Competition Ordinance: Final Chance for Preparation

Transcription

1 Competition Ordinance: Final Chance for Preparation Steven Yip, Partner Brian Liu, Associate 8 December 2015

2 Agenda Part 1: Understanding the basics why comply? Part 2: Knowing the boundaries complying with prohibitions on anti-competitive conduct Part 3: Enforcement Part 4: Practical Tips 2

3 Part 1: Why comply? 3

4 The whys of competition law Why do we need competition laws? To promote competition & fair trading Why is competition so important? Promotes efficiency Leads to lowest prices, highest quality, most innovation Benefits consumers (including you) 4

5 The whys of competition law Why do we have competition law training? Avoid breaches therefore avoid fines Detect possible issues & enable business to act quickly Mitigatory effect on penalty 5

6 The Competition Ordinance (Cap. 619) Hong Kong s first cross sector competition law Regulates anti-competitive agreements and conduct Will come into full effect on 14 December 2015 Not retrospective Applies outside Hong Kong Before CO comes into effect After CO comes into effect Not prohibited X X 6

7 Importance of compliance Fines / penalties (per breach) of: Up to 10% of annual local turnover (i.e. total gross revenues obtained in Hong Kong) For each year of conduct, up to a maximum of 3 years Applies for any involvement: Attempting a breach Aiding, abetting, procuring, inducing a breach Being knowingly concerned in or party to a breach 7

8 Importance of compliance Disqualification orders banned from company management for up to 5 years Prohibition on indemnification of penalties / costs Individuals must personally pay Follow on action by third parties for damages Injunctions, declarations Management time Costs of investigation & proceedings Reputational effects / negative publicity / share price impact 8

9 Part 2: Anticompetitive conduct 9

10 The Competition Rules First Conduct Rule Undertakings must not make or give effect to agreements or decisions of associations or engage in concerted practices ( agreements ), with the object or effect of preventing, restricting or distorting competition in Hong Kong Second Conduct Rule Undertakings with a substantial degree of market power must not abuse that power by engaging in conduct which has the object or effect of preventing, restricting or distorting competition in Hong Kong Merger Rule 10

11 The First Conduct Rule Prohibits agreements with object or effect of preventing, restricting or distorting competition in Hong Kong What is an agreement? Does not need to be in writing Communication + mutual behavioural expectations Mere discussions can raise risks Formal meetings (eg trade associations) Informal settings (eg parties, dinners, bars, airport lounges) 11

12 First Conduct Rule - two categories of conduct Serious anti competitive conduct Price fixing Allocation of sales, territories, customers or markets Fixing, controlling, limiting or eliminating the production or supply or services (output restrictions) Bid-rigging / collusive tendering Often known as cartel conduct Consequences HKCC may issue an infringement notice or commence proceedings in Tribunal Other agreements subject to review Agreements that are not serious anti competitive conduct Consequences HKCC must issue a warning notice before commencing proceedings If do not comply with notice, HKCC may commence proceedings 12

13 Price fixing Agreements to fix, maintain, increase or control price Price include discounts, allowances, rebates, credits, other concessions & advantages, and other components of price Do not need to agree exact price - covers agreements to: Fix / add / remove components of price (incl. discounts & surcharges) Limit / guide price movements or maintain margins Stop discounting / price wars Cover price Risks in exchanging price information and price signalling Can unilaterally determine prices by reference to competitors 13

14 First Conduct Rule - Price fixing examples Construction (UK) 103 firms fined (total million) Cover pricing on 199 tenders Compensation payments to unsuccessful bidders in some cases Prestressing steel (EU) 17 producers fined (total 269 million) Fixed prices, set quotas, allocated customers & exchanged sensitive info Lasted 18 years, over 550 meetings Road bitumen (EU) Both suppliers & purchasers fined (total 266 million) Fixed price of bitumen & agreed uniform rebates for purchasers for over 8 years 14

15 First Conduct Rule - Market sharing / allocation Agreements which allocate sales, territories, customers or markets i.e. agreements as to what goods / services you will supply where you will supply which customers you will supply to which suppliers you will buy from Includes arrangements to go soft not to poach customers not to compete to maintain market shares Diagram from Malaysian Competition Commission 15

