KWM Hong Kong Competition Law Guide (EN)

Hong KongCompetition Law GuideDecember 2015

Hong Kong competition lawHong Kong’s new competition law applies to all businesses in Hong Kong. Penalties for failing to comply with the law can be severe – a company group may be fined up to 10% of its annual turnover in Hong Kong for each contravention. Individuals involved in a breach may also be penalised. It is therefore vital that companies are aware of and comply with the law.This guide provides an outline of what companies need to know and understand about the new law. We discuss the competition rules, key “dos and don’ts”, exclusions and exemptions from the rules, and consequences of breaching the rules. We also provide compliance tips for Hong Kong businesses.

Hong Kong Competition Law Guide / kwm.com2

In this Guide:► Hong Kong competition law

► Competition law in a nutshell

► Four key competition “don’ts”

► Information sharing

► Agreements that may breach competition law

► Abuse of market power

► Merger Rule

► Consequences of breaching competition law

► Exclusions and Exemptions

► Who are the competition authorities?

► Compliance tips

► Key contacts

Competition law in a nutshell


What is competition law?Hong Kong’s new cross-sector competition law prohibits conduct that harms competition in Hong Kong.

There are three key competition rules, known as the First Conduct Rule, the Second Conduct Rule and the Merger Rule.

The law is governed by the Competition Ordinance (Cap. 619) and associated regulations.

First Conduct RuleThe First Conduct Rule prohibits arrangements between businesses that have the object or effect of preventing, restricting or distorting competition in Hong Kong. The rule is especially focused on

prohibits companies that have a substantial degree of market power in a market from abusing that power by engaging in conduct that has the object or effect of preventing, restricting or distorting competition in Hong Kong.

Examples of conduct that may be abusive include predatory pricing, exclusive

preventing cartels – agreements between competitors to fix prices, share markets, rig bids or limit output. Resale price maintenance (e.g. fixing a resale price) is also prohibited.

Second Conduct RuleThe Second Conduct Rule

dealing and refusals to deal.

Merger RuleMergers that have, or are likely to have, the effect of substantially lessening competition in Hong Kong are prohibited. The rule only applies when one or more of the parties to the merger holds a telecommunications carrier licence.







► Merger Rule




► Compliance tips

► Key contacts

Four key competition “don’ts”1. Bid-riggingDon’t exchange information on, or agree strategy with, competitors when bidding for (or considering whether or not to bid for) contracts. This includes agreeing who should win a bid and manipulating the bidding process to achieve that outcome.

Example: Four property developers eligible to tender for the sale

of a large parcel of land meet and agree that three of the four will submit non-competitive or non-compliant bids, in order to assist the fourth company to win the tender.

2. Price fixingDon’t agree with competitors to fix, maintain, increase or control the price, including the formula to calculate price, discounts, rebates, promotions or credit terms, for the supply of goods or services.

Examples: Rival banks agree on the handling fees they will charge

for new mortgages.

A trade association issues recommendations to members on prices or publishes fee scales for members.








► Merger Rule




► Compliance tips

► Key contacts

Four key competition “don’ts”4. Output limitationDon’t agree with competitors to fix, maintain, control, prevent, limit or eliminate the production or supply of goods or services (including volume and type).

Example: Competing construction materials suppliers agree to

restrict the volume of materials available for sale in order to lower supply and raise prices.

3. Market sharingDon’t agree with competitors to allocate sales, territories, customers or markets for the production or supply of goods or services.

Examples: Funds managers from rival firms agree to divide the

market between themselves, with each targeting separate clients, geographic areas and service offerings.

Retail tenants reach an agreement as to the nature of goods they will sell in a particular area.








► Merger Rule




► Compliance tips

► Key contacts

Information sharing


Exchanging confidential business information with competitors may breach competition law. Caution should be exercised when speaking with competitors, including in informal settings such as industry and social events.

