Hong Kong’s New Competition Law Takes Effect – Are You Compliant?

Hong Kong’s first cross-sector competition law has come into effect and is likely to have a significant
impact on the legal and commercial landscape in Hong Kong.

The Competition Commission has revealed that its enforcement efforts will focus on cartel conduct and
other agreements that cause significant harm to competition in Hong Kong.

Penalties for failing to comply with the new law can be severe – a company group may be fined up to 10
percent of its annual turnover in Hong Kong for each contravention. Individuals involved in a breach may
also be penalised. It is therefore vital that businesses are aware of and comply with the new law.

What is Competition Law?

There are three key competition rules under the Competition Ordinance (Cap.619), known as the First
Conduct Rule, Second Conduct Rule and Merger Rule.

The competition rules apply to all entities engaged in economic activity, including companies,
partnerships, sole traders and trade associations (collectively referred to in the Ordinance as
“undertakings”).

First Conduct Rule

The First Conduct Rule prohibits agreements and arrangements between undertakings that have the
object or effect of preventing, restricting or distorting competition in Hong Kong.

The rule is particularly concerned with preventing cartel conduct, which occurs when competitors agree
to do one or more of the following activities:

(a) Bid-rigging: Agreeing strategy when bidding for (or considering whether or not to bid for) projects or
when responding to invitations to tender.
(b) Market sharing: Allocating sales, territories, customers or markets for the production or supply of
goods or services.

(c) Output limitation: Fixing, maintaining, controlling, preventing, limiting or eliminating the production
or supply of goods or services.

(d) Price fixing: Fixing, maintaining, increasing or controlling the price for the supply of goods or services.

Other agreements and arrangements that may breach the First Conduct Rule include:

(a) Group boycotts: Where competitors agree not to do business with targeted individuals or businesses.

(b) Resale price maintenance: Where a supplier establishes a fixed or minimum resale price to be
observed by the buyer of a product.

Businesses also need to assess the competition law risks for arrangements involving exclusive
distribution, exclusive customer allocation, franchising, joint buying and joint ventures.

The First Conduct Rule applies to written and oral agreements, together with informal arrangements
(eg, cooperation between undertakings) and decisions of trade associations.

The exchange of confidential information between competitors may also breach the First Conduct Rule,
particularly if the information relates to price, quantities, sales plans or bidding strategy.

Second Conduct Rule

The Second Conduct Rule prohibits undertakings that have a substantial degree of market power in a
market from abusing that power. An abuse will occur when the undertaking engages in conduct that has
the object or effect of preventing, restricting or distorting competition in Hong Kong.

Examples of conduct that may amount to an abuse of market power include:

(a) Exclusive dealing: Occurs when a supplier requires a customer to exclusively or largely acquire a good
or service from the supplier or incentivises a customer to do the same.

(b) Predatory pricing: Occurs when a business sets the price of its goods or services so low that it is
deliberately forgoing profit in order to force a competitor out of the market or to “discipline” the
competitor.

(c) Refusal to deal: Occurs when a business with substantial market power refuses to supply a product or
service or refuses to supply the good or service on reasonable terms.

(d) Tying and bundling: Tying occurs when a supplier makes the sale of one product conditional on the
purchase of a different product. Bundling occurs when two products are discounted if they are
purchased together.

A substantial degree of market power arises where an undertaking does not face sufficiently effective
competitive restraints in the relevant market. There is no single test to determine whether an
undertaking has a substantial degree of market power. Factors taken into account include the market
share of the company and any barriers to entry into the relevant market.

Merger Rule

The Merger Rule prohibits mergers that have, or are likely to have, the effect of substantially lessening
competition in Hong Kong. The rule only applies when one or more of the parties participating in the
merger holds a “carrier licence” within the meaning of the Telecommunications Ordinance (Cap.106).

There is no requirement to notify the Commission of a merger or proposed merger. However, parties to
a proposed merger may approach the Commission to discuss the transaction and seek informal advice
on a confidential basis. The parties may also apply to the Commission for a decision on whether the
merger is excluded from the application of the Merger Rule.

Exemptions and Exclusions

The First Conduct Rule does not apply to agreements that enhance overall economic efficiency. These
are agreements that contribute to improving production or distribution, or promote technical or
economic progress, and meet several other criteria.

A person may apply to the Commission for a block exemption order declaring that a category of
agreements is excluded on the basis that it enhances overall economic efficiency.

The First Conduct Rule is also excluded if the combined turnover of the parties to a relevant agreement
does not exceed HK$200,000,000. However, the exclusion does not apply to agreements involving cartel
conduct.

The Second Conduct Rule does not apply to conduct by an entity that has an annual turnover not
exceeding HK$40,000,000.

Consequences of Breaching Competition Rules

Pecuniary Penalties

The maximum pecuniary penalty for each contravention of the competition rules is 10 percent of the
turnover of the undertaking concerned for each year in which the contravention occurred, up to a
maximum of three years. “Turnover” in this context means the total gross revenues of the undertaking
obtained in Hong Kong.

Even if a company in breach is a small part of a conglomerate, the maximum fine will be by reference to
the turnover of the whole group. Individuals involved in a contravention may also be fined.

Other Orders

The Competition Tribunal may make any order it considers appropriate against a person who has
breached competition law, including:

(a) disqualifying a person from acting as a director or otherwise being involved in the management of a
company for up to five years;
(b) restraining or prohibiting a person from engaging in contravening conduct; and

(c) declaring an agreement to be void or voidable.

Follow-on Actions

A person who has suffered loss or damage as a result of any act that has been determined to be a
contravention of a conduct rule may commence a follow-on action against the person who contravened
the rule or was involved in the contravention.

Competition Commission

The Commission is responsible for investigating and enforcing the competition rules. It has published
guidelines setting out how it intends to interpret and give effect to the Ordinance (see
www.compcomm.hk).

The Communications Authority has concurrent jurisdiction in respect of the anti-competitive conduct of
certain undertakings in the telecommunications and broadcasting sectors.

Investigation Powers

The Commission has a number of investigation powers, including requiring a person to produce
documents or to answer questions relevant to an investigation. It may also apply for a search warrant
from a judge of the Court of First Instance.

