China Law Insight : China Business and Intellectual Property Lawyers & Attorneys : King & Wood Law Firm : IP, Arbitration, Litigation, Securities, Foreign Investment

 The following are some details of what has been alleged:

• several commercial banks have come together and agreed to raise various fees and charges to similar amounts (including bill printing fees, small account management fees and inter-bank ATM fees);
• it was alleged that this collusive conduct was facilitated by meetings hosted by the China Banking Association between 2005 and 2010.

It remains to be seen if the NDRC will formally launch an investigation into this issue. We note that currently the China Banking Regulatory Commission (CBRC) and the NDRC are putting together rules which would regulate the service fees of commercial banks (entitled “Interim Measures on the Administration of Service Fees of Commercial Banks) (service fee rules). These service fee rules, once enacted, will no doubt provide clearer guidance in relation to what conduct is permitted, both pursuant to the proposed rules as well as pursuant to the AML.

[1] Including in the Beijing Daily  and in the Global Times.

• From 2008 to June 2010, MOFCOM accepted 140 merger review applications for review. Out of these 140 merger review applications, MOFCOM has completed review of approximately 90% of the cases.
• 95% of these merger reviewed were approved unconditionally. In the European Union (EU) and in the United States (US), on average only 93% of mergers are approved unconditionally.
• Thus far, only 5 mergers have been approved with conditions and only 1 merger was rejected (Coca-Cola’s proposed acquisition of Huiyuan).
• The merger control review process in China is divided into 3 stages. The first stage of review lasts no more than 30 days; the second stage of review spans for a further 30 to 90 days; and the third stage of review spans for a maximum of 60 days after the second stage. The entire merger control review process is not to exceed a total of 180 days.
• Out of all the mergers reviewed, more than half of the mergers were cleared within the first stage; the remainder of the mergers were cleared within the second and third stages.
• Shang Ming noted that the proportion of mergers entering the second stage of review was somewhat higher than that in the US or the EU. Shang Ming commented that at times, merger reviews enter the second stage of review not due to antitrust issues but due to process issues (e.g. MOFCOM undertaking public consultations etc).
• 62% of the merger applications received by MOFCOM are horizontal mergers; 14% of the merger applications received by MOFCOM are vertical mergers; and the remainder of the merger applications received by MOFCOM are conglomerate mergers.(2)
• A majority of the cases reviewed by MOFCOM involved business operators in the manufacturing industry. In addition, three-quarters of mergers accepted for review by MOFCOM involved public listed business operators.
• Shang Ming noted that some commentators believe that Chinese State Owned Enterprises (SOEs) obtain “special treatment” from MOFCOM pursuant to merger clearances. Shang Ming emphasised that this was not the case. All business operators, including SOEs, privately-owned companies and foreign companies are treated equally by MOFCOM.
• MOFCOM has received more merger clearance applications which involve foreign companies (as opposed to merger clearance applications which involve domestic companies only). Shang Ming said that this could be because the “financial strength” of these multinational foreign companies trigger the turnover notification thresholds more easily. In addition, Shang Ming also noted that since the global financial crisis, foreign multinational companies have been quite active acquirers.

It is timely for MOFCOM to conduct a stock-take of the merger control process in China, since its inception in 2008. It is interesting that a significant number of merger applications received by MOFCOM spill into the second stage of review. Shang Ming’s explanation that some of these “second stage review” merger applications do not necessary involve complex antitrust issues, but rather “process” issues, is also interesting.

In light of the above, companies that are interested in mergers or acquisitions that meet the turnover thresholds pursuant to the AML should ensure that they factor in the notification and review periods into their planning processes.

(1) The AML was enacted on 1 August 2008.

(2) The term “conglomerate mergers” refers to mergers involving businesses that operate in different product markets (i.e. they are neither “vertical” nor “horizontal” mergers).

The primary objectives of the Bill are two-prong:

• to prohibit conduct which prevents, restricts or distorts competition in Hong Kong; and
• to prohibit mergers that substantially lessen competition in Hong Kong.
   

Who does what?

The Bill provides for a judicial enforcement model, such as applies in Australia and New Zealand, with a Competition Commission (the Commission) and a Competition Tribunal (the Tribunal) established to enforce the Bill.

The Commission's primary role is to investigate suspected breaches of the CO. The Commission may commence investigations:

• on its own initiative;
• upon receipt of complaints; or
• on referral from the Hong Kong Government (the Government) or a court.

