The maintenance of fair market competition is a practice taken very seriously in jurisdictions around the globe, and until now Hong Kong has had minimal legislative means through which to control anti-competitive conduct. At the forefront of any competition law is the principle of protecting consumers and allowing entrepreneurs with new ideas to compete in a market economy. Generally speaking, competition law (or “anti-trust law”, as it is known in the United States) comprises of three main elements:
- The prohibition of agreements or behaviour which might restrict free trading or fair competition
- Preventing a company with significant market power from behaving in a manner in which that power is abused so as to prevent any legitimate competition from developing
- The control and supervision of mergers, acquisitions or joint ventures between major corporations which could lead to unfair market dominance and prevent other businesses from being able to compete.
Practices which are banned include, but are not limited to, the formation of cartels, predatory pricing, refusing to deal or price fixing. The Competition Ordinance is consistent with the above approach, albeit with slight differences and drawing from legislative features of major jurisdictions such as Europe and the United States. The Ordinance itself states that its purpose is to “prohibit conduct that prevents, restricts or distorts competition in Hong Kong; to prohibit mergers that substantially lessen competition in Hong Kong; to establish a Competition Commission and a Competition Tribunal; and to provide for incidental and connected matters”.
In addition to identifying the establishment of a Competition Commission in its statement of purpose, the Ordinance also contains provisions requiring as such. As discussed in this paper, the Competition Commission will be provided with broad investigatory powers in order to monitor and investigate claims of anti-competitive behaviour and suspected violations of the Ordinance. As a comparison, this body is likely to have the same influence and power as the Securities and Exchange Commission has in regulating the financial services industry.
Whilst having such a status is still a long way off for the Competition Commission, companies need to begin planning now in order to raise awareness and prepare for conducting business in Hong Kong in this new era.
Competition law in other jurisdictions
Breaches of competition laws, particularly by larger organisations, are often the subject of significant attention of authorities in various countries, such is the perceived seriousness of this type of behaviour. It is a subject area taken very seriously by many jurisdictions around the world, with the European Union and the United States often considered to be at the forefront in monitoring and regulating businesses under their respective laws. Just as with the Ordinance in Hong Kong, most countries embrace the main policy areas of cartel prevention, monopolies and merger control. One of the key differences between jurisdictions is that of the varying levels of enforcement. In recent years, competition law breaches have garnered more attention and have been taken more seriously, with companies and their senior management susceptible to enormous financial penalties and even prison sentences. Understanding the nature of enforcement in these leading jurisdictions is important to gain an indication of how the Competition Commission is likely to implement the legislation in the long term, and how compliance programmes should now be planned accordingly.
Article 105 of the Treaty on the Functioning of the European Union provides the European Commission with broad powers to monitor, investigate and prosecute competition breaches. Fines imposed by the European Commission for infringement have been as high as ten percent of a company’s annual worldwide turnover. Fines have even been imposed where the illegal purpose of an infringement was not actually achieved; that is, companies engaging in price fixing or similar will still be susceptible to conviction even if the benefits for the participants were not realised.
In 2005, the European Commission issued fines of over €43 million to various thread producers from Germany, Belgium, the Netherlands, France, Switzerland and the United Kingdom due to the formation of a cartel. It was discovered that between 1990 and 2001 these companies took part in regular meetings and had bilateral contacts to agree on simultaneous price increases and/or target prices. They exchanged sensitive information on price lists or prices that were being charged to various consumers to avoid undercutting the incumbent suppliers’ prices and arrange customer allocation.
In 2008 a number of international removal companies were found to have participated in a cartel in Belgium, and as a result the European Commission issued fines of more than of €31 million. Between 1984 and 2003 the companies had fixed prices, shared the market and manipulated the procedures for submission of tenders by issuing false quotes to customers and through a compensation system for rejected offers.
