KWM Hong Kong Competition Law Guide (EN)

Hong Kong
Competition Law Guide
December 2015

Hong Kong competition law
Hong Kong’s new competition law applies to all
businesses in Hong Kong. Penalties for failing to
comply with the law can be severe – a company
group may be fined up to 10% of its annual turnover
in Hong Kong for each contravention. Individuals
involved in a breach may also be penalised. It is
therefore vital that companies are aware of and
comply with the law.
This guide provides an outline of what companies need to
know and understand about the new law. We discuss the
competition rules, key “dos and don’ts”, exclusions and
exemptions from the rules, and consequences of breaching
the rules. We also provide compliance tips for Hong Kong
businesses.
Hong Kong Competition Law Guide / kwm.com2
In this Guide:
► Hong Kong competition law
► Competition law in a
nutshell
► Four key competition
“don’ts”
► Information sharing
► Agreements that may
breach competition law
► Abuse of market power
► Merger Rule
► Consequences of breaching
competition law
► Exclusions and Exemptions
► Who are the competition
authorities?
► Compliance tips
► Key contacts

Competition law in a nutshell
What is
competition law?
Hong Kong’s new cross-
sector competition law
prohibits conduct that harms
competition in Hong Kong.
There are three key
competition rules, known as
the First Conduct Rule, the
Second Conduct Rule and
the Merger Rule.
The law is governed by the
Competition Ordinance
(Cap. 619) and associated
regulations.
First Conduct Rule
The First Conduct Rule
prohibits arrangements
between businesses that
have the object or effect of
preventing, restricting or
distorting competition in
Hong Kong. The rule is
especially focused on
prohibits companies that
have a substantial degree of
market power in a market
from abusing that power by
engaging in conduct that
has the object or effect of
Hong Kong.
Examples of conduct that
may be abusive include
predatory pricing, exclusive
preventing cartels –
agreements between
competitors to fix prices,
share markets, rig bids or
limit output. Resale price
maintenance (e.g. fixing a
resale price) is also
prohibited.
Second Conduct
Rule
The Second Conduct Rule
dealing and refusals to deal.
Merger Rule
Mergers that have, or are
likely to have, the effect of
substantially lessening
competition in Hong Kong
are prohibited. The rule only
applies when one or more
of the parties to the merger
holds a telecommunications
carrier licence.
In this Guide:
nutshell
“don’ts”
► Merger Rule
competition law
authorities?
► Compliance tips
► Key contacts

Four key competition “don’ts”
1. Bid-rigging
Don’t exchange information on, or agree strategy with,
competitors when bidding for (or considering whether or not
to bid for) contracts. This includes agreeing who should win a
bid and manipulating the bidding process to achieve that
outcome.
Example:
 Four property developers eligible to tender for the sale of
a large parcel of land meet and agree that three of the
four will submit non-competitive or non-compliant bids, in
order to assist the fourth company to win the tender.
2. Price fixing
Don’t agree with competitors to fix, maintain, increase or
control the price, including the formula to calculate price,
discounts, rebates, promotions or credit terms, for the supply
of goods or services.
Examples:
 Rival banks agree on the handling fees they will charge
for new mortgages.
 A trade association issues recommendations to
members on prices or publishes fee scales for members.
In this Guide:
nutshell
“don’ts”
► Merger Rule
competition law
authorities?
► Compliance tips
► Key contacts

Four key competition “don’ts”
4. Output limitation
Don’t agree with competitors to fix, maintain, control, prevent,
limit or eliminate the production or supply of goods or services
(including volume and type).
Example:
 Competing construction materials suppliers agree to
restrict the volume of materials available for sale in order
to lower supply and raise prices.
3. Market sharing
Don’t agree with competitors to allocate sales, territories,
customers or markets for the production or supply of goods or
services.
Examples:
 Funds managers from rival firms agree to divide the
market between themselves, with each targeting
separate clients, geographic areas and service offerings.
 Retail tenants reach an agreement as to the nature of
goods they will sell in a particular area.
In this Guide:
nutshell
“don’ts”
► Merger Rule
competition law
authorities?
► Compliance tips
► Key contacts

