On 29 April, the Hong Kong Competition Tribunal, a division of the Hong Kong High Court, handed down its first financial penalties under the Competition Ordinance. It imposed fines totaling nearly HK$4 million on 10 building renovation companies.
They were found to have agreed to share contracts between them on a particular public housing estate, instead of competing for them. The tribunal agreed with the Competition Commission (the prosecutor in the case) that this was a serious breach of the Competition Ordinance, which requires businesses to compete independently of each other, even for individual contracts.
The judgment is notable not just for the severity of the fines imposed, which can be expected to increase in future cases now that the benchmark has been set, but also because the tribunal helpfully set out its methodology for calculating the fines that it will impose in future on companies which breach the rules.
The starting point is to set a percentage of the turnover the businesses received from the offending conduct. The turnover is evidenced by way of sales receipts. This percentage is specifically designed to deter the offending conduct, by making it unprofitable for companies to engage in it. The tribunal referred to the European Commission’s guideline, which says that for egregious conduct such as market (or contract) sharing, a percentage of up to 30% is appropriate – the so-called gravity percentage. In this case, the tribunal agreed with the Hong Kong Competition Commission’s recommendation that a gravity percentage of 24% was appropriate.
This amount will then be adjusted up or down to take account of aggravating or mitigating circumstances respectively. In this case, three of the companies successfully pleaded mitigation, because the conduct was committed by their subcontractors, not them. Cooperation and assistance with the commission’s investigation are also mitigating factors, when it comes to assessing the level of penalties. An overall cap on the fine of 10% of Hong Kong turnover is applied.
Naturally, most businesses will never want to get into the situation of having to worry about the level of penalties the tribunal might impose. It should be borne in mind that these are not just direct financial penalties: the tribunal can also, for example, disqualify offending directors and managers for up to five years.
The reputational damage which comes from the adverse publicity surrounding competition proceedings, and the financial cost of dealing with commission investigations and potential prosecutions are also serious matters to consider.
The best way of protection is to put in place a proper competition law compliance programme. This has two major benefits. First, it reduces the risk of any breach of the rules occurring. Secondly, if any breach of the rules does occur (for example, due to the conduct of an errant member of staff who has not followed company guidelines) it may be a mitigating factor when the commission or tribunal assesses any penalties that should be imposed.
Even if the compliance programme does not successfully achieve the objective of avoiding a commission investigation and potential prosecution, there are other alternatives to consider which may avoid, or at least minimize the effect of, these outcomes. Like many other competition authorities in the world, the Hong Kong Competition Commission offers lenient treatment to any business involved in a suspected contravention which is prepared to come forward and give full information to, and cooperate with, the commission. In this respect, the commission published its latest leniency policy on 16 April.
Clearly, it is ever more important for Hong Kong businesses to make sure they are competition law-compliant, and to seek the appropriate advice if necessary.