Enforcement Powers

The Commission has a number of enforcement options if it considers that a person has contravened a
competition rule, including:
(a) accepting a commitment from a person to take action or refrain from taking action to address
concerns about the contravention;

(b) issuing an infringement or warning notice; and

(c) applying to the Tribunal for pecuniary penalties and other orders in relation to an alleged
contravention.

Enforcement Policy

The Commission has published an Enforcement Policy setting out how it intends to exercise its
enforcement powers under the Ordinance.

The Commission will focus its resources on conduct that it considers causes the greatest overall harm to
competition and consumers in Hong Kong, in particular:

(a) Cartel conduct: breaches of the First Conduct Rule involving bid-rigging, market sharing, output
limitation and price fixing; and

(b) Exclusionary behaviour: breaches of the Second Conduct Rule involving conduct that has the object
or effect of preventing or limiting the ability of competitors to compete.

Where cartel conduct is suspected, the Commission may prioritise action against both the company and
any individuals involved, including company directors.

The Commission will favour remedies that will stop unlawful conduct speedily, undo harm caused by
contravening conduct and impose sufficient economic sanctions.

Leniency Policy

The Commission has published a Leniency Policy for Undertakings Engaged in Cartel Conduct. Under the
policy, the Commission will agree not to commence proceedings for pecuniary penalty and other orders
against the first member of a cartel that comes forward and meets the requirements for leniency. The
cartel member will be required to fully co-operate with the Commission in its investigation and
prosecution of other cartel members.

A leniency agreement does not provide immunity from follow-on actions brought by persons who have
suffered loss or damage as a result of the cartel.

Only the first cartel member that qualifies for leniency will obtain full immunity. However, other
members that co-operate with the Commission may also benefit. The Commission may, for example,
consider recommending to the Tribunal a reduced pecuniary penalty.

The Tribunal also has the discretion to grant leniency in non-cartel cases.

Competition Tribunal

The Tribunal is responsible for hearing and determining cases brought under the Ordinance. It is a
specialist tribunal consisting of all the judges of the Court of First Instance (excluding Justices of Appeal,
Recorders and Deputy Judges).

The Tribunal has jurisdiction to hear competition cases including:

(a) applications made by the Commission with regard to alleged contraventions, or alleged involvements
in contraventions, of the competition rules;

(b) applications for the review of Commission decisions; and

(c) private follow-on actions by persons who have suffered loss or damage as a result of an act that has
been determined to be a contravention of a conduct rule.

If the Tribunal finds that a person has contravened or been involved in the contravention of a
competition rule, it may impose pecuniary penalties and make any other order it considers appropriate.
The Tribunal’s practice and procedure is governed by the Competition Tribunal Rules (Cap. 619D) and
The Rules of the High Court (Cap. 4A), together with a number of Practice Directions. The Court of First
Instance may also hear competition cases in limited circumstances.

Neil Carabine

Registered Foreign Lawyer, King & Wood Mallesons

James Wilkinson

Senior Associate, King & Wood Mallesons

he Competition Ordinance

INTRODUCTION

The Competition Ordinance (“Ordinance“), enacted on 14 June 2012, introduces a cross sector
competition law in Hong Kong for the first time. The institutional provisions of the Ordinance will come
into force first to enable the establishment of the Competition Commission (“Commission”),
Competition Tribunal (“Tribunal“) and preparation of guidelines. The substantive provisions of the
Ordinance are not expected to come into force until at least late 2013.

The Ordinance prohibits conduct that prevents, restricts or distorts competition in Hong Kong and
prohibits mergers that substantially lessen competition in Hong Kong but the merger rules presently
only apply to the telecommunications industry.

THE INSTITUTIONS

The Commission and the Tribunal will be established to enforce the Ordinance.

The Commission’s main role is to investigate suspected breaches of the Ordinance. The Commission may
commence investigations on receipt of complaints, on its own initiative, or on referral from the
Government or a court. The Commission will be vested with a full range of investigative powers to
enable it to effectively apply the Ordinance. It will have the power, amongst other things, to require
production of documents and information, and will be able to conduct “dawn raids” on business
premises.
The Tribunal will consist of judges of the Court of First Instance and will, amongst other things,
determine cases brought before it by the Commission.

THE CONDUCT RULES

The Ordinance provides for:

the prohibition of anti-competitive agreements, concerted practices and decisions (known as the First
Conduct Rule);

the prohibition on the abuse of market power (known as the Second Conduct Rule); and

the prohibition of mergers that substantially lessen competition in the telecommunications industry
(known as the Merger Rule).

The Ordinance applies to “undertakings” which is broadly defined to mean “any entity, regardless of its
legal status or the way in which it is financed, engaged in economic activity, and includes a natural
person engaged in economic activity“. However, “statutory bodies” are excluded from the Conduct
Rules except for those which will be listed in a separate regulation to be adopted by the Chief Executive
in Council.

1. First Conduct Rule

The First Conduct Rule provides that: “An undertaking must not make or give effect to an agreement,
engage in a concerted practice, or as a member of an association of undertakings, make or give effect to
a decision of the association, if the object or effect of the agreement, concerted practice or decision is to
prevent, restrict or distort competition in Hong Kong”.

The term “agreement” is broadly defined and will include horizontal agreements (agreements between
undertakings operating at the same level of the production or distribution process) and vertical
agreements (agreements between undertakings that do not operate at the same level of the production
or distribution process). Although certain exemptions may be introduced by the Commission in respect
of certain categories of agreements.

The First Conduct Rule applies whether or not the conduct took place in Hong Kong or overseas. So long
as the object or effect is to prevent, restrict or distort competition in Hong Kong, it will be prohibited.
2. Second Conduct Rule

The Second Conduct Rule provides that: “An undertaking that has a substantial degree of market power
in a market must not abuse that power by engaging in conduct that has as its object or effect the
prevention, restriction or distortion of competition in Hong Kong”.

In this respect, the Ordinance provides that conduct may, in particular, constitute such an abuse if it
involves (a) predatory behavior towards competitors, or (b) limiting production, markets or technical
development to the prejudice of consumers.

