Hong Kong’s merger control regime is voluntary in nature and – substantively speaking – only applies to transactions involving business groups with activities in the telecommunications industry. Mergers that fall outside of the merger control regime are wholly excluded from the application of competition law.
i The merger control regime under the new Competition Ordinance
The entry into force of the Competition Ordinance (Cap 619) in December 2015 has brought about significant institutional and procedural reforms to the Hong Kong competition regime, which now applies across all sectors of the economy. The new legislation has also brought changes to the merger control regime, albeit to a lesser extent. New merger rules (most of which are contained in Schedule 7 to the Ordinance) have replaced the previous regime established under the Telecommunications Ordinance (Cap 106). These new rules represent more of an evolution rather than any revolution when compared to those that have been replaced. As was the case under the previous regime, merger control is still relevant mainly to those operators with activities in the telecommunications sector, and the authority responsible for merger review remains the Communications Authority. As such, the relevant Guideline on the Merger Rule (Guideline) has been jointly issued by the Hong Kong Competition Commission and the Communications Authority.
Under the Competition Ordinance, mergers that substantially lessen competition are prohibited (the merger rule). This prohibition, found in Section 3 of Schedule 7 to the Ordinance, has, however, a limited scope of application and only applies to mergers involving undertakings that hold telecommunications licences or that directly or indirectly control such licensees (see Section 4 of Schedule 7). Reliance on the broad notions of ‘undertaking’ and ‘direct or indirect control’ (specifically defined to include the ability to exercise a decisive influence) means in our view that any merger involving these undertakings will come within the scope of the prohibition, irrespective of whether the transaction has a particular nexus with the telecommunications industry. This was not intended by the legislator, and this is not discussed in the Guideline. The question remains to be decided by the courts, but in our view as soon as an undertaking directly or indirectly controls a telecommunications carrier licensee, the merger rule will apply to all mergers in which it is involved.
ii Types of transactions caught
In common with merger control regimes of other jurisdictions, only certain types of transactions constitute a ‘merger’ for purposes of the Competition Ordinance. According to Sections 3 and 4 of Schedule 7 to the Ordinance, these are:
- a mergers between previously independent undertakings, where one or more of the undertakings participating in the merger holds a telecommunications carrier licence, or controls (directly or indirectly) an undertaking that holds such a licence (Sections 3(2)(a) and 4(a));
- b acquisitions of control over undertakings (through the acquisition of rights or assets), where the acquiring undertaking, the individual (or individuals) acquiring control, or the target, holds a telecommunications carrier licence, or controls (directly or indirectly) an undertaking that holds such a licence (Sections 3(2)(b), 3(2)(c), 3(3), 4(b) and 4(c) of Schedule 7); and
- c the establishment of full-function joint ventures, where any of the parent undertakings or the joint venture holds a telecommunications carrier licence, or controls (directly or indirectly) an undertaking that holds such a licence (Sections 3(2)(b), 3(4) and 4(b) of Schedule 7).
The first type of transaction can be likened to the corporate concept of a merger, through which one unified undertaking would be created by the amalgamation of two existing undertakings, or by the absorption of one by another. While this generally means that the legal personality of one or more pre-merger undertakings would no longer exist post-transaction, de facto mergers also qualify under Section 3(2)(a), if the transaction results in the creation of a permanent, single economic management (such as by revenue- or risk-sharing through the entities that are part of the group).
The second type of transaction concerns the acquisition of control, which translates as the ability to exercise decisive influence by one or more undertakings, whether solely or jointly, over the activities of another undertaking. In this regard the Ordinance (at Section 5 of Schedule 7) makes clear that particular regard will be attributed to the ownership of or the right to use an undertaking’s assets; or rights or contracts that enable decisive influence to be exercised with regard to the composition, voting and governance of any governing body of an undertaking. The acquisition of control therefore would be derived by an undertaking becoming a holder of such rights or otherwise having the power to exercise such rights. Consistent with the position under EU law, the Communications Authority explains at paragraph 2.7 of the Guideline that ‘decisive influence’ refers to the power to make strategic and management decisions (including the positive making or negative vetoing of a decision) related to an undertaking (such as in respect of budget, the business plan, major investments and so on). It should also be noted that an acquisition of assets, whether whole or part, which results in the target undertaking being replaced (or substantially replaced) in its business or part of the business would also constitute a merger.
