HK's antitrust model offers clear separation of powers
Waha and Chang of Norton Rose take a look at how the city's new Competition Ordinance stacks up against similar legislation in the region
Businesses that are familiar with competition laws in Asia will be in for a few surprises when they read the Hong Kong Competition Ordinance that was recently enacted. Overall, however, the surprises will mostly be good.
In most other Asian countries, government agencies act as investigators, prosecutors and judges. But in Hong Kong the model of enforcement reflects a clear separation of functions. The ordinance sets up a Competition Commission and a Competition Tribunal for investigation and adjudication.
The commission may launch investigations on its own initiative, on receipt of complaints, or on referral from the government or a court. Sanctions can only be imposed by judges, and civil action may be brought after contravention of the law is established.
Hong Kong's neighbours, most of which have had experience enforcing competition law for at least a few years, usually only impose significant sanctions for serious anti-competitive activity. Of the more than US$1 billion of fines imposed annually in South Korea and Japan, most sanctions involve bid-rigging and price-fixing practices. Singapore's Competition Commission imposes fines for serious violations of the local competition legislation.
In Hong Kong, the ordinance limits the possibility of imposing fines and awarding civil damages for non-serious restrictive practices. This makes for legal certainty, but doubts remain as to what constitutes serious anti-competitive conduct. Also, the ordinance lacks similar statutory protection for non-serious abuses of market power.
The ordinance sets out two major prohibitions that apply to any businesses engaged in economic activity: a prohibition on restrictive practices and a prohibition on the abuse of market power, known as the conduct rules. Merger control is excluded from the scope of the law, except in the telecommunications sector. This is uncommon. Other jurisdictions, such as Malaysia, have introduced competition rules without a merger control regime, but it remains a feature of all other regimes in the region. What makes the Hong Kong regime unique is that merger activity is expressly excluded from the scope of the conduct rules. Another notable feature is that statutory bodies enjoy immunity under the law.
Two of the three competition law pillars found elsewhere are thus implemented. Perhaps the Hong Kong government and the business community will recognise the benefits of extending the scope of the new law to cover merger activity at some stage in the future.
The first conduct rule in the ordinance prohibits agreements and concerted practices that restrict competition. As mentioned, the enforcement focus is expected to be on serious anti-competitive activity, which includes price-fixing, market-sharing, bid-rigging and output restrictions. Small and medium-sized enterprises are excluded from the scope of the first conduct rule, but not as regards serious anti-competitive conduct. The way the exclusion is designed is not very practical: it only applies if the aggregate combined size of all parties involved does not exceed HK$200 million of business sales. Few are the SMEs who will know exactly whether their sales, combined with the sales figures of the other relevant parties, remain below the threshold. It might have been more practical to set a market share threshold or to provide an outright exclusion on account of an SME's individual size alone. Agreements between suppliers and distributors are also caught by the first conduct rule, although it is not yet known to what extent they may benefit from exemptions granted by the commission.
The second conduct rule prohibits a business with a substantial degree of market power from abusing this power. The government expects the commission and the courts to interpret the "substantial degree of market power" as setting the bar quite low.
To paraphrase what the government said on the point, above 40 per cent market share a business is likely to reach the threshold; below 25 per cent a business is unlikely to do so; and anything in between is up for consideration, if market conditions support a finding of significant market power. As is the case elsewhere, having market power is not in itself illegal. Only the abuse of market power is prohibited.
While the adoption of a substantial market power test is quite surprising considering that Asian countries, including mainland China, mostly apply a dominance threshold, one should not overstate the significance of the difference. First, the purpose of the prohibition appears to be limited to exclusionary conduct - such as predatory pricing, tying, bundling, fidelity rebates or refusal to supply. Exploitative abuses are not meant to be captured by the regime: excessive profits or the use of a superior bargaining position will not constitute an abuse, unlike in South Korea or Japan. And while the market power standard will probably be lower than in other jurisdictions, there is no way for the commission to challenge exclusionary practices, such as below-cost pricing, if the relevant party has no market power.