Adhering to the notion that free and open markets are the foundation of a vibrant economy, the United States has some of the strictest measures to counteract anti-competitive conduct. Under the Sherman Antitrust Act 1890 (the Sherman Act), “every contract, combination, or conspiracy in restraint of trade” and any “monopolization, attempted monopolization, or conspiracy or combination to monopolize” constitutes behaviour that is highly detrimental to the economy, and therefore highly illegal. The penalties for violating the Sherman Act can be severe, and despite the majority of enforcement actions being civil claims, criminal penalties are also available. Individuals and businesses that are in contravention of this legislation can therefore face prosecution from the Department of Justice. Criminal prosecutions are typically limited to more blatant and intentional violations, such as when competitors have an arrangement or understanding to fix prices. The Sherman Act imposes criminal penalties of up to $100 million for a corporation and $1 million for an individual, along with up to ten years in prison. Under United States federal law, the maximum fine may be increased to twice the amount the conspirators gained from the illegal acts or twice the money lost by the victims of the crime, if either of those amounts is over $100 million.
In June 2008, five major international airlines pleaded guilty to the US Department of Justice for fixing prices on air cargo rates since as early as 2001. The airlines’ conduct, which included discussing and implementing cargo price-fixing, was in direct contravention of the Sherman Act. The five companies were fined more than US$500 million in total. Air France-KLM, which had operated under common ownership by a holding company since May 2004, was fined $350 million (out of the total $504 million). Prior to 2008, it had been the second-highest fine levied in a criminal antitrust prosecution. Since 2007, various major international airlines were sentenced to hundreds of millions of dollars in criminal fines due to similar violations; these companies included Korean Air, British Airways and Japan Airlines.
Executives or officials responsible for conspiracies are also subject to penalties under the United States antitrust law. In another price-fixing case, Kazuhiko Kashimoto, executive of Japan-based Yazaki Corporation, plead guilty for his role in fixing prices of automotive wire harnesses installed in US-manufactured cars. He was sentenced to 14 months in a United States prison and fined US$20,000. Kashimoto was convicted of fixing, stabilizing and maintaining the prices of automotive wire harnesses and related products sold to customers in the United States and other overseas locations. Including Kashimoto, six companies and ten individuals have been charged in the US Department of Justice’s on-going investigation into price fixing and bid-rigging in the auto parts industry. Additionally, seven of the individuals have been sentenced to pay criminal fines and serve jail sentences ranging from a year and a day to two years each.
The Hong Kong legislation
Prior to the Ordinance being passed on 14 June, only the telecommunication and broadcasting sectors in Hong Kong had been subject to any antitrust regulations. Besides this, matters concerning market competition and consumer rights were dealt with by the Consumer Council, whose powers are limited only to collecting and publishing information about goods and services, and giving policy suggestions to the government. The Ordinance is therefore widely considered be a great leap towards better market practices and bringing Hong Kong up to speed with the rest of the world.
The Ordinance specifies that there is to be a transitional period before the enforcement commences (the exact date of which is yet to be set by the Secretary for Commerce and Economic Development), although the expectation is that the application of the Ordinance will not begin in earnest before 2014 as the Hong Kong Government will be implementing a phased-in approach. Indications are that the institutional provisions will come into force quickly to allow the Competition Commission to be set up and to commence work on guidelines. The Competition Commission will then conduct further public consultations on its proposed enforcement guidelines. The substantive provisions of the Ordinance will only come into full effect after these guidelines have been finalised, with estimates at this stage projecting late 2013 or early 2014.
As previously identified, the Ordinance provides for the establishment of the Competition Commission (which will conduct investigation services as well as provide a prosecution function) as well as a Competition Tribunal (which will sit as a division of the High Court). The Competition Commission will be granted full-range power to perform functions such as subpoenaing, document seizure, conducting surveillance operations and legalising surprise on-site inspections. Judging by similar bodies in other jurisdictions, such as the United States or Australia, the Competition Commission’s powers are likely to be extremely broad.