Do not discuss…Do not discuss with competitors (to the extent such information is not publicly available) your business’s:

• current or future prices or trends, including elements of pricing (such as discounts, credits or rebates);

• the terms and conditions on which goods or services will be supplied or acquired;

considering exchanging information through a third party.

In principle fine to discuss…Discussing the following kinds of information with competitors is unlikely to raise competition law concerns:

• publicly available information;

• matters of general interest (e.g. governmental policy, regulatory changes, industry problems, industry lobbying);

• general economic and technical issues; and

• socio-political issues and lobbyism.

• dividing or allocating the market in terms of geographic areas or customers;

• actual or potential customers, suppliers or service providers;

• business plans (e.g. marketing strategies);

• intentions to bid, or not to bid, for work; or

• preventing or restricting production or supply.

Be careful discussing…Be careful when receiving and responding to any communication from a competitor about behaviour in the market.

Caution should also be exercised before







► Merger Rule




► Compliance tips

► Key contacts

Agreements that may breach competition law


Resale price maintenanceSuppliers must not set a fixed or minimum resale price to be observed by the buyer of a product. It may however be permissible to fix a maximum resale price or to recommend a resale price.

Exclusive distributionIn an exclusive distribution agreement, a supplier assigns to a single distributor the exclusive right to resell its products in a particular territory or to particular customers.

GroupboycottsCompanies may infringe competition law if they agree with competitors not to do business with targeted individuals or businesses with the aim of excluding an actual or potential competitor from the market.

In most cases, exclusive distribution agreements will not give rise to competition concerns. They will often have pro-competitive benefits, including protecting brand image and incentivising distributors to invest in marketing and customer service.

Competition concerns may arise if the agreement leads to reduced competition between distributors for the same products/brands, market sharing, or limiting market access to potentially competing distributors.

Joint buyingJoint buying occurs when companies agree to jointly purchase property, goods or services. For example, a number of companies join together to purchase goods,







► Merger Rule




► Compliance tips

► Key contacts

Agreements that may breach competition law


enabling them to compete against large competitors. Joint buying in this case will generally be permissible.

Competition concerns may arise if the joint buyers together have a substantial degree of market power, and the joint buying results in the buying market being foreclosed to competing purchasers.

Joint tenderingJoint tendering may not give rise to competition concerns if it is carried out in the open and the arrangement is known to the party organising the tender.

The arrangement may be pro-competitive if it allows participation by companies that would not have been able to make a stand-alone bid.

Competition concerns may arise if the parties could have made independent bids, and the joint tendering leads to a reduction in the number of potential bidders.

Joint venturesIn general, a joint venture agreement will be permissible if it does not have the object or effect of harming competition.

It may also be excluded from the First Conduct Rule on the basis that it enhances overall economic efficiency. This requires an analysis of the joint venture and its impact on competition in the market.

It is recommended that you consult your legal adviser prior to entering into any joint venture arrangements.







► Merger Rule




► Compliance tips

► Key contacts

Abuse of market power








► Merger Rule




► Compliance tips

► Key contacts

Companies that have a substantial degree of market power in a market must not abuse that power by engaging in conduct that has the object or effect of preventing, restricting or distorting competition in Hong Kong.

The Competition Commission is particularly concerned with conduct by incumbents that is focussed on preventing or limiting the ability of competitors to compete.

Examples of conduct that may amount to an abuse of market power are set out on the next page.

What is a substantial degree of market power?A substantial degree of

market power arises where a company does not face

sufficiently effective competitive restraints in the relevant market.

There is no single test to determine whether a company has a substantial degree of market power.

Factors taken into account include:

• the market share of the company;

• the level of market concentration;

• the company’s power to make pricing and other decisions;

• countervailing buyer power; and

• any barriers to entry to competitors into the relevant market.

Abuse of market power


Tying and bundlingTying occurs when a supplier makes the sale of one product conditional on the purchase of a different product. Bundling occurs when two products are discounted if they are purchased together.

Both these strategies are often legitimately used in the market, but may be anti-competitive if they interfere with or eliminate a competitor’s ability to sell the tied or bundled product.

