The Competition Ordinance
With the Competition Ordinance coming into force on 14th December 2015, it has been recognised that anti-competitive practices create a corrosive market atmosphere and strangleholds within the economy which can lead to inappropriate commercial bars by established businesses on new businesses with a consequent reduction in consumer choice.
As the first introduction of economy-wide prohibitions on anti-competitive agreements and abusive commercial conduct, the Competition Ordinance models many of its provisions on the competition regime of the European Union and the Anti-Trust Laws of the United States.
New Statutory Bodies
As part of the new regime, two new institutions, the Competition Commission (the “Commission”) and the Competition Tribunal (the “Tribunal”) have been created. The Commission’s dual roles are acting as an investigative body, as well as a promoter of competition.
Under the Competition Ordinance, the Tribunal has been tasked to hear and adjudicate competition-related cases, as well as a reviewing certain determinations of the Commission. The Tribunal may hear cases that have been brought by the Commission, in addition to cases which have been brought by a higher court or by private parties where there has been an admission of liability.
With the objective being to prevent competitive and abusive conduct in the Hong Kong market place, the Ordinance applies not only to undertakings that engage in business in Hong Kong, but also provides an extra-territorial application on undertakings outside of Hong Kong where the anti-competitive behaviour has the effect of preventing, restricting or distorting competition in Hong Kong.
The Competition Ordinance creates two “Conduct Rules” which apply cross-sector, as well as a merger rule which is limited to the telecommunications sector. Unless involving serious anti-competitive conduct, the First Conduct Rule applies only if the undertaking has a turnover of more than HK$200 million. The Second Conduct Rule applies if the turnover of the undertaking is more than HK$ 40 million.
- The “First Conduct Rule” prohibits undertakings from making or giving effect to agreements or engaging in concerted practices that have as their object or otherwise have the effect of preventing, restricting or distorting competition in Hong Kong.
- The “Second Conduct Rule” prohibits undertakings which have a substantial degree of market power in a market from engaging in conduct that has as its object or otherwise have the effect of preventing, restricting or distorting competition in Hong Kong.
- The merger rule prohibits mergers that have or are likely to have the effect of substantially lessening competition in Hong Kong. This rule is limited to carrier licensees issued under the Telecommunications Ordinance (CAP 106).
First Conduct Rule
In particular, the focus of the First Conduct Rule is serious cartel activity amongst business competitors. Cartel acts which constitute serious anti- competitive conduct, would include:
- Price fixing: where agreement is reached on customer prices, or price-elements such as discounts or price-ranges;
- Market-sharing: where non-competition between competitors would be agreed by allocation of parts of the market, such as by customer demographic or by geographical location.
- Out-put restriction: where production or sales output is limited as a means of increasing prices.
- Bid-rigging: agreeing with competitors who would make the winning bid, subverting the competitive nature of the tendering process.
These have been explicitly highlighted by the Commission as serious anti-competitive behaviour which will be dealt with most severely. Other conduct such as Vertical arrangements between supplier and customers, or manufacturers and retailers are generally not considered by the Commission as serious anti-competitive behaviour and will generally only result in a ‘warning notice’ to the infringing parties, unless such behaviour is continued despite the warning.
Second Conduct Rule
The Second Conduct Rule focuses on businesses which have a substantial degree of market power. Section 21(3) of the Competition Ordinance sets out the following non-exhaustive list of matters which the Commission would take into consideration in determining whether an undertaking has a substantial degree of market power:
- The market share of the undertaking;
- The undertaking’s power to make pricing and other decisions;
- Any barriers to entry to competitors into the relevant market; and
- And other relevant matters.
The Commission has therefore clarified in their guidance note, that an assessment of market power comprises an analysis of several factors including market share, countervailing buyer power, barriers to entry or expansion, and market-specific characteristics. Further details of their assessment can be found in their guidance note on Second Conduct Rule, the link of which is below.
Where the Commission has assessed that an undertaking has a substantial degree of market power, the Commission has identified a non-exhaustive list of conduct which the Commission may in appropriate circumstances, consider an abuse of that market power, which include:
- Predatory pricing: Where an undertaking leverages its substantial degree of market share to set prices to such a degree as to deliberately forgo profits as a means of forcing another undertaking out of the market.
- Tying and bundling: Where an undertaking makes the sale of one product conditional on the purchase of another. This is considered anti-competitive where the undertaking leverages its substantial degree of market share in a product sector to increase sales in another as a means to force competitors out of the linked market by limiting potential buyers.
