Competition compliance: in search of legal certainty
A new compliance challenge for company secretaries in Hong Kong is just around the corner with the Competition Ordinance due to be implemented next year. Our In Profile candidate this month, Clara Ingen-Housz, Partner, Linklaters, helps to clarify some of the uncertainties surrounding the new law.
Thanks for giving us this interview. Do you think Hong Kong’s new competition law will be a major issue for Hong Kong companies?
‘I think most companies will have been following the public debate about this law over the last 10 to 15 years. Over the last two years, of course, discussions in LegCo have been particularly lively, with a lot of stakeholders making their views known. As you may recall, SMEs have expressed a lot of concern about the cost of compliance and the regulatory burden they may be exposed to. This is surprising since SMEs are often the main beneficiaries of competition legislation – it shelters them from bad conduct by bigger groups.
So the ordinance is nothing new and those who feel that they need to do something are probably already working on it. People are not going to wake up one morning and say – “oh my God I need to change my entire business model”.
Meanwhile, at the consumer level, there are huge expectations in terms of what this ordinance is going to bring about. The hope is that prices at the supermarket and rents are going to go down but these are deliverables which are not going to be so easy for the Competition Commission to bring about because there is not necessarily a direct link between these prices and the competition law.
So there are a whole set of different expectations and the Commission has a lot of work ahead of it. Firstly, that is going to be about education. This law is not going to change the world the day it comes into force – change is going to be very gradual. Secondly, the Commission is going to have a big job trying to address the legal uncertainties that surround this law. That work will begin with the guidelines it will be releasing soon, but, in addition to that, the Commission may need to issue policy statements where there are areas of the law that are not completely crystal clear.’
What do you think will be the Competition Commission’s enforcement priorities?
‘Like any new authority, at first the Commission will have to go after well circumscribed cases that they can win beyond doubt. Typically it is easier to go after small cases because it is easier to gather evidence. In Singapore, for example, they initially went after what people thought were completely meaningless cases, but at the same time it is very important for an authority to build a track record of successful implementation or enforcement.
However, in Hong Kong the SMEs have been assured that they won’t be hit too hard by this ordinance and the public expects the Commission to go after the big guys which are much more difficult to catch. So it is a very difficult environment for the Commission to navigate in Hong Kong.’
You mentioned that SMEs are concerned about the cost of compliance, do you think these concerns are justified? For example, ‘vertical agreements’ are relatively common in Hong Kong so any prohibition of these could have a big impact.
‘Vertical agreements are notoriously difficult to analyse and understand. You have to assess whether they are better or worse for competition before imposing restrictions on them, so there is a big push to try to exempt them from the regime. On the other hand, horizontal agreements will clearly always be illegal and it is my impression that SMEs will be more directly concerned by horizontal issues.’
Could you give us a layman’s guide to the meaning of ‘horizontal’ and ‘vertical’ agreements?
‘Horizontal agreements refer to agreements between companies at the same level of the supply chain. So, for example, if all the print shops in a Wan Chai street quote you exactly the same price for what you want to buy that is obviously a cartel – a horizontal agreement to fix prices. The law is very clear on this: it is not acceptable and has to stop.
Vertical agreements are agreements between companies at different levels of the supply chain. An example of this would be a supplier telling a distributor not to sell in a particular area because another distributor is going to be selling in that area and the supplier doesn’t want them to compete with each other. That might be how a supplier manages its distribution network.
Vertical agreements can have pro-competitive effects. Many competition regimes therefore require an analysis as to whether they are good or bad for competition and if they are seen as having a positive effect they may be permitted. There is no such debate when it comes to horizontal agreements.’
You mentioned that the Competition Commission needs to address the legal uncertainties that surround the Competition Ordinance – do you think the requirements are not sufficiently clear cut?
‘Competition cases are very much based on the actual circumstances. I am often asked abstract questions about whether something is anti-competitive and the answer is always the same – it depends on the market and the sector and the product you are talking about. So many elements come into play. How do you define the market, for example? If the market is defined as the whole of Hong Kong a company may be seen as a small player, but if the market is defined as Central district, the company may suddenly have a huge market share.
For abuse of dominance cases, there is an expectation that the economy is going to be quite important. That is why the Competition Commission has hired an economist. An economist can help explain the net effect on the market. Vertical agreements are also going to be very difficult to assess and therefore it is important to learn from the Commission’s guidelines whether they are going to be exempted. If they are going to be exempted this will reduce the regulatory burden because companies can just focus on horizontal agreements.’