Refusal to dealOccurs when a company with substantial market power refuses to supply a product or service, or refuses to supply on reasonable terms.

It can also occur when a company refuses to grant access to certain facilities essential to other competitor’s businesses.

Example

A communications company that owns the majority of phone lines in an area refuses to provide wholesale access to that infrastructure to its competitors.

Example

A supplier with substantial market power in the cement market offers a lower price for cement if the purchaser also buys aggregates from it.

Predatory pricingOccurs when a company sets the price of its goods or services so low that it deliberately forgoes profit in order to force a competitor out of the market, or to otherwise “discipline” the competitor.

Example

A large supermarket chain temporarily begins selling staple products at or below cost price in order to make it uneconomical for small independent grocers to compete in the same markets.

Exclusive dealingOccurs when a supplier requires a customer to exclusively or largely acquire a good or service from the supplier, or incentivises a customer to do the same.

It can also occur where a purchaser requires or incentivises a supplier to supply only to that purchaser.

Exclusive dealing is a common commercial arrangement and in most cases will not harm competition.

Competition concerns may arise where the object or effect of the exclusive dealing arrangement is to foreclose competitors by preventing them from selling to customers.

In this Guide:► Hong Kong competition l

aw






► Merger Rule




► Compliance tips

► Key contacts

Merger Rule


The Merger Rule prohibits mergers that have, or are likely to have, the effect of substantially lessening competition in Hong Kong.

The rule only applies where a company involved in the merger holds, directly or indirectly, a “carrier licence” within the meaning of the Telecommunications Ordinance.

When is competition substantially lessened?

The following matters may be taken into consideration in determining whether competition is substantially lessened:

• the extent of competition from competitors outside Hong Kong;

• whether the acquired company, or part of the

transaction is 40% or more, it is likely that the merger will raise competition concerns and the HKCC is likely to make a detailed investigation of the transaction.

Safe harbours

The Commission has identified two “safe harbour” measures to identify mergers that are unlikely to substantially lessen competition. These are based on an analysis of post-merger market concentration.

The Commission notes that meeting one or both of the safe harbour thresholds does not necessarily mean that the proposed transaction does not give rise to competition concerns.

acquired company, has failed or is likely to fail in the near future;

• the extent to which substitutes are available or are likely to be available in the market;

• the existence and height of any barriers to entry into the market;

• whether the merger would result in the removal of an effective and vigorous competitor;

• the degree of countervailing power in the market; and

• the nature and extent of change and innovation in the market.

Generally, for a horizontal merger where the post-merger combined market share of the parties to the

Consultation with Commission

There is no mandatory requirement to notify the Commission of a merger or proposed merger.

To avoid future complications, it may be preferable to consult with the Commission in relation to mergers that fall within the Merger Rule before completing.

Parties to a proposed merger may approach the Commission to discuss the transaction and seek informal advice on the transaction on a confidential basis. The parties may also apply to the Commission for a decision whether the merger is excluded from the application of the Merger Rule.







► Merger Rule




► Compliance tips

► Key contacts

Consequences of breaching competition law


FinesPenalties for violations of Hong Kong competition law can be severe. They can be imposed not only on companies, but also on employees, agents and directors who authorise or participate in the contravening conduct.

The maximum fine for each contravention is 10% of the turnover of the company group for each year in which the contravention occurred, up to a maximum of 3 years. “Turnover” means the total gross revenues of the company obtained in Hong Kong. The company in breach may be a small part of a conglomerate but the maximum fine will be by reference to the turnover of the whole group.

Other ordersThe Competition Tribunal may make any other order it considers appropriate against a person who has breached competition law, including:

• requiring a person to dispose of operations, assets or shares of a company;

• requiring the parties to an agreement to modify or terminate an agreement;

• declaring an agreement void or voidable; and

• requiring a person to pay an amount not exceeding the amount of any profit gained or loss avoided as a result of the contravention.

Banning ordersA director of a company that contravenes a competition rule may be disqualified from acting as a director or otherwise being involved in the management of a company for up to 5 years.