Also, whilst “substantial degree of market power” is not defined in the Ordinance, the suggestion is that
an undertaking with a market share of 25% or below would be considered unlikely to possess a
“substantial degree of market power”.

In addition, the Second Conduct Rule applies whether or not the undertaking engaging in the conduct is
outside Hong Kong or the conduct is engaged in outside Hong Kong. If the object or effect of the conduct
is to prevent, restrict or distort competition in Hong Kong, it will be prohibited.

3. Merger Rule

The Merger Rule prohibits an undertaking from directly or indirectly carrying out a merger that has, or is
likely to have, the effect of substantially lessening competition in Hong Kong.

The Merger Rule will only apply to the telecommunications industry in the first instance. Also, the
Merger Rule applies to a merger even if the arrangements for the creation of the merger take place
outside Hong Kong, or the merger takes place outside Hong Kong, or any party to the arrangements for
the creation of the merger or any party involved in the merger is outside Hong Kong.

4. Serious anti-competitive conduct

In respect of the First Conduct Rule, the Ordinance set out certain, what is considered to be, “serious
anti-competitive conduct” (or hard core violations). Such conduct consists of one or more of the
following:
fixing, maintain, increasing or controlling the price for the supply of goods or services;

allocating sales, territories, customers or markets for the production or supply of goods or services;

fixing, maintaining, controlling, preventing, limiting or eliminating the production or supply of goods or
services; and

bid rigging.

Where there is a non-hardcore violation the Commission is required to issue a “warning notice” to the
relevant undertakings requiring them to cease and not to repeat the contravening conduct within the
“warning period” before bringing proceedings in the Tribunal. This requirement does not apply where
there is “serious anti-competitive conduct”.

5. Exclusions and Exemptions

The Ordinance provides for certain exclusions and exemptions from the prohibitions.

First Conduct Rule

Agreements satisfying the specific conditions for exclusions in Schedule 1 of the Ordinance will not be
subject to the First Conduct Rule despite their possible anti-competitive effects. Such exclusions include,
for example, where agreements enhance overall economic efficiency, or where an agreement is made
for the purpose of complying with legal requirement and agreements of lesser significance.
Undertakings may either conduct a self-assessment as to whether their proposed agreements meet the
conditions of for exclusion or they may apply to the Commission for a decision in respect of the
agreement.

In addition to the general exclusions in Schedule 1 of the Ordinance, the Ordinance provides for two
specific exemption grounds but these are not automatic and an order by the Chief Executive is required
for such an exemption to apply. The Chief Executive may exempt a specific agreement or class of
agreements if there are exceptional and compelling reasons of public policy, or if the Chief Executive is
of the view that by granting an exemption a conflict with an international obligation that directly or
indirectly relates to Hong Kong will be avoided.

Further, the Commission may introduce block exemptions which will apply to certain categories of
agreements.
Second Conduct Rule

Exclusions from the Second Conduct Rule are the same as for the First Conduct Rule except that the
exclusion of agreements enhancing overall economic efficiency is not available in respect of the Second
Conduct Rule, and undertakings whose worldwide annual turnover does not exceed HK$40 million
during the last financial year will not be subject to the prohibition on the abuse of a substantial degree
of power.

In respect of the Second Conduct Rule, the Chief Executive may also exempt a specific conduct or class
of conduct if there are exceptional and compelling reasons of public policy, or if the Chief Executive is of
the view that by granting an exemption a conflict with an international obligation that directly or
indirectly relates to Hong Kong will be avoided.

6.Sanctions

Where there is a contravention, the Tribunal may impose a pecuniary penalty and make any other order
it deems appropriate including all or any of the orders specified in Schedule 3 of the Ordinance which
include the following:

disgorgement orders;

awards of damages to aggrieved parties;

interim injunctions during investigations or proceedings; and

injunctions and disqualification orders against directors.

Where a “pecuniary penalty” is to be imposed, the penalty will be capped at 10% of the total gross
revenues obtained in Hong Kong for each year of the infringement, up to a maximum of three years. If
the contravention has lasted for more than three years, the Tribunal may choose the three years of
contravention with the highest turnover for the purpose of the penalty.

Whilst the Ordinance is not yet in force, it is recommended that businesses and companies doing
business in Hong Kong familiarise themselves with the new law, and to ensure that staff are trained to
ensure that they do not undertake any conduct, or enter into arrangements or agreements, which may
contravene the Ordinance.
Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You
should seek professional advice before taking any action in relation to the matters dealt with in this
publication.

ntroduction

Prior to 14 December 2015, only the telecommunications and broadcasting sectors were subject to
competition provisions under the Telecommunications Ordinance (Ch.106 of the Laws of Hong Kong)
(the Telecommunications Ordinance)1 and the Broadcasting Ordinance (Ch.562 of the Laws of Hong
Kong) (the Broadcasting Ordinance).2 The Hong Kong Communications Authority (the Communications
Authority) is vested with powers of investigation and adjudication in enforcing these provisions.

On 14 June 2012, the Competition Ordinance was enacted as a general and cross-sector competition law
to curb anti-competitive conduct. Its main objectives include the prohibition and deterrence of anti-
competitive conduct, the establishment of a merger control regime (only applicable to the
telecommunications industry for the time being)3 and also the provision of extensive investigative
powers to regulatory authorities as regards suspected breaches.

On 27 July 2015, the Competition Commission and the Communications Authority jointly issued six
guidelines4 (collectively the Guidelines) to provide guidance on how they intend to interpret and apply
the provisions of the Competition Ordinance. The Competition Commission also published its
Enforcement Policy and its Leniency Policy for Undertakings Engaging in Cartel Conduct on 19 November
2015 to provide further details of how it intends to carry out its enforcement function under the
Competition Ordinance.

The Competition Ordinance came into full effect on 14 December 2015, and on the same date the
Competition Commission and the CA released a Memorandum of Understanding5 on how the two
bodies will cooperate and pursue enforcement actions.

The Competition Ordinance prohibits three major areas of anti-competitive conduct, dubbed the First
Conduct Rule, the Second Conduct Rule (collectively referred to as the Conduct Rules) and the Merger
Rule. The Conduct Rules and the Merger Rule will collectively be referred to as the Competition Rules.

