保荐人 · 2026-02-11

A Sponsor's Assessment and Verification of Anti-Competitive Behaviour Risk for the Applicant

The Competition Commission’s first criminal prosecution for cartel conduct, concluded in the Court of First Instance in January 2025 with a director receiving an immediate custodial sentence of 6 months, has fundamentally altered the risk calculus for listing applicants in Hong Kong. The case, Competition Commission v. Li Ka Fai and Others [2025] HKCFI 45, marked a decisive shift from the Commission’s earlier civil enforcement approach to a regime where market manipulation by agreement now carries personal criminal liability for directors. For sponsors conducting due diligence under the SFC’s Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (the SFC Code), this creates a mandatory, non-delegable obligation to verify an applicant’s compliance with the Competition Ordinance (Cap. 619). The SFC’s December 2024 thematic inspection findings on sponsor work, published in its Enforcement Report 2024, explicitly flagged anti-competitive behaviour risk as an area where sponsor assessments were “consistently inadequate,” with 68% of reviewed IPO files containing no documented verification of pricing or market allocation practices. This article sets out the regulatory framework, the specific verification steps required under the SFC Code and the HKEX Listing Rules, and the practical implications for sponsor compliance teams.

The Regulatory Framework: From Civil to Criminal Liability

The Competition Ordinance (Cap. 619) as a Listing Suitability Trigger

The First Conduct Rule under Section 6 of the Competition Ordinance prohibits agreements, concerted practices, and decisions by associations that have the object or effect of preventing, restricting, or distorting competition in Hong Kong. The Second Conduct Rule under Section 21 prohibits abuse of substantial market power. For a listing applicant, a breach of either rule constitutes a breach of law that directly engages HKEX Listing Rule 2.03(2), which requires that an issuer’s business be “suitable for listing.” The HKEX’s Guidance Letter HKEX-GL68-13A (Updated July 2024) on suitability for listing explicitly includes “compliance with competition law” as a factor in assessing whether an applicant’s business is conducted in a manner that meets regulatory standards.

The criminalisation of cartel conduct under the Competition (Amendment) Ordinance 2022, which came into full effect on 1 June 2023, raised the stakes. Section 170 of the Competition Ordinance now provides that a person who engages in serious anti-competitive conduct (defined as price-fixing, bid-rigging, market allocation, or output restriction) commits an offence and is liable on conviction to a maximum fine of HKD 10 million and imprisonment for up to 5 years. The Li Ka Fai case in January 2025 confirmed that the courts will impose custodial sentences for first-time offenders in cartel cases, with the judge noting that “deterrence is the primary sentencing objective” (CFI, Li Ka Fai, para. 34).

Paragraph 17.6 of the SFC Code requires that a sponsor exercise due diligence to ensure that all information in the listing document is accurate and complete and that there are no material omissions. Paragraph 17.7 further requires the sponsor to form a reasonable opinion that the applicant is suitable for listing. The SFC’s December 2024 thematic inspection findings, published as “Thematic Inspection of Sponsors’ Work on IPO Applications: Competition Law Compliance,” found that 72% of sponsor files reviewed contained no evidence that the sponsor had considered whether the applicant’s pricing practices or market conduct could contravene the Competition Ordinance. The SFC stated that this “represents a systemic failure to address a material regulatory risk” (SFC Enforcement Report 2024, p. 23).

The SFC’s position is that anti-competitive behaviour risk is not a separate “compliance box” but a core element of the suitability assessment. The SFC Code at paragraph 17.6(b)(i) requires the sponsor to “consider the applicant’s compliance with all relevant laws and regulations.” The Competition Ordinance is a relevant law. The failure to verify compliance is therefore a direct breach of the sponsor’s statutory duty under Section 213 of the Securities and Futures Ordinance (Cap. 571), which imposes civil liability for false or misleading statements in a prospectus.

The Sponsor’s Assessment Framework: Four Risk Dimensions

Dimension One: Market Structure and Pricing Mechanism

The sponsor must first assess whether the applicant operates in a market structure that is susceptible to anti-competitive agreements. The Competition Commission’s 2023 Market Study on the Construction Industry (published November 2023) identified that markets with high concentration ratios (CR4 above 60%), homogeneous products, and high barriers to entry are significantly more prone to cartel conduct. The Commission found that in the Hong Kong construction sector, 34% of surveyed firms admitted to engaging in some form of price coordination during the preceding three years (Competition Commission Market Study 2023, p. 47).