Serious anti-competitive conduct
An aspect of the Ordinance that is likely to cause confusion is the application of the term “serious anti-competitive conduct”. If conduct is identified as such it will become subject to a stricter enforcement regime from the Competition Commission. Conversely, behaviour that does not fall within this ambit will, at first instance, attract only a warning from the Competition Commission. Specifically, “serious anti-competitive conduct” is defined in the Ordinance as any of, or a combination of, the following:
- Fixing, maintaining, increasing or controlling the price for the supply of goods or services
- Allocating sales, territories, customers or markets for the production or supply of goods or services
- Fixing, maintaining, controlling, preventing, limiting or eliminating the production or supply of goods or services
Just how the Competition Commission will fully categorise particular behaviour as “serious” will undoubtedly be addressed in the impending guidelines; however, in identifying the above it is made clear what practices are of particular concern, and governance and compliance programmes should be adjusted to reflect this.
Understanding the key prohibitions
First conduct rule: Prohibition on agreements and concerted practices that prevent, restrict or distort competition.
This is an all-encompassing provision that sets the requirements for the manner in which competitors must interact with each other, and aims to dispel any form of cartel behaviour. As a basic guide, company employees should not:
- discuss prices, discounts, supply terms or any other terms of business with their competitors
- agree to limit production, markets, technical development or investments
- agree with competitors to share markets, territories, customers or sources of supply
- exchange commercially-sensitive information with competitors, such as future prices or quantities.
Interestingly, the Hong Kong Government has indicated that most vertical agreements are likely to be exempted, unless the supplier acts as a “conduit” (also known as a “hub-and-spoke” arrangement) to coordinate between competitors, or if the supplier has market power to foreclose competitors. Exclusions provided for in the Ordinance include agreements between businesses (defined in the Ordinance as “undertakings”, which are any entity engaged in an economic activity) with combined annual global turnover below HK$200 million, and agreements undertaken to comply with legal requirements or entrusted by the government to enhance economic efficiency or to provide services of general economic interest.
Second conduct rule: Prohibition of the abuse of market power
In its simplest sense, an organisation’s conduct will be considered to be an abuse of market power where it is “exclusionary” – that is, preventing competitors (or potential competitors) from competing effectively or driving them out of the market. It should be noted that a “substantial degree of market power” is yet to be fully defined by the government. Indications are that a business with 25 percent or less market share would not fall within this category. It also appears that this will be a lower threshold than the “dominance” test adopted in the European Union, China, Singapore and other jurisdictions. The Hong Kong Government’s rationale is to apply the law to sectors with two to three big players. Examples of abusive conduct include, but are not limited to:
- predatory pricing
- loyalty enhancing
- rebate schemes
- exclusive dealing
- tying or bundling
- refusing to supply an essential input to a competitor.
Exclusions to this provision include any business with an annual global turnover less than HK$40 million, and any agreements undertaken to comply with legal requirements, or by businesses entrusted by the government to provide services of general economic interest.
Mergers and acquisitions in the telecommunications industry
Just as in other jurisdictions, the Ordinance provides for the prohibition of mergers and acquisitions that are deemed to have the effect of lessening competition. However, for Hong Kong such provisions are only applicable to telecommunications licensees. At this stage, the intention is that the government will broaden the scope of this application when it determines that such an action is appropriate.
Procedures and penalties
Warning and infringement notices
If an alleged infringement of the Ordinance does not amount to “serious anti-competitive conduct”, then the Commission must issue a warning notice requesting the business to cease within a specified period, whatever conduct is breaching the Ordinance. Following this, the Commission may institute proceedings in the tribunal if the illegal behaviour continues.
If the infringement amounts to “serious anti-competitive conduct”, the Commission can choose to bring the proceedings in the tribunal straight away, or may issue an infringement notice which sets out evidence and the terms on which it would be willing to settle the matter without bringing the proceeding to the tribunal.
Penalties that may be faced by parties found to be in contravention of this law include:
- financial penalties of up to ten percent of a company’s annual Hong Kong turnover (this is limited to the amount equivalent to three years of infringement)
- damages awarded to aggrieved parties
- injunctive relief
- disqualification orders against directors.
