All eyes are on Hong Kong as the world’s last developed economy finally implements a competition law. In the making for over a decade, the bill has seen its fair share of controversy, attracting criticism from both SMEs and big businesses for being alternately toothless or overly harsh.
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All eyes are on Hong Kong as the world’s last developed economy finally implements a competition law. In the making for over a decade, the bill has seen its fair share of controversy, attracting criticism from both SMEs and big businesses for being alternately toothless or overly harsh.Announced on June 26, Hong Kong’s first cross border competition act has officially come into play. Broad-reaching in scope, it bars a substantial amount of anti-competitive activity including cartels and bid rigging, and possesses significant enforcement powers.
Although often viewed as an unrestricted capitalist dreamland due to low taxes and ease of conducting business, certain markets in Hong Kong are simultaneously dominated by a handful of massive conglomerates. As such, the bill has faced fierce public debate from small-- and medium-sized enterprises (SMEs) that advocate for a tougher, more aggressive stance while the government has come under pressure from big businesses to relax the proposed restrictions. The resulting law is an intriguing mix, which sources say, will take some time to play out in the marketplace.
A tale of mobiles and markets
Prior to the bill, the only sector that was regulated by antitrust conventions was the telecom and broadcasting industry. Overseen by a committee that was set up post-handover, the Competition and Policy Advisory Group had no enforcement powers. However, it would spot issues, which soon led to competition regulations for the telecom sector. Sources indicate that given the success of these policies, Hong Kong has seen one of the lowest mobile phone charge rates in the world, in addition to notably high levels of market penetration.
Margaret Wang, counsel at Freshfields Bruckhaus Deringer, says: “We’ve benefited as a community from the competition regimes that are present in the telecom industry. So the development of an economy wide general competition law is likely to be a positive change for the domestic economy if it is enforced properly with the right safeguards in place.”
People often equate free trade and minimal regulatory barriers in Hong Kong with a competitive domestic economy. But market observers note that this is not always the case.
One of the most striking examples of the perceived anti-competitiveness of certain industry sectors is French hypermarket giant Carrefour’s attempted entry into Hong Kong over 10 years ago. Dominated by the supermarket duopoly of Park ‘n Shop and Wellcome, owned respectively by Hutchison Whampoa and Jardine Matheson, media reports indicate that the two closed ranks, forcing suppliers to ostracise Carrefour for lowering prices below theirs. Carrefour eventually pulled out, providing the Hong Kong Consumer Council with a list of 22 companies that allegedly applied pressure on it to not cut prices. A challenger to Park ‘n Shop and Wellcome is yet to be seen.
The public debate is clearly very polarised between those that cite the fact that Hong Kong consistently scores as one of the freest economies in the world with vigorous competition, and others who use the Carrefour example to suggest that there are markets which are unfairly dominated by a few major players.
However, most lawyers see this as a positive development. Clara Ingen-Housz, partner at Baker & McKenzie, affirms that “the ordinance is a way for Hong Kong to conform to international standards, and introduce principles that are now shared across the world, and specifically the Asia-Pacific region”.
Breaking it down
Essentially, the ordinance is based on a three-part system. The first handles the gravest offences, prohibiting price fixing, bid rigging and even joint distribution agreements. The second focuses on abuse of significant market power, which is aimed at preventing businesses with a prevailing position in the industry from engaging in anti-competitive behavior. The final section deals with merger controls.
John Hickin, partner at Mayer Brown JSM, elaborates: “The first point to make is that the ordinance is a cross sector law that includes fairly generally-worded provisions. That will give the commission the ability to target the hardcore cartel-type activity in Hong Kong, or wherever they find it. It’s going to be a powerful weapon once it’s established. However, there are certain significant omissions and concessions that have been made, which people have complained have watered down the effect of the law.”
The most egregious of those concessions has been the merger control provision. At the moment, the ordinance only contains merger control restrictions if the transaction involves the telecom industry. Sources pinpoint this as a definite limitation for the regulator, as most major competitive regimes around the world include a broad-reaching merger control element. “There is no good theoretical reason for singling out the telecom sector for merger review,” says Thomas Cheng, Assistant Professor, Faculty of Law, at the University of Hong Kong. Wang agrees: “The government has left the door open so that they can revisit this issue once the bill has been in operation for a few years.”