The Commission will be led by a Chairperson and will consist of at least 5 members (including the Chairperson). Commission members are expected to have expertise or experience in industry, commerce, economics, law, small and medium enterprises or public policy.

The Tribunal's primary role is to adjudicate on whether breaches of the CO have occurred. The Tribunal will also hear appeals from the Commission on a limited set of matters where the Commission can make binding determinations such as on exemption or exclusion applications.

The Tribunal may hear cases brought to it either by the Commission or by private parties.
All judges of Hong Kong's Court of First Instance are Tribunal members. The Tribunal will formally be a division of the High Court. The Chief Executive in Council (CE) will appoint a President to lead the Tribunal. Each case will be led by a presiding Tribunal member who will sit with other judicial members. The Tribunal may also appoint one or more assessors or non-judicial persons to assist in the adjudication of cases.

The separation of investigative and adjudicative functions (between the Commission and the Tribunal) provides a good system of checks and balances appropriate in a small jurisdiction.

The following diagram outlines the institutional framework outlined by the Bill.

 What does the Bill prohibit?

The Bill prohibits three categories of conduct:

• the First Conduct Rule prohibits undertakings (a broad term encapsulating any entity engaging in commercial or economic activities(3) ) from engaging in agreements, concerted practices or decisions with the object or effect of preventing, restricting or distorting competition in Hong Kong;
• the Second Conduct Rule prohibits undertakings with a substantial degree of market power from abusing that power by engaging in conduct which has the object or effect of preventing, restricting or distorting competition in Hong Kong; and
• the Merger Rule prohibits undertakings from directly or indirectly carrying out a merger that has, or is likely to have, the effect of substantially lessening competition in Hong Kong. The Merger Rule will apply only to undertakings who are licensees in respect of the telecommunications industry only. This is a continuation of the current merger regime applicable to telecommunications licensees in Hong Kong, although as the Government has said, the Merger Rule has been “modernised”. (4) 

The First Conduct Rule and the Second Conduct Rule are known collectively as the Conduct Rules. The First Conduct Rule, the Second Conduct Rule and the Merger Rule are collectively known as the Competition Rules.

Exclusions and exemptions

Certain conduct or agreements may be excluded from the application of the Conduct Rules, provided these fall into the categories of conduct and agreements set forth in the exemption and exclusion framework in the Bill.

The following table indicates the exemption and exclusion grounds under which conduct or agreements may be exempt, and which of the Conduct Rules these would be exempt or excluded from.

The exclusion grounds in (1) to (3) (in the table) above apply without the need for a Commission determination applying the exclusion to an undertaking. This allows scope for undertakings to undertake self-assessment to determine if their conduct or agreements fall into the exclusion grounds.

In respect of the exemption grounds listed in (4) and (5) above, undertakings would not be able to undertake self-assessment to determine if their conduct or agreements fall under those grounds, until the CE makes an order indicating the sorts of conduct or agreements which may be exempt based on those grounds.

There is only one exclusion ground in relation to the Merger Rule. The Merger Rule does not apply to a merger if the economic efficiencies that arise or that may arise from the merger outweigh the adverse effects caused by any lessening of competition in Hong Kong.

Commission's role in exclusions

There are two avenues by which the Commission can provide for more certainty about the application of exclusions.

First, the Commission has the power to issue Block Exemptions which exclude categories of agreements from the First Conduct Rule, based on the exclusion ground listed in (1) in the previous table.

Second, if undertakings wish for clarification or greater certainty as to whether their agreements or conduct are exempt or excluded, they would be able to seek clarification from the Commission through a decision process. If the Commission makes a decision that conduct or agreements are excluded or exempt from the application of either or each of the Competition Rules, then those conduct or agreements are immune from any action pursuant to the Bill (including both public and private enforcement action). However, the Commission may rescind a favourable decision if there has been a material change of circumstances since the decision was made or if the information in which it has based its decision was incomplete, false or misleading.

Government and statutory bodies

The Competition Rules will not apply to the Government and to statutory bodies in Hong Kong. However, statutory bodies may be brought within the scope of the Competition Rules through regulations. There are some 500 statutory bodies in Hong Kong with very diverse functions. The Government has yet to reveal which statutory bodies could be subject to the Competition Rules.

Enforcement by the Commission

The Commission will be vested with a full range of investigative powers, including the power to require production of documents and information, the power to require persons to attend an interview before the Commission and the power to enter and search premises under a court warrant. The Commission may only conduct an investigation if it has reasonable cause to suspect that a contravention of a Competition Rule has taken place, is taking place or is about to take place. There are criminal penalties for non-compliance with the Commission’s investigative powers.

