Competition Ordinance: final preparations
Three years after its enactment, full implementation of Hong Kong’s Competition Ordinance is expected towards the end of this year. Mark Jephcott, Adelaide Luke and Lisa Geary at Herbert Smith Freehills Hong Kong, urge businesses to audit their existing agreements and practices for compliance with the new law.
On 14 June 2012, following lengthy debate, the Hong Kong Legislative Council (LegCo) approved the Hong Kong Competition Ordinance. Three years have now elapsed since the passing of the Competition Ordinance without implementation of its substantive provisions.
In the intervening period, the Hong Kong Competition Commission (HKCC), in conjunction with the Communications Authority, has been readying itself for full implementation. These preparations are now nearing completion and it is anticipated that the Competition Ordinance will finally come into full effect towards the end of 2015.
All signs are that, notwithstanding its prolonged gestation, the HKCC is preparing for active enforcement postimplementation. Businesses should therefore be taking steps to audit their existing agreements and practices for compliance with the new law, and ensure that business staff are aware of the latest competition developments.
Overview of key developments towards implementation
Appointments and international cooperation
In April 2013, several key staff members were installed at the HKCC with the appointment of Chairperson Anna Wu and 13 other HKCC members (drawn from various backgrounds including law, economics, consumer protection, financial services, commerce and industry). This was followed by the much anticipated appointment of Dr Stanley Wong as Chief Executive Officer in 2014. It is understood that the HKCC’s case teams have been recruited from a range of overseas regulatory authorities and from private practice.
In December 2013, the HKCC joined the International Competition Network and it has expressed enthusiasm for sharing experiences and expertise with other competition authorities. Indications are, therefore, that the HKCC will be in a position to draw on internal and external experience of international best practices when fulfilling its functions.
During 2014, the HKCC conducted outreach and advocacy programmes with the aim of educating businesses and the general public about competition law and canvassing views on existing trade practices. This assisted the HKCC in formulating the draft guidelines on the Competition Ordinance that were published in October 2014. Since mid-2014, the HKCC has held over 130 briefings and meetings with a wide range of industry associations, professional bodies, chambers of commerce and SME representatives.
Following the substantial progress made in establishing the necessary administrative structures, the primary obstacle to implementation of the Competition Ordinance remained the need for the HKCC to draft and obtain LegCo approval for guidelines on the implementation of the Ordinance which it was required to produce under the Ordinance.
To that end, the HKCC published draft guidelines in October 2014 which were set out in six separate documents covering:
• Procedural matters: (i) complaints; (ii) investigations; and (iii) applications for exclusions and exemptions and block exemption orders; and
• substantive application of: (i) the First Conduct Rule (which governs agreements between undertakings); (ii) the Second Conduct Rule (relating to abuse of market power); and (iii) the Merger Rule.
In light of submissions received from a cross section of stakeholders on the draft guidelines during the consultation period, the HKCC provided additional guidance on a number of issues (including the exchange of commercially sensitive information, resale price maintenance and common types of joint ventures) in revised draft guidelines published on 30 March 2015. The revised draft guidelines were presented to LegCo on 27 April 2015 and finalised guidelines are expected to be issued shortly.
What should businesses expect before the full implementation of the Ordinance?
In addition to the finalised guidelines, the HKCC plans to release further policies and publications in the run-up to the full implementation of the Ordinance. The drafting of a memorandum of understanding between the HKCC and the Communication Authority is also well advanced.
Of particular relevance to businesses in Hong Kong will be the HKCC’s statement of its enforcement priorities, which may provide some insight into the behaviours and sectors that could be subject to particular scrutiny by the HKCC. A leniency policy will also be released prior to full implementation. Given the importance of leniency policies in particular in encouraging parties to abandon their anti-competitive conduct, the publication of this guidance is awaited with interest.
The HKCC has not provided specific guidance for individual industry sectors in Hong Kong, on the basis that the guidelines are designed to be applicable across economic sectors. However, it has indicated that it will continue to meet with industry associations and chambers to offer assistance in relation to particular issues of concern, and to assist them with the drafting of their publications and compliance information.
Market studies and complaints
Although the HKCC has not yet commenced operations, it is already monitoring a number of areas and conducting research on certain issues. In April 2015, the HKCC confirmed that it had commenced initial market studies into the retail fuel sector and the building maintenance sector, having received petitions from a number of quarters ahead of the implementation of the Ordinance. The HKCC has invited parties to continue to contact it with concerns regarding potentially anti-competitive practices. The HKCC plans to keep records of all information received with a view to future operations under the Ordinance.
Competition Tribunal – procedural rules
The Tribunal will serve as a specialist tribunal which will make determinations on liability and sanctions for competition law infringements, and as a forum for follow-on private damages actions. On 5 June 2015, the Hong Kong government gazetted the procedural and fees rules for the Competition Tribunal in the Hong Kong Government Gazette and on 10 June 2015 the rules were tabled in LegCo for negative vetting.
The enactment of these procedural and fees rules is a necessary precondition to the Tribunal coming into operation. LegCo approval for the procedural and fees rules may be forthcoming as early as mid-July 2015.
What should businesses not expect before full implementation of the Ordinance?
Substantial market power/market share thresholds
The HKCC has stated that it does not propose to set a market share threshold that would demonstrate the existence of ‘substantial market power’ under the Second Conduct Rule. In the view of the HKCC, a clear bright line would be extremely difficult to apply in certain Hong Kong markets which are characterised by high degrees of concentration. Furthermore, the HKCC is of the view that market share alone does not determine whether an undertaking has substantial market power. It therefore plans to adopt a more economic approach, taking into account factors such as buyer power, ease of entry and expansion and supply-side substitutability.
The HKCC has indicated that its focus is on preparation for full implementation of the Ordinance but that it will ‘consider whether any preparatory work’ can be done regarding block exemptions as part of this process. This indicates that businesses in sectors which have applied for block exemptions should not expect to receive a determination on their application before the Ordinance comes into force.
Implications for business
Three years after the passing of the Competition Ordinance, it is clear that businesses have had longer than they might have initially expected to adjust their practices to prepare for its full implementation.
The HKCC has consistently emphasised that businesses should use the delayed implementation of the Competition Ordinance as an opportunity to bring to an end arrangements which potentially infringe the Ordinance. It should be recalled that in the UK the Office of Fair Trading imposed fines for conduct which ended less than a month after the implementation of relevant sections of the Competition Act 1998 and there is no reason why the HKCC could not take similar enforcement action. Indeed, public pronouncements of the HKCC and the commencement of initial market studies prior to full implementation of the Ordinance point towards active enforcement by the HKCC post-implementation.
Therefore, for those businesses which have not yet done so, the prospect of the Competition Ordinance coming into force in the near future should serve as a timely reminder to review and, if necessary, amend practices to ensure compliance with competition law.
Mark Jephcott, Partner and Head of Competition – Asia; Adelaide Luke, Registered Foreign Lawyer; and Lisa Geary, Legal Manager
Herbert Smith Freehills Hong Kong
Copyright: Herbert Smith Freehills