21 April, 2016
General
What is the main piece of legislation of general application which regulates anti-competitive behavior? What are the main prohibitions in the legislation?
The Competition Ordinance (HKCO). The HKCO prohibits anti- competitive agreements (First Conduct Rule), abuse of a substantial degree of market power (Second Conduct Rule) and anti-competitive mergers (Merger Rule) (although this is currently only applicable to mergers involving a party that owns or directly or indirectly controls a telecommunications carrier licencee in Hong Kong).
Which regulator is responsible for administering and enforcing competition laws?
Hong Kong Competition Commission (HKCC).
The HKCC has concurrent jurisdiction with the Communications Authority (HKCA) in respect of the anti-competitive conduct of certain undertakings operating in the telecommunications and broadcasting sectors.
Are there any exclusions from the competition legislation of general application? Are there any sector-specific competition laws or regulations?
Yes. The HKCO contains a number of exclusions and exemptions i.e.:
(a) there are general exclusions for: (i) agreements that enhance overall economic ef ciency in respect of the First Conduct
Rule; (ii) compliance with legal requirements; (iii) undertakings entrusted by the Government with the operation of services of a general economic interest; (iv) mergers in respect of the First and Second Conduct Rules; and (v) agreements and conduct of lesser signi cance;
(b) the HKCO does not apply to statutory bodies, except those specifically approved by the Chief Executive in Council;
(c) the Chief Executive in Council may, by regulation, not apply the HKCO to any person and/or speci c activities they undertake. To date, the operator of Hong Kong’s stock market and futures market has been exempted from the HKCO;
(d) the HKCC may issue a Block Exemption Order in respect of a particular category of agreement which is excluded from the application of the First Conduct Rule. The HKCC has not to date issued any block exemption order; and
(e) the Chief Executive in Council may grant specific exemptions on public policy grounds, or in order to avoid a con ict with international obligations that directly or indirectly relate to Hong Kong. To date, no such speci c exemption has been issued.
Does the competition legislation apply extraterritorially to persons, behaviour or action outside the jurisdiction?
Yes. The HKCO applies to all business operators inside and outside Hong Kong, where their conduct has the object or effect of restricting competition in Hong Kong.
What penalties and liabilities may be imposed for a breach of the competition law?
The Tribunal may impose nes on companies for infringement of the First or Second Conduct Rule of up to 10% of turnover obtained in Hong Kong for each nancial year in which the infringement occurred, up to a maximum of three years. The HKCC may recover its investigation and legal costs.
Other remedy powers include director disquali cation (up to a maximum of ve years), unwinding of the transaction, a declaration that the relevant agreement is void, damages for loss suffered as a result of the infringement and paying back the pro t gained to the Hong Kong government or any other speci ed person as a result of the infringement.
Third parties which have suffered loss can bring private action against the relevant companies. Only follow on actions are permitted (i.e. based on a nal infringement decision from the Tribunal / the appellate courts or an admission of contravention accepted by the HKCC).
Prohibition on anti-competitive agreements
What kinds of agreement or conduct is illegal under the prohibition?
The First Conduct Rule prohibits an undertaking from (a) making or giving effect to an agreement; (b) engaging in a concerted practice; or (c) as a member of an association of undertakings, making or giving effect to a decision of the association, if the object or effect of the agreement, concerted practice or decision is to prevent, restrict or distort competition in Hong Kong.
Agreement is a broad concept which includes any agreement, arrangement, understanding, or undertaking, whether express or implied, written or oral, and whether or enforceable or intended to be enforceable by legal proceedings. A concerted practice is a form of cooperation, falling short of an agreement, where undertakings knowingly substitute practical cooperation for the risks of competition.
The First Conduct Rule applies to both horizontal and vertical agreements
What types of agreements or conduct are illegal by object? And which are illegal only if they are significantly anti-competitive in effect?
The HKCC Guidelines state that the following conduct will typically have the “object” of harming competition:
(a) price xing;
(b) bid-rigging;
(c) market sharing;
(d) output restrictions;
(e) exchange of future price and quantity information;
(f) group boycotts; and
(g) resale price maintenance.
Other agreements will infringe the HKCO if they can be shown to have the effect of harming competition and do not otherwise bene t from one of the speci ed exclusions or exemptions.
Is there regulation of vertical agreements and if so, what type of vertical restraints or provisions in such agreements are typically examined?
Yes, the First Conduct Rule applies to both horizontal and vertical agreements.
Vertical restraints which are typically examined may include resale price maintenance, exclusivity obligations, exclusive distributorships and others.
Is resale price maintenance allowed? Are recommended resale prices or maximum resale prices permitted?
Resale price maintenance (RPM) may be considered by the HKCC as having the object of harming competition when implemented to limit competition from competitors of the distributor at the resale level or to foreclose competing suppliers. Where RPM does not have the object of harming competition, whether or not it is allowed is determined by assessment of its effects on competition. Absent compelling ef ciency justi cations that outweigh any anticompetitive effects, it is likely to be prohibited.
Recommended and maximum resale prices are subject to analysis of their competitive effects and are not considered to have the object of harming competition.
Are there any defences or relief from liability provided by the legislation?