Another bone of contention that practitioners highlight is the lack of standalone private action, which specifies that an individual with a complaint cannot bring a lawsuit in court to sue a wrongdoer. Under the current rules, the individual can only complain to the competition commission and wait for them to investigate.
Other controversial sticking points include concessions by the government that have exempted businesses with a turnover of less than HK$40 million ($5.16 million) from certain offences, which is an increase from the previously suggested HK$11 million; as well as proposing that the maximum penalty that can be imposed is now capped at 10 percent of the local Hong Kong turnover; something which was originally suggested at 10 percent of the global turnover.
The question of how to define market power also remains, and is a crucial debate for businesses as they may or may not be exempt from certain provisions depending on how their market power is characterised. Sources have differing views on this. “It’s impossible to say in advance how market power will be defined and evaluated in the context of a specific case, and that is what caused businesses some discomfort and anxiety,” says Cheng. “The determination of market power is very case-specific, and unless provided with a concrete case, it is very difficult for someone to say in the abstract how market power will be assessed and evaluated.”
Ingen-Housz further details that: “The Hong Kong Ordinance is no more vague than competition laws in other leading jurisdictions. However people in Hong Kong need some time and guidance to better understand the concepts and the consequences in the way they conduct business. The Competition Commission will assist in the process, in particular by issuing guidelines about a wide range of key substantive and procedural issues, such as market definition, market power or the handling of complaints. All in all, getting this ordinance off the ground is a huge enterprise for Hong Kong and people need to understand that.”
Finally, practitioners say that unlike many antitrust regimes around the world, the ordinance does not specify that the impact on competition needs to be substantial. It merely references the fact that certain behaviour has the effect of restricting, preventing, or distorting competition. Ingen-Housz says: “But what if the distortion to competition is really minimal, for example, involving price fixing affecting a minor part of the Hong Kong economy. Do you really want to use the Hong Kong Competition Commission’s (HKCC) resources to be going after that kind of behavior? Most laws around the world will request that the effect on the market be substantial; and the ordinance today does not contain that kind of language.”
Whether it is merger controls, government concessions on turnover, or simply murky language, it’s evident that the ordinance has gone through several iterations throughout its history.
“As a result of all of those things, one could say that the impact of the law compared with what it might have been has been lessened,” says Hickin. “But having said that, it’s still a significant piece of legislation and will have an impact on the way that business is conducted throughout the territory.”
EU building blocks
Hong Kong’s government made it clear during the law-making process that the competition law follows the legislative rubric found in the EU. “If you look at the two key provisions - sections 6 and 21 - you see language that reminds one of the corresponding provisions in the EU law,” says Cheng. While the ordinance clearly has its roots in EU law, several practitioners also note that the Hong Kong government refrained from referring to China’s anti-monopoly law, adopted in 2008, for guidance. “It is surprising how little effort has been made to ensure a consistent approach with the competition authorities in China,” says Waha. On the other hand, while Hong Kong and China’s relationship has become increasingly connected post-handover, the legal system has arguably been an area where the former has taken the one-country-two-systems approach most seriously. “People in Hong Kong jealously guard their legal and judicial autonomy, and I think the legal profession still likes to keep a somewhat polite distance from the mainland legal system,” says Cheng. Nonetheless, it is highly likely that the two authorities will ramp up cooperation as more cross border investigations emerge.
For her part, Ingen-Housz is unsurprised by the absence of cooperation between the two authorities, stating that the Chinese law itself is very much modelled after the EU model.
The origins of the ordinance aside, legal experts expect case law to provide the commission and the public with the actual details. “It is possible that Hong Kong courts will turn to EU case law more because of the government’s professed desire to follow the EU regime. But the devil is in the detail, and they will not be supplied until the courts actually decide cases. By then, we will know whether the Hong Kong law is really modelled after EU law,” says Cheng.
