Getting ready for the Competition Ordinance
Hong Kong’s competition law goes live this month, Stephen Crosswell, Partner, and Tom Jenkins, Senior Associate, Baker & McKenzie, ask – are you ready?
It has been over three years since the enactment of the Competition Ordinance (Ordinance), passed with the support of a bare majority of the votes in Hong Kong’s Legislative Council in June 2012. Now that the Ordinance has come into effect, businesses in Hong Kong need to ensure that their agreements and practices are in compliance with the Ordinance.
In this article we provide a brief overview of the Ordinance, as well as highlighting some practical issues and uncertainties.
Overview of the Ordinance and guidelines
The key substantive prohibitions are laid down in the Ordinance, which has the force of law, and is binding on both the Competition Commission and the Hong Kong Courts. The key prohibitions are on agreements between businesses (‘undertakings’ in competition law speak) which prevent, restrict or distort competition (First Conduct Rule) and on the abuse of substantial market power in a manner which prevents, restricts or distorts competition (Second Conduct Rule). The Ordinance includes a prohibition on mergers which are likely to prevent or restrict competition, but this rule currently only applies where at least one party holds a telecommunications carrier licence.
The importance of compliance
Amidst a general trend towards increased regulation across a large number of industries and sectors, businesses in Hong Kong could be forgiven for suffering from ‘regulatory fatigue’. In this context, you may be left wondering what, if anything, is special about competition law.
Put simply, the risks of non-compliance with the Ordinance mean that ignoring it is not a viable option for those doing business in Hong Kong. Businesses may be fined up to 10% of their Hong Kong turnover for each year of the infringement. They may also be sued by their customers in so-called ‘follow-on’ actions. These sanctions aside, companies caught up in an investigation face losing many hours of management time and money in legal fees. There is also in Hong Kong a dedicated and highly experienced regulator – the Hong Kong Competition Commission (Commission). With a specialist staff of around 50, drawn from established and well-respected antitrust regulators, for example in Europe and Australia, the Commission clearly has the expertise, willingness and mandate to be an active enforcer from day one. The Commission’s day-to-day work is overseen by 14 Commissioners drawn from a broad spectrum of business, consumer, academic and political backgrounds.
It has said publicly and repeatedly that it will enforce the law with no grace period.
The position of directors and employees
The Commission plainly expects companies’ management and directors to take ultimate responsibility to ensure compliance. As Anna Wu, the Commission’s Chairperson, commented at a Hong Kong Institute of Directors’ function earlier this year: ‘Directors – both executives and independent directors – are the drivers of commercial strategy in a business. With that, you bear the responsibility for the actions of your company at all levels’ (www.compcomm.hk/en/pdf/speeches/HKIoD_20150325.pdf).
The Ordinance empowers the Commission to seek a disqualification order against directors of companies that have infringed the Ordinance, if:
- the director’s conduct contributed to the infringement, or
- the director should have been aware of the infringement.
Such orders may be for up to a five-year period. The law makes no distinction between the duties of non-executive and executive directors.
In addition, individual employees (including directors and company secretaries) can be prosecuted for obstructing the Commission’s exercise of its investigatory powers, with a maximum sentence of two years’ imprisonment. Examples of obstruction include:
- knowingly providing false or misleading documents
- obstructing Commission officials during a search, or
- knowingly or recklessly destroying documents which the Commission has requested the company provide.
The Ordinance prevents indemnities being offered to employees, officers and agents for a contravention – meaning that directors and company secretaries cannot be insured or shielded from the financial pain of a penalty.
Key risk areas
When most people think about competition law, the image that comes to mind is that of competitors sitting in a smoke-filled room, agreeing to fix prices, allocate customers or markets, limit output or to rig bids as part of a tender process. It is no surprise that all of these types of conduct are strictly prohibited under the Ordinance.
However, the Ordinance is more far reaching than this. Like many competition regimes (for example the EU), the prohibitions, as drafted in the Ordinance, are broad. They apply to agreements between non-competitors (such as distribution, retail and franchising agreements). The definition of ‘agreement and/or concerted practice’ is broad, and may even catch one-off, unilateral disclosures of certain types of sensitive information. We examine some important practical risk areas below.
1. Information exchange
As the guidance prepared by the Commission for SMEs helpfully points out, ‘businesses often share information. This is normal commercial behaviour that rarely has anti-competitive impacts’. However, there remains significant scope for information exchange to be sanctioned under the Ordinance.
