Competition Ordinance: guidance for company secretaries
The Competition Ordinance, which is likely to be fully implemented in 2015, will have significant compliance implications for company secretaries in Hong Kong. A new HKICS guidance note on the ordinance seeks to familiarise HKICS members with the main provisions of the ordinance and to make useful recommendations on compliance with the law.
The Competition Ordinance (Cap 619) will provide a legal framework to curb anti-competitive conduct in Hong Kong. The Ordinance will apply to any entity that engages in economic activity and the consequences of any breaches of the law are potentially serious. If anti-competitive behaviour is admitted or proved, companies may be liable to substantial fines, structural orders including divestiture of parts of the business, and the regulation of their future business conduct and internal affairs.
Moreover, directors may face disqualification for up to five years where they have been personally involved
with the offending conduct by directly approving it, or not taking reasonable steps to prevent its occurrence. Company secretaries, where they are officers of the company who are deemed to be accessories to the offending conduct, may also be liable.
While full implementation of the ordinance is probably not going to happen before mid-2015, company secretaries need to take immediate action to ensure that they and their boards fully appreciate how the new law will affect them.
When will the ordinance take effect?
The Competition Ordinance was passed by the Legislative Council in June2012 but it is being implemented in phases. The provisions relating to the establishment of the Competition Commission, the statutory body responsible for investigating anti- competitive conduct, commenced on 18 January 2013. The provisions relating to the establishment of the Competition Tribunal, which will be in charge of hearing and adjudicating competition-related cases, commenced on 1 August 2013. Implementation of the rest of the ordinance still awaits these two agencies becoming operational.
Anna Wu was appointed Chairperson of the Competition Commission in May 2013 along with key staff. The Commission is currently setting up its internal procedures, its financial and administrative systems and seeking to recruit senior officers, including the Chief Executive Officer. It is expected that staff members will be in place by the first or second quarter of 2014.
The President and Deputy President of the Competition Tribunal were appointed in July 2013. The judiciary is currently making the necessary arrangements to prepare for the full operation of the tribunal, including formulating the rules relating to its operation and proceedings.
What has changed?
While certain sectors of the Hong Kong economy are already subject to competition legislation, namely the telecommunications and broadcasting sectors, the Competition Ordinance is the first competition law to apply to the entire economy of Hong Kong.
The Competition Ordinance creates two specific prohibitions:
- the making or giving effect to anti- competitive agreements, concerted practices or the decisions of a trade association ‘if the object or effect… is to prevent, restrict or distort competition in Hong Kong’ – this is known as the First Conduct Rule.
- ‘an undertaking with substantial market power abusing such power by engaging in conduct that has as its object or effect the prevention, restriction or distortion of competition in Hong Kong’ – this is known as the Second Conduct Rule.
Some of the key terms in these conduct rules, such as ‘concerted practices’ and ‘a substantial degree of market power’, are not precisely defined in the ordinance. The interpretation of these terms will depend on the judgement of the Competition Commission and the Competition Tribunal and that judgement may not be straightforward. The HKICS guidance note points out that assessing what constitutes ‘substantial market power’ will require a complex analysis of how the market for the particular product or service functions.
For these reasons, the guidelines on the Competition Ordinance currently being prepared by the Competition Commission are eagerly awaited. No date has been set for their publication, but it seems likely that this will be by mid-2015 since the Competition Commission intends to consult both the Legislative Council and the public before issuing the guidelines.
Other potential problem areas relating to the ordinance identified by the HKICS guidance note are highlighted below.
- The ordinance’s merger control provisions only apply to licencees under the Telecommunications Ordinance – why are they not applied to all sectors?
- Statutory bodies are exempted from the ordinance – will this distort the markets in which these bodies operate?
- The maximum financial penalties are limited to 10% of up to three years’ Hong Kong turnover – will companies who derive most of their revenues in Hong Kong suffer the highest fines?
- The abandonment of stand-alone private actions by the government grants the Competition Commission a monopoly of initial enforcement – will the Competition Commission have adequate resources to investigate or take enforcement action in respect of every legitimate complaint of anti- competitive conduct?
The HKICS Guidance Note on the Competition Law points out that company secretaries need to prepare now for the implementation of the Competition Ordinance. It recommends that HKICS members should advise their boards and relevant officers of the main contents of the Competition Ordinance. ‘HKICS members, where they serve as company secretaries, have a duty to ensure that boards and relevant officers are fully aware of the nature and effect of the ordinance,’ the guidance note states.
In addition to this advisory function, the guidance note also points out that company secretaries will be involved in devising appropriate and effective compliance procedures to mitigate the substantial risks of material non- compliance with the ordinance. These procedures will need to be tailored to each company, but the guidance note recommends a review of current and future business operations in the light of the new law. Companies may also consider carrying out a competition audit.
The HKICS Guidance Note on the Competition Ordinance will be available from the HKICS website (www.hkics.org.hk) later this month. It was written by Professor Mark Williams, Member, HKICS Technical Consultation Panel, and Executive Director, Asian Competition Forum, with the assistance of Mohan Datwani FCIS FCS, HKICS Director of Technical and Research. Further guidance will be provided by the Institute when the Competition Commission issues its guidelines on the Competition Ordinance.
The Competition Commission intends to consult the public on its draft guidelines on the Competition Ordinance. It will also organise forums with relevant stakeholders, including small and medium enterprises (SMEs), to promote understanding of the Ordinance and assist them in gearing up for its full implementation. More information is available on the government’s information services website: www.news.gov.hk.