An innovation in the Bill is the power to issue infringement notices to undertakings alleged to have breached Conduct Rules. The Commission may only issue an infringement notice if it has reasonable cause to believe that a contravention of a Conduct Rule has taken place; and only if it has not yet brought proceedings in the Tribunal in respect of the alleged contravention. The infringement notice would describe the alleged infringing conduct, the evidence on which the Commission has formed its view and the terms in which the Commission would be prepared to settle the matter, including the payment of a specified amount not exceeding HK$10 million (approximately US$1.3 million). Undertakings who receive the infringement notice could choose not to accept the notice without any adverse inferences being drawn, in which case the Commission could proceed to institute proceedings before the Tribunal. It is likely that the Commission would issue infringement notices in respect of “smaller” or “minor” infringements of the Conduct Rules.

In addition:

• the Commission may accept commitments from a person to take any action or refrain from taking any action that the Commission considers appropriate to address its concerns about a possible contravention of a Competition Rule. If the Commission accepts a commitment, it may agree:
  • not to commence an investigation or if it has commenced an investigation, to terminate it; or
  • not to being proceedings in the Tribunal or if it has brought proceedings, to terminate them (5); and
• the Commission may also enter into leniency agreements with individuals and corporations who have breached the Bill, but wish to mitigate their penalties by cooperating with the Commission. The Commission cannot bring proceedings against a party which is the beneficiary of a leniency agreement (which could include employees of a company which has made disclosure to the Commission).

Penalties

The Tribunal is vested with the power to apply a full range of remedies for contraventions of the Competition Rules. These include pecuniary penalties not exceeding 10% of the turnover of the offending undertaking; disgorgement orders; awards of damages to aggrieved parties; interim injunctions during investigations or proceedings; injunctions and disqualification orders against directors. The Tribunal may only impose pecuniary penalties on application by the Commission.
Private rights of action

The Bill provides for private actions to be brought by persons who have suffered loss or damage as a result of a contravention of a Conduct Rule. Such private actions:

• could be brought by a private party, following on from a Tribunal determination (i.e. a “follow-on action”); or
• could be brought independently of a Tribunal determination by a private party (i.e. a “stand-alone action”).

In relation to follow-on actions, private parties do not need to prove that the breach of the Conduct Rule occurred (but merely that they have suffered loss or damage as a result of the contravention of the Conduct Rule). In relation to stand-alone actions, private parties would need to prove that the contravention of the Conduct Rule occurred, before any loss or damage assessment can be undertaken.

Private rights of action

The Bill provides for private actions to be brought by persons who have suffered loss or damage as a result of a contravention of a Conduct Rule. Such private actions:

• could be brought by a private party, following on from a Tribunal determination (i.e. a “follow-on action”); or
• could be brought independently of a Tribunal determination by a private party (i.e. a “stand-alone action”).

In relation to follow-on actions, private parties do not need to prove that the breach of the Conduct Rule occurred (but merely that they have suffered loss or damage as a result of the contravention of the Conduct Rule). In relation to stand-alone actions, private parties would need to prove that the contravention of the Conduct Rule occurred, before any loss or damage assessment can be undertaken.
 

(1) King & Wood and Gilbert + Tobin are Consultants to the Hong Kong Government on the cross-sector competition law, however, the views expressed in this article are those of the two firms’ alone.

(2) Currently, there are competition law rules and regulations in Hong Kong which apply to licensees in the Telecommunications and Broadcasting industries only. There are transition arrangements in the Bill which provide for the smooth transition of these sector-specific competition laws to the cross-sector competition law. For instance, when the Bill is enacted as law, the Broadcasting Authority and the Telecommunications Authority will possess concurrent jurisdiction with the Competition Commission to enforce the prohibitions in the law.

(3) Similar terminology is used in the United Kingdom and Singapore competition laws.

(4) The Government has also announced that there is a possibility that the Merger Rule will apply more broadly in the future.

(5) If a person accepts an infringement notice, this could be done using the commitment framework.

The Policy Environment

In the last decade, the percentage of corruption cases which Chinese authorities have investigated and which arise from international trade or involve foreign business entities is surprisingly high, accounting for almost two thirds of investigations that have resulted in a penalty. On June 22, 2008, the CPC Central Committee promulgated its 2008-2012 Work Plans for Establishing and Improving the System of Corruption Punishment and Prevention, which focus on the investigation and punishment of commercial bribery committed by foreign business entities operating in the PRC.

