1 August, 2015
FIVE MONTHS TO GO: GUIDELINES FINALISED
On 27 July 2015, Hong Kong's Competition Commission ("HKCC") and Communications Authority ("CA") jointly published the final versions of six guidelines ("Guidelines") in respect of the Competition Ordinance. Publication of the Guidelines represents a key step towards full implementation of the Hong Kong Competition Ordinance ("Ordinance"), and the culmination of an iterative process spanning nine months since the first draft guidelines were published in October 2014.
The Guidelines follow hot on the heels of the gazetting by the Hong Kong Government of the Commencement Notice for the Ordinance on 17 July 2015. The Ordinance is now expected to take full effect on 14 December 2015 (barring any last-minute delays at the level of the Hong Kong Legislative Council ("LegCo") when the Notice undergoes negative vetting in October 2015).
Therefore, with less than five months before the Ordinance comes into full effect, the final countdown is well and truly on for businesses to prepare for the first cross-sector competition law in Hong Kong. This is the first of a series of e-bulletins in the run up to full implementation of the Ordinance and considers the relevance of the Guidelines for businesses and the remaining milestones that businesses should expect to be met by the HKCC before December 2015.
1. What is the purpose of the Guidelines and what do they cover?
The Ordinance specifically required the HKCC to consult on and issue Guidelines prior to the implementation of the statute.
The aim of the Guidelines is to set out the general approach that the HKCC intends to apply to the provisions of the Ordinance. While the Competition Tribunal ("Tribunal") and other courts will be the ultimate arbiters of the Ordinance, the Guidelines represent the HKCC's interpretation of the application of the Ordinance. As such, the Guidelines are a hugely valuable resource for businesses ahead of full implementation of the Ordinance.
The Guidelines cover six areas in total, spanning substantive and procedural issues. The substantive matters covered by the Guidelines are the application of: (i) the First Conduct Rule (which governs agreements between undertakings); (ii) the Second Conduct Rule (relating to abuse of substantial market power); and (iii) the Merger Rule. The procedural matters covered by the Guidelines are: (i) Complaints; (ii) Investigations; and (iii) Applications for exclusions and exemptions and block exemption orders.
Two previous versions of the guidelines were published for consultation in October 2014 and March 2015 with the HKCC receiving numerous submissions from a cross-section of stakeholders in response to each.
2. What do the Final Guidelines say?
Changes to earlier drafts
The Guidelines largely confirm the Commission's approach in the previous draft version issued in March 2015. However, the HKCC has provided further guidance and clarifications in particular areas.
For example, under the First Conduct Rule, the HKCC has provided additional guidance on trade association activities, which follows on from the bespoke guidance for trade associations issued in May 2015. Under the Second Conduct Rule, the HKCC has also provided additional examples to help businesses in distinguishing abusive predatory pricing from below cost pricing further to a legitimate and genuine commercial objective. This may include where the pricing policy is a genuine promotional offer of limited duration relating to the launch of a new product or entry into a new market, or where the practice is genuinely intended to minimise losses in respect of deteriorating products. The HKCC has also removed from the Guidelines an explicit statement that most conduct falling within the scope of the Second Conduct Rule will be assessed based on its actual or likely effects in the market. While this could potentially indicate a change in the HKCC's approach to the Second Conduct Rule, alternatively the HKCC may wish to retain flexibility ahead of full implementation.
Confirmation of positions in earlier drafts
Equally relevant are the provisions in the Guidelines that remain unchanged since the second draft Guidelines issued in March 2015. The Guidelines confirm that a jointly controlled joint venture will, generally speaking, not be considered part of the same economic unit as any of its parents, meaning that the First Conduct rule may apply. This statement, which was added during the second iteration of the Guidelines, is particularly relevant in Hong Kong where joint venture structures are very common.
As anticipated, the Guidelines also confirm the HKCC's previously stated position that it does not propose to set a market share threshold that would demonstrate the existence of "substantial market power" under the Second Conduct Rule. While the HKCC considers that market shares may be useful as "an initial screening device", other factors such as industry characteristics and barriers to entry will also be relevant. This position allows the HKCC considerable flexibility in its assessment of Hong Kong market structures although it differs from that of other regulators (e.g. the European Commission takes the general view that a company whose market share is below 40% is unlikely to be dominant). It remains to be seen whether the Tribunal will provide further guidance on the interpretation of "substantial market power" in due course.
3. What else should businesses expect before the full implementation of the Ordinance?
Potential contacts from the HKCC
The HKCC has stated that it may contact businesses prior to full implementation of the Ordinance where it considers that their conduct would likely contravene the First Conduct Rule or the Second Conduct Rule post full commencement.
This reinforces the view that even though the HKCC has not commenced full operations, it is already monitoring a number of areas and conducting research on certain issues. Indeed, in April 2015, the HKCC confirmed that it had begun initial market studies into the retail fuel sector and the building maintenance sector. The HKCC has also confirmed recently that it has received a significant volume of inquiries regarding potential anti-competitive practices.
Further guidance
The HKCC plans to release further policies and guidance in the run-up to the full implementation of the Ordinance (although these are not required by the Ordinance so if these are not published, implementation will not be delayed). Of particular relevance to businesses in Hong Kong will be the HKCC's statement of its enforcement priorities, which may provide some insight into the behaviours that could be subject to particular scrutiny. The publication of the HKCC's leniency policy is eagerly awaited, given its importance in particular in encouraging parties to abandon their anti-competitive conduct. The precise interaction between the HKCC's leniency policy and the Tribunal's responsibility under the Ordinance for imposing penalties for infringements of the Ordinance will also be of significant interest. Both documents (on enforcement priorities and leniency) are expected to be released in the coming months prior to full implementation of the Ordinance.
Negative vetting process
On 14 October 2015, the Commencement Notice for the Ordinance and the Competition (Fees) Regulation (which provides for the fees to be charged for making various applications under the Ordinance) will be placed before LegCo for negative vetting. The Government usually adopts the negative vetting procedure (as opposed to the positive vetting procedure) when it wishes to minimise uncertainty. Negative vetting means that the relevant subsidiary legislation comes into operation before being scrutinised by LegCo and remains in operation unless amended by LegCo.
While this procedure means that LegCo could, in theory, amend the commencement date for the Ordinance by majority vote, the chairperson of the HKCC has expressed guarded optimism that implementation will not be delayed by filibustering.
4. Implications for business
The publication of the Final Guidelines represents a key milestone on the road to full implementation of the Ordinance. The Guidelines represent the best indication of the HKCC's likely approach to enforcement of competition law in Hong Kong. While sector-specific guidance has not been forthcoming, the Commission has provided valuable insight into how it will tackle competition law enforcement in Hong Kong.
Although the Guidelines have certainly been influenced to some extent by European regulators' approaches to competition law enforcement, they also demonstrate that the HKCC proposes to apply the Ordinance in a way that is tailored to the complexities of Hong Kong markets.
Therefore, businesses should familiarize themselves with the contents of the Guidelines and use the final countdown to full implementation of the Ordinance to review and, if necessary, amend practices to ensure compliance with the Ordinance.
For further information, please contact:
Mark Jephcott, Partner, Herbert Smith Freehills
mark.jephcott@hsf.com
Adelaide Luke, Herbert Smith Freehills
adelaide.luke@hsf.com
