Out-Law / Your Daily Need-To-Know

Hong Kong's Competition Ordinance

Out-Law Guide | 10 Aug 2015 | 12:51 pm | 4 min. read

From 14 December 2015 businesses in Hong Kong will be subject to the new Competition Ordinance. Effective procedures including training and oversight and reporting systems need to be put in place by all businesses to make sure that they are ready.

The main aim of the ordinance is to prohibit 'undertakings' from preventing, restricting, or distorting competition in Hong Kong – or even trying to do so. Undertakings are defined as any entity engaged in economic activity regardless of its legal status or the way it is financed. The term can also cover a group of companies when they operate as one economic unit.

First conduct rule

The ordinance sets out two 'rules': the first conduct rule and second conduct rule.

The first conduct rule applies where there is an 'agreement' or 'concerted practice' between undertakings or a decision by a trade association that aims to harm, or actually harms, competition.

The rule also applies when an agreement affects competition indirectly, with an adverse effect on one or more aspects of competition.

It is important to note that the behaviour doesn't have to actually succeed: if the conduct has the "object" of influencing competition, it is caught by the ordinance. 

Certain conduct will be seen as serious anti-competitive conduct under the first conduct rule:

  • price fixing – including recommendations on prices, discounts and allowances;
  • market allocation – where the market is divided up geographically or in any other way to minimise competition;
  • supply restriction – where supply is controlled to boost process; and
  • bid rigging – when bidders collude on competitive tenders.

Second conduct rule

The second conduct rule focuses on undertakings with more influence, who have a 'substantial' amount of power over the market (i.e. they can raise prices or reduce quality for a long period of time without being subject to pressures by the market).

Conduct that is covered under the second rule includes:

  • predatory pricing – where prices are set very low to drive out competition;
  • tying – where a customer has to buy one product in order to buy another;
  • Bundling – where two or more products are offered at a discount;
  • margin squeeze – this applies when an undertaking supplies a product to its competitors as well as to its own customers. By increasing the price it charges its competitors but keeping the price it charges its own customers unchanged it can reduce the ability of its competitors to compete against it for customers;
  • refusals to deal – either completely, or on unreasonable terms; and
  • exclusive dealing – requiring a customer to buy all or a substantial portion of its requirements from one undertaking.

Exclusions

There are some exclusions to both rules.

Agreements that 'enhance overall economic efficient' will be allowed, where they contribute to improved production or distribution. They must not, however, impose unnecessary restrictions or give the undertakings the power to eliminate their competition in a large area of the market.

If agreements are made to comply with a legal requirement they will be allowed, as will agreements made for a task required by the government, if the conduct rules would prevent that task being performed.

Agreements are exempt from the first conduct rule if the combined turnover or the undertakings involved does not exceed HK$200 million (£16.5 million), and from the second conduct rule for turnover under HK$40 million (£3.3 million). This exemption does not apply to serious anti-competitive conduct.

Mergers, except those in the telecommunications sector within Hong Kong, are not covered by either rule.

Guidance from the Competition Commission

The Competition Commission will give advice in some circumstances, when it is unclear whether an agreement or course of conduct will comply with the ordinance. This will be a public process, however, and a decision will only be given when it answers new or unresolved questions of wider importance. The Commission will not give legal advice other than this.

Competition Commission powers

If the Commission believes an agreement breaches the ordinance, it has extensive powers to investigate including the right to demand production of documents and information, to require individuals to answer questions, and to gain a search warrant to enter premises and take away evidence.

The Commission can then start proceedings in the Competition Tribunal, and impose fines, demand payment of damages, and require disposal of assets and property.

Fines can be up to 10% of annual local turnover of one undertaking or of the combined turnover of connected entities.

Injured parties can also bring proceedings to recover losses.

Getting ready

With the above in mind, it is important that all businesses understand the rules and make sure that they are ready for the ordinance. 

An initial investigation will need to be carried out to determine the risk of breaching the ordinance. Large companies with a strong market position, in particular, need to carefully assess their conduct and whether it would raise concerns under the second conduct rule. Similarly, companies that regularly partner with competitors need to look at how this could be judged under the first conduct rule

High risk conduct needs to be identified. Does the company share market information, particularly on pricing and wages? Could anti-competitive information be shared at conferences and other meetings? Many standard ways of doing business will have to be reassessed to make sure they do not breach the new rules.

A compliance programme should be put in place with a clear, written policy and strong management commitment. A manual should be put together to explain how the business will comply, and training put in place to keep employees up to date on what is required of them. A record of the training should be kept, and employees need to be told how to pass any concerns to management.

Senior management also needs its own policy and plans if it has to respond to actions from the Competition Commission. A protocol and action plan should be put together so that each manager knows the right steps to take if an investigation notice arrives, or in the event of an unannounced 'raid' from the Competition Commission.

Finally, an ongoing review process should make sure compliance continues. Contracts need to be reviewed, along with business practices of both the business and any associations or other organisations it works with.