Which are more clear cut?
‘They are more clear cut but they are not always that simple either to be honest. If you have grass roots companies running a small cartel this might be, for a competition lawyer, very easy to recognise, but there may be a cultural issue to consider because the companies may not perceive this as a problem. Talking to your competitors may be regarded as the way to do business – that’s an issue we face in Asia. There is a whole cultural revolution that needs to take place.
So I would say that the compliance hurdle will not be so much about the legal analysis companies will need, but more about a change in attitudes. It is going to be about getting across the message that this is simply not something you are allowed to do, and this message needs to be repeated until it starts to get under the skin.
This is why the Competition Commission’s educational work will be so important, but it will not only be up to the Commission to get this message out. Christopher To, Executive Director at the Construction Industry Council, is very alive to this issue and recognises that industry bodies need to help SMEs understand what they can and cannot do. You can’t ask an SME association to hire lawyers and to get a full audit of their members’ practices, this is impossible from a cost point of view, but I think that, following the example of the construction sector, it is incumbent on industry bodies to provide the necessary educational tools such as seminars and presentations.
Another dimension to this is that, when it comes to enforcement, it is important to demonstrate that you have done what you could to mitigate the risk of the law being breached. I am not saying that all SMEs should have a Rolls-Royce type of compliance programme but where a company can prove that it took the time to look at its own practices and, if there were issues, that they took steps to correct those issues, this would be an important element that the Competition Commission would look at.’
Do you think the Competition Ordinance is too lenient? In particular, there are no merger control provisions.
‘Anna Wu was in Singapore recently and she said that she doesn’t find it normal that we don’t have a merger control regime in Hong Kong because that is an important dimension to any competition regime. This was part of the political fight that was going on as the competition law went through the legislative process. This will mean that former competitors can merge and, for example, coordinate prices without breaching the first conduct rule. Once they have merged, however, if they start abusing their market power, they will be caught by the second conduct rule.
But I think it is important to bear in mind that, firstly, this is not irreversible. Merger controls were omitted with an understanding that the government will reconsider this in a few years. Secondly, there is a merger control regime in the telecom sector in Hong Kong, and thirdly, a gradual approach to the enforcement of a new competition regime is not necessarily a bad thing.
The Ordinance is quite lenient in terms of giving the benefit of the doubt to companies involved in less serious anti-competitive practices – which basically means anything other than the four main types of horizontal agreement: price fixing, market sharing, bid rigging and output restrictions. Where companies are involved in less serious anti-competitive conduct, the Commission will impose a ‘warning notice’ and the company will be given six months to change its business practices.
Some people say that the ordinance has been gutted by this because, frankly, companies have no incentive to change anything until they get a warning from the Commission. But is it such a bad thing that the Commission has to focus on the most serious conduct first? The reality is that they are probably not yet equipped to go after complex conducts, such as vertical agreements, and they will be much better off having a simple, clear regime focused on the four types of horizontal agreement.
Many competition regimes around the world are way too complicated. Why do countries think that they have to have a 60-page law when what they actually need is a very simple set of rules against price fixing, etc. Because they adhere to all the international networks, there is huge pressure on smaller countries to have an elaborate competition regime when in fact they should be taking one step at a time.
For any new regime, having looked at these issues in different countries at different levels of maturities, my two cents on this would be that it is better to have a narrow scope of implementation and to put a premium on legal certainty. In the US they use a lot of economists to test the impact of any given behaviour on the market. Do you think SMEs are going to be able to do that here? So that’s why we need to put the emphasis on legal certainty.
Of course, as a practitioner, I should want it to be complicated, but that will not help the effectiveness of the law. The Competition Commission has a big reputational stake here, it needs to be seen to be working with the business community and helping it to understand the law. I think the Commission understands that it needs to go one step at a time, which is to be welcomed.’
One final question – do you have any advice for company secretaries involved in competition compliance in Hong Kong?
‘I think all companies, small or large, need to do something about this. Company secretaries should take the time to read the Competition Ordinance, understand it, and question to what extent the company they work for may have issues. After the implementation of the ordinance, the Competition Commission will have little tolerance for companies who suddenly wake up and say “what is this all about?”‘
Subsequent to this interview, the Competition Commission has released its guidelines on Hong Kong’s new competition regime. Look out for coverage of these guidelines in subsequent editions of CSj.