Information sharing
Exchanging confidential
business information with
competitors may breach
competition law. Caution
should be exercised when
speaking with competitors,
including in informal settings
such as industry and social
events.
Do not discuss…
Do not discuss with
competitors (to the extent
such information is not
publicly available) your
business’s:
• current or future prices
or trends, including
elements of pricing
(such as discounts,
credits or rebates);
• the terms and conditions
on which goods or
services will be supplied
or acquired;
considering exchanging
information through a third
party.
In principle fine to
discuss…
Discussing the following
kinds of information with
competitors is unlikely to
raise competition law
concerns:
• publicly available
information;
• matters of general
interest (e.g.
governmental policy,
regulatory changes,
industry problems,
industry lobbying);
• general economic and
technical issues; and
• socio-political issues and
lobbyism.
• dividing or allocating the
market in terms of
geographic areas or
customers;
• actual or potential
customers, suppliers or
service providers;
• business plans (e.g.
marketing strategies);
• intentions to bid, or not
to bid, for work; or
• preventing or restricting
production or supply.
Be careful
discussing…
Be careful when receiving
and responding to any
communication from a
competitor about behaviour
in the market.
Caution should also be
exercised before
In this Guide:
nutshell
“don’ts”
► Merger Rule
competition law
authorities?
► Compliance tips
► Key contacts

Agreements that may breach competition law
Resale price
maintenance
Suppliers must not set a
fixed or minimum resale
price to be observed by the
buyer of a product. It may
however be permissible to
fix a maximum resale price
or to recommend a resale
price.
Exclusive
distribution
In an exclusive distribution
agreement, a supplier
assigns to a single
distributor the exclusive
right to resell its products in
a particular territory or to
particular customers.
Group
boycotts
Companies may infringe
competition law if they
agree with competitors not
to do business with targeted
individuals or businesses
with the aim of excluding an
actual or potential
competitor from the market.
In most cases, exclusive
distribution agreements will
not give rise to competition
concerns. They will often
have pro-competitive
benefits, including
protecting brand image and
incentivising distributors to
invest in marketing and
customer service.
Competition concerns may
arise if the agreement leads
to reduced competition
between distributors for the
same products/brands,
market sharing, or limiting
market access to potentially
competing distributors.
Joint buying
Joint buying occurs when
companies agree to jointly
purchase property, goods or
services. For example, a
number of companies join
together to purchase goods,
In this Guide:
nutshell
“don’ts”
► Merger Rule
competition law
authorities?
► Compliance tips
► Key contacts

Agreements that may breach competition law
enabling them to compete
against large competitors.
Joint buying in this case will
generally be permissible.
arise if the joint buyers
together have a substantial
degree of market power,
and the joint buying results
in the buying market being
foreclosed to competing
purchasers.
Joint tendering
Joint tendering may not give
rise to competition concerns
if it is carried out in the open
and the arrangement is
known to the party
organising the tender.
The arrangement may be
pro-competitive if it allows
participation by companies
that would not have been
able to make a stand-alone
bid.
arise if the parties could
have made independent
bids, and the joint tendering
leads to a reduction in the
number of potential bidders.
Joint ventures
In general, a joint venture
agreement will be
permissible if it does not
have the object or effect of
harming competition.
It may also be excluded
from the First Conduct Rule
on the basis that it
enhances overall economic
efficiency. This requires an
analysis of the joint venture
and its impact on
competition in the market.
It is recommended that you
consult your legal adviser
prior to entering into any
joint venture arrangements.
In this Guide:
nutshell
“don’ts”
► Merger Rule
competition law
authorities?
► Compliance tips
► Key contacts

Abuse of market power
In this Guide:
nutshell
“don’ts”
► Merger Rule
competition law
authorities?
► Compliance tips
► Key contacts
Companies that have a
substantial degree of
market power in a market
must not abuse that power
by engaging in conduct that
has the object or effect of
Hong Kong.
The Competition
Commission is particularly
concerned with conduct by
incumbents that is focussed
on preventing or limiting the
ability of competitors to
compete.
Examples of conduct that
may amount to an abuse of
market power are set out on
the next page.
What is a
substantial degree
of market power?
A substantial degree of
market power arises where
a company does not face
sufficiently effective
competitive restraints in the
relevant market.
There is no single test to
determine whether a
company has a substantial
degree of market power.
Factors taken into account
include:
• the market share of the
company;
• the level of market
concentration;
• the company’s power to
make pricing and other
decisions;
• countervailing buyer
power; and
• any barriers to entry to
competitors into the
relevant market.