In the final type of transaction, the creation of a joint venture would constitute a merger under the Ordinance if the joint venture is to perform, on a lasting basis, all the functions of an autonomous economic entity. Consistent with EU law, the Communications Authority clarifies in the Guideline that these are ventures that bring about a lasting change in the structure of the undertakings concerned and the relevant market. In this regard, a short-term, project-specific (such as a research and development or production) joint venture would not be seen as bringing about a lasting change. Additionally, the autonomous nature of the joint venture must go to prove that, subject to a reasonable transition period, it would ultimately have sufficient resources (in the form of management personnel, financial resources and other assets) to be able to act independently of its parents on the market. The activities of its parents upstream or downstream will be relevant for the analysis. Where substantial sales or purchases occur between the joint venture and its parents for a lengthy period and not on an arm’s-length basis, the joint venture would not be seen as having autonomy on the market. See the Guideline at paragraphs 2.8 to 2.12.
In line with the EU merger control regime, intra-group mergers are outside the purview of the Ordinance where the parties form part of a single undertaking.
Finally, in an attempt to bring legal certainty to M&A activities that are not caught by the merger rule, the Ordinance makes clear that mergers cannot be challenged under the Ordinance’s behavioural rules. In other words, the only relevant provisions in the Ordinance under which mergers should be assessed are the merger control regime; if a merger falls outside of the regime because none of the undertakings involved are or control telecommunications carrier licensees, then the merger is completely excluded from the scope of application of the Ordinance (see Section 4 of Schedule 1 to the Ordinance). Although the Communications Authority’s guidance on this point is not entirely clear, the Guideline suggests at paragraphs 2.18 and 2.19 that ancillary restrictions (such as non-competes) that are directly related and necessary to the implementation of the merger should also benefit from this exclusion.
iii Standard of review: substantial lessening of competition
As already mentioned, Section 3 of Schedule 7 to the Ordinance provides that mergers that substantially lessen competition are prohibited. The Ordinance provides further guidance on the matters that may be considered in determining whether competition is substantially lessened. Section 6 of the same Schedule lists the following matters:
- a the extent of competition from competitors outside Hong Kong;
- b whether the acquired undertaking, or part of the acquired undertaking, has failed or is likely to fail in the near future;
- c the extent to which substitutes are available or are likely to be available in the market;
- d the existence and height of any barriers to entry into the market;
- e whether the merger would result in the removal of an effective and vigorous competitor;
- f the degree of countervailing power in the market; and
- g the nature and extent of change and innovation in the market.
These factors are not exhaustive, and the Communications Authority has developed a more comprehensive methodology for its assessment, which it sets out at paragraphs 3.21 to 3.85 of the Guideline. One of the most relevant aspects of this methodology is the reliance on market concentration levels as a proxy for the more complex economic analysis of whether competition is substantially lessened. The Guideline provides for indicative market concentration safe harbours, below which a substantial lessening of competition is deemed unlikely.
The Guideline first indicates that, in general, horizontal mergers leading to a combined market share of 40 per cent or more are likely to raise competition concerns. Below this market share threshold, there may still be concerns if market concentration ratios are exceeded. These ratios are expressed in the form of two alternative safe harbour thresholds at paragraphs 3.15 to 3.19 of the Guideline:
- a if the post-merger combined market share of the four (or fewer) largest firms (CR4) in the relevant market is less than 75 per cent, and the merged firm has a market share of less than 40 per cent, the Communications Authority takes the view that it is unlikely that there will be a need to carry out a detailed investigation or to intervene. Where the CR4 is 75 per cent or more, the Authority is unlikely to investigate the merger if the combined market share of the merged entity is less than 15 per cent of the relevant market; and
- b an alternative safe harbour threshold relies on the Herfindahl-Hirschman Index (HHI) measure of market concentration. The Communications Authority considers that no detailed investigation will be required for mergers fulfilling any of the following conditions:
- • any merger leading to a post-merger HHI of less than 1,000 on the relevant markets;
- • any merger leading to a post-merger HHI of between 1,000 and 1,800 and producing an increase in the HHI of less than 100; or
- • any merger leading to a post-merger HHI of more than 1,800 and producing an increase in the HHI of less than 50.