- The Commission has said it will treat the exchange of information as to competitors’ future pricing intentions as presumptively unlawful. At clear risk here is the casual conversation on the shop floor (or in the bar) as to future pricing intentions. Whilst one of the world’s largest economies, Hong Kong is in many ways a ‘small town’, with competitors frequently socialising and moving around between different firms in the same market. Whereas up until now such connections were simply a normal way in which to do business and gather intelligence, such conversations will become presumptively unlawful as of the 14 December.
- Similarly, exchanging future pricing intentions via a third party also raises equally serious issues under the Ordinance. Examples of such behaviour include a supplier mediating pricing disputes between distributors or retailers. In a recent UK case, a leading German auto manufacturer was fined for facilitating collusion amongst its dealerships, whereby the dealerships agreed to charge a ‘reasonable margin’ and not to sell into each other’s allocated areas.
- Other types of information sharing will be subject to an effects-based test. Generally, the exchange of current information about prices and volumes is likely to still be problematic, although safeguards can be put in place here. A typical example is aggregation, where a third party collects information about prices and volumes from all competitors in the market, and presents these in aggregated form. But, given the risks involved, such programmes should now be vetted for compliance.
2. Trade associations
According to the Directory of Hong Kong Trade and Industrial Organisations, published by the Trade & Industry Department, there are nearly 400 registered associations in Hong Kong. The total number will greatly exceed this. As the Commission has said, ‘Trade associations serve an important function in furthering their members’ interests. They have a vital role to play in educating their members on the Competition Ordinance and promoting a pro-competitive compliance culture’.
Trade associations frequently involve competitors participating in discussions related to their respective markets, and therefore can raise information exchange/collusion concerns. Associations should actively review their practices and policies, and put in place compliance safeguards (including operating protocols, guidelines, training for their members). For businesses participating in trade associations, it will be increasingly important to ensure that:
- their participation serves a legitimate purpose
- appropriate records/minutes are kept, and
- problematic discussions are avoided.
A particular challenge is that, as in other jurisdictions, the Commission is likely to follow a ‘guilt-by-association’ approach – if you are in the room when problematic discussions occur, and you do not demonstrably distance yourself from these discussions, you may be found liable for infringing the Ordinance, even if you never participate or act upon what you hear.
3. Resale price maintenance (RPM)
RPM occurs when a supplier requires a distributor or retailer to resell its goods or services at a fixed or minimum resale price. RPM prevents distributors or retailers from competing aggressively on price which can ultimately harm consumers who may have to pay higher prices for products and services.
The Commission has stated that it will generally regard RPM as unlawful under the Ordinance (meaning that it will be presumed to be anti-competitive in most circumstances). In practice, this has led many suppliers to review and amend their distribution agreements. Recommended resale prices (RRPs) and maximum resale prices will generally still be lawful. But suppliers need to be careful. Any attempt to pressurise distributors/retailers to observe RRPs is likely to be treated as unlawful and may be treated by the Commission in some cases as hard core price-fixing (serious anti-competitive conduct). Evidence of such behaviour (for example in the form of emails, letters, records of telephone calls) has led to many successful investigations and prosecutions in other jurisdictions, and the same will likely be true in Hong Kong.
4. SMEs and market power
The Second Conduct Rule contains additional prohibitions on certain categories of behaviour which might be considered as ‘abusive’. The Ordinance makes clear that having market power in itself is not unlawful.
Examples of potential abuses include:
- engaging in predatory/below cost pricing
- tying or bundling separate products, or
- refusing to supply an essential input where this hinders or excludes competition in a downstream market.
Assessment under the Second Conduct Rule will likely turn on complicated economic facts and require a detailed assessment.
But there is far from perfect clarity about when a business will be deemed to have substantial market power. Other jurisdictions have provided guidance based on market shares (in the EU, dominance is only presumed above 50% market share; in Singapore it is only presumed over 60%; China uses a more complicated threshold, based on the number of players in the market). However, the Commission expressly declined to provide such guidance in Hong Kong, citing the need to take a case-by-case assessment. Its recent statements that it will not treat SMEs as having market power, whilst helpful, leave plenty of scope for uncertainty as to how it will define an SME and how it will determine market power in other cases.
Stephen Crosswell, Partner; and
Tom Jenkins, Senior Associate
Baker & McKenzie