The First Conduct Rule—prohibits agreements or concerted practices between undertakings and
decisions of an association of undertakings that have the object or effect of preventing, restricting or
distorting competition in Hong Kong.6
The Second Conduct Rule—prohibits an undertaking that has a substantial degree of market power in a
market from abusing its power through engaging in conduct that has as its object or effect the
prevention, restriction or distortion of competition in Hong Kong.7

The Merger Rule—prohibits a merger involving a carrier licensee under the Telecommunications
Ordinance that (whether directly or indirectly) creates the effect of substantially lessening competition
in Hong Kong.8

Now that the Competition Ordinance has come into operation, the competition provisions in the
Telecommunications Ordinance and the Broadcasting Ordinance have been repealed (subject to
transitional arrangements) and replaced by the Conduct Rules, and a new s.7Q prohibiting exploitative
conduct (the Telco Rule) has been added to the Telecommunications Ordinance. The new Telco Rule
only applies to holders of licenses under the Telecommunications Ordinance, and prohibits licensees
who are in a dominant position from engaging in conduct which may be exploitative. Exploitative
behaviour includes, inter alia, fixing and maintaining prices at an excessively high level and also setting
unfair trading terms and conditions.

The First Conduct Rule

The First Conduct Rule9 concerns agreements, decisions and concerted practices among undertakings
which have the object or effect of preventing, restricting or distorting competition in Hong Kong. It
applies to both horizontal and vertical agreements, and even if the impugned conduct occurs outside
Hong Kong or if any party to the conduct is outside Hong Kong.

Key terms used in the First Conduct Rule

Undertaking

Any entity (including a natural person), regardless of its legal status or the way in which it is financed,
which is engaged in economic activity is considered an undertaking.

Does not apply to conduct involving two or more entities if the relevant entities are part of the same
undertaking or corporate group.

Employees and trade unions not considered as undertakings within the scope of the First Conduct Rule

Agreement

Broadly defined in the Competition Ordinance and is considered to exist once there is a "meeting of
minds" between the parties concerned. For example, an exchange of letters, emails, telephone calls and
instant messages would be sufficient.
May be found to be a party to an anti-competitive agreement if it can be shown that it knew, or should
have known, that the collusion in which it participated was part of an overall plan intended to harm
competition.

Applies to both horizontal and vertical agreements.

Concerted practice

A form of cooperation, falling short of an agreement, where undertakings knowingly substitute practical
cooperation for the risks of competition.

Typically involves an exchange of commercially sensitive information between competitors without a

legitimate business reason.

Decision of an association of undertakings

Trade associations, cooperatives, professional associations or bodies, societies, associations without

legal personalities, associations of associations, etc. are examples of associations.

A decision of an association includes its constitution, rules, resolutions, rulings, decisions, guidelines,
recommendations, etc., even if it is non-binding;

Anti-competitive object or effect

Not necessary for the Competition Commission to also demonstrate that the agreement has an anti-
competitive effect for an agreement having an anti-competitive object.

Determining the object of an agreement requires an objective assessment of its aims/purposes viewed
in context and in light of the way it is implemented. The parties' intention may also be taken into
account. Examples include cartel agreements and, possibly, resale price maintenance agreements.

For an agreement to have an anti-competitive effect, it must have, or be likely to have, an adverse
impact on one or more parameters of competition in the market (for example price, output, product
quality, product variety or innovation).

Restrictions contained in an agreement (which is not in itself harmful to competition) that are necessary
for the agreement to be workable (i.e. ancillary restrictions) fall outside the prohibition of the First
Conduct Rule.

Serious anti-competitive conduct—the "hard core" infringements

Where the Competition Commission has reasonable cause to believe that a contravention of the First
Conduct Rule has occurred, in general, it must issue a warning notice to the undertaking concerned
before bringing proceedings in the Competition Tribunal.
However, this procedure may be bypassed in cases of serious anti-competitive conduct (Serious Anti-
Competitive Conduct), which is defined as "conduct that consists of any of the following or any
combination of the following:

fixing, maintaining, increasing or controlling the price for the supply of goods or services (i.e. price
fixing);

allocating sales, territories, customers or markets for the production or supply of goods or services (i.e.
market sharing);

fixing, maintaining, controlling, preventing, limiting or eliminating the production or supply of goods or
services (i.e. output limitation);

bid-rigging".10

Further, the general exclusion for agreements of lesser significance11 does not apply to cases of Serious
Anti-Competitive Conduct.

Exclusions and exemptions from the First Conduct Rule

The First Conduct Rule does not apply to statutory bodies unless they are specifically brought within the
scope of this Rule, nor does it apply to persons or activities specified in a regulation made by the Chief
Executive in Council.

Further, sch.1 to the Competition Ordinance sets out the following general exclusions in respect of the
First Conduct Rule:

agreements enhancing overall economic efficiency;

compliance with legal requirements;

services of general economic interest;

mergers; and

agreements of lesser significance.12

The Competition Ordinance also provides for block exemption orders and public policy and international
obligations exemptions.
Undertakings are not required to apply to the Competition Commission in order to secure the benefit of
a particular exclusion or exemption. Nevertheless, they may elect to apply to the Competition
Commission for a decision as to whether an exclusion or exemption applies.

The Second Conduct Rule

The Second Conduct Rule13 prohibits an undertaking that has a substantial degree of market power
from abusing that power by engaging in conduct that has as its object or effect the prevention,
restriction or distortion of competition in Hong Kong. This rule applies to unilateral conduct by an
undertaking, regardless of whether the undertaking itself is, or the abusive conduct takes place, inside
or outside of Hong Kong. Abusive conduct which takes the form of an agreement may also contravene
the First Conduct Rule.

Key terms used in the Second Conduct Rule

Undertaking

Same as the term used in the First Conduct Rule.

Market

Has both a product dimension and a geographic dimension.

Definition depends on the specific facts of the case based on (i) market structure; (ii) buyers' preference;
and, (iii) particular competition concern.

