On 15 May 2002, a bill regulating mergers and acquisitions in the telecommunications market was presented to the Legislative Council in Hong Kong. This new bill will amend the Telecommunications Ordinance by granting the Telecommunications Authority (TA) the power to order a carrier licensee to act to eliminate any actual or likely anti-competitive effects of a change in its ownership or control.
Who will be affected?
At first glance, the bill will only apply to carrier licensees, which include:
- local fixed telecommunications network services operators
- TV broadcasters who own or operate
- telecommunications transmission facilities
- external fixed telecommunications network services operators
- mobile operators
- satellite operators
However, the scope of the bill is far wider, as it grants the TA the power to regulate merger and acquisition (M&A) activities occuring at the level of carrier licensee shareholders. Therefore, the bill could, indirectly, apply to purchasers of shares in carrier licensees.
How will M&A activities be regulated?
Ex post regulation
M&A activities will be regulated on an ex post basis. This means that regulatory control would be exercised after a merger or acquisition is completed. Under the new framework, a carrier licensee would not have to obtain the TA's prior consent for any proposed change to its ownership or control - though it may do so voluntarily.
Under the bill, if the TA believes that a change in the ownership or control of a carrier licensee is likely to substantially lessen competition in a telecommunications market, it may direct the licensee to take action to eliminate any anti-competitive effect. The types of change that would be affected are changes in:
- the control exercised over a carrier licensee
- the beneficial ownership of voting shares in a carrier licensee
- the voting control of voting shares in a carrier licensee
The TA may direct the carrier licensee to take remedial action, including procuring modifications to its beneficial ownership or control. If it fails to act as directed, the TA may impose sanctions such as financial penalties or suspension or cancellation of its licence.
Obtaining prior consent
A carrier licensee may voluntarily approach the TA to seek prior consent for any proposed change in ownership or control.
The TA has the power to:
- refuse consent; or
- give its consent subject to the carrier licensee's taking certain actions
Once the TA has given its consent, provided the proposed change takes effect within the terms of that consent, the TA may not alter its decision and require the licensee to unwind the change.
In practice, given the TA's powers,potential purchasers would be prudent to seek the TA's prior consent, where possible. This is particularly true if the transaction is likely to cause an adverse effect on competition in the market.
Implications
As noted above, the bill will apply not only directly to carrier licensees but also indirectly to purchasers of shares in licensees. Any M&A activity to be undertaken in a telecommunications market by any person should be examined for its potential anti-competitive effect.
The bill appears to provide only for carrier licensees whose ownership or control will change to apply to the TA for prior consent. This means the procedure is likely to be useful only in friendly M&A situations, where the target carrier licensee and purchaser are co-operating.
There seems to be no avenue for a hostile purchaser to seek the TA's prior consent for its proposed transaction. A hostile purchaser will have to accept the risk that the TA may deem the transaction anti-competitive and direct it to be unwound.
Failure to comply with this direction could result in financial penalties or suspension or cancellation of the target company's licence. This may be an unintended effect of the bill. It remains to be seen whether in practice the TA will entertain approaches from a potential purchaser.
Furthermore, where the carrier licensee is listed in Hong Kong, the absence of a mechanism in the Takeovers Code for delaying the timetable where there is a competition referral, as well as - for the time being - the absence of any clear indication of how long the TA would take to process a request for prior consent, will have implications for structuring takeovers in Hong Kong.
It is noteworthy that the TA's focus is on any actual or likely anti-competitive effect that may occur in a telecommunications market. In other words, a transaction may take place in, say, the fixed line market, but if this adversely affects competition in, say, the mobile market, then it would trigger the exercise of the TA's regulatory power.
The bill does not define the term 'market'. The guidelines which the bill requires the TA to issue may address this critical question. We understand that these guidelines will specify criteria to be considered in determining anti-competitive effect, including:
- availability of substitutes
- entry barriers
- market concentration
- degree of countervailing power
- the dynamic characteristics of the market (growth,innovation and product differentiation)
- the removal of a vigorous and effective competitor
- the nature and extent of vertical integration
Also of note are the very wide definitions of the terms 'change of control' and 'voting control', which are the threshold questions in determining whether a transaction would trigger the TA's regulatory power.
It remains to be seen whether these issues will be addressed as part of the ensuing debate.
