What is the Merger Rule?
Under the Competition Ordinance, the Merger Rule prohibits a merger that has, or is likely to have, the effect of substantially lessening competition in Hong Kong.
Hong Kong's merger control regime is currently of limited scope as it is only applies to undertakings that hold a carrier licence under the Telecommunications Ordinance (Cap 106). Unlike many regimes around the world, Hong Kong's merger regime is voluntary. Nevertheless, parties are strongly encouraged to approach the Competition Commission if the merger is likely to raise competition concerns as the Commission has the power to investigate a merger and bring proceedings before the Tribunal to seek orders to unwind a merger should it be found to substantially lessen competition.
This alert will take a brief look at some of the features of Hong Kong's merger regime.
What constitutes a merger under the Ordinance?
A merger takes place where:
- two or more undertakings previously independent of each other cease to be independent of each other;
- one or more undertakings (or persons) acquire direct or indirect control of the whole or part of one or more other undertakings; or
- an undertaking acquires the whole or part of the assets, including goodwill, of another undertaking.
Conducting a competition assessment
Once it is established that there is a merger within the meaning of the Ordinance, the next step is to assess the competitive effects of the merger. This involves:
- Defining the relevant market or markets, which includes defining the product or services scope as well as the geographic dimension
- Assessing the competitive effect or likely effect of the merger and whether it is likely to substantially lessen competition in the identified market or markets
The Ordinance provides a non-exhaustive list of the relevant matters that the Commission may take into account when assessing the competitive effects of a merger:
- the extent of competition from competitors outside Hong Kong;
- whether the acquired undertaking has failed or is likely to fail;
- the extent to which substitutes are available or are likely to be available in the market;
- barriers to entry into the market;
- whether the merger would remove an effective and vigorous competitor;
- the degree of countervailing power in the market; and
- the nature and extent of change and innovation in the market.
In Hong Kong, import competition is likely to play a key role in many competition assessments.
Preliminary assessment of a merger
Generally, for a horizontal merger, if the post-merger combined market share of the parties to the transaction is 40% or more, it is likely to raise competition concerns and a further investigation of the transaction is likely to happen.
Further, the Commission has proposed two types of internationally used safe harbours which aim to identify whether a merger is likely to substantially lessen competition: concentration ratios and the Herfindahl-Hirschman Index.
Do any exclusions or exemptions apply?
The Merger Rule will not apply if the economic efficiencies that arise from the merger outweigh the adverse effects caused by any lessening of competition in Hong Kong. The onus is on the merger parties to demonstrate these efficiencies outweigh any lessening of competition.
If made out, the merger parties may seek a decision from the Commission that the merger is excluded from the application of the Merger Rule. This is a public process: the Commission will publish a notice of the application and invite comment from interested parties.
A merger may also be exempted from the application of the Merger Rule under exceptional and compelling reasons of public policy.