Civil damagesA person who has suffered loss or damage as a result of an act that has been determined to be a breach of a conduct rule has a right to commence a private action against any person who breached the law or was involved in the breach.

The Competition Tribunal may order that damages be paid to the person who suffered loss or damage.







► Merger Rule




► Compliance tips

► Key contacts

Exclusions and exemptions


Exclusion for agreements that enhance overall economic efficiencyAgreements that enhance overall economic efficiency are excluded from the application of the First Conduct Rule.

An agreement will be excluded on this basis if it meets all of the conditions below.

Economic benefits

The agreement must contribute to improving production or distribution, or promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit.

Restrictions

The agreement must not impose restrictions that are not indispensable to the attainment of the economic benefits.

No elimination of competition

The agreement must not afford the companies concerned the possibility of eliminating competition in

respect of a substantial part of the goods or services in question.







► Merger Rule




► Compliance tips

► Key contacts

Exclusions and exemptions


Agreements and conduct of lesser significanceThe First Conduct Rule is excluded if the combined turnover of the parties to a relevant agreement does not exceed HK$200,000,000.

However, the exclusion does not apply to agreements involving cartel conduct (i.e. bid-rigging, price fixing, market sharing and output restriction).

The Second Conduct Rule does not apply to conduct by an entity that has an annual turnover not exceeding HK$40,000,000.

“Turnover” means the total gross revenue whether obtained in Hong Kong or outside Hong Kong.

Block exemptionsCompanies may apply to the Commission for a block exemption in relation to a particular category of agreement. If a block exemption is granted, an agreement that falls within the category of agreement is exempt from the application of the First

Decisions on exclusionsA company may apply to the Competition Commission for a Decision as to whether a particular agreement or conduct is excluded from the competition rules.

If the Commission makes a Decision that the agreement or conduct is excluded, the parties will be immune from any action under the Ordinance in relation to the agreement or conduct.

Companies may consider applying for a Decision before entering into a contract that has the potential to breach the competition rules (e.g. a joint venture for the purpose of tendering for a high-value project).

Conduct Rule. In order to issue a block exemption order, the Commission must be satisfied that the category of agreement falls within the exclusion for agreements enhancing overall economic efficiency.

The Commission has not yet issued any block exemptions.

Block exemption example - Vertical agreements

In Europe, a block exemption applies for some vertical agreements. An example of a vertical agreement is one between seller and purchaser, where each party operates at a different level in the production chain.

Under the block exemption, an agreement is exempt from the competition rules if:

• the parties do not have a market share exceeding 30%; and

• the agreement does not contain “hard core” restrictions (such as resale price maintenance) or other specified restrictions.







► Merger Rule




► Compliance tips

► Key contacts

Who are the competition authorities?


Competition CommissionThe Competition Commission is responsible for investigating and enforcing the competition rules.

Investigation powers

The Commission’s investigation powers include requiring a person to produce documents or to answer questions.

The Commission may also obtain a search warrant to enter and search premises for documents that may be relevant to an investigation (known as a “dawn raid”).

Enforcement powers

The Commission has a number of enforcement options if it considers that a

for orders to be made against a person, including pecuniary penalties.

Leniency

The Commission may agree not to bring proceedings against a person in exchange for their co-operation in an investigation or proceedings.

The Commission’s policy for leniency is set out in its Leniency Policy for Undertakings Engaged in Cartel Conduct.

person has contravened a competition rule.

Commitment

The Commission may accept a commitment from a person to take action or refrain from taking action to address concerns about a contravention.

Infringement notice

The Commission may issue an infringement notice offering not to bring proceedings against a person in exchange for the

person making a commitment to comply with the requirements of the notice.

Warning notice

The Commission must issue a warning notice before commencing Tribunal proceedings against a person (unless the contravention involves cartel conduct).

Tribunal proceedings

The Commission may apply to the Competition Tribunal







► Merger Rule




► Compliance tips

► Key contacts

Who are the competition authorities?


