After more than a decade of debate and discussion, Hong Kong’s first ever competition law was enacted in June 2012. Broad-reaching in scope, it bars a substantial amount of anti-competitive activity including cartels and bid rigging, prohibits the abuse of market power, and contains merger control provisions for the telecom sector. In October, the recently formed Hong Kong Competition Commission issued draft guidelines for public comment on how it intends to administer the Competition Ordinance, with the aim of putting the law into full effect by the second half of 2015.

Polarised debate

The Ordinance is essentially based on a three-part system – the First Conduct Rule, the Second Conduct Rule and the Merger Control Rule. The first part applies to anti-competitive arrangements between parties that have, or are likely to have, the object or effect of preventing, restricting or distorting competition. The second aims to prevent businesses with a dominant position in a market from abusing their market power. The final section lays out merger control provisions for the telecom sector.

While Hong Kong has historically been viewed as a capitalist dreamland due to its low tax rates and ease of conducting business, certain industry sectors continue to be dominated by just a handful of players. As a result, some smaller businesses and new entrants to Hong Kong have complained of having borne the brunt of anti-competitive behaviour by the larger market incumbents. One of the most striking examples is French hypermarket giant Carrefour’s attempted entry into Hong Kong more than a decade ago. In a market dominated by the supermarket duo of PARKnSHOP and Wellcome, owned by Hutchison Whampoa and Jardine Matheson, respectively, media reports indicate that the two closed ranks, putting pressure on suppliers to shun Carrefour for lowering prices below theirs. Carrefour eventually pulled out, handing the Hong Kong Consumer Council a list of 22 companies that allegedly applied pressure on the French firm to refrain from cutting prices. A notable challenger to PARKnSHOP and Wellcome in Hong Kong is yet to be seen.

The Ordinance is the culmination of years of highly polarised debate between those who cite that Hong Kong consistently scores as one of the freest and most competitive economies in the world, and others who point to Carrefour’s exit as a clear indication that some markets can be dictated by just a handful of players. As a result of the fierce debate, some industry experts claim that certain significant omissions and concessions were made during the development of the Ordinance, which have watered down the effect of the law. Nonetheless, the legal and business communities agree that the presence of a competition law is a positive development for Hong Kong in aligning the territory’s regime with international standards, as long as it is enforced properly with the right safeguards in place.

Public consultation

In order to enforce the Ordinance, the 14-member Hong Kong Competition Commission, an independent statutory body, was formed last April. Anna Wu, a lawyer and former chair of the Hong Kong Consumer Council, was appointed as the Commission’s chairperson for a three-year term. On Oct. 9, the Commission published draft guidelines outlining how it intends to interpret and enforce the rules in the Ordinance. The draft guidelines, which were issued jointly with the Communications Authority, are divided into the Substantive Guidelines (on the First Conduct Rule, Second Conduct Rule and the Merger Control Rule) and the Procedural Guidelines (on Complaints, Investigations and Applications for a Decision under sections 9 and 24 (Exclusions and Exemptions) and Section 15 Block Exemption Orders).

The draft guidelines have been well received by Hong Kong’s business and legal community, with lawyers saying that in most cases, the guidelines will help companies with business activities in the city gain a better understanding of the potential scope of application of the Ordinance, as well as a relatively clear overview of the Commission’s enforcement priorities. For example, the text of the Substantive Guidelines sends a clear signal to the business community that the Commission will consider Resale Price Maintenance (RPM), a specific vertical arrangement, as being, by its nature, harmful to competition if not proven to be efficient. In some cases, RPM may amount to serious anti-competitive conduct.

However, the guidelines do contain several grey areas where further clarification is needed, lawyers say. In a Mayer Brown JSM news briefing, partners John Hickin and Hannah Ha wrote that the guidelines are of cross-sector application and do not as yet include industry- or sector-specific guidance, as previously requested by a number of industry stakeholders in their submissions to the Bills Committee on the Competition Bill.

Furthermore, the guideline on the Second Conduct Rule, which focuses on the abuse of market power, leaves the question of what constitutes “substantial market power” unanswered, much to the dismay of the business community in Hong Kong. “The guidelines provide a lot of useful guidance, but the one thing that is really missing are clear safe harbour market share thresholds that would be easy to apply for the business community,” says Maxime Vanhollebeke, a senior associate in Norton Rose Fulbright’s competition team in Hong Kong. “It might be going too far to ask the Commission to put in place a definitive market share threshold below which there would not be issues, but it would be useful if the guidelines could at least give an indicative threshold below which the Commission would generally not be interested in investigating,” adds Vanhollebeke.