Third parties who suffer losses as a result of the infringement may also be eligible to bring a private action for damages against the contravening business. The ruling of the tribunal will also be binding in the follow-on action, and the claimant would need to prove only the causation aspect and quantify damages. However, private actions cannot commence unless the tribunal has made a final decision on the case. The purpose of this approach is to protect small enterprises, as they may not have the financial capacity to stand opposition in private actions in addition to prosecution.
From experience of similar implementations in other jurisdictions it is reasonable to assume that the damage to an organisation’s reputation resulting from breaches of competition provisions can be severe and take many years to recover from.
Your compliance programme
For many businesses in Hong Kong, building a programme which complies with competition law principals will be a very unfamiliar concept. Utilising four key steps to manage risks and build and manage a general compliance programme while also incorporating the key aspects of the Ordinance is an essential strategy for businesses that needs to be put in place now.
This section of the paper will demonstrate how organisations should approach dealing with this new issue internally.
The leadership group within your business must be totally briefed on the requirements and risks posed by the Ordinance as they apply to your organisation. Following this briefing the board and executive management team will need to fully commit to endorsing the initiatives required for Ordinance compliance. Without the commitment of the board and senior management, your company will not be able to manage this issue in a sufficient manner.
The “commitment” phase requires the consideration of a number of factors. First, the CEO and board need to be fully aware of the Ordinance and the risks associated with potential breaches. Compliance with this legislation needs to be mapped alongside the company’s businesses values and communicated to all of those at the top. The process by which compliance with the Ordinance will take effect needs to be aligned with the priorities and values of the business, and also linked to its governance framework. Perhaps more importantly, compliance with the Ordinance needs to be weighed up in contrast to the risk appetite and core functions of the company. Factors that need to be considered include the size of the market in which your business operates, the number of players in that market, your company’s market share, whether the “front-end” people of your business interact with competitors regularly (if at all), and so on. Senior management must be fully aware of all the facts and necessary information; this must be assimilated to the organisation’s regular processes for assessing and prioritising risk areas.
Commitment from the leadership group is required to obtain the resources necessary to run your compliance programme; their endorsement is requisite for all levels of the business to have a positive approach to complying with legislation and internal policies. An important exercise that should be undertaken to facilitate this is clearly working out the objectives of the business and the objectives of the compliance programme in the context of the Ordinance. It is critical at this point to be able to demonstrate the value of compliance to the business and how an effective compliance programme facilitates better business, new opportunities and growth. Organisations that stumble at this point typically view compliance in general as a business inhibitor, an unwanted cost centre and a generally non-productive overhead.
At present, implementing your company’s compliance programme to address the Ordinance will be particularly challenging, as the concept of a competition law and its specifics will still be largely unfamiliar to many people across an organisation in Hong Kong. Educating employees on this topic will be a crucial step in raising awareness and understanding, thereby mitigating risk of breaching the Ordinance.
Simply inserting the provisions of the Ordinance into existing policies and advertising the changes is insufficient. All policies and procedures need to incorporate this new legislation, but it must be tailored to the needs of the business and the particular roles of the target audience, whether they are third parties, employees or other stakeholders. The responsibilities of various units within the business will need to be defined and communicated, relevant training programmes developed and implemented around this allocation. Running a one-off seminar on the Ordinance and the changes involved will only have a limited impact, and will not form the basis for a credible defence in the case of any Ordinance breach. The competencies of those who are being trained must be identified and measured, and the specific requirements of the legislation conveyed to all levels of competency.
Training on this legislation is, however, only one small step; behavioural change throughout an organisation must also be facilitated. As identified previously, this begins with the “tone from the top”: senior management leading by example. The motivating factors of individuals complying with the competition laws must be identified – simply telling people to not behave in a certain way is largely ineffective. Rather, it should be asked what motivates and drives employees to perform well, and what can be done to align those motives with the objectives of the compliance programme. One solution may be to implement reward mechanisms or commence a mentoring programme. These, of course, are fairly long-term solutions and require patience and perseverance as awareness of the Ordinance and its effects on the business grows.