Effects on the marketplace
Much media attention has been focused on the HKCC’s range of enforcement powers as alongside traditional sanctions, it also has the power to conduct dawn raids. A hot topic, given its dramatic implications, Wang says: “Judging on the track record of regulators in Hong Kong, they are usually quite careful and especially when you have a new law where there is uncertainty about the scope of application and a lot of pushback from the business community, it would take a very bold regulator to be using those dawn raid powers from day one.”
Also notable are the leniency provisions. Businesses can approach the commission and report on cartel activity that they have been involved in with others, and can benefit from being treated more leniently for having blown the whistle. “That traditionally has been a destabiliser of cartels in many jurisdictions where this power has been included,” says Hickin.
How will these new regulations and enforcement powers affect SMEs? “The greatest impact it will have is to the extent the businesses and SMEs currently pursue anything that would be deemed illegal under the competition law,” says Cheng. “For example, a lot of SMEs talk about prices in the context of trade association meetings. That would likely have to be stopped.”
It is generally agreed that SMEs have less to worry about than big businesses. “SMEs, by definition, do not have market power in their relevant markets,” continues Cheng. “The only provisions in the bill that would apply would be the prohibition of the so-called serious offences.” For SMEs, their main focus in terms of compliance efforts should be on those offences.
What about big businesses? Sources indicate that the ordinance will mostly affect companies that are selling in Hong Kong. Those companies, especially any with a significant degree of market power, will most likely have to undergo essential compliance. “Competition law is so new to Hong Kong and laissez-faire economics is so deeply engrained in the mind of business people, that the idea that the law will prohibit some business conduct that has been so far deemed as perfectly legitimate, will be quite a foreign idea to them,” says Cheng.
Advanced preparations
As a result, companies are doing their utmost to avoid getting entangled in legal proceedings. Several have adopted a conservative and risk-averse approach by making preparations long before the law was passed. This has provided competition lawyers with ample work over the last few years, with a considerable increase in interest this year. “Our message to clients is that you still have time to get prepared,” advises Waha.
Indeed, there is still time. The ordinance has been vetted, but now the commission awaits creation, and guidelines need to be issued before any active enforcement can occur. But despite a grace period that could last up to 18 months, Hickin stresses that clients should not delay their compliance preparations. “Creating a real fair competition culture in an organisation takes some time to develop. It is something that needs to be done over the medium term. You can’t flip a switch and say we will now become compliant with the law,” he says.
The new law will not be completely foreign to all businesses. Several Hong Kong-based companies that have been selling abroad should possess sound knowledge and understanding of antitrust issues. The task of rolling out a compliance programme in Hong Kong should not be too rigorous for MNCs, as most already follow their own internal rules and standards around antitrust compliance. However, it is vital that these businesses take their programmes seriously. “It is not so much about penalties, but about the reputation and damage that they need to think about,” cautions Wang, who advises MNCs to review their business conduct and internal rules on antitrust compliance, and implement necessary changes quickly.
Nonetheless, law firms with dedicated competition teams are witnessing a spike in inquiries and activity from Hong Kong-based businesses. Antitrust lawyers are keeping busy assisting businesses with creating compliance policies and training, reviewing existing contractual agreements with suppliers and competitors, and identifying areas of exposure. Once the commission has been fully formed and appropriate guidelines have been disseminated, private practitioners can expect to see a transition in client work; from playing an advisory role to enforcement-related matters.
Competing for talent
The threat alone of enforcement will urge established market players to deliver quality products at the right prices, says Waha. He adds that the law will also enhance the possibility of new entrants to the market. Others, like Cheng, believe that the impact of the law on the market remains to be seen, as it will depend on the intensity of enforcement efforts. These efforts will in turn be a reflection of the individuals that are appointed to the commission.
Few would contest that the greatest challenge for the newly elected chief executive and his government in the next 12 months is the search for, and the appointment of appropriate people for the commission. “This will be absolutely key in determining the nature and quality of the enforcement of this law. If the law is going to carry any weight, it is going to be a function of who is sitting on the commission,” states Ingen-Housz.
To find individuals who have the political clout and the sense to drive the regulatory agenda forward will certainly be a challenge, given Hong Kong’s nascent competition law jurisprudence and the scarcity of human capital in this field.