16 First Conduct Rule - Market sharing examples Premix concrete # 1 (China) Association assigned members specific market shares / specific areas to supply Association monitored compliance Members had to file sales contracts with association Premix concrete # 2 (Aus) 3 suppliers (& executives) fined (total A$20 million) More than 50 meetings & telephone calls Agreed to maintain market shares (by not competing for business of certain customers) and not to compete on major projects Also agreed to price fix 16

17 First Conduct Rule - Output restrictions Agreements to fix, maintain, control, prevent, limit or eliminate production or supply of goods or services For example Setting production / sales quota arrangements Agreeing not to add production capacity Agreeing to restrict access to market Agreeing to restrict the supply of services Decisions to reduce output or in relation to future investment must be made independently 17

18 First Conduct Rule Output restrictions examples Concrete reinforcing bars (EU) 8 companies fined (total 83 million) Limited output & sales Also fixed elements of price Players in market reduced from 40 to 12 over cartel s lifetime Salmon cull (Australia) Agreed to limit supplies of salmon to address problem of oversupply causing prices to fall Industry association facilitated agreement Cull stopped by regulator 18

19 First Conduct Rule - Bid rigging (collusive tendering) Agreements regarding terms on which parties will (or will not) bid / tender, eg who should withhold a tender ('bid suppression') who should withdraw a tender ( bid withdrawal ) who should submit / not submit a bid on a rotating basis / taking turns to win jobs ('bid rotation') the payment of 'unsuccessful' or 'loser' fees to 'share' the available contracts between them to cover price / quote to otherwise submit a tender on terms agreed between competitors or which reduces competitive tension in tender process Often also involves price fixing 19

20 First Conduct Rule Bid rigging examples Coastline survey (Korea) Cover pricing on bids to provide coastline survey and database construction services Steel gates (Hong Kong) Cover pricing on tenders for Housing Authority projects Building projects (Aus) Cover pricing on 4 government building projects (fined A$1.3 million) Offshore works / engineering & harbour works / highway (Japan) Many bid rigging construction cartels all involved designating a successful bidder & cover pricing so that bidder would win (all fined more than JYP1 billion) 20

21 Joint tendering/consortium bidding Arrangements known to the party soliciting bids Parties may agree to submit tenders together, as long as this is known to the employer HKCC guidelines: may result in more bidders than otherwise possible, thereby increasing competition But take care where bidders could have submitted individually Contrast with bid rigging Generally, the HKCC recognizes that joint ventures often enhance economic efficiency 21

22 Joint tendering/consortium bidding Guidance from overseas (Ireland EU competition law) Joint bidding is permitted between parties who are not actual or potential competitors Even if they are actual or potential competitors, permissible if: None of the parties could fulfill the tender requirements alone No subset of the parties could fulfill the tender requirements Only the minimum amount of information needed passed between the parties Parties otherwise compete vigorously in all other contexts Even if above not satisfied, may show net positive effects of the joint tender versus any anti-competitive effects 22

23 Joint tendering/consortium bidding Guidance from overseas joint ventures generally Do not stray outside the scope of the relevant project Do not change your behavior with other customers Share only the minimum amount of information necessary Ensure that the JV is not a conduit for sensitive information between different sets of competitors 23

24 First Conduct Rule - Trade Associations Membership not illegal But decisions (rules, recommendations, agreements among members) and discussions about pricing, supply, bidding, costs, customers can be a breach Eg Recommended fee schedules / price guidelines issued by association Does not legitimise unlawful behaviour Exercise caution - provides forum for easy discussion between competitors Leave if / when inappropriate topics raised 24

25 First Conduct Rule - Trade Associations examples Construction industry association (Aus) Bid rigging on government construction project (fined A$1.75 million) Involved payment of unsuccessful tenderer fee to losers Roof tile industry (Aus) Used association to fix rates paid to roof tile contractors Also agreed to only engage services of contractors who were members Medical Association (Sing.) Warned by regulator that issue of fee guidelines (which recommended fee ranges for doctors services) would be a breach 25

26 Second Conduct Rule Substantial market power Ability to give less /charge more without competitive constraint Abuse that power Engage in conduct with purpose or effect of preventing, restricting or distorting competition in Hong Kong Example of high risk behaviour: Predatory pricing Limiting production, markets or technical development Exclusive dealing (incl tying/bundling) Refusal to supply to competitors Price / service quality discrimination Loyalty / target pricing, discounting or rebates 26