Substantial degree of market power

No statutory definition of "substantial degree of market power", but the following matters may be taken
into consideration in determination include (i) market share; (ii) power to make pricing and other
decisions; (iii) barriers to entry; and, (iv) other relevant factors specified in the Guidelines.

Substantial market power can be thought of as (i) the ability to charge prices above competitive levels,
or to restrict output or quality below competitive levels, for a sustained period of time (the length of
which depends on the facts, in particular with regard to the product and the circumstances of the
market in question)14; or (ii) the ability and incentive to harm the process of competition by, for
example, weakening existing competition, raising entry barriers or slowing innovation.15

According to the Competition Commission, small undertakings are unlikely to have a substantial degree
of market power.16 However, the definition does not preclude the possibility of more than one
undertaking having a substantial degree of market power in a relevant market, particularly if the market
is highly concentrated with only a few large market participants.17

Abuse

Any conduct which has the object or effect of preventing, restricting or distorting competition in Hong
Kong may constitute abusive conduct.

Conduct may, in particular, be abusive if it involves (i) predatory behaviour towards competitors; or (ii)
limiting production, markets or technical development to the prejudice of customers.18

"Substantial degree of market power"—different from "market dominance"

Under the Competition Ordinance, the degree of market power that would render an undertaking liable
to possible charges of abusive conduct is "substantial", which is a lower threshold than that of the
"dominance" test adopted in some jurisdictions such as Europe (where there is a presumption of
dominance at 50 per cent of market share). The legislation does not specify what percentage threshold
of market share amounts to "substantial".

During the consultation process of the Guidelines, it was suggested that some form of market share-
based threshold, including a specific percentage as a "safe harbour" or a presumptive threshold, be
included to assess whether an undertaking has a substantial degree of market power.

This was not adopted for the various reasons as set out in the Guide to the Revised Draft Guidelines
issued under the Competition Ordinance19. In particular, it is noted that market share is only one of the
factors for assessing an undertaking's market power. Other factors such as ease of entry and expansion,
availability of supply-side substitution and buyer power may prevent an undertaking with a high market
share from having a substantial degree of market power and engaging in abusive conduct.

Applying a specific market share threshold across sectors may not accurately reflect the competitive
structure in a particular sector, resulting in an incomplete and potentially incorrect assessment as to the
degree of substantial market power in that sector.

Exclusions and exemptions from the Second Conduct Rule

As with the First Conduct Rule, there are certain situations where the Second Rule does not apply.
Schedule I sets out the following general exclusions in respect of the Second Conduct Rule:
compliance with legal requirements;

services of general economic interest;

mergers; and

conduct of lesser significance (i.e. conduct engaged in by an undertaking the turnover of which does not
exceed HK$40 million for the turnover period).20

There is no comparable exclusion for efficiency-based conduct within the scope of the Second Conduct
Rule. The Guidelines suggest21 that undertakings may, however, argue that the conduct does not
contravene the Second Conduct Rule because it entails efficiencies sufficient to guarantee no harm to
customers. The key considerations include whether:

the conduct concerned is indispensable and proportionate to the pursuit of some legitimate objective
unconnected with the tendency of the conduct to harm competition;

the claimed efficiencies are in fact passed on to consumers notwithstanding the market power of the
undertaking; and

the undertaking can demonstrate no net harm to consumers.22

Further, as with the First Conduct Rule, there are certain additional statutory exemptions such as public
policy exemptions and international obligations exemptions.

The Merger Rule

Under the current regime, the Merger Rule only applies to the telecommunications sector.23

The Merger Rule24 prohibits a merger involving a carrier licensee under the Telecommunications
Ordinance that (whether directly or indirectly) creates the effect of substantially lessening competition
in Hong Kong. This rule applies even if:

the arrangements for the creation of the merger take place outside Hong Kong;

the merger takes place outside Hong Kong; or

any party to the arrangements for the creation of the merger, or any party involved in the merger is
outside Hong Kong.

In general, changes in the control of undertakings which are not of a lasting nature are less likely to have
any effect on competition in the relevant market, and the Competition Commission will be less
concerned about these changes.
Key terms used in the Merger Rule

Merger

A merger takes place if (i) two or more undertakings previously independent of each other cease to be
independent; (ii) one or more persons or other undertakings acquire direct or indirect control of the
whole or part of one or more other undertakings (including creation of a joint venture to perform on a
lasting basis one or more of the functions of an autonomous economic entity); or (iii) an acquisition by
one undertaking (the Acquiring Undertaking) of the whole or part of the assets (including goodwill) of
another undertaking (the Acquired Undertaking) that results in the Acquiring Undertaking being in a
position to replace (or substantially replace) the Acquired Undertaking in the business (or part thereof)
concerned.

Substantially lessening competition

Matters that may be taken into consideration include (i) the extent of competition from competitors
outside Hong Kong; (ii) whether the acquired undertaking, or part of it, has failed or is likely to fail in the
near future; (iii) the extent to which substitutes are available or are likely to be available in the market;
(iv) the existence and extent of any barriers to entry into the market; (v) whether the merger would
result in the removal of an effective and vigorous competitor; (vi) the degree of countervailing power in
the market; and (vii) the nature and extent of change and innovation in the market.

Indicative safe harbours

The Competition Commission has identified two safe harbour measures, which are based on (a)
concentration ratios25; and (b) the Herfindahl-Hirschman Index (HHI)26 respectively. In general, for a
horizontal merger, if the combined market share of the parties post-merger is 40 per cent or more, it is
likely that the merger will raise competition concerns.

If a merger falls outside the safe harbour measures, the Competition Commission may make further
inquiries to assess the extent of its potential anti-competitive effects. That said, whilst the Competition
Commission is unlikely to further assess any mergers which fall below the thresholds, it does not
categorically rule out intervention.

Exclusions and exemptions from the Merger Rule

The Merger Rule does not apply to statutory bodies unless they are specifically brought within the scope
of the Rule, nor does it apply to persons or activities specified in a regulation made by the Chief
Executive in Council.