Notwithstanding the above, the Authority is careful to mention in the Guideline that the safe harbours are indicative in nature and that it does not completely rule out intervention even where transactions are below these thresholds.
iv The lead authority to enforce the merger rule is the Communications Authority, but the power of adjudication belongs to the Competition Tribunal
Under Section 159 of the Competition Ordinance, the newly established Competition Commission has concurrent jurisdiction with the Communications Authority in respect of the activities of undertakings licensed to operate in the telecommunications and broadcasting sectors. However, in recognition of the Communications Authority’s specific function of regulating the telecommunications sector, and in view of the limited application of the merger rule, both authorities have agreed that the Communications Authority will ordinarily take the lead on matters that fall within their concurrent jurisdiction, including mergers (see clause 1.2 of the Memorandum of Understanding between the Competition Commission and the Communications Authority of 14 December 2015).
In this regard, the powers of the Communications Authority under the Competition Ordinance in relation to mergers are limited to conducting investigations. While the Authority can seek to resolve issues informally or by way of commitments, most adjudicative powers belong to the newly established Competition Tribunal.
v Voluntary notification
There is no statutory obligation under the Competition Ordinance for parties to a merger that falls within the scope of the merger rule to seek clearance from the Communications Authority (or the Competition Commission). The merger control regime is entirely voluntary. However, in a departure from the previous regime under the Telecommunications Ordinance (and other voluntary regimes such as those of Australia, Singapore and the UK), the possibility for parties to seek a formal decision from the competition authorities is severely curtailed. Under the Competition Ordinance, applications for a decision can only be made if parties intend to avail themselves of the economic efficiency exclusion. In addition, the competition authorities are required to consider the application (and even then there is no obligation to issue a decision) where it poses novel or unresolved questions of wider importance or public interest and where there is no clarification in existing case law on the matter (see Section 11 of Schedule 7 to the Ordinance).
To remedy this very limited scope of application, the competition authorities have introduced an informal notification regime under their joint Guideline. Under this informal procedure, parties are invited to approach the Communications Authority to discuss their transaction and seek informal non-binding advice on the transaction on a confidential basis. See paragraphs 5.4 to 5.8 of the Guideline.
II YEAR IN REVIEW
The main development in the past twelve months has been the introduction of the new merger control rules under the Competition Ordinance, which took effect on 14 December 2015. The main changes against the previous regime under the Telecommunications Ordinance are as follows:
- a The new regime has a broader scope of application. Whereas the old regime required a strong nexus between the transaction and one or more holders of a telecommunications licence, the new regime applies not only to mergers directly involving telecommunications licensees but also to those involving undertakings (i.e., business groups) that directly or indirectly control those licensees. Further, the jurisdiction of the competition authorities under the new regime is no longer limited to assess a transaction’s effects on a telecommunications market but extends to any market. Finally, the new regime also applies to the establishment of greenfield joint ventures where they are full-function in nature.
- b Change to a judicial enforcement regime. The Competition Ordinance brought two significant changes to the enforcement regime. First, the newly established Competition Commission now has concurrent jurisdiction with the Communications Authority to enforce the merger rules, although in practice the latter will retain a leading role pursuant to the terms of the Memorandum of Understanding between the two authorities. Second, most adjudicative powers now belong to the Competition Tribunal, which can make orders on application by either of the competition authorities.