The Legal Framework

For many business operators, their counterparts in China may include "state functionaries". Article 93 of the PRC Criminal Law, amended on March 14, 1997, defines this concept broadly. It includes persons who hold office in state organs, employees of state-owned companies and others who perform official duties according to the law. Foreign companies supplying infrastructure, teaching materials and hospital equipment in the Chinese market are examples of，those which deal with state functionaries on a regular basis.

With this concept in mind, Article 389 of the PRC Criminal Law makes it a crime for an individual or unit to give "money or property" to a state functionary for the purpose of obtaining an undue advantage.

On November 20, 2008, the Supreme People's Court and the Supreme People's Procuratorate jointly issued their Opinion on Some Issues Concerning the Application of the Law in Criminal Commercial Bribery Cases ("Opinion"). In the Opinion, the concept of "property" in the crime of bribery under the PRC Criminal Law was clarified to include any "property interest" that can be quantified with a monetary value.

Payment or reimbursement of travelling expenses is certainly caught by the broader concept of "property interest" and so is the provision of meals. Strictly speaking, the provision of such benefits, even of a low value, could attract criminal liability, as long as the provider had the requisite intent to obtain an undue advantage.

In reality, there is a monetary threshold for criminal prosecution. According to the Threshold for Criminal Prosecution in Bribery Cases issued by the Supreme People's Procuratorate, the "property" offered as a bribe must be at least RMB10,000 for an individual or RMB200,000 for a unit, to justify criminal prosecution. However, these amounts may be taken cumulatively so that if meals or entertainment of a low value are provided on a regular basis (and for the purpose of obtaining an undue advantage), it will progressively attract criminal liability to the provider and eventually justify criminal prosecution.

However, according to Article 10 of the 2008 Opinion, prosecutors and judges must comprehensively analyze relevant information in addition to the value and purpose of giving a "property interest". The factors which they must consider include the past contacts between the provider and the recipient, whether provider and recipient are relatives or friends, the reason for and the occasion on which the "property interest" was given, whether the provider made any request in connection with the recipient's post, and whether the recipient actually rewarded the provider by using his or her post in a corrupt way. The purpose of this analysis is to differentiate, on the basis of the facts of the case, between legitimate gifts and bribes, both to state functionaries and otherwise.

Business operators in China are also prohibited from engaging in "commercial bribery" by giving money or property to another business unit or individual, or by any "other means", for the purpose of selling or purchasing goods. Business operators may be levied with an administrative penalty of between RMB10,000 and RMB200,000, if found to have engaged in commercial bribery.

The concept of "property" in Article 8 of the PRC Anti-Unfair Competition Law ("Anti-Unfair Competition Law"), which became effective as of December 1, 1993, is construed narrowly by the State Administration for Industry and Commerce ("SAIC"), the authority responsible for supervising the conduct of business operators in China. According to Article 2 of the Interim Rules for Prohibiting Commercial Bribery, issued by the SAIC on November 15, 1996 ("SAIC Interim Rules"), "property" under Article 8 of the Anti-Unfair Competition Law means cash and material objects. It does not include meals.

According to Article 2 of the SAIC Interim Rules, offering domestic or international tours (for the purpose of selling or purchasing goods) is an example of commercial bribery using "means other than paying in property". The term "other means" has an inclusive definition but in practice has not been interpreted by AICs to include meals.

There is an exception under the SAIC Interim Rules to the prohibition against business operators giving gifts of property to other business units or individuals as part of their trading activities – advertising gifts of a small value can be given, based on common commercial practice. In the spirit of this exception, the provision of low-cost meal treats and related hospitality is unlikely to trigger an investigation by the AIC if it is part of normal commercial practice. However, the provision of conspicuous or unusually expensive entertainment, such as a golf trip or a sightseeing tour, might attract attention.

AICs at or above county level have jurisdiction to supervise and examine cases of commercial bribery. If the activity constitutes a crime, they are required to transfer the case to judicial organs for further investigation and prosecution.

It is also important to note that disciplinary rules apply to state functionaries and other official personnel. The leaders of state-owned enterprises are prohibited in general from using their positions for personal gain and to the detriment of the enterprise which they serve. In particular, they must not accept personal gifts or any other items of value that ought rightfully to be awarded to the enterprise.

