What does Hong Kong’s competition ordinance mean for business?

Hong Kong’s Competition Ordinance came into force on December 14 2015. Drafted in a broad manner, the law features three main pillars and is enforced through the Competition Commission.  In the almost 12 months since it became effective, enforcement and how to prepare for investigations have proved to be areas of concern for businesses.

Aim of the ordinance

The ordinance is far reaching because as long as the anti-competitive agreement or conduct harms the Hong Kong market, it can be caught by the ordinance regardless of where parties are located and where agreement is entered into.

Wendy Thian

“The ordinance aims to protect consumers by prohibiting behaviour that negatively impacts competition in Hong Kong,” says Wendy Thian, senior associate at Deacons.

“The notion that any agreement or conduct that restrict competition is an extremely broad one,” Conor Quigley QC, of Serle Court Chambers in London and one of the two editors of the recently launched book Hong Kong Competition Law.

Key features of the ordinance

The Competition Ordinance has three major pillars: the first and second conduct rules and the merger rule.

The first conduct rule prohibits anti-competitive agreements and concerted practices whose object or effect is to prevent, restrict or distort competition in Hong Kong. Encompassing a wide range of agreements and form of cooperation, any form of written or oral agreement, communication or conduct may be caught by the ordinance. Even if an agreement may not be intended to harm competition, if it has anti-competitive effects on parameters of competition, including price, output, product quality, product variety or innovation, the agreement would still be prohibited.

The second conduct rule targets the unilateral abuse of substantial market power. Both the product and geographic markets are considered in defining the relevant market. A substantial market power arises when no sufficiently effective competitive constraints exist in the relevant market such that a business can profitably charge prices above competitive levels or restrict supply for two years or more.

Conor Quigley

Complaints mechanism
The merger rule is limited to the telecommunications industry. “In the EU, the merger rule applies to all sectors, but in Hong Kong only the telecoms industry,” says Quigley. “The business community didn’t want to extend the merger rule to the entire economy.”

The Competition Commission is a promoter to the public of the competition law and also an investigative and regulatory body while the Competition Tribunal hears and adjudicates competition related cases.

“The Competition Commission is very complaints-driven and has already received over 1,600 complaints,” says Thian.

“The commission has a significant role in enforcing while the courts have a limited role,” says Quigley. “In the UK, if a company alleges a business to be competitive, it can sue for breach and seek damages, but few cases actually go to court. The actions are settled most of the time. In Hong Kong if a complaint is made and a breach is found, the commission would follow on the action but a company can’t start an action.”

With the leniency rule in Hong Kong, only the first leniency applicant can receive full immunity from files and prosecution. A cartel member is incentivised to disclose to the commission for full immunity.

An interesting aspect of the enforcement system is the inclusion of a warning notice period that is not often found in other jurisdictions. With the warning notice system, if the commission takes action on potential allegations, it needs to decide if the action is serious. If it is not serious, before taking an action, the commission needs to write to companies and provide a notice. This opens up questions on how effective enforcement is and the length of time given to a business to comply depends on the situation.

“The importance of enforcement needs to be stressed,” says Quigley. “It would be a mistake not to get on top of the effects of the ordinance. The commission needs to be proactive in enforcing it to make it effective in practice.”

Preparing for investigations

Though the risk of breaching the Competition Ordinance is one that businesses should be aware of, being prepared for investigations is a risk that is often underestimated. “Investigations can be very expensive. Most businesses will want to constructively engage with the Commission, which also has very broad powers to compel evidence,” says Thian.

“Documents including reports, emails, handwritten meeting notes and even hard drives can be taken,” says Thian. “Businesses should have robust document and communications protocols and a compliance strategy to assist them in responding to allegations of anti-competitive behaviour.

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