- c The possibility for the parties to obtain a formal decision has been curtailed under the Ordinance. The competition authorities have partly remedied this with the introduction of an informal notification regime in their Guideline.
Other significant developments in 2015 relate to the introduction of the new regime. These are mainly the joint adoption by the Communications Authority and the Competition Commission of the Guideline in July 2015, the conclusion of a Memorandum of Understanding between the Competition Commission and the Communications Authority in December 2015, and the issuance of Application Form M, which sets out the information required for an application for a decision on whether a merger or a proposed merger is excluded from the application of the merger rule.
Since the entry into force of the new merger rules in December 2015, the Communications Authority has reviewed one transaction. On 31 March 2016, the Authority announced that it had decided not to open an investigation under the Competition Ordinance in relation to the acquisition of New World Telecommunications by Hong Kong Broadband Network.2 In its press release, the Authority explained that the acquirer was the holding company of Hong Kong Broadband Network Limited, a carrier licensee under the Telecommunications Ordinance, and that the transaction led to an indirect acquisition of New World Telecommunications Limited, another carrier licensee under the Telecommunications Ordinance. The transaction thus fell within the scope of the merger rule under the Competition Ordinance. While the activities of the acquirer and the target overlap in relation to the provision of fixed-voice and broadband telecommunications services in Hong Kong, the Authority took the view that the transaction was unlikely to have the effect of substantially lessening competition in the relevant telecommunications service markets in Hong Kong. It accordingly decided not to commence an investigation under the Competition Ordinance. The Authority’s press release does not explain whether the parties had notified their transaction or whether the Authority reviewed the transaction of its own initiative.
III THE MERGER CONTROL REGIME
i No mandatory filing requirement
In the absence of a statutory obligation for parties to notify and obtain clearance from the Communications Authority in respect of a merger falling within the scope of the merger rule, parties are equally not subject to any corresponding obligation to suspend the implementation or consummation of their transaction. Instead, the competition authorities (in practice, the Communications Authority) are expected to keep themselves informed of any transactions that come within the scope of their jurisdiction and to bring objection by initiating investigations and (if necessary) proceedings before the Competition Tribunal to challenge a completed or anticipated merger. Appropriate remedies in the form of commitments may also be negotiated at any stage to allay any concerns that are identified, in consideration for the Communications Authority’s agreement to refrain from taking action to investigate, bring proceedings, or to terminate any investigation or proceeding that has been commenced.
The absence of any suspension obligation removes an important hurdle, giving parties considerable flexibility in the implementation of their transaction. More specifically, it means that transactions involving publicly listed entities, including hostile takeovers, which are otherwise often subject to merger control filing requirements around the world, can proceed unimpaired by protracted delays.
ii Challenges by the Communications Authority
Notwithstanding its general power to conduct investigations in respect of a suspected contravention of the Ordinance (under Section 39), investigations of an already completed merger must be commenced within 30 days after the day on which the Communications Authority first became aware, or ought to have become aware, that a merger has taken place. Further, the Communications Authority may only mount a challenge before the Competition Tribunal within six months after completion of such merger or becoming aware of it (whichever is later). Accordingly, the commencement of an investigation within the prescribed time limit is essential to its ability to remedy the consequences of a contravention of the merger rule. Once objections in respect of a completed merger have been raised in legal proceedings, and the Competition Tribunal is satisfied that it leads to a substantial lessening of competition in Hong Kong, the Competition Tribunal can make an appropriate order against the merger.
While the Communications Authority is subject to more onerous procedural constraints in respect of proceedings initiated against already completed mergers, these do not apply in the context of anticipated mergers. Accordingly, it may exercise its general power to conduct an investigation and apply to the Competition Tribunal for an order to prevent (or alter the scope) of a merger that, if carried into effect, would result in the substantial lessening of competition in Hong Kong. In a similar vein, interim measures can be issued to prevent any ‘pre-emptive action’ that might prejudice the outcome of proceedings or a final order that is made following the hearing of such application before the Competition Tribunal.
