Hong Kong: Hong Kong’s Competition Bill - An Update

Originally published 21 December 2010

Keywords: Hong Kong, Competition Bill, Bills Committee

It is now almost six months since the Competition Bill was introduced into Hong Kong's Legislative Council. In this legal update, we summarise the key developments and progress relating to Legislative Council consideration of the Bill.

Status of the Competition Bill

The Competition Bill was gazetted on 2 July 2010, and received its first reading in Hong Kong's Legislative Council on 15 July 2010. The Bill is now under consideration by a Bills Committee that was formed on 8 October 2010. The Bills Committee is considering the principles and merits of the Bill as well as its detailed provisions, and may propose amendments relevant to the Bill in due course. After the Bills Committee has completed scrutiny of the Bill, it will notify the House Committee of the Legislative Council and advise the committee in writing of its deliberations, following which debate on the Second Reading may resume (following which, further steps towards passage of the Bill into law may proceed). This is not expected to occur before May 2012.

Composition and Work Plan of the Bills Committee - Hon Andrew LEUNG Kwan-yuen has been appointed Chairman of the Bills Committee, and Hon Ronny TONG Ka-wah has been appointed Deputy Chairman - notwithstanding that both have previously expressed strong concerns about aspects of the government's current or previous competition law proposals. The 40 member Bills Committee has published a 'work plan' which indicates that at least 37 meetings are planned - running until April 2012. Five meetings have been held to date.

Submissions Presented to the Bills Committee - A number of organisations were invited to attend a Bills Committee meeting on 29 November 2010 to provide comments on the Bill. In addition, a general invitation was issued to any party wishing to provide a written or oral submission regarding the Bill, following which at least 54 written submissions have been provided to the Bills Committee. Organisations who have made submissions include:

• Chambers of Commerce (such as The Chinese General Chamber of Commerce);
• private companies (such as Cathay Pacific Airways Limited, A.S. Watson Group, Hutchison Port Holdings Limited, MTR Corporation and Park'n'Shop);
• trade associations (such as the Hong Kong Association of Banks and the Hong Kong Retail Management Association) and federations;
• government bodies (such as the Consumer Council);
• industry 'think tanks' and lobby groups (such as the Lion Rock Institute and Momentum 107); and
• members of the public.

Development of 'Sample' Guidelines Relating to the Bill - The Undersecretary for Commerce and Economic Development, Mr. Greg So, has reportedly advised the Bills Committee that 'sample guidelines' will be provided for review in January 2011. It is understood that these sample guidelines are intended to be indicative or representative of the guidelines that the Bill contemplates would be developed in due course by the Competition Commission to explain matters such as how the broadly worded prohibitions in the Bill will be applied in practice. According to section 35 of the Bill, the Commission would be required to engage in a level of consultation when developing these guidelines. However that consultation need only occur with persons that the Commission "considers appropriate". Further, the sample guidelines that are presently being drafted by the government will not be binding on the Commission. Accordingly, the extent to which the business sector may have an opportunity to influence the shaping of the actual Commission guidelines may be limited.

Position of Statutory Bodies May Be Clarified Soon - It is understood that the government intends to brief the Bills Committee on the government's position regarding which statutory bodies (or which of their activities) will be brought under the purview of the Competition Law in early 2011. This is in the context of the fact that the Bill proposes statutory bodies will be exempt from the law except and until regulations are introduced to specify otherwise for one or more such bodies.

Funding of the Proposed Competition Commission - A briefing paper submitted to the Bills Committee by the Commerce and Economic Development Bureau in November 2010 has provided additional information regarding how the proposed Competition Commission will be funded. The paper notes that such funding will mainly come from the government (an initial annual budget of between HK$60 million and HK$80 million was previously suggested by the Bureau), but may also come from other sources such as fee payments by businesses and individuals when using Commission services. For example, the paper notes that the Commission will be empowered to hear applications from business operators for confirmation of whether an agreement or conduct benefits from a relevant exemption from the proposed law, and suggests that the Commission may charge a fee for such applications and retain the fee income for its own use. This mirrors existing arrangements in Singapore, where the city-state's Competition Commission has received almost HK$4 million in revenue from applications relating to Singapore's Competition Act in the previous two completed financial years.

Importantly, the paper states that pecuniary penalties received from issuance of infringement notices will not go to the Commission but will instead go directly into General Revenue - to ensure the Commission's impartiality in discharging its investigative powers.