Open dialogue
Once the commission and competition tribunal are set up and guidelines on enforcements are circulated, the commission is likely to invest heavily in public advocacy and education to inform businesses about the law. This will provide a valuable opportunity for businesses to engage with the government and put forward their concerns. “I don’t think that now that public consultation has ended and the bill has been signed, the door is closed. You should be proactive right now,” says Wang. The transition period is in effect, and the government is on the search for appropriate individuals to spearhead the competition commission. Case law surrounding anti-competitive behaviour in Hong Kong is still far on the horizon, but businesses need to gear up for this inevitability and review their operations, compliance standards and contractual agreements. The stage is set. “We have the bones, but now we have to see flesh on these bones,” says Waha.
Economists: A lawyer’s best friend?
Bryane Michael, University of Hong Kong
Few lawyers receive training in econometrics and advanced statistics. And why should they? Negotiating contracts, bringing suits against parties who violate the law, and interpreting the way new laws affect Hong Kong’s companies does not usually require heavy statistical analysis. Yet, in-house counsel with experience in the U.S. and/or the EU know that statistics provide a key method of helping to detect and file civil actions against the anti-competitive behaviour of commercial rivals. As Professor Rubinfeld of the New York University Law School notes: “To obtain a financial recovery in a private action, the plaintiff must prove three distinct elements: (1) an antitrust violation; (2) antitrust injury; and (3) damages – a measure of the extent of the injury.” Hong Kong’s law firms and in-house counsel will find that economists can help them with each of these points.
Consider the case of a hotel owner in Kowloon wishing to show that other hotels in the area are keeping their prices too low in order to drive him out of business. Without an economist, that owner would need to obtain written proof that these hotel managers had met and come to an agreement. He would need copies of e-mails or preferably one of the hotel owners to “squeal” on the others in their collusive agreement. With statistics though, the hotel owner’s legal counsel could more easily obtain information useful to start litigation. Such information might include correlations between room prices, discounts below estimated marginal costs, and expected losses taken by rival hotels in the area. Such information would certainly convince a judge to order further material investigation.
Three key statistical tests prove useful in this kind of litigation. Lead counsel should know about these tests when working with economists, particularly on competition law-related cases. The hypothesis test (or test of similarity) can show – with a certain level of certainty – that one hotel owner’s prices, occupancy rates and other factors are not like the other hotel owners’. For example, an economist can tell you with a 99.999 percent level of probability that hotels in a district advertise prices below their expected marginal costs. Economic methods can actually remove the distorting effects of factors like seasonal demand, how well the stock market is doing, the prices of inputs like labour, and so forth. The regression analysis can tell legal counsel how much the prices, quantity offered, amount of innovation, product quality, and so forth has changed in response to changes in factors like the number of other hotels in the area, the size of these hotels (the amount of assets they hold) and so on. Such regression analysis can show (with a certain level of confidence) that the profits of our hypothetical hotel owner have changed because of the actions of the other hotel owners. Economists can also do cost-benefit analyses – showing the profits our hypothetical hotel owner has lost because of collusion by neighbouring rival hotels. Such analysis can “take out” the effects of a weakening economy, changes in hotel regulations, and other factors.
Economists can provide law firms and in-house counsel with information useful in three venues. They detect anti-competitive behaviour – showing with a level of probability – when rivals are engaged in such behaviour. Presenting proof of such behavior can be useful when asking regulators and judges for more in-depth investigatory work. They prove (in some jurisdictions) which anti-competitive behaviour occurs. We cannot directly observe secret meetings in which trading partners agree to manipulate prices, quantities, and so forth. But we can observe their effects. In some instances, a 99.999999 percent statistical probability of engaging in anti-competitive behaviour is enough for regulators or judges to provide injunctive relief, assess fines, and provide other remedies. In this way, an economist can be a lawyer’s best friend, while enforcing Hong Kong’s new Competition Law.
Bryane Michael is currently at the University of Hong Kong’s Centre for Comparative and Public Law. He has previously advised on anti-competition law in Russia for the EU, and in the developing world for the OECD and World Bank since 1995. He has done his doctoral work in economics at Oxford and Harvard.
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