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Introducing the New Competition Law in Hong Kong
1 September 2012

The Competition Ordinance was finally passed on 14 June 2012 after more than 10 years of public consultation and intense legislative council debates. The law which introduces a general prohibition on cartel behaviour and other anti-competitive conduct, as opposed to industry specific anti-competition rules, is expected to have a significant impact on businesses that are used to a free market economy in Hong Kong.

Although it will take at least another year or two for the new law to come into effect, businesses should be familiar with the new prohibitions and exemptions and take steps to review their existing practices and conduct during the transitional period so as to avoid possible breaches in the future.

Scope of the New Ordinance

It should be noted that the new law is extra-territorial in that it will apply not only to the conducts which take place in Hong Kong, but also to those outside the territory if it produces an impact in Hong Kong.

The prohibitions in the Competition Ordinance are contained in three Conduct Rules which prohibit anti-competitive agreements and concerted practices, abuse of a substantial degree of market power and merger activities. Details of the three rules are as follows :-

(a) The First Conduct Rule targets serious anti-competitive conducts or agreements which maintain, increase or control the price of the supply of goods or services (price fixing), allocate the market share amongst business entities (market sharing), control or limit the production or supply of goods or services (output restriction) and bid rigging activities.

(b) The Second Conduct Rule prohibits a business entity with ‘a substantial degree of market power’ from abusing that power to engage in conduct which has the effect of restricting or distorting competition in Hong Kong.

(c) The Merger Rule prevents a business entity from carrying out a merger which has the effect of substantially lessening competition in Hong Kong. However, this Rule applies only to merger activities in the telecommunication sector.

Exemptions

Not all businesses are affected by the new Ordinance. The Ordinance does not apply to most statutory bodies including the Trade Development Council and some of the other main exemptions are summarized below :-

(i) Agreements which improve economic efficiency.

(ii) Agreements which are made for the purpose of complying with a legal requirement.

(iii) Agreements which are made between business entities whose turnover is below HK$200 million may be exempted from the First Conduct Rule.

(iv) Agreements which are made between business entities whose turnover is below HK$40 million may be exempted from the Second Conduct Rule.

(v) The Chief Executive may exercise its discretion to disapply the prohibitions in certain types of agreements if (i) there are exceptional and compelling reasons of public policy or (ii) it is appropriate to do so in order to avoid conflict with an international obligation.

It remains to be seen as to how the authorities would apply the exemptions and it is likely that reference would be made to precedents from jurisdictions outside Hong Kong.

Enforcement

The establishment of the Competition Commission and the Competition Tribunal would play a significant role in the implementation of the Competition law.

Under the new regime, the Commission is equipped with the power to carry out investigations on possible anti-competitive conducts, issue infringement notices and bring proceedings before the Competition Tribunal. The Commission may offer not to bring proceedings before the Tribunal if the offender makes a commitment to comply with the notice. Conversely, if the offender refuses to make that commitment, it may expose itself to the risk of prosecution.

The Competition Tribunal also has extensive power to make any orders it considers proper, including an order to impose a fine of up to 10% of the offender’s turnover and an order to disqualify the directors who have acted in breach of the Conduct Rules from holding directorships.

Advice to Business Enterprises

During the transitional period, business enterprises should understand the implications of the new regime and the possible impacts on their existing business arrangements, agreements and practices by taking the following steps : –

(a) Assess whether the prohibitions under the Conduct Rules would apply to the existing agreements or practices;

(b) Develop compliance policy and internal guidelines to ensure due compliance with the new law;

(c) Provide training to the staff in relation to the scope and operation of the new law, in particular, the severe penalties which ensue upon breach;

(d) Assess the extent to which the exemptions may apply; and

(e) Keep an eye on the latest development of the new regime, including guidelines to be published by the Competition Commission.

Conclusion

Although as a result of pressure from business sectors, the Competition Ordinance is a much watered down version of the original Competition Bill lodged in 2010, it is nonetheless a significant step to set out a legal framework for general competition law in Hong Kong. This would ensure that Hong Kong remains a competitive and fair market by prohibiting anti-competitive conduct and misuse of market powers.

If you have any queries regarding any competition law matter in Hong Kong, experienced lawyer in our Litigation and Dispute Resolution Practice will be happy to assist you.

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