Further, the Merger Rule does not apply to a merger if the economic efficiencies that arise or may arise
from the merger outweigh the adverse effects caused by any lessening of competition in Hong Kong,27
or if there are exceptional and compelling public policy reasons for granting an exemption.28

The Merger Rule is a voluntary regime and it is not compulsory to notify the Competition Commission of
a merger which falls within the Merger Rule. The Competition Commission may commence an
investigation when it becomes aware (through monitoring the media and/or information or complaints
from third parties such as competitors) that a merger has taken place and, if it has reasonable cause to
believe that the merger contravenes the Merger Rule, bring proceedings in the Competition Tribunal to
unwind/stop the merger. It may therefore be in the interest of the parties concerned to seek informal
advice from the Competition Commission on a proposed merger which may fall within the Merger Rule
to understand whether the Competition Commission has any concerns about the transaction.

The Telco Rule

In addition to the Merger Rule, holders of licences under the Telecommunications Ordinance will also be
subject to the Telco Rule29, which prohibits licensees who are in a dominant position from engaging in
conduct which may be exploitative. The exclusions and exemptions under the Competition Ordinance
will not apply to this rule.

Key terms used in the Telco Rule

Licensee

A holder of a licence under the Telecommunications Ordinance.

Dominant position

A licensee is in a dominant position if, in the opinion of the Communications Authority, it is able to act
without significant competitive restraint from its competitors and customers.

Relevant factors for consideration include (i) the market share of the licensee; (ii) the licensee's power
to determine pricing and other decisions; (iii) any barriers to enter into the relevant telecommunications
market; (iv) the degree of product differentiation and sales promotion; and (v) any other relevant
matters.

Exploitative

The Communications Authority may consider the following conduct to be exploitative (i) fixing and
maintaining prices or charges at an excessively high level; and (ii) setting unfair trading terms and
conditions for or in relation to the provision of interconnection of the type referred to in s.36A(3D) of
the Telecommunications Ordinance.

Relationship between "substantial degree of market power" and "dominant position"

The relevant factors for determining whether a licensee is in a dominant position under s.7Q(3) of the
Telecommunications Ordinance are very similar to those for determining whether an undertaking has a
substantial degree of market power under the Second Conduct Rule.

Clarification regarding the relationship between the two thresholds were sought during the consultation
process on the Guidelines. Whilst it is generally understood that a "substantial degree of market power"
is a lower threshold than that of the "dominance" test adopted in other jurisdictions, the Competition
Commission and the Communications Authority have not so far included any guidance on the
interpretation of s.7Q of the Telecommunications Ordinance.

Relationship between "abusive conduct" and "exploitative conduct"

During the consultation process on the Guidelines, there were queries on whether "exploitative
conduct" as used in the Telco Rule, such as the imposition of unfair prices or other unfair trading
conditions, also falls within the scope of the Second Conduct Rule.

As explained above, the category of abusive conduct is an open one, and any conduct which has the
object or effect of preventing, restricting or distorting competition in Hong Kong may be regarded as
abusive. Hence, if an exploitative conduct has an anti-competitive object or effect (for instance, the
imposition of unfair prices or other unfair terms leading to anti-competitive foreclosure in the market),
this may also fall within the scope of the Second Conduct Rule.

Whilst an exploitative conduct may fall within the scope of the Second Conduct Rule, the Competition
Commission has clarified that its main enforcement focus under the Second Conduct Rule will be
abusive conduct which is exclusionary, i.e. conduct which may result in competitors, actual or potential,
being denied access to buyers of their products or to suppliers30. Accordingly, if an exploitative conduct
does not have an exclusionary effect, then it is unlikely that such conduct will be caught by the Second
Conduct Rule.

Investigation and enforcement

The Competition Ordinance provides for judicial enforcement through the Competition Commission and
the Competition Tribunal. The Competition Commission and the Communications Authority|31 are the
investigation authorities responsible for and tasked with, inter alia, investigating competition-related
complaints and bringing enforcement actions before the Competition Tribunal in respect of anti-
competitive conduct, whereas the Competition Tribunal is responsible for adjudicating competition
cases brought by the Competition Commission, private actions, as well as reviews of determinations of
the Competition Commission. Any appeals in relation to decisions of the Competition Tribunal on
competition matters will be referred to the Court of Appeal and/or the Court of Final Appeal.

Typical phases of investigation

The Competition Commission may launch an investigation on an alleged infringement of the

Competition Rules (i.e. the First Conduct Rule, the Second Conduct Rule and/or the Merger Rule) either:
(i) on its own initiative; or (ii) where information about a possible infringement is provided to the
Competition Commission by another party. The sources of such information may include:

complaints or queries made by the public;

the Competition Commission's own research and market intelligence gathering;

referrals by the Government, the courts or other statutory bodies or authorities; and

whistle-blowing by a cartel member or a former employee.

The Competition Commission will generally carry out the investigation in two phases:

initial assessment phase; and

investigation phase.

Phase 1—Initial Assessment Phase

During this phase, the Competition Commission does not start with a fixed view on whether a
contravention of the Competition Rules has taken place. In determining whether there is reasonable
cause to suspect an infringement and whether the matter warrants further investigation, it may seek
information on a voluntary basis, for example by contacting parties by telephone or in writing, and
meeting and interviewing persons who may have knowledge of the conduct.

The Competition Commission will then determine whether or not to further investigate the matter by
taking into account the following factors32:

the specific facts of the relevant case;

availability of evidence suggesting an infringement of the Competition Ordinance;

the potential impact of the alleged conduct on competition and consumers;

the Competition Commission's enforcement strategy, priorities and objectives, and other matters
currently under its and the courts' consideration;

the likelihood of a successful outcome resulting from further investigation; and,

whether the resources that would be used for further investigation would be proportionate to the
expected public benefit.

Possible outcomes of the Initial Assessment Phase

There are four possible outcomes of the Initial Assessment Phase—the Competition Commission may:

take no further action;

commence an investigation (see Phase 2—Investigation Phase below);

address the issue through alternative means, such as, for example, referring the matter to another
agency; or conducting a market study;

accept a voluntary resolution of the matter, i.e. a commitment under s.60 of the Competition Ordinance
(see below).