Research Studies Conducted into Other Competition Law Regimes - Just prior to introduction of the Bill into the legislature, the Legislative Council's Research and Library Services Division (RLSD) was requested by the Panel on Economic Development to conduct research on various aspects of competition law enforcement in other jurisdictions, with Singapore a primary focus. Matters that the RLSD was requested to look into included several issues that are known to be of particular concern to members of the Bills Committee - including:

• The extent of exemptions and exclusions provided under relevant foreign regimes;
• The impact introduction of such a regime had on levels of foreign direct investment;
• How the interests of SMEs were protected; and
• How penalties for breaches of the regime were calculated.

The RLSD's report on these matters was published in October 2010 and has been made available to the Bills Committee.

Delicate Questions on the Bill Have Been Raised by the Bills Committee - On 26 October 2010, the legal advisor to the Bills Committee, Mr. Timothy Tso, submitted a number of questions to the Commerce and Economic Development Bureau about the Competition Bill, apparently reflecting issues and concerns identified by the Bills Committee and/or its legal advisors during their preliminary consideration of the Bill. These include:

• a query as to why the Bill does not include a definition of the term "economic activity", in the context that the Bill applies only to relevant entities "engaged in economic activity";
• a query regarding the types of situations in which the Chief Executive in Council may exercise the right he or she has under the Bill to exempt undertakings (or certain activities of undertakings) from application of key competition law prohibitions;
• a query as to whether the Bill should more clearly set out the test that would be applied to determine if an undertaking has "substantial market power", in the context of the prohibition in the Bill (referred to as the "Second Conduct Rule") that would only be applicable to such undertakings, and a query as to why this threshold of market power is a focus in the Bill when many other jurisdictions apply equivalent prohibitions to the Second Conduct Rule only to entities who hold a "dominant" market position;
• a query as to what criteria would need to be satisfied before the proposed Competition Commission could make an agreement to provide leniency to an undertaking that was co-operating in an investigation or proceedings under the Bill;
• a query as to why the scope of the 'merger control' provisions in the Bill was intended to be confined to the telecommunications sector.

It is not clear if a response has been provided to the legal advisor or Bills Committee in relation to these queries to date.

A number of other important issues remain to be clarified - Although government representatives have made a number of speeches and comments to the media on the Bill since it was introduced to the Legislative Council, they are yet to clarify the key uncertainties relating to the scope of the Bill that were explained during our July presentation - such as:

• The Scope of 'M&A' Deals That Can Be Challenged - The broad wording of the 'First Conduct Rule' (the prohibition of anti-competitive agreements, concerted practices and decisions) could conceivably be applied to challenge M&A deals in any sector. This appears inconsistent with the intended scope of the Bill, as the Explanatory Memorandum and previous statements by the government indicate that it is only M&A deals that may substantially lessen competition in a Hong Kong telecommunications market that are intended to be open to challenge.
• Whether a Vertical Agreement Between Parties Without Market Power Can Be Challenged - The First Conduct Rule is worded broadly enough to apply to 'vertical agreements' (that is, agreements or arrangements between business operators at different levels of the supply chain, such as suppliers and customers or manufacturers and distributors). There is no wording in the Bill exempting these types of agreements from the First Conduct Rule. This appears contrary to previous government proposals, pursuant to which vertical agreements were only capable of being challenged if implemented by a business operator possessing substantial market power (under what is now the 'Second Conduct Rule' in the Bill). For example, in paragraph 26 of its May 2008 "Detailed Proposals for a Competition Law" consultation paper, the government stated in relation to the First Conduct Rule that - "The focus of the prohibition on agreements should be on horizontal agreements. Vertical agreements should only be addressed in the context of abuse of substantial market power."

Opportunities to Make Submissions to the Bills Committee and Government Remain

Although potential passage of the Bill is still some time away, and introduction of the competition law is expected to be followed by a 'grace period' before the key prohibitions take effect, it is clear that a failure to secure relevant exemptions or amendments to the Bill at the present stage could lead to very serious ramifications for business operators in the future.

Once the Bill is passed, its scope will be largely 'set in stone', and an independent Competition Commission will be free to interpret and apply the broadly worded prohibitions as it sees fit - unless appropriate safeguards and enforcement parameters are put in place now.

In this context, we are continuing to assist a broad range of organisations who are making submissions to the Bills Committee on matters such as those outlined directly above, or applying for exemptions from the proposed law. Please do not hesitate to let us know if your organisation is interested in taking similar steps.

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