Competition Tribunal orders against mergers
The consequences of completing a merger that is found to contravene the Competition Ordinance, or proceeding with a merger that will likely do so if carried into effect, are far-reaching; potentially giving rise to a Competition Tribunal order that either seeks to prevent a contravention or bring it to an end. This may include orders directing parties not to proceed with a merger or imposing structural or behavioural remedies, such as business, asset or share divestitures in respect of an overlapping business, the dissolution of the merger, or an undertaking by parties to conduct themselves in a particular manner. When challenges are brought in relation to anticipated mergers, the Competition Tribunal can also order interim measures for the purpose of preventing pre-emptive action pending review of the proposed transaction.
Under Section 155 of the Competition Ordinance, parties (including the Communications Authority) that wish to challenge a judgment of the Competition Tribunal may bring an appeal in the Court of Appeal.
iii Voluntary notification procedures
The risks that a merger might be blocked or unwound altogether or materially altered in scope, and the transaction costs associated with these risks are likely to encourage parties to exercise caution before consummating transactions that fall within the scope of the merger rule. This situation is further aggravated given the market share safe harbours set out under the Guideline, aimed at facilitating the self-assessment of whether a transaction might raise competition concerns, do not sufficiently safeguard the interests of merging parties – meeting one or both of these thresholds does not exclude the risk of ensuing investigations (see paragraph 5.6 of the Guideline).
Several options are available to merging parties who wish to seek comfort that their transaction will not be challenged. The Ordinance provides for two formal procedures, whose scope of application is regrettably very limited. This has led the Communications Authority to establish informal procedures, one of which is documented in the Guideline. These are discussed in turn below.
Applications for a decision on the availability of an exclusion
The only procedure that allows parties to seek a formal decision from the Communications Authority is found in Section 11 of Schedule 7 to the Ordinance. Under this procedure, merging parties can apply for a decision in reliance on a statutory cause for exclusion, in other words an exception in the Ordinance pursuant to which the transaction escapes from the application of the merger rule. Of most relevance is the economic efficiency exclusion under Section 8 of Schedule 7 to the Ordinance. This efficiency exception is available by operation of statute and can be relied upon as soon as specific conditions are met – the parties need not obtain a decision from either the Communications Authority or the Competition Tribunal.
The Communications Authority is not under a statutory obligation to consider an application for a decision under Section 11 of Schedule 7 unless three specific conditions are met. In other words, it retains the discretion to decline to consider an application altogether unless:
- a the application poses novel or unresolved questions of wider importance or public interest in relation to the application for an exclusion;
- b the application raises a question for which there is no clarification in existing case law or decisions of the Communications Authority; and
- c it is possible to make a decision on the basis of the information provided.
In addition to a lack of precedent showing (and certainty as to) how these conditions will be applied in practice, even where all three conditions are indeed met, the Communications Authority’s statutory obligation would still be limited to considering an application – it need not consider the merits of the application, nor provide a definitive decision on whether the subject-matter merger infringes the Ordinance. On being satisfied that the aforesaid conditions have been met and in proceeding to consider an exclusion application, it is also subject to an obligation to publicise a notice of the relevant application and to allow 30 days for the submission of representations by interested third parties.
Having considered these representations, the Communications Authority may then make a decision as to whether the merger would be excluded from the application of the merger rule. The Ordinance does not provide for a timetable in this respect. In the Guideline, the Communications Authority states that it will endeavour to process applications in an efficient and timely manner with due regard being paid to the circumstances of the case (see paragraph 5.21 of the Guideline). Although the Communications Authority’s statutory obligation is only limited to considering an application and it does not follow that it will also issue a formal decision, it would be expected to adopt a decision in all cases where it decides to proceed to launch a public consultation in respect of an application under consideration.
Under the Competition Ordinance, a favourable decision in respect of an application provides an applicant with confirmation that a specific merger fulfils the conditions to qualify for the efficiency exclusion, affording immunity from enforcement. However, the very narrow scope of application of the procedure suggests that formal decisions from the Communications Authority are likely to be few and far between.