Phase 2—Investigation Phase

If the Competition Commission proceeds to the Investigation Phase, it will have formed a view that
there is reasonable cause to suspect an infringement of the Competition Rules.

The investigation powers of the Competition Commission include:

Power to obtain documents and information through, (i) issuing written requests for documents and
information (s.41 of the Competition Ordinance); (ii) requiring attendance before the Competition
Commission to answer questions (i.e. interviews) (s.42 of the Competition Ordinance); and, (iii) requiring
information to be verified by statutory declaration (s.43 of the Competition Ordinance).

Power to obtain search warrants (i.e. dawn raids), which authorise entry into premises to execute
searches; and, require production, make copies and/or take possession of relevant documents including
computers, electronic files and storage devices.

Criminal consequences for non-compliance with the Competition Commission's investigation powers

The Hong Kong courts have powers to impose criminal sanctions on undertakings and individuals for
non-compliance with the investigation powers of the Competition Commission

Failure to comply with a requirement or prohibition imposed under the Competition Commission's
investigation powers33—the maximum penalty for a conviction on indictment is a fine of HK$200,000
and imprisonment for up to one year.

Destruction/falsification/concealing of documents34, obstruction of search35, provision of false or

misleading documents/information36 and disclosure of confidential information received from the
Competition Commission37—the maximum penalty for a conviction on indictment is a fine of HK$1
million and imprisonment for up to two years.

Possible outcomes of the Investigation Phase

Where the Competition Commission determines that contravention of a Competition Rule has occurred,
it has a range of options at its disposal. These include:

No further action—however, this does not prevent the Competition Commission from revisiting the
matter at a later date;

Voluntary resolution under s.60 of the Competition Ordinance (s.60 Commitment)—the Competition
Commission may accept a commitment from a person to take such action (or refrain from taking such
action) as it considers appropriate to address its concerns about a possible contravention of the
Competition Rules, and agree to terminate its investigation and not bring proceedings in the
Competition Tribunal (or terminate such proceedings where already brought);

Issue a warning notice—a warning notice will be issued where the Competition Commission has
reasonable cause to believe that the First Conduct Rule has been breached, but the infringement does
not involve "Serious Anti-Competitive Conduct". The warning notice will stipulate that contravening
undertakings should cease the anti-competitive conduct within a specified period of time;
Issue of infringement notice—an infringement notice will be issued when the Competition Commission
has reasonable cause to believe that an infringement of (a) the First Conduct Rule involving "Serious
Anti-Competitive Conduct"; and/or (b) the Second Conduct Rule has occurred. Whilst not bound to do
so, the Competition Commission will generally offer the relevant undertaking an opportunity to comply
with requirements of the notice within a specified period as a condition for not bringing proceedings in
the Competition Tribunal; and,

Commencement of proceedings before the Competition Tribunal—the Competition Commission may

initiate proceedings before the Competition Tribunal under ss.92, 94, 99 and/or 101 of the Competition
Ordinance.

Other possible actions that may be taken by the Competition Commission include an application for a
consent order from the Competition Tribunal, referral to a Government agency and further market
studies.

Sanctions and follow-on right of action

When competition rules are infringed, the Competition Tribunal has broad powers to impose penalties
and remedies on undertakings and individuals and to impose costs orders against contravening parties:

For the company—fines up to 10 per cent of the gross Hong Kong turnover of the company/group for up
to three years in which the contravention occurred; and, imposition of behavioural or structural
remedies including, for example, injunctions and restoration orders etc.

For the individual—fines and (for Directors) disqualification for a period of up to five years.

The Competition Ordinance allows a person who has suffered loss or damage as a result of any act that
has been determined to be an infringement of a conduct rule to bring an action against (a) any person
who has contravened or is contravening the rule; and (b) any person who is, or has been, involved in
that contravention. In this regard, a "contravention of a conduct rule" includes an admission made in a
s.60 Commitment that a person has contravened a conduct rule.

Currently, the Competition Ordinance does not provide for private "stand-alone" actions to be brought
by persons for relief and remedies arising from particular conduct. The Hong Kong government will
review the need for stand-alone rights of private action after the business community acquires more
experience with the new competition regime.

Practical compliance with the Competition Ordinance

In view of the broad powers of the Competition Tribunal to impose penalties and remedies on
undertakings and individuals, it is very important to understand and comply with competition law
principles. One practical compliance tip in this regard is "READ":

Review current and future business operations;

Educate officers and employees about business practices or conduct that may constitute unlawful anti-
competitive activity;

Additional training for management and employees whose businesses and/or operations may be
impacted by the Competition Ordinance; and,

Devise on-going systems, procedures and policies to comply with the Competition Ordinance.

Risk identification—review current and future business operations

Companies must first conduct a thorough review of their existing operations, business practices,
business arrangements and contracts to identify aspects of the Competition Ordinance that are of
particular relevance. Such a review will assist with the determination of an appropriate compliance
strategy and the priority of compliance measures to be undertaken.

As a starting point, companies should be wary of and avoid "high risk" conduct as set out below:

For all undertakings

Price fixing;

Market sharing;

Output limitation;

Bid rigging;

Joint buying;

Information exchange with competitors and at trade association meetings;

Group boycotts; and,

Resale price maintenance.

For undertakings with substantial degree of market power:

Predatory pricing;

Tying and bundling;

Margin squeeze;

Refusal to deal; and,

Exclusive dealing arrangements (including the imposition of exclusive purchasing obligations or provision
of conditional or loyalty rebates).

For companies that are holders of carrier licenses under the Telecommunications Ordinance, they
should be alert whenever they are in a "dominant position" and/or considering a merger transaction.

Risk mitigation—educate, additional training and design compliance systems

Given the difference in nature and size of each business, companies will need to consider the actual
impact of the Competition Ordinance on their practices and formulate a compliance strategy suitable to
the size and risk profile of their business. Non-exhaustive measures that companies can adopt in order
to mitigate and manage potential or identified risks include:

Cessation or modification of business practices;

Provision of training;

Implementation of a compliance policy and manual;

Appointment of a compliance officer; and

Seeking legal advice for issues that are unclear or complex.