Abuse of market power
Tying and bundling
Tying occurs when a
supplier makes the sale of
one product conditional on
the purchase of a different
product. Bundling occurs
when two products are
discounted if they are
purchased together.
Both these strategies are
often legitimately used in
the market, but may be anti-
competitive if they interfere
with or eliminate a
competitor’s ability to sell
the tied or bundled product.
Refusal to deal
Occurs when a company
with substantial market
power refuses to supply a
product or service, or
refuses to supply on
reasonable terms.
It can also occur when a
company refuses to grant
access to certain facilities
essential to other
competitor’s businesses.
Example
A communications
company that owns the
majority of phone lines
in an area refuses to
provide wholesale
access to that
infrastructure to its
competitors.
Example
A supplier with
substantial market
power in the cement
market offers a lower
price for cement if the
purchaser also buys
aggregates from it.
Predatory pricing
Occurs when a company
sets the price of its goods or
services so low that it
deliberately forgoes profit in
order to force a competitor
out of the market, or to
otherwise “discipline” the
competitor.
Example
A large supermarket
chain temporarily begins
selling staple products at
or below cost price in
order to make it
uneconomical for small
independent grocers to
compete in the same
markets.
Exclusive dealing
Occurs when a supplier
requires a customer to
exclusively or largely
acquire a good or service
from the supplier, or
incentivises a customer to
do the same.
It can also occur where a
purchaser requires or
incentivises a supplier to
supply only to that
purchaser.
Exclusive dealing is a
common commercial
arrangement and in most
cases will not harm
competition.
arise where the object or
effect of the exclusive
dealing arrangement is to
foreclose competitors by
preventing them from selling
to customers.
In this Guide:
► Hong Kong competition
law
nutshell
“don’ts”
► Merger Rule
► Consequences of
breaching competition
law
► Exclusions and
Exemptions
authorities?
► Compliance tips
► Key contacts

Merger Rule
The Merger Rule prohibits
mergers that have, or are
likely to have, the effect of
substantially lessening
competition in Hong Kong.
The rule only applies where
a company involved in the
merger holds, directly or
indirectly, a “carrier licence”
within the meaning of the
Telecommunications
Ordinance.
When is competition
substantially lessened?
The following matters may
be taken into consideration
in determining whether
competition is substantially
lessened:
• the extent of competition
from competitors outside
Hong Kong;
• whether the acquired
company, or part of the
transaction is 40% or more,
it is likely that the merger
will raise competition
concerns and the HKCC is
likely to make a detailed
investigation of the
transaction.
Safe harbours
The Commission has
identified two “safe harbour”
measures to identify
mergers that are unlikely to
substantially lessen
competition. These are
based on an analysis of
post-merger market
concentration.
The Commission notes that
meeting one or both of the
safe harbour thresholds
does not necessarily mean
that the proposed
transaction does not give
rise to competition
concerns.
acquired company, has
failed or is likely to fail in
the near future;
• the extent to which
substitutes are available
or are likely to be
available in the market;
• the existence and height
of any barriers to entry
into the market;
• whether the merger
would result in the
removal of an effective
and vigorous competitor;
• the degree of
countervailing power in
the market; and
• the nature and extent of
change and innovation
in the market.
Generally, for a horizontal
merger where the post-
merger combined market
share of the parties to the
Consultation with
Commission
There is no mandatory
requirement to notify the
Commission of a merger or
proposed merger.
To avoid future
complications, it may be
preferable to consult with
the Commission in relation
to mergers that fall within
the Merger Rule before
completing.
Parties to a proposed
merger may approach the
Commission to discuss the
transaction and seek
informal advice on the
transaction on a confidential
basis. The parties may also
apply to the Commission for
a decision whether the
merger is excluded from the
application of the Merger
Rule.
In this Guide:
nutshell
“don’ts”
► Merger Rule
competition law
authorities?
► Compliance tips
► Key contacts

Consequences of breaching competition law
Fines
Penalties for violations of
Hong Kong competition law
can be severe. They can
be imposed not only on
companies, but also on
employees, agents and
directors who authorise or
participate in the
contravening conduct.
The maximum fine for each
contravention is 10% of the
turnover of the company
group for each year in which
the contravention occurred,
up to a maximum of 3
years. “Turnover” means
the total gross revenues of
the company obtained in
Hong Kong. The company
in breach may be a small
part of a conglomerate but
the maximum fine will be by
reference to the turnover of
the whole group.
Other orders
The Competition Tribunal
may make any other order it
considers appropriate
against a person who has
breached competition law,
including:
• requiring a person to
dispose of operations,
assets or shares of a
company;
• requiring the parties to
an agreement to modify
or terminate an
agreement;
• declaring an agreement
void or voidable; and
• requiring a person to pay
an amount not
exceeding the amount of
any profit gained or loss
avoided as a result of
the contravention.
Banning orders
A director of a company that
contravenes a competition
rule may be disqualified
from acting as a director or
otherwise being involved in
the management of a
company for up to 5 years.
Civil damages
A person who has suffered
loss or damage as a result
of an act that has been
determined to be a breach
of a conduct rule has a right
to commence a private
action against any person
who breached the law or
was involved in the breach.
The Competition Tribunal
may order that damages be
paid to the person who
suffered loss or damage.
In this Guide:
nutshell
“don’ts”
► Merger Rule
competition law
authorities?
► Compliance tips
► Key contacts

