11 March, 2016
The Competition Ordinance (Cap. 619) came into effect on 14 December 2015. The concept of “undertakings” is a fundamental one under this new Ordinance. The First Conduct Rule prohibits various conduct amongst undertakings which has the effect of harming competition in Hong Kong. The Second Conduct Rule regulates activities of undertakings with a substantial degree of market power. The Merger Rule seeks to prevent anti-competitive mergers amongst undertakings in the telecommunications market. Given the importance of the term “undertakings” in the Competition Ordinance, it is essential for corporations to fully understand the concept of “undertakings” in order to avoid violation of this new Ordinance.
Pursuant to section 2(1) of the Competition Ordinance, an “undertaking” is defined as “any entity, regardless of its legal status or the way it is financed, engaged in economic activity, and includes a natural person engaged in economic activity”. In other words, an entity is considered as an “undertaking” only if it engages in “economic activity”. For the purpose of illustration, a trade union acting on behalf of its members in collective bargaining with an employer on salaries and terms and conditions of work is not an undertaking, as the trade union is not engaging in economic activities. It is also worth noting that the concept of “entity” includes both legal and natural persons, although employees are generally not considered as undertakings.
An undertaking may comprise more than one entity. This is important as the First Conduct Rule does not apply to conduct involving two or more entities if the relevant entities are part of the same undertaking. Two scenarios are set out below which are most relevant to corporate entities.
Parent companies and subsidiaries
To determine whether two (or more) entities form part of the same undertaking for the purpose of the First Conduct Rule, the Competition Commission will assess whether the relevant entities constitute a single economic unit. The Competition Commission shall take into account various factors in determining whether several entities belong to the same economic unit. In general, where an entity exercises decisive influence over the commercial policies of another entity, whether through legal or de facto control, both entities are likely to be considered as belonging to the same undertaking and agreements entered into amongst those entities are not subject to the First Conduct Rule. The same applies to agreements entered into between two entities under the same control of a parent company.
In the case of a joint venture, if two or more parents have the power to veto strategic commercial decisions of the joint venture, the joint venture would generally not be considered as part of the same economic unit as any of its parents. A case before the Commission of European Communities (IJsselcentrale and Others (IV/32.732) [1991] OJ L.28/32) provides an example. Four electricity generation companies based in the Netherlands entered into a cooperation agreement with a joint venture company they had set up together. When the cooperation agreement was investigated by the Commission of the European Communities, it was argued that the four electricity generators together formed a single economic unit because they were components in “one indivisible public electricity supply system”. This line of argument was rejected by the Commission of the European Communities. The Commission found that the four electricity generators did not belong to a single group of companies, and were separate legal persons and not controlled by a single person, natural or legal. Each generating company determined its own conduct independently. The fact that they formed part of one indivisible system of public supply was irrelevant.
The Commission further held that the joint venture company did not form a single economic unit with one or more of the generating companies, as the joint venture was controlled by its parent companies together.
Principals and Agents
Agency agreements cover situations where an agent is vested with the power to negotiate and/or conclude contracts on behalf of the principal, whether in the name of the agent or the principal, for the purchase of goods or services by the principal, or sale of goods or services supplied by the principal. A true agent is not considered as a separate undertaking from its principal and therefore true agency agreements are not caught by the First Conduct Rule.
However, it should be noted that whether or not a third party is considered a true agent of its “principal” does not depend on whether that third party is labelled an “agent” or whether the agreement appointing the third party is labelled an “agency agreement”. For a true agency agreement to exist, the principal must exercise a certain degree of control over the agent and most importantly, the agent must not bear any significant risks (whether commercial or financial) in relation to the activities for which it has been appointed as an agent. Below are examples of relevant types of risks and costs in this context:
- Costs or risks associated with the maintenance of stocks of the contract products;
- Responsibility for damage caused by contract products sold to third parties;
- Costs or risks associated with non-performance by customers;
- Costs associated with advertising or sales promotion for the contract products; and
- Costs associated with market-specific investments in equipment, premises or the training of personnel.
Conclusion
We have examined the meaning of undertakings in the context of agreements between parents and their subsidiaries and between agents and their principals. In both cases, the subsidiaries and agents are separate legal entities from their parents and principals respectively, yet agreements entered into between a parent and its subsidiary or a principal and its agent would not be caught by the First Conduct Rule.
A parent company and its subsidiaries are considered as one single economic unit with activities of the subsidiaries under the control of the parent. Similarly, an agent which merely perform functions as designated by its principal is also considered to be under the control of the principal and is therefore not a separate undertaking from its principal in relation to the activities in which it is engaged. While parent-subsidiary relationships are generally quite clear cut, this is not the case with principal-agent relationships, as the risk distribution and level of control might vary on a case-by-case basis. Businesses are reminded not to simply rely on the “agency” label in entering into agency agreements with anti-competitive features.
For further information, please contact:
Karen Dicks, Deacons