In addition, business counterparts who are members of the China Communist Party must abide by internal rules which prohibit them from accepting gifts or banqueting that might influence the impartial execution of their official duties. Those who accept invitations to meals which might unduly influence their official conduct are liable to punishment (such as a warning in serious cases or a more severe punishment in very serious cases) under Article 80 of the Communist Party Disciplinary Punishment Rules promulgated by the Central Anti-Commercial Bribery Taskforce under the Central Commission of Discipline Inspection of the China Communist Party on February 28,2004.

Likewise, persons who are civil servants are prohibited from using their post to seek personal gains for themselves or for others or for engaging in any activities for profit. They may be punished (including by warning, demerit, demotion or dismissal) and their eligibility for any wage rise, promotion or any other reward for good conduct as a civil servant will be suspended for the duration of the punishment.

Although the Communist Party Disciplinary Punishment Rules and the PRC Civil Servants Law will not apply to the provider of hospitality if the provider itself is not a party member or civil servant, providing paid hospitality or paying for the travel expenses of a person who is a party member or civil servant may be considered a type of "unfair competition activity" under the Central Leadership Group of the Anti-Commercial Bribery Administration's Opinion on Accurately Mastering the Policy in dealing with Commercial Bribery on May 28,2007("2007 Opinion").

In the 2007 Opinion, a distinction was made between "criminal commercial bribery activities", "unlawful activities attracting administrative penalties" and "unfair competition activities – those activities involving low amounts which are against business ethics or market rules". While "unfair competition activities" under the 2007 Opinion will not attract criminal or administrative liability, another business operator who is harmed by such activities may recover damages and its own costs of investigating the activity by bringing a lawsuit in the PRC People's Court under Article 20 of the Anti-Unfair Competition Law. Such public action could in turn result in an administrative investigation.

Conclusion

The purposes of China's laws against bribery are to prevent corruption and to safeguard fair competition. While the current policy is focused on the investigation and punishment of commercial bribery committed by foreign business entities operating in the PRC, it is clear that prosecutors and judges will attempt to differentiate between genuine gifts, reasonable commercial activity and actual bribes. Because the threshold for criminal prosecution is cumulative, compliance-oriented business operators will take a cautious approach to the provision of paid entertainment and travel opportunities to their business counterparts in China, even if each occasion is of a small value, and will audit their operations to eliminate the risk of forming corrupt intent. This might mean not extending invitations on some occasions or to some persons, even when local custom seems to condone it. Where legal compliance is part of the business operator's bottom line this decision will come naturally. Seeking specific legal advice in case of doubt is strongly encouraged.
 

Negative influences on the market due to Coke’s existing dominant position in the carbonated drink market

MOFCOM believed that after the completion of the Transaction, Coca-Cola would have had the ability to leverage its dominant position in the carbonated drink market in the juice drink market.

The ability to leverage is where an operator has a dominant position in a certain market and by taking advantages of its current dominant position, it is also able to obtain a new dominant position in a similar product market through tie-ins or bundle sales, imposing exclusive trading conditions, or other methods.

As Coca-Cola may have a dominant position in the carbonated drink market, MOFCOM believed that after the Transaction, Coca-Cola may (i) tie or bundle in Coca Cola’s juice drinks by utilizing its customers’ preferences in its carbonated drink, or tie its carbonated drink in as a means of promotion when selling juice drink; (ii) by offering discounts or refunds, encourage carbonated drink retailers to purchase a large number of its juice drinks, or limit their purchase and distribution of juice drinks manufactured by other competitors; (iii) increase sales volumes of its juice drink and supplant other juice drink products by taking advantage of its current sales channels, for example, its in-store refrigeration units installed at down-stream retailers.

Dominant market position in a certain market may be leveraged in adjacent or other closely related markets, which has already raised competition concerns by authorities in other jurisdictions. For instance, according to the decision made by the Australia Competition and Consumer Commission (ACCC) of the acquisition of Berri Limited (Berri) by Coco-Cola Amatil Limited’s (CCA) on October 8, 2003, ACCC believed that CCA would have the ability and incentive to leverage its market power in CSD (carbonated soft drinks) to increase distribution of Berri’s FB (chilled and ambient fruit juice and fruit drinks) product to the exclusion of rivals in the non-grocery trade channels.

Coke’s ability to impede market entry by controlling brands

Through review, MOFCOM believed that the brand is a key factor that influences effective competition in the drink market, that is, among other factors which may influence competition, such as capital and technology, the brand is considered one of the most important as opposed to other industries where technology may be more important. New entrants may not successfully gain market share in that it is difficult for them to obtain consumers’ recognition of their brands, even though they own certain technologies, facilities and capital. Coca-Cola may also restrain new market entrants by using its dominant position in the carbonated drink market as well as the leverage effect.

