After lively debate last year, the Hong Kong Government has finally released a bill aimed at clarifying the regulation of mergers and acquisition activity in the telecommunications sector. The Telecommunications (Amendment) Bill 2002, gazetted in May, is being scrutinised by a bills committee due to the controversial nature of the proposals. It requires companies and financiers considering investments in carrier licensees to either undertake a detailed competition analysis to assess the risk of the Telecommunications Authority upsetting the transaction post-completion, or approach the authority for pre-approval. Either way, the regulatory risks of mergers and acquisition (M&A) activity in the telecoms sector will increase. The bill builds on a consultation paper issued by the Office of the Telecommunications Authority (Ofta) in April last year, proposing that carrier licensees should obtain prior authority approval for any transactions which would result in a change in specified levels of ownership or control. The proposals caused an industry stir. Submissions were made by the major domestic and external fixed and mobile operators, public non-exclusive telecommunications service licensees, HSBC, the Consumer Council and the Hong Kong Information Technology Federation (HKITF). Most opposed such a regulation on the grounds the authority had not justified why additional scrutiny was warranted, particularly when there was no perceived failure in the existing regime needing remedy. Ofta's proposals were considered to be a disproportionate cure for a non-existent ailment. There was much support for the view that existing competition regulation should be more actively used by the authority to address actual anti-competitive practices rather than introduce pre-approval regulations. Only two submissions from industry bodies were broadly in favour - the Consumer Council and HKITF supporting the broadening of the authority's powers to regulate M&A activity. A second cause for concern was the lack of clarity in the timing of approvals, something essential to the smooth running of a transaction. Critics of the bill have suggested that introducing piecemeal solutions to merger issues which are common to other sectors would distort an efficient overall market. The authority has not demonstrated the industry warrants a different approach from the general economy. Indeed, in many other jurisdictions the telecoms regulator is not given any responsibility for administering merger control regulation, as such regulation exists across the board on a non-sector-specific basis. Concerns were also raised about the transparency and adequacy of the proposed assessment criteria, given the complex analysis required in this area of competition law. Respondents thought that the proposed triggers for intervention by the authority served merely to increase the compliance burden on carrier licensees with no real benefit to consumers. Another common theme in the submissions was that, if it was appropriate to apply such rules to carrier licensees, then the overlap in services meant they should apply across the board to all licensees. Despite such opposition, the government concluded a sector-specific M&A regulatory regime was necessary to prevent over-concentration of market power in a few carrier licensees and undesirable cross-ownership. However, the government has not addressed many of the valid criticisms or revealed any of its analysis in reaching these conclusions. In introducing the bill it aims to replace the existing, somewhat fragmented regime of approvals or notifications of changes of ownership in a carrier licensee with a clear framework and tools to deal with transactions which lessen competition. The bill gives the authority the power to make directions to eliminate anti-competitive effects if it is of the opinion that any change occurring in control exercised over, or ownership of voting shares in a 'carrier licensee' has, or may have, the effect of substantially lessening competition in a telecommunications market. A change in control includes a change in director or principal officer of the licensee, or beneficially owning or controlling more than 15 per cent of its voting shares. The parties concerned can make representations to the authority before its decision. It can require a licensee to modify the levels of control or beneficial ownership resulting from the transaction. The proposals allow licensees to voluntarily seek prior approval for a transaction. The authority can make consent conditional on compliance with it directions in order to eliminate any anti-competitive effect. Otherwise, potential merger partners run the risk of incurring penalties and having the authority move the goal posts after the deal is done. Merger hopefuls will not be without guidance in deciding whether or not to seek prior consent. Once the bill becomes law, the authority must issue appropriate guidelines containing the criteria used in determining whether a transaction has (or is likely to have) an anti-competitive effect. Draft guidelines containing Ofta's proposed assessment criteria accompanied its original consultation. It is time to review them and voice any concerns about their content. The guidelines will be the yardstick by which merging entities must measure themselves for an indication whether the transaction may raise consent issues. Further industry consultation will take place once the Bill has been passed. According to the guidelines, the authority's prime concerns are adverse effects on the performance of markets by reducing competition and increasing market power of the new merged entity, possibly leading to excessive prices and inefficient markets. Only where these concerns are raised will the authority intervene and withhold consent. It will assess the competition effect of a merger only if the merged entitiy would have a market share of 40 per cent or more; or 15 per cent, when the concentration of the four largest companies in the market is 75 per cent or more. The authority will also assess barriers to entry, levels of import competition, vertical integration, countervailing power and the impact of efficiency savings in determining the impact of a merger on competition. This list is not exhaustive. The guidelines require far more detail and clarity before they can usefully assist companies considering M&A activity in the telecoms sector. In particular, the absence of any time-lines for notifications and approvals in either the Bill or the guidelines has to be remedied to ensure the process does not unnecessarily delay deals. Finally, it is worth noting that Ofta's concerns appear focused on preventing abuses of market power by newly merged entities. Ofta already has the power to regulate these, using competition provisions recently inserted into the Telecommunications Ordinance. Ofta can impose significant financial penalties for breach of these provisions. Licensees can be forgiven for wondering why these provisions don't suffice. Nick Norris is the partner in charge of Simmons & Simmons' corporate group. Katie Elias is an associate with the law firm.