1 The Proposed Hong Kong Competition Law: Principle Provisions and Problematic Issues Professor Mark Williams 12 December 2008

Outline  Competition problems in Hong Kong  Proposed Substantive Provisions  Unresolved Issues  Threats  Opportunities  Conclusion

Competition Problems in Hong Kong  Government land monopoly – the Faustian Pact with the developers.  Government intervention in the market – housing, part ownership of some enterprises, public sector ‘ mission creep ’.  Mainland economic influence both direct and indirect – positive and negative effects.  Utility and transport sectors, cartels, conglomerates and high concentration ratios.  Non-traded services – the professions?

Proposed Substantive Provisions  HKSARG Detailed Proposals May 2008  Application to ‘ Undertakings ’  Anti-competitive agreements and concerted practices – general prohibition with examples  No definitive list  No per se prohibitions rather a requirement to show the purpose or effect is to substantially lessen competition  Application to horizontal agreements or practices only  Hardcore cartel activities – price fixing, market allocation, bid rigging – almost a presumption  Guidance to be issued

Abuse of Substantial Market Power  General prohibition with examples  No definitive list of banned conduct  Guidance to be issued  Threshold lower to find SMP than ‘ dominance ’ as in the EU. AUS/NZ adopt SMP. But note SG has adopted the EU/UK standard.  Why?  Application to vertical agreements – distribution agreements, RPM. Need to show holder of SMP uses vertical agreements to substantially lessen competition (SLC)  Required to prove that the purpose or effect of the conduct is to SLC

Public enforcement  Competition Commission and Tribunal  Independent statutory body  Corporate Board structure to be the decision maker cf. with UK OFT  Chair + 6 Commissioners appointed by CE  CEO and executive to investigate and ‘ prosecute ’ infractions  Wide powers of competition advocacy, sectoral investigation and international co- operation

Investigation and Adjudication  Formal separation between investigation and adjudication  Power to require delivery of documents and information  Powers of search and seizure when authorized by judicial warrant  Protection of due process rights very important given the CFA decision in Koon v Insider Dealing Tribunal FACV(No.10 of 2007)  Greg So mentioned that this structure is under reconsideration; HKSARG may adopt the a modified Irish/Aust or NZ approach rather than the EU/UK enforcement model or some variation.

Penalties  Civil ‘ penalties ’ not criminal but Koon decision; are all ‘ penalties ’ criminal in nature?  Commission power to order cessation or rectification of effects of conduct  Interim orders obtainable from Tribunal  Commission power to impose a ‘ fine ’ for breaches of conduct rules of up to HK$10 million  Tribunal on application by Commission to impose ‘ fine ’ of up to 10% of total turnover  Individual disqualification from holding a directorship or being involved in management for up to 5 years  Adoption of a leniency programme – useful tool in ‘ cartel busting ’

Competition Tribunal  Composition and appointment  Powers  On Commission ’ s application, can impose more severe penalties.  On parties appeal, review of the Commission findings  Approve, substitute or vary a Commission decision on breach and/or penalty  Hear and determine stand alone or following private actions  Further appeal to CA and CFA on point of law or penalty only

Private Enforcement  Stand alone private right of action for damages and injunction  Safeguards to prevent nuisance cases  Mechanism to deal with ‘ composite ’ cases  Representative actions  Right of Commission intervention  Grant of leniency would not immunize against private claims

Unresolved issues (1)  Jurisdiction - Will the law apply only to actors present in Hong Kong or should agreements or conduct undertaken outside Hong Kong that has an economic effect in a Hong Kong market be caught? Cf. Singapore  China – How will the Hong Kong Ordinance interface with the Anti-Monopoly Law?  Guidance – to be issued with the Bill or would that unduly constrain the Commission?  Structural powers – no powers to require divestiture cf. BAA case  Mergers – Will a merger regime be included in the Ordinance?  Pros and Cons

Unresolved issues (2)  IPRs  How will the exploitation of IP rights interface with the new Ordinance?  Exemptions  De minimis and SMEs  Vertical agreements except where undertaking has SMP  Individual agreements – net economic benefit  Block Exemptions

Unresolved issues (3)  Exclusions  Public interest – general economic interest Gas, electricity, water supply, public transport, postal services (?) Who will decide? What criteria will be used? Can this be justified if a private monopoly exists without a regulatory framework?  Public Policy Overriding political considerations – government land monopoly (?) Mechanism for exercise of the power by CE.  Government and statutory bodies Will the law extend to government provided services (health, education, exhibition services) statutory monopolies (gambling) or other statutory bodies the Law Society, HKIPA etc – Now under reconsideration – Greg So.  Political considerations – new Legislative Council

Threats  Cartel operators need to reconsider  Parties to restrictive agreements such as co-operation or joint ventures, or specialization agreements  Firms with SMP who use that power to prevent market entry or to eradicate new entrants or impose vertical restrictions or tie sales of products or the provision of services  Prohibition of parallel imports?  Merger and acquisition activity

Opportunities  Aggrieved consumer, commercial or public sector parties who have suffered damage from anti-competitive activities  Actual or potential market entrants  Nimble law firms  Aspiring cartel busters, competition lawyers and competition judges!

Conclusion (1)  Need to keep up to date with developments in the passage of the Ordinance especially during the committee stage  Devise or outsource competition law awareness training for appropriate staff especially sales, marketing and corporate affairs employees of clients  Advise the commercial clients on strategic acquisitions, assets swaps or mergers before the new Ordinance comes into effect thereby removing or reducing regulatory risk  Advise industry/professional association clients about the impact of the law

Conclusion (2)  Update compliance procedures and ensure you undertake an ‘ antitrust audit ’ of client activities  Review existing client conduct especially if they have SMP  Review commercial agreements especially restrictive covenants and cartel-like arrangements for compliance with the new law  Consider whether any clauses might be rendered void  Prepare to use the new Ordinance as a shield as well as a sword in negotiations and litigation

Conclusion (3)  Educate yourself about competition law and the issues likely to affect your clients  See me and ACLEC Asian Competition Law and Economics Centre

Thank you! Professor Mark Williams