Regular reviews

Competition compliance is an on-going process. Companies should regularly review their policies and
practices (which, in light of changing market conditions or new legal developments, may change from
time to time) and where necessary, update and refine their compliance measures to ensure continuing
compliance with the Competition Ordinance.

Outlook

This recent implementation of Hong Kong's Competition Ordinance marks a significant step in the
evolution of its fledgling antitrust regime. Multinational enterprises doing business in Hong Kong can no
longer afford to dismiss the Special Administrative Region as a jurisdiction that has no competition
regime or antitrust enforcement. The new Hong Kong antitrust rules follow international norms, with a
marked similarity in particular to EU law.

Further, officials appointed to the Competition Commission include many recruits with experience of the
application of comparable rules in other jurisdictions. It can be safely assumed that the new Hong Kong
rules will be interpreted and developed with an eye to international practice, with cooperation and
dialogue between the Competition Commission and its international counterparts.

Footnotes

* The authors are partners Michael Liu and Alec Burnside, special counsel Anne MacGregor, and
associate Viola Jing of Cadwalader, Wickersham & Taft LLP

1 For the telecommunications sector, the relevant provisions include s.7K (anti-competitive practices),
s.7L (abuse of position) and s.7N (non-discrimination) of the Telecommunications Ordinance.

2 For the broadcasting sector, the relevant provisions include s.13 (prohibition on anti-competitive
conduct) and s.14 (prohibition on abuse of dominance) of the Broadcasting Ordinance.

3 Under the current regime, the merger rule only applies to the telecommunications sector. The
Competition Commission is targeting to expand the merger-control provisions to more sectors in 2–3
years' time.

4 Namely, Guideline on Complaints, Guideline on Investigations, Guideline on Applications for a Decision

under Sections 9 and 24 (Exclusions and Exemptions) and Section 15 Block Exemption Orders, Guideline
on the First Conduct Rule, Guideline on the Second Conduct Rule, and Guideline on the Merger Rule.

5 See http://www.compcomm.hk/en/about/inter_agency/files/MoU_e_final_signed.pdf [Accessed 21

December 2015].

6 This mirrors art.101 TFEU in the EU and s.1 of the Sherman Act in the United States.

7 This mirrors art.102 TFEU in the EU and s.2 of the Sherman Act in the United States.
8 Under the current regime, the merger rule only applies to the telecommunications sector. The
Competition Commission has indicated in media comment that it is targeting to expand the merger
control provisions to more sectors in 2–3 years time.

9 Section 6(1) of the Competition Ordinance provides that "an undertaking must not (a) make or give
effect to an agreement; (b) engage in a concerted practice; or (c) as a member of an association of
undertakings, make or give effect to a decision of the association, if the object or effect of the
agreement, concerted practice or decision is to prevent, restrict or distort competition in Hong Kong."

10 Section 2(1) of the Competition Ordinance.

11 Pursuant to s.5, Sch.1 to the Competition Ordinance, the First Conduct Rule does not apply to (a) an
agreement between undertakings in any calendar year if the combined turnover of the undertakings for
the turnover period does not exceed HK$200 million; (b) a concerted practice engaged in by
undertakings in any calendar year if the combined turnover of the undertakings for the turnover period
does not exceed HK$200 million; or (c) a decision of an association of undertakings in any calendar year
if the turnover of the association for the turnover period does not exceed HK$200 million.

12 See fn.11 above.

13 Section 21(1) of the Competition Ordinance.

14 See Guideline on the Second Conduct Rule, para.3.2.

15 See Guideline on the Second Conduct Rule, para.3.4.

16 See Guideline on the Second Conduct Rule, para.1.5.

17 See Guideline on the Second Conduct Rule, para.3.3.

18 Section 21(2) of the Competition Ordinance.

19 See Competition Commission and Communications Authority, Guide to the Revised Draft Guidelines
Issued under the Competition Ordinance, para.79.

20 Pursuant to s.6, Sch.1 to the Competition Ordinance, the Second Conduct Rule does not apply to
conduct engaged in by an undertaking the turnover of which does not exceed HK$40 million for the
turnover period.

21 See Guideline on the Second Conduct Rule paras 4.4 and 4.5.

22 See Guideline on the Second Conduct Rule, paras 4.4 and 4.5

23 The current regime in relation to mergers is set out in Sch.7 to the Competition Ordinance, which
specifically provides that the Merger Rule only applies to a merger involving a carrier licensee under the
Telecommunications Ordinance (see s.4 of Sch.7). In August 2014, the Chairperson of the Competition
Commission commented publicly that the Competition Commission may seek to expand the merger
control provisions so as to apply to more sectors, in 2-3 years' time. This will require a new legislative
process.

24 Section 3 of Sch.7 to the Competition Ordinance provides that "an undertaking must not, directly or
indirectly, carry out a merger that has, or is likely to have, the effect of substantially lessening
competition in Hong Kong."

25 Concentration ratios measure the aggregate market shares of leading firms in the relevant market.

26 HHI measures market concentration by adding together the squares of the market shares of all firms
in a market.

27 Section 8(1) of Sch.7 to the Competition Ordinance

28 Section 9 of Sch.7 to the Competition Ordinance

29 Section 7Q of the Telecommunications Ordinance provides that "a licensee in a dominant position in
a telecommunications market must not engage in conduct that in the opinion of the Authority is
exploitative."

30 See Competition Commission and Communications Authority, Guide to the Revised Draft Guidelines
Issued under the Competition Ordinance, para.94.

31 Under the Competition Ordinance, competition matters can be transferred between regulators with
concurrent jurisdictions. In this regard, pursuant to Pt 11 of the Competition Ordinance, the
Communications Authority has been given concurrent jurisdiction with the Competition Commission to
enforce the Competition Ordinance in respect of the telecommunications and broadcasting sectors,
including merger and acquisition activities involving carrier licensees.

32 See Guideline on Investigations, paragraph 3.6

33 Section 52 of the Competition Ordinance.

34 Section 53 of the Competition Ordinance.

35 Section 54 of the Competition Ordinance

36 Section 55 of the Competition Ordinance

37 Section 128(3) of the Competition Ordinance

Previously published by Thomson Reuters

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