Will Hong Kong's new competition law have teeth?

A Hong Kong ordinance mandating the establishment of a competition commission comes into effect in January 2014 but it is unlikely to have any real impact until 2015 -- and even that is unclear.

What the new regulatory framework will mean for mergers and acquisitions in Hong Kong won’t really be known until key personnel are put into place, because the attitude of the competition commissioners will be as important as the ordinance’s wording, according to a legal academic who was commenting upon the new ordinance, but who declined to be named.

(The original version of this story incorrectly referred to the Hong Kong chief executive, rather than the chief executive of the competition commission who would be influential in this decision).

The ordinance was passed by the Legislative Council in 2012 and a competition commission and tribunal have already been established. It will be up to the commission to draw up the rules setting out Hong Kong's anti-monopoly policy.

The commission is currently recruiting and should be more or less fully staffed by spring, after which it should start to focus on providing guidance and making the law operational. As such, the legal academic believes the commission won’t really become a force to be reckoned with until 2015. He and expects the commission to review corporate structures both horizontally and vertically to determine whether they are anti-competitive. That is, he expects it and for the commission to consider issues such as whether a company would stifle competition by owning and controlling an entire supply chain as well as whether a merger would squash competition by creating giants with the power to dictate pricing.

The academic, who is based in Hong Kong, commenting upon the new ordinance thinks the commission will look at whether a company is deemed to have too much market power rather than focus on the abuses of market dominance. This is the way competition policy is conducted in Australia, which was the main blueprint for the Hong Kong law.

But it remains an open question whether the commission will focus on ‘exclusionary abuses’, such as keeping other potential competitors out of a market, or on ‘excessively low’ or abusive pricing.

The law also allows for exemptions for certain statutory bodies, which are defined as commercial entities whose M&A activity is meant to enhance Hong Kong’s overall economic interest or efficiency. Utilities potentially fit this description, although it remains unclear how the commission might approach this matter in practice.

According to the ordinance, exemptions can be given both to defined groups of companies and to individual companies, prompting the academic to caution that the commission may be flooded with applications unless it is clear in defining block (collective) exemptions. “The exemptions are too wide,” he says.

As in Australia, the competition commission only has the power to prosecute and take cases to the tribunal; the tribunal has the power to sanction. The commission also has a compliance and advocacy function, advising the government and investigating market failures. In these respects it can settle cases but has no punitive power.

The competition tribunal is to consist of two judges and a panel of assessors who will advise them. It is on paper a powerful body, with the statutory equivalence of a high court. It can order compliance, levy damages, nullify agreements and disqualify directors.

But those powers only come into play if the commission brings cases to the tribunal. “There is no enforcement power if the commission refuses to act,” the academic says, describing this is as a “flaw” in the ordinance.

What that means, he the legal academic concludes, is that the attitude of the commissioners and will determine the effectiveness of the competition law.

(This article has been corrected. The original version wrongly reported the Hong Kong chief executive would also play a role in determining the effectiveness of the commission, via appointments of the commissioners. The attitude of the commissioners and the commission's chief executive are relevant to how the ordinance is implemented.)