A new HKICS guidance note suggests that, despite its reputation as a fiendishly complex and technical piece of legislation, Hong Kong’s new Competition Ordinance can be best understood with an appreciation of the nature of, and the benefits of, competition.
Hong Kong’s new Competition Ordinance, which came into effect in 2015, presents compliance and governance professionals, company secretaries in particular, with a tough challenge. Following the new trend in legislation in Hong Kong, the new law takes a largely principles-based approach to preventing anti-competitive behaviour. The prohibitions of the first and second conduct rules, for example, focus on behaviour ‘which prevents, restricts or distorts competition’.
Since the Competition Ordinance was enacted in 2012, the market has been clamouring for guidance on how the new law will be interpreted. The Competition Commission has produced different sets of guidance in relation to various aspects of the law (available on the Commission’s website: www.compcomm.hk), but this month a new HKICS guidance note has become available giving guidance tailored to company secretaries and governance professionals.
The new guidance note is the work of the HKICS Competition Law Interest Group (see ‘The HKICS Interest Groups’ below), and it aims to provide an overview of the ordinance. ‘In future guidance,’ the guidance states, ‘we will dwell upon the Competition Commission’s guidelines and policy documents along with other analysis relevant to the company secretary and business undertakings. But at this juncture, and as an introduction a valid question is what, as a practical matter, does the competition law mean?’
What does the competition law mean?
The Competition Ordinance imposes new obligations on companies which, in many cases, will require a change to existing commercial practice in Hong Kong. Businesses often share information, for example, and sometimes this has no anti-competitive impact. Businesses need to be aware, however, that some forms of information exchange – in particular the sharing of pricing or bidding information among competitors – may be caught under the law.
As mentioned above, the law takes a largely principles-based approach, prohibiting behaviour which compromises underlying competitive market forces. ‘The focus is on competition as a process itself, rather than merely on outcomes (prices)’, the guidance states. ‘Another way to consider the nature of anti-competitive activity is that it prevents or otherwise limits outcomes that should be happening naturally through the forces of competitive response. A group of firms may be able to set prices or terms for its members because the group can exclude renegade members or non-group members from favourable opportunities. Such agreements distort market forces so as to provide an advantage to some at the expense of other actual or potential competitors and ultimately of consumers.’
Relevance for company secretaries
In addition to looking at the meaning of the new law, the guidance investigates its relevance for company secretaries. It points out, for example, that company secretaries need to ensure competition compliance receives board-level attention.
‘If it is understood that, like technological risks, competition law issues are yet another set of risk factors for enterprises, then similar issues such as board composition to take into account competition law skill sets; having a regular board agenda item for risk management, including competition law implications, as appropriate; having adequate board oversight, competition-related internal controls; and proper procedures for handling classified information, personal data, audit plan, incident response and disclosure obligations, as referred under the Technology Guidance Note, where appropriate; could be considered,’ the guidance states.
Company secretaries will also need to advise directors of the new liabilities they face as a consequence of the Competition Ordinance. The law empowers the Competition Commission to seek a disqualification order against directors of companies that have infringed the law, 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.
Liability also extends to individual employees (including company secretaries) who 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.
Hong Kong’s competition law principles ‘are at their infancy’, the new HKICS guidance points out. There are, for example, some glaring gaps in the coverage of the new law, notably the lack of merger controls. ‘Hong Kong only regulates, through the Communications Authority and the Competition Commission, mergers of telecoms licencees. This effectively allows for undertakings to merger to buy their way out of competition,’ the guidance points out.
The new law does, however, serve a very real purpose. ‘In a competitive market, even the most successful are at risk of losing their advantage to a smarter, faster, or more innovative alternative. This tension is what keeps markets dynamic,’ the guidance states. ‘Some companies whose names formerly lit up the Hong Kong nighttime skyline no longer exist. Competition laws aim to ensure that this process of creative destruction is unfettered by actions that confer secret advantages, obstruct competitive response, limit market access, or otherwise prevent markets from working as they should. Competitors, after all, are supposed to compete!’
The key message of the guidance is that compliance with the Competition Ordinance will not only require a detailed knowledge of the letter of the law, but also an understanding of the nature of competition and a judgement as to whether a particular course of action will have the effect of harming competition. This judgement may of course require an assessment of highly complex issues. For example, determining ‘abuse of market power’ will require an in depth assessment of the market in which the business operates. Moreover, this judgement must be made in the absence of any enforcement record of the new law – there remains uncertainty as to how the Competition Commission and the Competition Tribunal will interpret the law.
The HKICS Competition Law Interest Group promises further guidance on these complexities, but its first guidance seeks to highlight the fact that successful compliance with the Competition Ordinance should start with an understanding of the rationale behind the law. ‘The point is that both the first and second conduct rules have a common objective at their core to protect the integrity of competition itself. An understanding of this will help the company secretary better articulate and analyse any given situation calling for an analysis,’ the guidance states.
The Competition Ordinance Guidance Note is available from the Publications section of the HKICS website: www.hkics.org.hk. Look out for a review of the next HKICS Interest Group guidance note on mergers
and acquisitions in next month’s journal.
SIDEBAR: The HKICS Interest Groups
The HKICS Competition Law Interest Group is one of seven groups set up earlier this year under the Technical Consultation Panel to look into key areas of corporate governance and company secretarial practice with a view to producing guidance to HKICS members and the wider profession and community.
The Competition Law Interest Group comprises:
- David Simmonds (Chairman), Member of the Company Secretaries Panel and Technical Consultation Panel, HKICS, and Group General Counsel & Company Secretary, CLP Holdings Ltd
- Brian Kennelly QC, Blackstone Chambers
- James Wilkinson, Senior Associate, King & Wood Mallesons
- Professor Mark Williams, Member of the Technical Consultation Panel, HKICS, and University of Melbourne Law School
- Mike Thomas, Partner, The Lantau Group
- Neil Carabine, Partner, King & Wood Mallesons, and
- Mohan Datwani FCIS FCS(PE) (Secretary), Senior Director and Head of Technical & Research, HKICS
The six other Interest Groups cover the following areas:
- company law
- ethics, bribery and corruption
- public governance
- securities law and regulation
- takeovers, mergers and acquisitions, and
Two previous Interest Group guidance notes (the public governance and technology guidance notes, published in August and November this year respectively) are available from the Publications section of the HKICS website: www.hkics.org.hk. The next guidance note in this series, on takeovers, mergers and acquisitions, is scheduled to be published in early 2017.
Suggestions on topics relevant to the HKICS Interest Groups are welcome. Please contact Mohan Datwani FCIS FCS(PE), Senior Director and Head of Technical & Research, HKICS, at: email@example.com.