Accordingly, MOFCOM believed that after completion of the Transaction, Coca-Cola would have significantly stronger power to control the juice market by controlling two famous juice brands: “Meizhiyuan” and “Huiyuan”, as well as using its dominant position in the carbonated drink market. Therefore, the Transaction would significantly increase obstacles for potential competitors to enter the juice drink market from the prospective of branding.

The negative influences of the proposed concentration over small and medium operators and for the competition within the industry

MOFCOM believed that the Transaction would reduce survivability of domestic small and medium juice manufacturing enterprises, inhibit the ability of domestic enterprises to compete in the juice drink market, and harm the effective competition structure in the China juice drink market.

MOFCOM may have also believed that in the juice drink market, Coca-Cola and Huiyuan are direct competitors and therefore after the completion of the Transaction, Huiyuan, as an important and competent competitor, will no longer exist, which may lead to an increase of concentration. In addition, after the Transaction, Coca-Cola may soon gain a new dominant position by better utilizing Huiyuan’s current purchasing channels for raw materials, distribution channels of products, manufacturing equipment, market share, brand effects, and other advantages, as well as the leverage effects resulting from its dominant position in the carbonated drink market. Therefore, it could be concluded that the Transaction may negatively impact small and medium operators and may have a bad influence on the competition structure of juice drink industry and its further development.
 

B. Exemptions and exclusions
One of the issues that is gaining the most interest in the consultation phase is the issue of whether and when should there be exclusions or exemptions from the core competition law rules identified above. Under the Hong Kong proposed Competition Ordinance, conduct would be excluded or exempt from the competition law if it passes one of the following three tests:

• the Economic Benefit Test: essentially an efficiency gains test weighing economic benefits against potential anti-competitive harm;

• the Services of General Economic Interest Test: undertakings would first have to show that (a) they have been "entrusted" by the Government to provide the service in question and (b) the conduct must be a service of general economic interest (i.e. the service must be an essential public service); or

• the Public Policy Test: a test which takes into consideration benefits and broader than economic benefits.

Undertakings would be encouraged to make self-assessments to determine if their conduct fulfills any of the three tests set out above. However, if undertakings wish for clarification as to whether their agreements or conduct are exempt or excluded from the competition law, they may seek the Commission's guidance or decision.

The Commission will also possess the power to issue Block Exemptions. Block exemptions would exempt categories of agreements from the First Conduct Rule on the basis of the Economic Benefit Test. The Commission must undertake a public inquiry process before issuing a Block Exemption.

C. Two new Government instrumentalities
A Competition Commission (the "Commission") would be established and would consist of a minimum of seven members appointed by the Executive Council.

Generally speaking, the small and medium enterprise sector around the world is a strong advocate for robust competition laws but this is not so in Hong Kong. In Hong Kong there is apprehension amongst some small businesses that the law may be used by large companies against smaller rivals. If that were the case, it would be quite counterproductive against the achievement of the objective of the law. Nevertheless, one feature of the package has been designed to address that concern.

Although the person selected would not formally represent small business, at least one member of the Commission would be chosen who has experience with small and medium enterprise to ensure that these perspectives are available to the Commission when making decisions.
The functions of the Commission would be to:

• investigate suspected breaches of the law, for which the Commission will have powers to require documents to be produced and parties to answer questions. However, searches of premises will require a magistrate's order;

• issue orders appropriate to bring breaches of the law to an end or take enforcement litigation; and

• consider applications for guidance or decisions on the applicability of the exemptions to the Conduct Rules where the criteria for granting the exemption requires an economic assessment.
 

Where serious penalties are to be imposed by the State, or where there is litigation between private parties, matters would be brought before another new instrumentality, the Competition Tribunal. The Tribunal conduct trials, consider evidence and make judgment decisions. The Tribunal would have at least one judicial member would preside over matters but, reflecting that competition law is a complex economic regulatory regime, the Tribunal would also have members sitting on the bench selected for their economic credentials or business credentials who would not necessarily have any formal legal training. Appeals from the Tribunal would be to the Court of Appeal.
 

D. Private actions by individual plaintiffs and class actions

Persons or entities which have suffered loss or damage arising from breaches of the competition law may litigate to seek an award of damages or a range of other orders. Such actions could be brought after the Commission has taken action and the private plaintiff would not then be required to again prove matters already determined in the Commission. In such "follow-on actions" the private plaintiff would generally only need to prove what damages had flowed from conduct that the Commission or Tribunal had already decided amounted to a breach. However, it would also be possible for the private plaintiff to bring litigation even where the Commission has not taken any action ("stand-alone actions") but, of course, the private litigant would have to prove all the elements of a contravention and damage.

