Since December 2015, businesses in Hong Kong have needed to ensure compliance with Hong Kong’s new Competition Ordinance. This month, the Competition Commission answers key questions about the Ordinance, the Commission’s enforcement priorities and how to ensure compliance.

 

What advice do you have to help businesses in Hong Kong comply with the Competition Ordinance?

‘The Competition Ordinance (the Ordinance), by prohibiting anti-competitive behaviour, helps maintain a level playing field for businesses. This encourages effective distribution of economic resources, drives continuous innovation of products and services, enhances efficiency in supply and thus raises companies’ competitiveness. Businesses, no matter how big or small, will stand to gain from the Ordinance which deters abusive anti-competitive practices.

Compliance with the Ordinance should be straight forward. Regardless of their size, businesses should make sure they never agree with their competitors to engage in cartel activities which include price-fixing, market allocation, output restriction and bid-rigging. They should also watch out for other arrangements between businesses that in some circumstances can harm competition such as sharing competitively-sensitive information like future price intentions. Larger businesses which might have substantial market power also have to ensure they don’t abuse that power.

Our overall message is that if you act fairly and compete on a level playing field you will find that compliance is not necessarily costly or complicated. The key to successful competition compliance is to understand the risks the business is exposed to, manage those risks and ensure that all your staff are mindful of the need for compliance.

To help businesses review their business practices and develop a compliance strategy that best suits their needs, the Competition Commission (the Commission) has published a practical toolkit: How to Comply with the Competition Ordinance – Practical Compliance Tools for Small and Medium-sized Enterprises. Businesses are welcome to download it from the Commission’s website (www.compcomm.hk).’

What will be your enforcement policies/strategies?

‘As mentioned in our enforcement policy, in the initial stage of the Ordinance’s full operation, the Commission intends to direct resources to investigations and enforcement actions that result in the greatest overall benefit to competition and consumers in Hong Kong. Cartel conduct which includes price-fixing, output restriction, bid-rigging and market sharing are among those which the Commission will accord priority to.’

Do you think businesses are sufficiently aware that relatively common trade practices could potentially breach the ordinance?

‘The Competition Ordinance has been in place for more than three years before coming into full force on 14 December 2015. The Ordinance was enacted in June 2012 with a design to phase in implementation so that businesses would have time to get familiar with the law and to get prepared. The Commission has also made use of the time to engage with businesses, trade and professional associations, business chambers and the general public to assist them to become ready for the full implementation of the Ordinance. It has also produced numerous guidelines, education materials, brochures and run many meetings, seminars and exhibitions to help businesses understand the Ordinance.

Since the start of our engagement exercise, we have seen increased awareness and strong interest from stakeholders. Certain trades have ceased long-term business practices that might infringe the competition rules, demonstrating the emergence of a compliance culture. The latter development reflects well on our advocacy work. Our work on advocacy and education will be ongoing.’

One area of concern is the likely interpretation of the First Conduct Rule – in particular determining where to draw the line between legitimate dialogue between businesses and anti-competitive ‘agreements, decisions and concerted practices’ – do you agree that this will be a difficult judgement call for businesses?

‘Businesses often share information. This is normal commercial behaviour that rarely has anti-competitive impacts. However, sharing competitively-sensitive information – that is, strategic information that a business normally doesn’t want its competitors to know, such as future prices, quantities and customers – can harm competition. Businesses should not exchange competitively-sensitive information whether privately or through a trade association.

Trade associations should set a good example and educate their members about making independent pricing decisions, and should not assist members to share competitively-sensitive information with each other.

To avoid infringing the law unintentionally, you should distance yourself from any meetings/events, or simply leave the scene when discussions on competitively-sensitive information occur.’

Will any attempt to pressurise distributors/retailers to observe recommended resale prices be considered price-fixing?

‘Resale price maintenance (RPM) occurs when one business (such as a manufacturer) tries to set the price at which another business (such as a retailer) can sell an item, or imposes a minimum resale price on the other business. Such arrangements can undermine retailers’ and similar businesses’ pricing freedom and restrict competition. The Commission considers that RPM may have the object of harming competition and there may be circumstances when it amounts to serious anti-competitive conduct.

Nonetheless, there may be some circumstances where a specific RPM arrangement does not have the object of harming competition because of its context and the purpose pursued by the arrangement. Where this is the case the Commission will assess whether the RPM causes harm to competition by way of its effects on the market.

