Competition Law Compliance for Hong Kong Businesses: A Practical Guide to the Competition Ordinance

Introduction

Hong Kong's Competition Ordinance (Cap. 619), which came into full effect in December 2015, introduced a comprehensive competition law regime for the first time in the jurisdiction's history. The Ordinance prohibits anti-competitive conduct across all sectors of the economy (with limited exceptions) and is enforced by the Competition Commission and the Competition Tribunal. For businesses operating in Hong Kong—whether local SMEs or multinational corporations—understanding the key prohibitions and implementing effective compliance programmes is both a legal obligation and a sound commercial strategy.

This article provides a practical guide to the main provisions of the Competition Ordinance, the types of conduct that are prohibited, the enforcement powers available to the Competition Commission, the penalties that can be imposed for breaches, and the steps that businesses should take to build a culture of competition law compliance.

Overview of the Competition Ordinance

The Competition Ordinance is structured around three main prohibitions, known as the "conduct rules": the First Conduct Rule, which prohibits anti-competitive agreements and concerted practices; the Second Conduct Rule, which prohibits abuse of a substantial degree of market power; and the Merger Rule, which applies exclusively to telecommunications licensees and prohibits mergers that substantially lessen competition in a telecommunications market.

Unlike competition law regimes in some other jurisdictions, the Competition Ordinance does not apply to all sectors uniformly. Statutory bodies—including government-owned corporations and bodies performing public functions—are generally excluded from the conduct rules (though the government may by regulation bring them within scope). There is also a de minimis exception for agreements involving undertakings with a combined annual turnover of HK$200 million or less in Hong Kong, provided the agreement is not a serious anti-competitive agreement. However, cartel conduct is not eligible for the de minimis exception regardless of the parties' turnover.

The First Conduct Rule: Anti-Competitive Agreements

The First Conduct Rule prohibits undertakings from making or giving effect to agreements, engaging in concerted practices, or making decisions (in the case of associations of undertakings) that have the object or effect of preventing, restricting, or distorting competition in Hong Kong.

Agreements that are prohibited include both formal, written contracts and informal understandings—including gentlemen's agreements and arrangements that are not intended to be legally binding. The key question is whether the arrangement has an anti-competitive object or effect. Some types of agreements are so inherently harmful to competition that they are presumed to be anti-competitive without any need to analyse their market effects. These are known as "serious anti-competitive conduct" or "hardcore" restrictions, and include: price fixing (agreements between competitors to fix, maintain, or stabilise prices or pricing elements); market allocation (agreements between competitors to divide markets, territories, or customers); output restriction (agreements to limit or control production, markets, technical development, or investment); and bid rigging (agreements between competitors as to who will win a tender or bid, or at what price they will bid).

Businesses engaged in cartel conduct of this kind face the most severe enforcement response from the Competition Commission, including pecuniary penalties of up to 10% of the undertaking's Hong Kong turnover for each year of the infringement (up to three years), disqualification orders against directors, and in some cases criminal prosecution under the separate bid-rigging provisions of the Prevention of Bribery Ordinance.

Vertical agreements—arrangements between parties at different levels of the supply chain, such as between a manufacturer and a distributor—are also subject to the First Conduct Rule, but are generally assessed under the effects-based approach rather than being treated as presumptively anti-competitive. Common vertical restrictions that may raise competition law concerns include resale price maintenance (requiring a distributor not to sell below a minimum price), exclusive distribution arrangements, and non-compete obligations.

Block Exemptions and Safe Harbours

The Competition Commission has issued a number of block exemption orders (BEOs) and guidelines that provide safe harbours for certain categories of agreements. The most important block exemption for commercial agreements is the Block Exemption Order for Agreements of Lesser Significance, which exempts agreements from the First Conduct Rule where the combined Hong Kong turnover of all parties does not exceed HK$200 million, provided the agreement does not involve serious anti-competitive conduct. This exemption benefits many SMEs operating in Hong Kong.

The Commission has also issued guidelines on the First Conduct Rule that describe the analytical framework used to assess whether an agreement has an anti-competitive effect, including the relevant factors considered in defining the relevant market, assessing market power, and evaluating efficiencies that may outweigh anti-competitive harm.

Undertakings may also apply to the Competition Tribunal for an exclusion or exemption from the conduct rules on specified grounds, including that the agreement enhances overall economic efficiency, contributes to a service of general economic interest, or is required to comply with a legal requirement.

The Second Conduct Rule: Abuse of Market Power

The Second Conduct Rule prohibits undertakings that have a substantial degree of market power in a market in Hong Kong from abusing that power by engaging in conduct that has the object or effect of preventing, restricting, or distorting competition in Hong Kong.

Unlike the First Conduct Rule, the Second Conduct Rule applies only to dominant firms—those with a substantial degree of market power. The Competition Commission has indicated in its guidelines that a market share of 40% or above may be an indicator of substantial market power, but market share is only one factor; the Commission also considers barriers to entry, buyer power, the competitive dynamics of the industry, and other factors.

Abusive conduct can take many forms. Common examples of conduct that may constitute abuse of market power include: predatory pricing (selling below cost with the intent to drive out competitors and later raise prices); exclusive dealing (requiring customers or suppliers to deal exclusively with the dominant firm, foreclosing competitors from the market); loyalty rebates that penalise customers for purchasing from competitors; margin squeeze (where a vertically integrated firm sets its wholesale price for an input so high that downstream competitors cannot compete profitably); refusal to deal (refusing to supply a product or service to a competitor where doing so would be commercially reasonable); and tying (conditioning the sale of one product on the customer also purchasing a second, separate product).