Exclusions and exemptions
Exclusion for
agreements that
enhance overall
economic
efficiency
Agreements that enhance
overall economic efficiency
are excluded from the
application of the First
Conduct Rule.
An agreement will be
excluded on this basis if it
meets all of the conditions
below.
Economic benefits
The agreement must
contribute to improving
production or distribution, or
promoting technical or
economic progress, while
allowing consumers a fair
share of the resulting
benefit.
Restrictions
The agreement must not
impose restrictions that are
not indispensable to the
attainment of the economic
benefits.
No elimination of
competition
The agreement must not
afford the companies
concerned the possibility of
eliminating competition in
respect of a substantial part
of the goods or services in
question.
In this Guide:
nutshell
“don’ts”
► Merger Rule
competition law
authorities?
► Compliance tips
► Key contacts

Exclusions and exemptions
Agreements and
conduct of lesser
significance
The First Conduct Rule is
excluded if the combined
turnover of the parties to a
relevant agreement does
not exceed
HK$200,000,000.
However, the exclusion
does not apply to
agreements involving cartel
conduct (i.e. bid-rigging,
price fixing, market sharing
and output restriction).
The Second Conduct Rule
does not apply to conduct
by an entity that has an
annual turnover not
exceeding HK$40,000,000.
“Turnover” means the total
gross revenue whether
obtained in Hong Kong or
outside Hong Kong.
Block exemptions
Companies may apply to
the Commission for a block
exemption in relation to a
particular category of
agreement. If a block
exemption is granted, an
agreement that falls within
the category of agreement
is exempt from the
application of the First
Decisions on
exclusions
A company may apply to
the Competition
Commission for a Decision
as to whether a particular
agreement or conduct is
excluded from the
competition rules.
If the Commission makes a
Decision that the agreement
or conduct is excluded, the
parties will be immune from
any action under the
Ordinance in relation to the
agreement or conduct.
Companies may consider
applying for a Decision
before entering into a
contract that has the
potential to breach the
competition rules (e.g. a
joint venture for the purpose
of tendering for a high-value
project).
Conduct Rule. In order to
issue a block exemption
order, the Commission must
be satisfied that the
category of agreement falls
within the exclusion for
agreements enhancing
overall economic efficiency.
The Commission has not
yet issued any block
exemptions.
Block exemption example - Vertical agreements
In Europe, a block exemption applies for some vertical
agreements. An example of a vertical agreement is one
between seller and purchaser, where each party operates at
a different level in the production chain.
Under the block exemption, an agreement is exempt from
the competition rules if:
• the parties do not have a market share exceeding 30%;
and
• the agreement does not contain “hard core” restrictions
(such as resale price maintenance) or other specified
restrictions.
In this Guide:
nutshell
“don’ts”
► Merger Rule
competition law
authorities?
► Compliance tips
► Key contacts

Who are the competition authorities?
Competition
Commission
The Competition
Commission is responsible
for investigating and
enforcing the competition
rules.
Investigation powers
The Commission’s
investigation powers include
requiring a person to
produce documents or to
answer questions.
The Commission may also
obtain a search warrant to
enter and search premises
for documents that may be
relevant to an investigation
(known as a “dawn raid”).
Enforcement powers
The Commission has a
number of enforcement
options if it considers that a
for orders to be made
against a person, including
pecuniary penalties.
Leniency
The Commission may agree
not to bring proceedings
against a person in
exchange for their co-
operation in an investigation
or proceedings.
The Commission’s policy for
leniency is set out in its
Leniency Policy for
Undertakings Engaged in
Cartel Conduct.
person has contravened a
competition rule.
Commitment
The Commission may
accept a commitment from
a person to take action or
refrain from taking action to
address concerns about a
contravention.
Infringement notice
The Commission may issue
an infringement notice
offering not to bring
proceedings against a
person in exchange for the
person making a
commitment to comply with
the requirements of the
notice.
Warning notice
The Commission must issue
a warning notice before
commencing Tribunal
proceedings against a
person (unless the
contravention involves
cartel conduct).
Tribunal proceedings
The Commission may apply
to the Competition Tribunal
In this Guide:
nutshell
“don’ts”
► Merger Rule
competition law
authorities?
► Compliance tips
► Key contacts

