The Competition Ordinance is coming into effect on 14 December 2015. What is it all about?
After years of deliberation, the Competition Ordinance will finally take effect on 14 December 2015. The Ordinance provides for prohibitions in three major areas of anti-competitive conduct: the first conduct rule, the second conduct rule and the merger rule.
The First Conduct Rule
The first conduct rule prohibits agreements, concerted practices and decisions of trade associations that have the object or effect of preventing, restricting or distorting competition in Hong Kong. This rule covers undertakings and conduct outside Hong Kong as long as there is an object or effect in the jurisdiction.
There are four types of conduct that are regarded as "serious anti-competitive conduct": price fixing, market sharing, output restriction, and bid rigging.
Price fixing is where competitors agree on pricing or matters affecting pricing rather than competing against each other. Market sharing occurs when competitors agree to divide the market by allocating customers, suppliers or territories amongst themselves. Output restriction is an agreement between competitors that limits the volume or type of particular goods or services available in the market. Bid rigging occurs when two or more competitors agree not to compete for tenders, or to tailor their bids in order to allow one of them a better opportunity to win the tender.
Other prohibited conduct under the first conduct rule includes resale price maintenance, information exchange and group boycotts. The Competition Commission (which will administer the Ordinance) has identified in its guidelines that it considers that resale price maintenance (which occurs when a supplier requires a reseller to sell at or above a specified minimum price) could fall within the definition of "serious anti-competitive conduct" and will treat it as such in some circumstances.
The Second Conduct Rule
Under the second conduct rule, an undertaking that has a substantial degree of market power in a market is prohibited from engaging in conduct that has the object or effect of preventing, restricting or distorting competition in Hong Kong. However, the Ordinance currently does not provide a market share threshold to define "substantial degree of market power". The Commission has also refrained from setting a threshold in its guidelines, stating that market shares do not alone determine whether an undertaking has substantial market power as factors such as barriers to entry, the degree of substitution and buyer power are also relevant.
The rule covers exploitative abuses, such as excessive pricing, and exclusionary abuses, which include predatory pricing, tying and bundling, and exclusive dealing.
The Ordinance also provides for exclusions and exemptions to the first and second conduct rules. These include compliance with legal requirements, services of general economic interest and others.
The Merger Rule
The merger rule prohibits mergers that have, or are likely to have the effect of substantially lessening competition in Hong Kong. At this stage, the merger rule is limited to carrier licences issued under the Telecommunications Ordinance (Cap. 106).
The Competition Commission is the principal competition authority tasked with the function of enforcing the Ordinance. It is responsible for conducting investigations into competition-related complaints, and bringing enforcement actions before the Competition Tribunal in respect of anti-competitive conduct.
The Competition Tribunal is a court established within the judiciary. The Tribunal will hear and adjudicate on competition cases brought by the Commission, private actions, and reviews of determinations of the Commission. It is empowered by the Ordinance to apply a wide range of remedies, for example, pecuniary penalties and awards of damages.
Somewhat uniquely, the Commission has the discretion as to which cases are brought before the Tribunal. Businesses cannot enforce the Ordinance directly. Follow-on claims are only available where there is an admission by the company concerned that it has breached the Ordinance or a Tribunal decision that it has breached the Ordinance.
For conduct involving undertakings in the broadcasting and telecommunications sectors, the Commission and the Communications Authority have concurrent jurisdiction.
The Commission and the Communications Authority have also released six guidelines which provide guidance on how the authorities will interpret and apply the provisions of the Ordinance. The guidelines cover the first conduct rule, the second conduct rule, the merger rule, as well as procedures for handling complaints, conducting investigations, and applications for exclusions and exemptions under the Ordinance.
In the lead up to the commencement of the Ordinance, we will continue to publish a series of alerts that will cover different topics of the new competition regime in greater detail.