Applications for exemptions on public policy grounds
The second formal procedure provided by the Ordinance does not involve the Communications Authority. Under Section 9 of Schedule 7 to the Ordinance, parties may seek an order from the Chief Executive in Council that their transaction should be exempted from the prohibition under the merger rule on the basis that there are exceptional and compelling reasons of public policy. Reliance on this exemption is not automatic; parties are required to persuade the Chief Executive in Council to make a favourable order removing their obligation to comply with the merger rule. At the time of writing, the government has yet to publish any guidance on how the procedure would operate and the circumstances that would justify an exemption on public policy grounds.
Applications for confidential guidance
While the Competition Ordinance puts the emphasis on self-assessment and provides very few avenues to obtain formal comfort from the authorities that their merger will not be challenged, the Communications Authority has given clear indication in the Guideline that parties consummate their transactions at their own risks, and that they are advised to engage with it to discuss proposed mergers at an early stage to understand whether the Authority has any concerns (see paragraphs 5.2, 5.3 and 5.6 of the Guideline). However, the Communications Authority’s commitment to engage with transaction parties in respect of a proposed merger only extends to the provision of non-binding, informal advice on a confidential basis, and there is no strict timetable applicable to this process.
The provision of non-binding, informal advice under this procedure may prove to have limited appeal for transaction parties. Notably, the absence of any strict time constraints within which the Communications Authority must complete its assessment exacerbates this uncertainty. Moreover, in seeking to preserve confidentiality in respect of a transaction for which informal advice is being sought, the Communications Authority’s analysis will be based primarily on the evidence of the relevant parties, when in many cases it is the conduct of market inquiries, including consulting competitors of the merging parties, suppliers, customers, industry associations and consumer groups, which leads to competition concerns being uncovered. This begs the question of whether an assessment in a self-contained manner (and on a confidential basis), being limited to only evidence produced by the transaction parties, would allow the Communications Authority to arrive a satisfactory determination of whether a merger is or will likely result in a substantial lessening of competition.
Possible outcomes and other possible procedures
The Guideline contemplates the following outcomes in respect of applications for confidential guidance: (1) a positive confidential decision; (2) the opening of a formal investigation leading to a possible court challenge; (3) commitments discussions; or (4) a formal application for a decision that the merger benefits from a cause for exclusion. In practice, there may be room for the Communications Authority to develop other approaches and procedures that offer more legal comfort to merging parties. For example, the Authority may well take steps to gather information from third parties about the transaction, on the model of the initial assessment phase described in paragraphs 3.1 to 3.8 of the Guideline on Investigations, leading to the issuance of a public decision not to challenge the transaction without the need to formally open an investigation. Such a decision would be adopted on a more informed basis, thereby providing more comfort to the merging parties. While there is no information available on whether the parties had voluntarily approached the Communications Authority, in the Hong Kong Broadband Network/New World Telecommunications case the Authority showed that it was prepared to publicly state that it would not seek to challenge a merger.3
IV OUTLOOK AND CONCLUSIONS
While the merger control regime is relatively new and may bring about some procedural uncertainty, particularly for parties wishing to obtain formal legal comfort from the Communications Authority, it builds upon a well-developed decisional practice under the previous regime. As a result merging parties with activities in the telecommunications sector do not face a significantly changed regulatory framework.
The legal framework established by the Competition Ordinance has clearly been designed to serve as a blueprint for a merger regime of wider application. Officials from the Competition Commission have publicly stated that they wish the Ordinance to be amended in due course to expand the regime to all sectors of the Hong Kong economy.
1 Marc Waha is a partner and Pearl Yeung and Sophie Chen are associates at Norton Rose Fulbright.
2 See the Communications Authority’s press release of 31 March 2016 regarding its decision not to open an investigation in HKBN’s acquisition of New World Telecommunications.
3 See the Communications Authority’s press release of 31 March 2016 regarding its decision not to open an investigation in HKBN’s acquisition of New World Telecommunications.