27 Second Conduct Rule - Abuse of market power examples Concrete masonry (Aus) Predatory pricing (below manufacturing cost) to drive out new entrant and deter others Court found did not have substantial degree of market power Steel products (Aus) Refusal to supply steel Y bar (used for fence posts) to potential competing manufacturer of fence posts at competitive price 27

28 Part 3: Enforcement 28

29 The Hong Kong Competition Commission (HKCC) HKCC administers & enforces Competition Ordinance Role includes promoting understanding of competition & compliance Competition regulators are typically well-resourced, diligent and successful in their investigations & legal proceedings The Competition Tribunal New judicial body Proceedings under Competition Ordinance must be brought in Tribunal Power to impose penalties & wide range of other orders 29

30 HKCC enforcement options Warning notices Infringement notices Commitments Leniency agreements Decisions Must be issued before HKCC can bring any proceedings for breach of 1 st CR Cannot be issued for serious anti competitive conduct or 2 nd CR HKCC can take action if non compliance with notice Only for serious anti competitive conduct or 2 nd CR HKCC offer not to bring proceedings if give a commitment to comply with notice HKCC can take action if commitment not given Provide commitment to take / refrain from action - in return for HKCC not bringing / continuing an investigation or proceedings May require an admission HKCC offers immunity in exchange for cooperation & disclosure Guidelines / eligibility criteria to be issued Imperative to act quickly & cease conduct Proceedings in Tribunal 30

31 Investigatory powers Statutory power to compel: production of information & documents person to answers questions Statutory search & seizure powers (under warrant) Dawn raids Offence not to comply with powers or to provide false or misleading material Exposure to fines / imprisonment Costs of compliance with powers can be significant 31

32 Private action Parties suffering loss or damage as a result of breach can bring private 'follow on' civil proceedings Can only be brought following a finding of a contravention by Tribunal an admission in a commitment accepted by HKCC Exposes both companies and individuals to risk of damages 32

33 Guidelines Six sets issued by HKCC in July 2015 Sets out general principles of how HKCC will interpret the Ordinance, but non-binding Contain definitions of key terms in the Ordinance and hypothetical examples of behavior that may/may not contravene the Ordinance A useful reference for whether particular behavior is permitted procedures and regulations regarding the Ordinance and the HKCC itself, such as the procedure for making complaints, or the enforcement process 33

34 Applications and consultations A party may make an Application for Decision to HKCC to check whether certain behaviour contravenes the conduct rules. Note: HKCC not required to consider hypothetical questions Not without prejudice HKCC may use the information for any purpose under the Ordinance, including considering enforcement Prior to an Application, can have an Initial Consultation HKCC can indicate whether an Application would be suitable Indicate what evidence is needed and the key issues 34

35 Part 4: Practical tips 35

36 Tips be careful about your behaviour Always act unilaterally / independently Unilaterally determine prices, to whom you supply, from whom you acquire, what and where you supply Never discuss pricing, supply, production, customers, territories, or tenders with competitors even informally Beware of all forums involving competitors, including association meetings, social events, seminars, trainings, dinners Limit discussion to general industry issues 36

37 Tips be careful about your behaviour Do not discuss a tender / bid with other tenderers Avoid exchanging sensitive commercial information (directly or through a third party or association) or signalling price intentions Leave a conversation when red flags are raised Report any inappropriate approaches or proposals to compliance manager 37

38 Tips communicate carefully Internal & external materials can be potentially be used as evidence Careless statements taken out of context can be misunderstood and used as evidence Does not matter if it is only a private joke or gossip Avoid loose' or unfortunate language 38

39 Tips communicate carefully Real life examples: "Everybody is requested to keep it as secret as it would be serious damage if it is open to customers or European Commission" "Instigate cartel meeting to counter margin erosion by [X]" " all parties to communicate to ensure that fees and terms are discussed and agreed prior to the bid submission" "Producers need to avoid price competition through controlling their production capacity". 39

40 If in doubt - Always ask your compliance manager or legal advisor! 40

41 Contacts Steven Yip Partner T Malcolm Chin Partner T Henry Sherman Senior Consultant T Sonia Ng Senior Associate T Samuel Cho Senior Associate T Brian Liu Associate Valerie Yeung Associate Preston Lee Associate Charles Cheung Associate T T T T