of competition law in relation to the regimes of the United Kingdom, Europe and many jurisdictions in Asia – in particular, Greater China, Hong Kong and Singapore.

Jephcott has acted on major multi-jurisdictional mergers, including many requiring clearance from Chinese authorities. He has considerable experience in advising clients on behavioural issues and representing clients before the EU and Asian authorities in relation to cartel and abuse of dominance investigations. Jephcott was also closely involved in consultations on the development of the Hong Kong Competition Commission's draft guidelines on the Hong Kong Competition Ordinance.

In 2015, Jephcott was appointed by the Hong Kong Competition Commission as one of its Non-Governmental Advisers to the International Competition Network, and is also a member of the Executive Council of the Hong Kong Competition Association.


About the author

Adelaide Luke
Registered foreign lawyer, Herbert Smith Freehills

Hong Kong
T: +852 2101 4135
E: adeliade.luke@hsf.com
W: www.herbertsmithfreehills.com

Adelaide Luke is a registered foreign lawyer in Herbert Smith Freehills’ Hong Kong office. She has considerable experience in all areas of EU and UK competition law and of many of the competition regimes in Asia, particularly Hong Kong and China. Luke worked in Herbert Smith Freehills’ competition teams in London and Brussels prior to relocating to Hong Kong. Her practice encompasses merger control, joint venture arrangements, regulatory investigations and competition litigation (involving both Article 101 and 102 TFEU issues). Luke has worked for clients across a number of different jurisdictions and industries, including manufacturing, oil and gas, pharmaceuticals, telecoms and transport.


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