Yes. Under Schedule 1 of the HKCO, agreements that enhance overall economic efficiency may be excluded from the First Conduct Rule if:
(a) the agreement contributes to improving production or distribution or promoting technical or economic progress;
(b) consumers receive a fair share of the efficiencies;
(c) the agreement does not impose on the undertakings concerned restrictions that are not indispensable to the attainment of the relevant efficiencies; and
(d) the agreement does not afford the undertakings concerned the possibility of eliminating competition in respect of a substantial part of the goods or services in question.
Is there a leniency regime? If there is, please describe the extent of and process in seeking leniency?
Yes, the HKCC operates a leniency policy for undertakings engaged in cartel conduct. Leniency is only available to the rst undertaking that reports the cartel conduct to the HKCC and meets all the requirements for leniency. The HKCC would enter into an agreement with the undertaking not to take proceedings against the undertaking for a pecuniary penalty in exchange for cooperation in the investigation of the cartel conduct. The HKCC may use its enforcement discretion in relation to undertakings that are not rst to report cartel conduct, to the extent allowed by law and the Hong Kong courts.
Abuse of Dominance or Market Power
How is “dominance” or “market power” determined? Is there a market share test?
The Second Conduct Rule prohibits an undertaking that has a substantial degree of market power in a market from abusing that power by engaging in conduct that has as its object or effect the prevention, restriction or distortion of competition in Hong Kong.
There is no clear guidance on when an undertaking will have a substantial degree of market power. The HKCC will consider a number of factors including market share, countervailing buyer power, barriers to entry and characteristics of the market. As a general rule, market shares act as a useful initial screening device in the assessment of substantial market power.
What type of conduct constitutes abuse of dominance or abuse of market power?
The HKCC Guidelines cite the following as non-exhaustive examples of types of conduct which the HKCC may consider an abuse of a substantial degree of market power:
(a) predatory pricing;
(b) tying and bundling;
(c) margin squeeze conduct;
(d) refusals to deal; and
(e) exclusive dealing (including conditional rebates).
Pricing below average variable cost and some forms of exclusivity exercised by undertakings with a substantial degree of market power will be regarded as illegal by object.
Are there any defences or relief from liability or exclusions applicable for abusive conduct?
Yes. While there is no efficiency-based exclusion for the Second Conduct Rule under the HKCO, the HKCC Guidelines indicate that undertakings may nevertheless use ef ciencies arguments as a defence. The HKCC Guidelines suggest that a key consideration is whether the claimed ef ciencies are passed on to consumers.
Merger Control
Is there a merger control regime? What is considered a “merger”?
Yes. The Merger Rule prohibits an undertaking from directly or indirectly carrying out a merger that has, or is likely to have, the effect of substantially lessening competition in Hong Kong. At present, the Merger Rule only applies where an undertaking that directly or indirectly holds a “carrier licence” within the meaning of the Telecommunications Ordinance is involved in a merger.
As a general rule, transactions that involve:
(a) the merging of two or more undertakings into one;
(b) the acquisition of one (or part of an) undertaking by another;
(c) the forming of a joint venture; or
(d) the acquisition of assets by one undertaking from another, may potentially be a merger.
Is the merger noti cation a mandatory or voluntary process?
Voluntary.
When must the merger be noti ed to the regulator?
There is no specific requirement, though the HKCC recommends parties to a merger to contact the HKCC at the earliest opportunity to understand whether the HKCC has any concerns about a proposed transaction.
What are the ling thresholds and are there any exemptions from noti cation requirements?
The HKCC specified two “safe harbour” thresholds, whereby if a merger falls within one of the two thresholds, it is unlikely to substantially lessen competition in Hong Kong. The first safe harbour measure is based on concentration ratios and the second measure is based on the Her ndahl-Hirschman Index (HHI) index (which measures market concentration). In these cases, the HKCC will take the view that it is unlikely to further assess a transaction, though it retains the discretion to intervene.
First safe harbour threshold:
(a) the post-merger combined market share in the relevant market(s) of the four (or fewer) largest rms is less than 75%, and the merged firm has a market share of less than 40%; or
(b) the post-merger combined market share in the relevant market(s) of the four (or fewer) largest rms is 75% or more, and the merger firm has a market share of less than 15%.
Second safe harbour threshold:
(a) a merger resulting in market(s) with a post-merger HHI of less than 1,000;
(b) a merger resulting in market(s) with a post-merger HHI of between 1,000 and 1,800 and the merger produces an increase in the HHI of less than 100 in these market(s); or
(c) a merger resulting in market(s) with a post-merger HHI of more than 1,800.
Please provide a brief description of the merger clearance process and the typical timeline for merger clearance.
The HKCC may investigate a merger or a potential merger if it has reasonable cause to suspect a contravention of the Merger Rule. For completed mergers, the HKCC must commence an investigation within 30 days after which the HKCC rst became aware, or ought to have become aware, that the merger has taken place.
There is no formal merger clearance process and no timetable for the HKCC to provide informal advice. The HKCC has indicated that it will seek to deal with requests in an ef cient and timely manner and within the parties’ requested time frame, where that is possible.
What are the consequences of failing to notify the regulator when required?
The regime is voluntary and so there is no legal obligation on the parties to submit a noti cation. The HKCC may investigate a merger and take any action it considers necessary to ensure compliance with the Merger Rule, including bringing proceedings in the Competition Tribunal seeking orders to unwind the merger.
For further information, please contact:
Stephen Crosswell, Partner, Baker & McKenzie
stephen.crosswell@bakermckenzie.com