Dominant firms in Hong Kong—including those in the retail, property, telecommunications, and professional services sectors—should assess whether their commercial practices could be characterised as abusive under the Second Conduct Rule and take steps to ensure their commercial conduct is justifiable on efficiency or business rationale grounds.

Merger Control in Telecommunications

The Merger Rule applies exclusively to the telecommunications sector and prohibits mergers that substantially lessen competition in a telecommunications market in Hong Kong. A "merger" for this purpose includes acquisitions, amalgamations, and the creation of joint ventures. All telecommunications licensees involved in a merger must notify the Communications Authority, which assesses the merger in consultation with the Competition Commission. Companies outside the telecommunications sector are not subject to the Merger Rule, although the Competition Commission is mandated to keep this limitation under review.

Enforcement Powers of the Competition Commission

The Competition Commission has broad investigative and enforcement powers. It can: require undertakings to produce documents and information; conduct unannounced searches of business premises (dawn raids) with a warrant from the Court of First Instance; compel individuals to answer questions and provide information; accept binding commitments from undertakings to remedy anti-competitive conduct; issue infringement notices requiring undertakings to cease prohibited conduct; and bring proceedings before the Competition Tribunal seeking pecuniary penalties, disqualification orders, and other remedies.

The Competition Tribunal is a specialist tribunal within Hong Kong's court system with exclusive jurisdiction over competition law matters. It can impose pecuniary penalties of up to 10% of the undertaking's Hong Kong turnover for each year of infringement, up to a maximum of three years. For a large business, this can amount to a very substantial financial penalty. In addition to penalties, the Tribunal can make disqualification orders against directors who were knowingly concerned in a competition law breach, prohibiting them from managing companies in Hong Kong for up to five years.

Third parties—including customers, competitors, and suppliers who have suffered loss or damage as a result of an infringement—can also bring follow-on damages claims before the Competition Tribunal once an infringement has been established. This means that businesses found to have breached the Competition Ordinance may face not only regulatory penalties but also private damages claims from affected parties.

Leniency Programme

The Competition Commission operates a leniency programme that offers immunity from financial penalties to the first cartel member to report a cartel to the Commission and cooperate fully with its investigation. Subsequent cartel members who cooperate may receive a reduction in penalties. The leniency programme is an important tool for detecting and breaking up cartels, and businesses that discover they may have been involved in cartel conduct should seek legal advice immediately on whether to apply for leniency.

Leniency applications must be made promptly—the advantage of the leniency programme is only available to the first applicant. Legal professional privilege applies to communications with external lawyers in the context of leniency applications, meaning that documents and information shared with lawyers for the purpose of obtaining legal advice are protected from compelled disclosure to the Commission.

Building a Competition Law Compliance Programme

Businesses operating in Hong Kong should implement a competition law compliance programme tailored to their sector and business activities. An effective programme should include: a written competition law policy that clearly sets out the company's commitment to compliance and identifies the types of conduct that are prohibited; training for all staff who are involved in pricing, sales, procurement, trade association activities, and strategic planning—these are the employees most at risk of exposure to competition law issues; clear guidance on the company's approach to trade association participation, including rules on what topics may and may not be discussed at trade association meetings; procedures for reviewing and approving joint ventures, information sharing arrangements, and distribution agreements before they are entered into; a mechanism for reporting potential competition law concerns to senior management or legal counsel; and regular review and updating of the compliance programme in light of developments in the law and the company's business activities.

Companies that have implemented a genuine, effective compliance programme may receive some credit from the Competition Commission in the event of an infringement, although the existence of a compliance programme does not guarantee a reduction in penalties. The quality and genuine implementation of the programme—not merely its existence on paper—is what matters.

Common Compliance Pitfalls

Companies frequently encounter competition law issues in the following situations: attending trade association meetings where competitors discuss pricing, market conditions, or business strategies; exchanging commercially sensitive information—such as future pricing plans, capacity, or customer data—with competitors, whether directly or through a third party; entering into distribution agreements that include resale price maintenance clauses or exclusivity provisions that foreclose competition; acquiring market intelligence through methods that could be characterised as facilitating coordination with competitors; and implementing pricing algorithms that could track and respond to competitors' prices in a way that amounts to tacit coordination.

Businesses should adopt a cautious approach whenever they interact with competitors—whether at trade association meetings, industry events, or bilateral meetings. If a competitor raises pricing, market allocation, or customer-related topics, the appropriate response is to object clearly, refuse to participate in the discussion, and exit the meeting if the discussion continues. Internal records should be kept of the objection and departure.

Conclusion

Competition law compliance is a business-critical issue for all companies operating in Hong Kong. The Competition Ordinance's prohibitions on anti-competitive agreements and abuse of market power apply broadly, and the Competition Commission has demonstrated its willingness to investigate and prosecute infringements across diverse sectors. The financial, reputational, and personal (director disqualification) consequences of non-compliance are severe.

Alan Wong LLP's Corporate & Commercial practice advises businesses of all sizes on competition law compliance, including reviewing commercial agreements for competition law risk, advising on trade association participation, conducting competition compliance audits, and representing clients in Commission investigations and Tribunal proceedings. Contact us to discuss how we can help your business manage its competition law obligations effectively.