Guidelines

The Commission has published guidelines that provide useful guidance on the competition rules. They are available on the Commission’s website.

Communications AuthorityThe Communications Authority has concurrent jurisdiction with the Commission in respect of certain companies operating in the telecommunications and broadcasting sectors.

Competition TribunalThe Tribunal is responsible for hearing and determining cases brought under the Ordinance. It is a specialist tribunal consisting of all the

judges of the Court of First Instance (excluding Justices of Appeal, Recorders and Deputy Judges).

The Tribunal has jurisdiction to adjudicate on competition cases including:

• applications made by the Commission with regard to alleged contraventions, or alleged involvements in contraventions, of the competition rules;

• applications for the review of Commission decisions; and

• private follow-on actions by persons who have suffered loss or damage as a result of an act that has been determined to be a contravention of a competition conduct rule.







► Merger Rule




► Compliance tips

► Key contacts

http://www.compcomm.hk/

Compliance tips


Compliance can be distilled into three basic steps: Identify risks, mitigate risks and regular review.

Identify risksReview business practices

Review practices to identify potential competition law

• collaboration with competitors (in particular cartel conduct); and

• sharing of information with competitors.

Review contracts

Review existing contracts to determine whether there are any “red flag” provisions

risks your business faces. High-risk business areas include sales and management roles that involve regular contact with competitors and trading partners.

Business risks include:

• lack of awareness of competition law;

14 December 2015 – even if entered into prior to that date. When preparing new agreements with suppliers and customers, consider whether any competition law concerns arise.

Interview key staff

Interview staff in high-risk business areas to identify any competition risks. Note that competition law can be infringed even by very junior members of staff.

Compliance audit

Carry out an internal audit to identify potential competition law issues. Consider engaging external counsel to obtain privilege protection. If necessary, make improvements to policies and practices following the audit.

that need to be assessed against competition law.

Particular attention should be given to agreements of the kind referred to on pages 4 to 10 of this Guide.

The new law applies to all agreements in force from







► Merger Rule




► Compliance tips

► Key contacts

Compliance tips


for work and contract managers. Refresh this on a regular basis.

Take action if a breach is identified

Take all necessary action to rectify any breach as quickly and practicably as possible, and immediately seek legal advice.

Prepare for investigations

Put in place protocols for dealing with investigations and raids by the Competition Commission.

Ensure that staff members know what role they have to play during a “dawn raid” (whether senior executives or junior staff such as receptionists).

Consider running a “mock dawn raid” to prepare staff.

Mitigate risksCompliance manual

Develop a competition law compliance manual and a “dos and don’ts” pamphlet for staff.

Circulate within the business at all levels. Senior management should endorse the documents and make it clear that they support the company’s compliance efforts.

Competition law training

Train relevant staff about potential competition law “hot-spots”. In particular, train staff who may interact with competitors and customers, those responsible for bidding

Complaints handling

Have in place effective complaints handling procedures. Competition Commission investigations may be triggered by complaints from the public.

Expert advice

Each company should have access to competent legal counsel. Legal advice should be obtained whenever the company intends to engage in conduct that may raise competition concerns.

Regular reviewRegularly review your business practices and compliance strategy. Monitor developments in competition law and refresh your compliance policies as needed.







► Merger Rule




► Compliance tips

► Key contacts

Key contacts


Neil CarabinePartner (KWM Australia)Registered Foreign Lawyer (Hong Kong)T +852 3443 [email protected]

Edmund WanPartnerT +852 3443 1119 [email protected]

Hong Kong

Martyn HuckerbyPartnerT +86 21 2412 [email protected]

China

Sharon HenrickPartnerT +61 2 9296 [email protected]

Australia

Philipp Girardet PartnerT +44 20 7111 2055 [email protected]

Europe







► Merger Rule




► Compliance tips

► Key contacts

Richard MazzochiPartnerT +852 3443 [email protected]

Corporate & Securities Banking & Finance Dispute Resolution

mailto:[email protected]






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