Who are the competition authorities?
Guidelines
The Commission has
published guidelines that
provide useful guidance on
the competition rules. They
are available on the
Commission’s website.
Communications
Authority
The Communications
Authority has concurrent
jurisdiction with the
Commission in respect of
certain companies operating
in the telecommunications
and broadcasting sectors.
Competition
Tribunal
The Tribunal is responsible
for hearing and determining
cases brought under the
Ordinance. It is a specialist
tribunal consisting of all the
judges of the Court of First
Instance (excluding Justices
of Appeal, Recorders and
Deputy Judges).
The Tribunal has jurisdiction
to adjudicate on competition
cases including:
• applications made by the
Commission with regard
to alleged
contraventions, or
alleged involvements in
contraventions, of the
competition rules;
• applications for the
review of Commission
decisions; and
• private follow-on actions
by persons who have
suffered loss or damage
as a result of an act that
has been determined to
be a contravention of a
competition conduct
rule.
In this Guide:
nutshell
“don’ts”
► Merger Rule
competition law
authorities?
► Compliance tips
► Key contacts

Compliance tips
Compliance can be distilled
into three basic steps:
Identify risks, mitigate risks
and regular review.
Identify risks
Review business
practices
Review practices to identify
potential competition law
• collaboration with
competitors (in particular
cartel conduct); and
• sharing of information
with competitors.
Review contracts
Review existing contracts to
determine whether there are
any “red flag” provisions
risks your business faces.
High-risk business areas
include sales and
management roles that
involve regular contact with
competitors and trading
partners.
Business risks include:
• lack of awareness of
competition law;
14 December 2015 – even if
entered into prior to that
date. When preparing new
agreements with suppliers
and customers, consider
whether any competition
law concerns arise.
Interview key staff
Interview staff in high-risk
business areas to identify
any competition risks. Note
that competition law can be
infringed even by very junior
members of staff.
Compliance audit
Carry out an internal audit
to identify potential
competition law issues.
Consider engaging external
counsel to obtain privilege
protection. If necessary,
make improvements to
policies and practices
following the audit.
that need to be
assessed
against
competition law.
Particular
attention should
be given to
agreements of
the kind referred
to on pages 4 to
10 of this Guide.
The new law
applies to all
agreements in
force from
In this Guide:
nutshell
“don’ts”
► Merger Rule
competition law
authorities?
► Compliance tips
► Key contacts

Compliance tips
for work and contract
managers. Refresh this on a
regular basis.
Take action if a breach is
identified
Take all necessary action to
rectify any breach as quickly
and practicably as possible,
and immediately seek legal
advice.
Prepare for investigations
Put in place protocols for
dealing with investigations
and raids by the
Competition Commission.
Ensure that staff members
know what role they have to
play during a “dawn raid”
(whether senior executives
or junior staff such as
receptionists).
Consider running a “mock
dawn raid” to prepare staff.
Mitigate risks
Compliance manual
Develop a competition
law compliance manual
and a “dos and don’ts”
pamphlet for staff.
Circulate within the
business at all levels.
Senior management
should endorse the
documents and make it
clear that they support
the company’s
compliance efforts.
Competition law
training
Train relevant staff about
potential competition law
“hot-spots”. In particular,
train staff who may
interact with competitors
and customers, those
responsible for bidding
Complaints handling
Have in place effective
complaints handling
procedures. Competition
Commission investigations
may be triggered by
complaints from the public.
Expert advice
Each company should
have access to competent
legal counsel. Legal
advice should be obtained
whenever the company
intends to engage in
conduct that may raise
competition concerns.
Regular review
Regularly review your
business practices and
compliance strategy.
Monitor developments in
competition law and
refresh your compliance
policies as needed.
In this Guide:
nutshell
“don’ts”
► Merger Rule
competition law
authorities?
► Compliance tips
► Key contacts

Key contacts
Neil Carabine
Partner (KWM Australia)
Registered Foreign
Lawyer (Hong Kong)
T +852 3443 1260
neil.carabine@hk.kwm.com
Edmund Wan
Partner
T +852 3443 1119
edmund.wan@hk.kwm.com
Hong Kong
Martyn Huckerby
Partner
T +86 21 2412 6018
martyn.huckerby@cn.kwm.com
China
Sharon Henrick
Partner
T +61 2 9296 2294
sharon.henrick@au.kwm.com
Australia
Philipp Girardet
Partner
T +44 20 7111 2055
philipp.girardet@eu.kwm.com
Europe
In this Guide:
nutshell
“don’ts”
► Merger Rule
competition law
authorities?
► Compliance tips
► Key contacts
Richard Mazzochi
Partner
T +852 3443 1046
richard.mazzochi@hk.kwm.com
Corporate & Securities Banking & Finance Dispute Resolution

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KWM Hong Kong Competition Law Guide (EN)

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