Depending on the facts of the case, an RPM arrangement having the object or effect of harming competition might be excluded from the First Conduct Rule by reference to economic efficiencies.’

There has been some concern about when a business will be deemed to have substantial market power. Could you elaborate on your enforcement policies regarding compliance with the Second Conduct Rule and, in particular, will you be providing guidance on what level of market share will be deemed to be substantial market power in Hong Kong?

‘As stated in the Commission’s guideline on the Second Conduct Rule, a substantial degree of market power arises where a business has the ability profitably to charge prices above competitive levels, or to restrict output or quality below competitive levels for a sustained period of time.

The Commission maintains its view that market share does not alone determine whether an undertaking has substantial market power. Factors such as ease of entry and expansion, availability of supply-side substitution and buyer power have the capacity to prevent a firm with a high market share from having a substantial degree of market power.

In addition, market structures in Hong Kong vary widely. There is a risk that applying a particular market share percentage across sectors would become the focal point of analysis of substantial market power and could lead to an incorrect assessment regarding the existence or absence of substantial market power in a particular market.’

What message should company secretaries be giving directors regarding compliance with the Competition Ordinance?

‘Organisations of any size have an important task of risk awareness and risk management. The key to effective risk management in competition law is instilling a compliance culture in an organisation which means that managers at all levels of a business, from the top down, need to demonstrate a commitment to complying with the law. Organisations that comply with competition law will perform strongly in their market by competing as efficient, innovative players in their field.

Company directors should take proactive steps to understand the Ordinance, identify risk areas and set up compliance programmes. The board and senior management must take overall responsibility for instilling a commitment to compliance – and the sales force, the contract negotiators and your business teams need to be aware of their obligations.

Company directors should be aware that the Competition Ordinance gives the Commission power to apply to the Competition Tribunal for an order disqualifying a person from being a director of a company. The Competition Tribunal will have the discretion to impose a disqualification order if the company is found to have contravened a competition rule and the Tribunal considers that person’s conduct as a director makes the person unfit to be concerned in the management of a company.’

There has been a trend for legislation in Hong Kong to be more principles-based than in the past – do you think this is true of the Competition Ordinance and will companies need to make judgement calls regarding the spirit as well as the letter of the Competition Ordinance?

‘The Competition Ordinance seeks to prohibit undertakings from adopting conduct which has the object or effect of harming competition in Hong Kong. Similar to established competition law regimes, it provides for general prohibitions in three major areas of anti-competitive conduct (described as the first conduct rule, the second conduct rule and the merger rule). As required by the Ordinance, the Commission has issued six sets of Guidelines to elaborate on the key elements of the general prohibitions to provide practical and detailed guidance on how the principle-based competition law would be interpreted and applied. The Guidelines are applicable to all sectors and industries in Hong Kong.’

Competition Commission
The Competition Commission’s guidelines on compliance with the Competition Ordinance are available on the Commission’s website
(www.compcomm.hk).

 

SIDEBAR: Mergers – a clarification

Mergers are exempted from the conduct rules under the Competition Ordinance. However, there is a separate merger rule (the Merger Rule) which applies only to mergers with respect to an undertaking which directly or indirectly holds a carrier licence within the meaning of the Telecommunications Ordinance.

On an issue relating to harm to competition in the telecommunications space, the Competition Commission and Communications Authority (Commission) will determine whether a merger:

(1)          has lessened, or will likely lessen, competition in Hong Kong, and
(2)          was within any exclusion under the Competition Ordinance.

The Commission will also determine the manner of notification of the Commission in relation to a merger. Whilst notification of a merger or a proposed merger is not required under the Competition Ordinance, the Commission does have investigative powers to ensure compliance with the Merger Rule. The Commission therefore advises undertakings to approach it to seek informal advice on a confidential basis and, where appropriate, to apply for a decision that the merger is a merger which would be excluded from the Merger Rule.

Undertakings should, where they believe that they are in a merger type situation, establish whether there is in fact a merger which would bring their conduct outside the conduct rules. In case of doubt, the Commission could be approached for informal confidential views, or a formal decision.  In any event, where the merger relates to the telecommunications sector, that is, directly or indirectly involving a carrier licence within the meaning of the Telecommunications Ordinance, merger filing should be considered from a risk management perspective.

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