A credible organization acting in the interests of a defined group affected by anti-competitive conduct is authorised to bring an action on behalf of the group. To guard against potential abuse, a body wishing to bring such an action must have permission of the Competition Tribunal (as described below) and such permission is only granted if the Competition Tribunal considers that the body can fairly and adequately represent the interests of the relevant group.

II. Key issues that the draft paper does not currently address
A. Vertical arrangements
Traditionally, competition law regimes have included a general prohibition against vertical agreements (i.e. supply agreements) that have the purpose or effect of substantially lessening competition. However, the proposed legislation for Hong Kong does not prohibit vertical arrangements between suppliers and distributors of goods and services other than in the context of abuse of substantial market power. The recently adopted Singapore Competition Act takes a similar approach to the Hong Kong proposal.

Common vertical arrangements involve suppliers fixing re-seller price or setting minimum re-sale price for goods and services. Exclusive dealing and tying arrangements are other examples of vertical arrangements. The proposal takes the view that unless a supplier has substantial market power, a vertical agreement is simply a way of influencing the way in which its product is distributed and marketed and that a supplier has no incentive to use a distribution or marketing strategy to make its products less attractive to consumers than its competitors' goods and services.

That approach is similar to the approach emerging in the US through case law and in the EU through the block exemption and case law. The idea is that where a manufacturer and its distributor(s) lack a substantial degree of market power or lack dominance, there is vigorous competition between that brand of goods and other brands of goods. This "inter-brand" competition is invariably a more vigorous form of competition than "intra-brand" competition would be because the whole supply chain is competing, not just the final distributor. The theory also goes that any "intra-brand" restrictions (i.e. restrictions by the manufacturer upon the distributors of its brand of goods) would only be applied by a manufacturer or its distributor(s) where the restrictions enhance the sales of that brand of product against others – that is, the superior "inter-brand" form of competition.

Turning to how this might apply in Hong Kong, as set out above, while a supplier's possession of substantial market power is not prohibited, abuse of such power through vertical arrangements is.
Hong Kong has a small economy where more sectors than most economies have only a few sellers. These sectors are neither perfectly competitive nor are the players strong enough to be described as possessing a substantial market power. It remains to be seen whether applying principles developed in very large economies (i.e. a law that relies either on companies being vigorously competitive or have substantial degree of market power) will be sufficient in small economies such as Hong Kong and Singapore (i.e. in which market participants may fall between these extremes).

B. Geographic markets
Hong Kong is a small, open economy. It is also rapidly integrating into the larger Mainland economy, particularly the Pearl River Delta ("PRD").

The Hong Kong economy's openness can make it susceptible to trans-border anti-competitive conduct, such as regional or global cartels. But it also can complicate the task of market definition. There maybe many sectors of the Hong Kong economy where the relevant market definition may be larger than Hong Kong, such as the PRD as a whole.

Traditional approaches to market definition can accommodate trans-border markets. Hong Kong's competition authority may need to work closely with competition authorities in other jurisdictions to address anti-competitive conduct affecting Hong Kong consumers.

C. Intellectual property
At one level competition law and intellectual property law seek the same thing – to enhance economic efficiency. However, the way in which the two bodies of law seek to do so are, to a significant extent, at odds. In particular, intellectual property laws award a short run limited monopoly to encourage innovation and creativity while competition laws seek to prevent monopolies. This has spawned extensive and expensive litigation in established competition law regimes (e.g. the Microsoft cases in which both the US and Europe found Microsoft to have abused its IP rights).

In the US and Europe there are no exceptions or special provisions to the core competition laws provisions for the use of IP rights (although there is extensive informal comfort from the US regulators in non-binding guidelines and the European Commission has issued limited protection through the block exemption process).

Other countries have specific exemptions for IP rights – take for instance Article 55 of China's Anti-monopoly law. It states:

"This law [that is the Anti-monopoly law] shall not apply to the conduct of operators in exercising their intellectual property rights in accordance with the laws and relevant administrative regulations on intellectual property rights; however, this law shall apply to the conduct of operators to eliminate or restrict market competition by abusing their intellectual property rights."
 

There are also special provisions for IP rights in the competition laws of Australia, Canada and Singapore.