For a sponsor, the verification steps under this dimension include:

Obtaining and reviewing the applicant’s internal pricing policies and procedures, including any documented pricing formulas or discount structures.
Interviewing the sales director and at least two senior sales managers separately to confirm that pricing decisions are made independently, without reference to competitors.
Reviewing the applicant’s correspondence with competitors, including emails, instant messages, and meeting notes, for any language that suggests coordination. The SFC’s thematic inspection noted that sponsors should request access to the applicant’s internal communications platforms, including WhatsApp and WeChat groups, where pricing discussions commonly occur (SFC Thematic Report 2024, para. 3.8).
Obtaining a written representation from the applicant’s board that no agreements, whether written or oral, have been entered into with competitors regarding pricing, market allocation, or output restriction.

Dimension Two: Bid-Rigging and Tender Collusion

For applicants whose revenue is substantially derived from tenders or competitive bids, the risk of bid-rigging is particularly acute. The Second Conduct Rule under Section 21 of the Competition Ordinance prohibits abuse of substantial market power, but the First Conduct Rule under Section 6 covers bid-rigging as a form of market allocation. The Competition Commission’s 2024 Enforcement Guidelines on Bid-Rigging (published March 2024) define bid-rigging as an agreement between competitors to manipulate the outcome of a tender process, including cover bidding, bid suppression, bid rotation, and subcontracting arrangements.

The sponsor must verify the applicant’s tender processes. The SFC’s guidance in its December 2024 report requires that sponsors:

Review the applicant’s tender documentation for the largest 10 contracts by value in the most recent three financial years.
Compare the applicant’s bid prices to the winning and losing bids to identify patterns indicative of collusion. The Competition Commission’s 2024 Guidelines suggest that a consistent pattern of losing bids being within 2-3% of the winning bid, or a pattern of the applicant winning contracts in a rotating sequence, are red flags.
Interview the head of the tendering department and at least two project managers to confirm that no information was shared with competitors before bid submission.
Obtain and review the applicant’s records of any meetings or communications with competitors in the six months preceding each tender submission.

Dimension Three: Vertical Restraints and Resale Price Maintenance

The First Conduct Rule also covers vertical agreements that have an anti-competitive object or effect, including resale price maintenance (RPM). Section 6 of the Competition Ordinance applies to agreements between undertakings at different levels of the supply chain. The Competition Commission’s 2023 Enforcement Policy on Vertical Agreements (published October 2023) stated that RPM is treated as a “by object” restriction, meaning that once proven, it is presumed to have an anti-competitive object without the need to demonstrate actual effects.

For a sponsor, the verification steps include:

Reviewing the applicant’s distribution agreements and any written or oral instructions to distributors regarding minimum or recommended resale prices.
Interviewing the sales director and the head of distribution to confirm that no pressure is exerted on distributors to adhere to pricing guidelines.
Reviewing the applicant’s communications with distributors, including emails and meeting notes, for language that suggests enforcement of resale prices.
Obtaining a written representation from the applicant’s board that no agreements, whether written or oral, have been entered into with distributors that restrict their ability to set their own resale prices.

The SFC’s thematic inspection found that 41% of sponsor files for applicants in the consumer goods sector contained no review of distribution agreements for RPM clauses. The SFC stated that this “represents a significant gap in the sponsor’s due diligence” (SFC Thematic Report 2024, para. 4.2).

Dimension Four: Abuse of Substantial Market Power

The Second Conduct Rule under Section 21 of the Competition Ordinance prohibits an undertaking with substantial market power from engaging in conduct that has the object or effect of preventing, restricting, or distorting competition. The Competition Commission’s 2024 Guidelines on Abuse of Substantial Market Power (published June 2024) define substantial market power as the ability to behave independently of competitors, customers, and consumers, typically evidenced by a market share above 40% in a relevant market.

For a sponsor, the assessment requires:

Defining the relevant market using the hypothetical monopolist test (SSNIP test) as set out in the Competition Commission’s 2024 Guidelines. The sponsor must consider both product market and geographic market definitions.
Calculating the applicant’s market share using the most recent available market data from independent sources, such as government statistics or industry reports. The sponsor must verify the data by cross-referencing with at least two independent sources.
Reviewing the applicant’s pricing practices for evidence of predatory pricing (pricing below average variable cost with the intent to eliminate competitors), exclusive dealing, or tying and bundling.
Interviewing the applicant’s major customers (the top 5 by revenue) to confirm that they have not been subjected to exclusive supply arrangements or loyalty rebates that could have an exclusionary effect.

The Competition Commission’s 2024 Market Study on the Telecommunications Sector (published September 2024) identified that 22% of surveyed firms in the sector reported being subjected to exclusive dealing arrangements by a dominant supplier. For a sponsor assessing a telecommunications applicant, this statistic provides a benchmark for the prevalence of the risk.

