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New competition law regulations published in Hong Kong

Companies operating in Hong Kong should look carefully at their turnover figures to see how new competition regulations will affect them, competition law expert Mohammed Talib of Pinsent Masons, the law firm behind Out-Law.com said.20 Mar 2015

The Hong Kong government is introducing the law – called the Competition Ordnance – in stages, with a view to it being in full effect by the end of 2015. As part of that, it has published regulations laying out which businesses will be covered by the law.

Most agreements will only be covered by the law if the combined turnover of the organisations involved comes to more than $200 million. If an organisation is seen as having "substantial market power", however, the turnover threshold is $40 million.

Organisations operating in Hong Kong should consider the new regulations carefully, Talib said.

"Most large and medium size businesses in the infrastructure, telecommunications, financial services and other sectors are highly likely to be subject to the application of the Competition Ordinance given the relatively low thresholds for exemption and the way in which turnover is to be calculated. For most businesses it will be crucial to understand how the Competition Ordinance will affect them and what steps might need to be taken to reduce any risks of non-compliance," he said.

The use of a calendar year for assessing turnover means that businesses which use different financial years will need to suitably adjust their accounts to check if they are within the relevant exemption thresholds, Talib said.

The turnover rules don't excuse "serious anti-competitive behaviour", such as price fixing, supply restrictions and bid rigging, but will cover areas like maintaining resale prices, joint buying to boost bargaining power, and information sharing on areas other than price, Talib said.

The turnover figure will be calculated based on the organisations' "ordinary activities" both insider and outside Hong Kong, but excluding sales rebates and taxes.

The maximum penalty for a contravention of the Ordnance will be 10% of turnover "obtained in Hong Kong for each year when the contravention occurred, for up to three years," Talib said. For calculating the cap, turnover is only based on ordinary activities within Hong Kong.

The term "ordinary activities" is not defined, Talib said.

"European precedent suggests it will relate to the sale of products or the provision of services in the normal course of business, which generally excludes those items that are listed under the headers 'financial income' or 'extraordinary income' in a company's accounts. It remains to be seen if the Hong Kong authorities will adopt a similar approach," he said.

What is known is that any funds received from government in return for a contractual obligation to supply goods and services to a third party will be counted towards turnover. Where two or more organisations are involved, turnover will be calculated from their combined total gross revenue, but no account is to be taken of transactions between them, Talib said.

The turnover period in question is the previous calendar year.

This approach is different to that taken in other countries, Talib said: "For example, in the UK the equivalent requirements say that in calculating the maximum penalty for an infringement, worldwide turnover may be taken into account, rather than the domestic turnover that is to be considered in Hong Kong."

These regulations come into effect on 17 April.

Two further regulations look at how the Competition Ordinance applies to statutory bodies.

The Competition Ordinance is specifically applicable to: Ocean Park Corporation, Matilda and War Memorial Hospital, Kadoorie Farm and Botanic Garden Corporation, the Helena May, Federation of Hong Kong Industries and the General Committee of the Federation of Hong Kong Industries.

It does not apply to The Stock Exchange of Hong Kong Limited, Hong Kong Futures Exchange Limited, Hong Kong Securities Clearing Company Limited, HKFE Clearing Corporation Limited, The SEHK Options Clearing House Limited, OTC Clearing Hong Kong Limited and Hong Kong Exchanges and Clearing Limited. These companies are involved in the operation of the Hong Kong stock and futures markets and will continue their statutory monopoly after enactment of the Competition Ordinance.

These regulations will come into effect when the relevant parts of the main Competition Ordinance dealing with statutory bodies comes into effect, which is anticipated to be later this year.