Simon Powell, managing partner of Latham & Watkins’ Hong Kong office, explains that the use of a vague definition of “market power” in the guidelines indicates that the Commission does not want to pin itself down to a particular position, and allows the regulator some room for discretion. “To a degree this is understandable, as it will allow the Commission to reflect on how best to address the issue of market power once it has experienced how the Ordinance is working in practice in the Hong Kong context. On the flip side, the business community is naturally concerned at the lack of guidance they have due to the vagueness surrounding what the Commission will consider constitutes a substantial degree of market power,” says Powell.

While the Substantive Guidelines have received much media attention, some lawyers have also voiced concerns over grey areas in the Procedural Guidelines. Once the Ordinance takes full effect, the Commission is going to rely heavily on complainants coming forward and notifying the regulator about the conduct they are seeing in the market. For his part, Powell says that the draft procedural guidelines on complaints lack clear guidance on what the Commission will expect from potential complainants in terms of substance or material. He says that while Section 37 of the Ordinance deals with complaints and offers some guidance, more could have been provided in the guidelines. “That was a missed opportunity for the Commission. To encourage complainants to come forward and assist them in providing relevant and useful information, the Commission could have at least given some broad indications of the sorts of things they expect from complainants which would help them take a case forward,” adds Powell.

Another issue that had been the subject of much debate in the run-up to the Ordinance’s enactment was the scope of the Merger Control Rule. As it stands, the Ordinance only contains merger control restrictions if the transaction involves, directly or indirectly, holders of carrier licences under the Telecommunications Ordinance. Industry experts pinpoint this as a definite limitation for the regulator, as most major competitive regimes around the world include industry-wide merger control provisions. “The current situation is a result of a harsh compromise,” says Vanhollebeke. Nonetheless, support for expanding the scope of the Merger Rule to include all industry sectors remains strong, with proponents arguing that a fully functional merger control regime can provide a nascent competition law authority with an opportunity to gain experience. “The government has left the door open so that they can revisit this issue once the Ordinance has been in operation for some time, but if and when that will happen is hard to predict,” says Vanhollebeke. Discussions on this issue have stalled, at least for now. But if merger talks were to commence between high-profile players outside of the telecom sector in Hong Kong, that could provide the spark to reignite the debate.

A sword and a shield

Hong Kong’s new competition law will not be completely foreign to all businesses. Multinational companies with offices worldwide will already have sophisticated compliance programmes in place which apply to all their different offices, including in Hong Kong, says Vanhollebeke. “In the short term, the SMEs and local businesses that have never been exposed to competition law before will feel the greatest impact of the Ordinance,” he adds.

Nonetheless, law firms in Hong Kong with dedicated competition teams are witnessing a spike in inquiries and work from both local and international businesses. Much of the work since the enactment of the Ordinance in June 2012 has involved helping businesses create and strengthen compliance programmes, reviewing existing contractual agreements with suppliers and competitors, and identifying areas of exposure. As the Ordinance moves ever closer to full implementation, lawyers expect to see the nature of their advisory work transition towards assisting parties with complaints and investigation-related matters, and eventually, litigation. “People use competition law around the world as a sword as well as a shield. Inevitably, some will look to exploit the new law to try to put a stop to activities of their competitors about which they feel aggrieved. But they will first have to persuade the Commission to take up that matter,” says Powell. As a result, law firms are likely to be heavily involved in helping complainants craft complaints to put forward to the Commission, as well as assisting those who find themselves the subject of investigation by the regulator, says Powell. “Once the law comes into force, this will comprise much of lawyers’ competition-related work. But I can’t see any real litigation taking place until at least 2016, when we might start to see matters going to the Competition Tribunal,” says Powell.

Just around the corner

The deadlines for submitting public comment for both the Substantive and Procedural Guidelines fall in 2014, and the Competition Commission has indicated that the Ordinance is likely to take effect in the second half of 2015.In addition, the Commission is due to release its Leniency Agreement Policy, Enforcement Policy and a publication on SME’s rights and responsibilities to assist the business community in Hong Kong.

Lawyers have praised the Commission for its efforts in public advocacy – through the release of guidelines for public consultation as well as supplementary publications and seminars – to educate and inform businesses about the Ordinance and its effects, and provide a valuable opportunity for businesses to engage with the government and put forward their concerns. Despite some concerns raised by the business and legal community over grey areas shrouding parts of the draft guidelines, lawyers note that a high benchmark has been set to improve upon.  “I would hope that these guidelines are only the first set, and that they would be revisited shortly after the actual implementation of the Ordinance, and then regularly revisited as the Commission builds up experience and the business community in Hong Kong starts to understand and appreciate how competition law is going to be applied in the Hong Kong context,” says Powell.

Furthermore, decisions by the Competition Tribunal and comments made by the Commission will give the business community further clarity outside of the guidelines. However, case law surrounding anti-competitive behaviour in Hong Kong is still far on the horizon. Nonetheless, businesses need to use the beginning of 2015 to gear up for the inevitable and review their operations and contractual agreements, bolster their compliance programmes, and prepare to wield the competition law’s sword or shield themselves from it. The stage is set.