The Hong Kong proposal can accommodate both the US approach (that it is possible to argue that a mere use of intellectual property rights would not offend the prohibitions) and also accommodate the European approach which is to provide additional comfort through the Block Exemption process.

D. High level prohibitions or specific guidance
The law would not define key concepts such as what is a ‘market' or ‘abusive behavior'. There are no "bright line" or "per se rules" (such as an absolute prohibition on price fixing). There are only high level definitions of ‘economic efficiency' defense or ‘essential public service'.

In long established competition law regimes, clarity is typically found in years of case law precedents. This has its advantages because the law can change over time as different types of anti-competitive conduct are discovered or conduct is identified that is actually pro-competitive but falls foul of prescriptive prohibitions.

In newer competition laws, it is more common for the legislation itself to articulate detailed prohibitions rather than relying on the interpretation of the law by the Court or Tribunal (see for example China's Anti-monopoly Law which identifies six specific types of abusive conduct and six categories of economic benefit for which exemptions apply).

The course currently mapped out for Hong Kong provides a range of tools to provide certainty to business.

E. Government exemption
The current proposal is to exempt the Government, its instrumentalities and statutory bodies from the application of the law. This is similar (although not identical) to the approach in Singapore.
 

Competition laws tend to exempt mainline or core Government activities, although they use different approaches. At one level, this can be regarded as necessary: if the police shut down smuggling rackets, it necessarily reduces competition for the supply of the goods that otherwise would be smuggled and if the health authorities require food suppliers to adhere to standards or shut those that fail to meet the standards, competition from sub-standard food suppliers is reduced or eliminated. These actions must continue unhindered.

Turning to governments' involvement in activities that are more akin to the operation of businesses competition law may be appropriate to apply. However, properly identifying and delineating the separation between the regulatory and commercial activities of government s a detailed time consuming task. In economies in which the Government has extensive business interests this task is a higher priority than in economies in which the Government's interests are less extensive. In this regard, it is notable that the Hong Kong Government is less involved in business than most other governments (e.g. the Singapore Government).

The approach in other competition laws is not to have a blanket exemption but to assess whether the Government entity is engaged in business or commercial activities, which can be a complex exercise. The Government's proposal is that the Government and statutory bodies will initially be covered by a broad exemption but that there will be a review to determine whether parts of the Government should, in fact, be subject to the law. This approach has the advantage of not swamping the Commission in the start up phase of the Hong Kong law with a long and detailed task that for the reasons set out above is a lower order priority.

F. Criminal Sanctions
There has been a trend to criminalize certain competition law offences, such as cartel behavior. However, the draft framework paper proposes that the laws:

• not impose criminal sanctions for Conduct Rules; but also

• impose substantial fines of up to 10% of the offending firm's revenue. The fines which can be imposed by the Commission are limited to HK$10m and if the Commission seeks higher fines it will need to bring proceedings before the Tribunal.

A key issue with respect to these two points together arises from a recent decision of the Court of Final Appeal in the Koon Wing Yee v Insider Dealing Tribunal and Another [2008] 3 HKLRD 372 (the Koon Case) concerning the insider trading provisions of Hong Kong's Securities Ordinance (as it applied prior to certain amendments). The court found that the Hong Kong's Basic Law required Hong Kong legislation not to infringe certain human rights found in the constitutionally entrenched Bill of Rights. When the law provides that a substantial penalty may be imposed, the party alleged to have breached the law is entitled to the types of safeguards which apply in criminal proceedings, such as the privilege against self incrimination. This does not make the offenses criminal – for example attracting a prison sentence and resulting in a person having a criminal record. The offences remain civil but the human rights protections are more stringent if the penalties are substantial.

In a related case, the Court of Appeal ruled that questioning of individuals during an investigation by the Securities and Futures Commission (Hong Kong's security regulator) does not infringe the individual's right to remain silent or his or her right to a fair trial. A separate question arises as to whether, once collected, the material can be used in a trial where significant penalties may result. If this ruling stands, it will strengthen the Commission's ability to conduct investigations.

III. Final Comments

Numerous stakeholders have commented on the Government's proposed legislation since the Competition Policy Review Committee issued its first public discussion document in November 2006. Taking into consideration the various public comments, the Government intends to introduce a Competition Bill in the 2008-2009 legislative session. The likely content of the proposed law as summarized in this article will give businesses an opportunity to comment on the proposals and also provide some lead time to review their business practices, correct potentially infringing conduct and develop best practice guidelines to ensure compliance once the law comes into effect.