3. Monitoring and measurement
Monitoring the effectiveness of the competition compliance procedures and policies will be a crucial phase in ensuring the success of an organisation’s risk management. Time should be devoted to assessing whether the message is getting across to all relevant groups, and if not, revising whatever elements would make it more effective. The monitoring must also be backed up by measurement, reporting and accurate document keeping.
The traditional approach of conducting routine audits on the behaviour of various people in an organisation is not in itself a useful tool of monitoring and measuring how effective your compliance programme is with regards to controlling competition risk. In most large companies there is a host of “corporate people” doing regular rounds of audits and accompanying this there is often a fair degree of frustration and negativity. Often, too many audits are arranged around busy periods and can appear to just be asking the same questions of the same limited resources. Most audits are done by unqualified financial-based
auditors that simply miss the underlying compliance issues. For example, an audit might pick up some indicators of anti-competitive behaviour, but the reality is that it is individual conduct that poses the most risk. Who are people in the company liaising with? How much contact do they have with their competitors? Are they incentivised and rewarded appropriately so as to avoid the pressure to collude and engage with competitors and other organisations? Behaviour like this is almost impossible to detect by simply looking at document trails or business-as-usual audits. Companies need to consider different approaches such as conducting “healthchecks” or “integrity circles” that are less invasive and support a growing compliance adoption throughout their entire organisation, rather than the more traditional finger pointing and allocating blame.
4. Continual improvement
As businesses in Hong Kong learn to adjust to these laws, so too will governance structures and compliance programmes. It may be several years before the Commission first prosecutes for breaches of the Ordinance, but it is clear that when the inevitable does occur, the parameters by which they operate will be further defined. Changes in the external environment and how the laws are being interpreted by the courts must be captured in internal policies and procedures. The downfall of many companies is that their internal control structures are simply unable to adapt to this changing environment.
Particularly with multinational organisations, there is a common problem that business needs are generally seen at a global or corporate level, even though the local needs might be different. Compliance is often adapted to meet local business needs which can arise due to lack of engagement and lack of communication. Firms may set timelines and targets that are often reflective of just getting a policy implemented or achieving 100 percent training, but they are often not expanded to thinking about longer-term behavioural changes. Just because every employee has been trained does not necessarily mean that a compliance programme is effective.
A continual improvement initiative will regularly assess where a company’s compliance programme sits in contrast to that of its peers, the local business community, and as perceptions of the Ordinance evolve. Without this approach of continual improvement, the risks of those associated with the organisations breaching the Ordinance increase significantly.
Since the public consultation for the Competition Ordinance began, the majority of concerns have been raised by small-to-medium enterprises (SMEs), as opposed to larger corporations. Arguments have been put forward that the negative effects for SMEs outweigh the positive, claiming that the Ordinance provides little deterrence for larger corporations. Additional discontent has arisen due to the fact that for first violations in the non-serious category only warnings are given, and that multinational corporations are only fined for ten percent of annual turnover in Hong Kong, opposed to globally. There is also the discontent that compliance costs will increase disproportionately to business growth and opportunity.
The best approach for companies is therefore to deal with these potential concerns from the outset at the first board and executive briefing. Businesses in Hong Kong need to know that this Ordinance is now law and will soon be in operation – confirming is not optional. Many of the details as to how this ordinance will operate are yet to be finalised, but that in no way means preparations for adapting a compliance programme should not begin now. The most effective programmes don’t simply conform to what the rules state – they go beyond it. Crucial to reducing the risk of any breach is following the four key steps outlined in this paper, and continually adapting each of these phases as the implementation of the ordinance evolves. The commitment, implementation, monitoring and improvement cycle is essential to staying one step ahead of potentially disastrous criminal and civil penalties as a result of breaches of the Ordinance.