- Margin squeeze conduct: This occurs where a vertically integrated undertaking with a substantial degree of market power supplies an important input downstream on the market and through its substantial market power “squeezes” the margin between the price it charges for the input to downstream competitors and the price its downstream operations charge to its customers so that the competitors are unable to compete effectively.
Exclusions and exemptions
The Competition Ordinance does not apply to statutory bodies, save for the following statutory bodies which are engaged in economic activity of a private nature:
- Federation of Hong Kong Industries
- The general committee of the Federation of Hong Kong Industries
- Ocean Park
- Kadoorie Farm and Botanic Garden Corporation
- Matilda and War Memorial Hospitals.
The Chief Executive in Council also has the power to grant exemptions where there are exceptional and compelling reasons of public policy to do so.
Where the Tribunal has found there to be an infringement, the penalties that can be levied include:
- Pecuniary penalties up to 10% of annual local turnover;
- Director’s disqualification orders for up to 5 years;
- Divesture of assets, shares or business;
- Voiding of agreements;
- Criminal sanctions for obstruction;
- Injunctive relief;
- The ordering of third party damages; and
- Appointing a third party to take control of property.
Application for a Decision
As a means to assist businesses in complying with the Competition Ordinance, a procedure has also been included by the Commission to allow undertakings to write to apply to the Commission for a decision as to whether an agreement or conduct is excluded or exempt from the First Conduct Rule and/or Second Conduct Rule. The Commission may also as part of this process make decisions that an undertaking’s conduct is excluded or exempt from the First and/or Second Conduct Rules subject to conditions. Should an undertaking deviate from these conditions, then such exemptions may then no longer apply.
Investigatory Powers of the Commission
The Commission has been granted powers of compellability under section 41 and 42 of the Competition Ordinance. Under these powers, the Commission is able to compel persons which they have reasonable cause to suspect that a person may have possession or control of documents which are a contravention of a competition rule and can compel persons to attend before the Commission.
Under section 43 of the Ordinance, the Commission may require any explanation or particulars to be given by way of a statutory declaration. Should a person fail to comply with a requirement made by the Commission to provide documents or attend an interview with the Commission, the Commission may require an explanation of the reasons for the failure by way of Statutory Declaration.
Where a person is required to produce a document or attend an interview, section 45 of the Ordinance provides that a person is not excused from giving any explanation or from answering any question on the grounds that it may cause them to incriminate themselves. This is qualified in that such statements or explanations that are obtained under this provision are also not admissible as evidence on certain specific offences unless the person being interviewed adduces evidence or raises questions with respect to the excluded evidence.
The Commission has also been provided a power by the Ordinance to appoint any employee of the Commission as an authorised officer and for these authorised officers to apply for search warrants from a judge of the Court of First Instance on any premises which the Commission has reasonable grounds to suspect of containing documents relevant to an investigation.
Offences created by the Ordinance
Where any person fails to comply with a requirement under sections 41, 42, 43 and 50. They are liable, on conviction on indictment, to a fine of $200,000 and to imprisonment for 1 year; or on summary conviction, to a fine at level 5 and imprisonment for 6 months.
Where a person destroys, falsifies, conceals or causes or permits the destruction of documents that have been requested under section 41 and section 50, they are liable on conviction on indictment to a fine of $1,000,000 and to imprisonment for 2 years; or on summary conviction, to a fine at level 6 and to imprisonment for 6 months.
Where a person obstructs a person in exercising a power under a warrant, they are liable on conviction on indictment, to a fine of $1,000,000 and to imprisonment for 2 years; or on summary conviction, to a fine at level 6 and to imprisonment for 6 months.
Where a person produces or provides documents which they know to be false or misleading, is reckless to that fact, then they will be liable on conviction on indictment, to a fine of $1,000,000 and to imprisonment for 2 years; or on summary conviction to a fine at level 6 and to imprisonment for 6 months.
The Commission in an effort to encourage whistleblowing and to assist in combatting Cartelism, also has a policy of Leniency. This policy allows a Cartel member to give evidence against other Cartel members in exchange for the Commission not taking proceedings against it for a pecuniary penalty.
With the Competition Ordinance, there may be an early surge in investigations by the Commission of anti-competitive activity. Many of the powers of the Commission are similar to the powers of other regulatory bodies such as the Securities and Futures Commission. Morley Chow Seto’s lawyers are experienced in dealing with SFC investigations and the new regime has parallel legislation. We welcome any questions and are ready to provide assistance in the event of an investigation under the Competition Ordinance.
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