On June 14 2012, the Legislative Council finally passed the Competition Bill after its introduction in July 2010. Despite the watering down of the Bill, the upcoming Competition Ordinance (the “Competition Law”) will still carry broad and significant implications on the daily operation of many businesses.

Are you affected?

Any companies, partnerships, individuals and any undertaking engaging in economic activity will be subject to the Competition Law. The directors and executives of a company could also face personal liability for pecuniary penalty (without indemnification from the employers) and disqualification order if the company contravenes any competition rule.

Key Prohibitions – The Two Conduct Rules

The key prohibitions consist of two cross-sector Conduct Rules and limited merger control. The First Conduct Rule prohibits any agreements or concerted practices that have the object or effect of preventing, restricting or distorting competition in Hong Kong. Under this rule, four types of activities are defined as “hardcore activities” which will be subject to more stringent enforcement without the entitlement to any prior warning notice. They are agreement among competitors for:-

1. price fixing;

2. market sharing;

3. bid rigging in tender processes; and

4. output restriction on production or sales to maximise market positions.

Based on the above, companies and undertakings must be cautioned against breaches of this Conduct Rule in making decisions on pricing, liaising with competitors, structuring joint ventures and agreeing on rights or obligations of exclusive nature with suppliers or trading partners.

The Second Conduct Rule prohibits abuse of “substantial degree of market power” of any undertaking which engages in conduct that has the object or effect of preventing, restricting or distorting competition in Hong Kong. “Substantial degree of market power” is not defined in the Competition Law. However, the Government suggested that generally an undertaking having a market share of less than 25% may not be considered as having “substantial degree of market power”. It is expected that further guidance will be provided as to the definition of “market power” and “abuse”.

Implications

The penalties under the Competition Law can be substantial.A fine of up to 10% of the local turnover of a business can be imposed by the Competition Tribunal for a breach of a Conduct Rule. Also, overseas businesses can be affected by the Competition Law if its activities fall within the Conduct Rules and impact on Hong Kong markets, such as negotiation of an anti-competitive agreement on a regional level that would impact the market in Hong Kong. The Competition Commission (the “Commission”) has broad power to carry out investigation where it has a reasonable basis to believe that an infringement has occurred. Non-compliance with legitimate request during investigation can be an offence. The Commission also has broad discretion to prosecute and negotiate with undertakings on suspected infringements.

When to take action?

There will be a transitional period for businesses to prepare for the implementation of the Competition Law. The length of such period is still pending determination by the Government, but it can be as short as one year. Further, during this period, the Commission will be set up and start identifying suspected infringements once it is established. Any breach of the Conduct Rules during the transitional period will inevitably attract priority enforcement by the Commission once the Competition Law comes into effect. It is therefore prudent for businesses to take preventive steps by reviewing its current and proposed business practice and plan.

As the above shows, the Competition Law is significant in many key aspects even though concessions were made in the market turnover level under the de minimis arrangement and other aspects. It is the legislative intent to build a full-fledged competition regime in Hong Kong for sustainable competition. It is inevitable that the Competition Law will feature prominently in the business life of Hong Kong from now on.