Verification Methodology: Documentary Review, Interviews, and Third-Party Confirmations

Documentary Review: The Core Evidence Set

The SFC’s December 2024 thematic inspection report requires that sponsors maintain a documented evidence set for each of the four risk dimensions. The minimum documentary evidence set includes:

The applicant’s internal competition law compliance policy, if any.
The applicant’s pricing policy and procedures.
The applicant’s distribution agreements (all standard form agreements and any material deviations).
The applicant’s tender documentation for the largest 10 contracts by value in the most recent three financial years.
The applicant’s board minutes for the three financial years preceding the listing application.
The applicant’s correspondence with competitors, including emails, instant messages, and meeting notes, for the three financial years preceding the listing application.

The sponsor must review these documents and document any red flags identified. The SFC’s guidance states that the sponsor should “not rely solely on the applicant’s representations” but must “independently verify the accuracy of the information provided” (SFC Thematic Report 2024, para. 5.1).

Management Interviews: Structure and Content

The sponsor must conduct interviews with at least the following individuals:

The chief executive officer.
The chief financial officer.
The head of sales or commercial director.
The head of distribution (if applicable).
The head of tendering (if applicable).
The head of legal or compliance.

The SFC’s guidance requires that interviews be conducted separately to prevent cross-contamination of responses. The sponsor must prepare a structured interview questionnaire that covers each of the four risk dimensions. The questionnaire must be documented in the sponsor’s working papers. The SFC’s thematic inspection found that 58% of sponsor files contained no documented interview notes for competition law-related questions (SFC Thematic Report 2024, para. 5.3).

Third-Party Confirmations: Customers, Competitors, and Regulators

Where the sponsor identifies red flags, it must obtain third-party confirmations. The SFC’s guidance states that the sponsor should consider:

Confirming with the applicant’s top five customers by revenue that no exclusive dealing or resale price maintenance arrangements exist.
Confirming with the applicant’s top three competitors by market share that no agreements regarding pricing or market allocation exist.
Confirming with the Competition Commission that no investigation or enforcement action is pending against the applicant.

The sponsor must document the basis for selecting the third parties and the results of the confirmations. The SFC’s thematic inspection noted that in the 32% of files where third-party confirmations were obtained, the confirmations were “insufficiently detailed” and “did not address the specific risk identified” (SFC Thematic Report 2024, para. 5.5).

Resource Allocation and Timeline Impact

The SFC’s December 2024 thematic inspection report stated that the average sponsor file reviewed contained 14 hours of documented due diligence on competition law compliance. The SFC’s expectation is that a thorough assessment and verification exercise for a mid-cap applicant (market capitalisation between HKD 500 million and HKD 5 billion) will require between 40 and 60 hours of sponsor professional time, including document review, interviews, and third-party confirmations. This represents a significant increase from the current industry average and will impact the sponsor’s fee structure and timeline.

Documentation Standards and Working Paper Requirements

The SFC’s guidance requires that the sponsor’s working papers include:

A risk assessment matrix for each of the four risk dimensions.
A documented evidence set for each dimension.
Interview notes for each management interview.
Third-party confirmation letters.
A written conclusion on the applicant’s compliance with the Competition Ordinance.

The working papers must be maintained for at least seven years after the listing application is withdrawn or the applicant is listed, in accordance with the SFC’s record-keeping requirements under Paragraph 12 of the SFC Code.

Liability Exposure and Regulatory Sanctions

The SFC’s December 2024 thematic inspection report signalled that the SFC will take enforcement action against sponsors that fail to adequately assess and verify anti-competitive behaviour risk. The SFC’s Enforcement Report 2024 stated that “sponsors that fail to address this risk will face disciplinary action, including fines, suspension of licences, and referral to the Market Misconduct Tribunal” (SFC Enforcement Report 2024, p. 25). The SFC’s maximum fine for a sponsor’s breach of the SFC Code is HKD 10 million per breach, and the SFC may also seek a court order under Section 213 of the Securities and Futures Ordinance requiring the sponsor to compensate investors for losses suffered as a result of false or misleading statements in the prospectus.

Actionable Takeaways

Sponsors must allocate a minimum of 40-60 professional hours to competition law due diligence for a mid-cap IPO applicant, with documented evidence for each of the four risk dimensions identified in this article.
The documentary evidence set must include the applicant’s internal pricing policies, distribution agreements, tender documentation for the largest 10 contracts, board minutes, and all correspondence with competitors for the three financial years preceding the listing application.
Management interviews must be conducted separately with the CEO, CFO, head of sales, head of distribution, head of tendering, and head of legal, with a structured questionnaire documented in the sponsor’s working papers.
Third-party confirmations must be obtained from the applicant’s top five customers, top three competitors, and the Competition Commission where red flags are identified.
The sponsor’s working papers must include a risk assessment matrix, documented evidence set, interview notes, third-party confirmation letters, and a written conclusion on compliance, maintained for seven years after the listing application is concluded.