Challenges lie ahead for Malaysia’s new competition commission

Author: | Published: 26 Sep 2012
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Competition law and policy in Malaysia remains in its relative infancy, being the latest country to implement antitrust legislation in the form of the Competition Act 2010. Following an 18-month moratorium and a 15 year gestation period the Act finally came into force on January 1 2012.

Enforceable by the Competition Commission, the Act governs all competition matters in Malaysia to the exclusion of energy and communication and multimedia, which are separately legislated for under the Energy Commission Act 2001 and Communications and Multimedia Act 1998, respectively. The Act contains no merger control provisions, which continue to be regulated by the Securities Commission under the Capital Markets and Services Act 2007 and Code on Take-Overs and Mergers 2010.

The Act has been the subject of speculation and scrutiny by public and private sector enterprises, professional advisers and consumers alike, as they await a decision and test case to judge the manner in which the Act will be implemented in practice.

The Act applies to enterprises that undertake any commercial activity that has an effect on any market for goods and services in Malaysia.

An enterprise is any entity carrying on commercial activities relating to goods or services. However a parent and subsidiary company are considered a single enterprise if, despite their separate legal entity, they form a single economic unit within which the subsidiaries do not enjoy real autonomy. The term does not extend to natural, private persons.

Commercial activity captures any activity of a commercial nature without reference to its profitability, however does not include: Any activity, directly or indirectly in the exercise of governmental authority; any activity conducted based on the principle of solidarity; and any purchase of goods or services not for the purposes of offering goods and services as part of an economic activity.

Market is any market in Malaysia or in any part of Malaysia, and when used in relation to any goods or services, includes a market for those goods or services and other goods or services that are substitutable for, or otherwise competitive with, the first-mentioned goods or services. The Commission has clarified that market definition "is about identifying all the suppliers of products that compete with the product under investigation," and that geographic markets and the nature of products will be taken into account. The Hypothetical Monopolist Test has been adopted by the Commission as a means of defining relevant markets.

Extraterritorial effect

The legislation casts a wide net in applying to any commercial activity that takes place within Malaysia and outside Malaysia but has an effect on competition in any market in Malaysia.

The Commission has stated in its guidelines that relevant economic markets can extend beyond a single country, however, it has failed to go a step further in elucidating how foreign competitors will be considered or dealt with, and the requisite standard of effect their behaviour must have on a market in Malaysia.

It is unclear how the Commission intends to take enforcement action against foreign enterprises which have no permanent establishment or presence in Malaysia. This uncertainty is a source of trepidation for foreign enterprises whose business and operations may have direct or indirect interaction with any market in Malaysia.

If the Commission makes a finding of infringement of the Act, infringing enterprises may risk financial penalties scaled to up to ten percent of their worldwide turnover accrued over the period during which the infringement occurred.

Anti-competitive conduct

Infringement of the Act can arise from prohibited anti-competitive agreements between enterprises and abuses of dominant position by enterprises (whether independently or collectively).

Anti-competitive agreements are not constrained to legal contracts governed by the Malaysian Contracts Act 1950, but are inclusive of any form of contract, arrangement or understanding, whether or not legally enforceable between enterprises, and include a decision by an association and concerted parties. In turn, concerted practices include any form of coordination between enterprises which knowingly substitutes practical cooperation between them for the risks of competition and include any direct or indirect contact which has the object or effect of influencing or disclosing courses of conduct.

A horizontal or vertical agreement between enterprises is prohibited where such agreement has the object or effect of significantly preventing, restricting or distorting competition in any market for goods or services.

A horizontal agreement is deemed to significantly prevent, restrict or distort competition where it has the object to: fix price or any other trading conditions; share market or sources of supply; limit or control (i) production, (ii) market outlets or market access; (iii) technical or technological development; or (iv) investment; or perform an act of bid rigging.

In such circumstances no assessment into the agreement's effect is required. The Commission has flagged, without limitation, certain horizontal agreements that require an assessment as to their anti-competitive effect: information sharing; restrictions on advertising; and standardisation agreements.

Though considered less harmful vertical agreements are likely to be anti-competitive where one of the parties has enough market power to influence the other (falling short of abuse of dominant position). The Commission has issued a non-exhaustive guide of its enforcement priorities for vertical agreements: resale price maintenance (minimum or maximum price fixing); tying/bundling; non-compete clauses; most or all products from seller; exclusive territory; exclusive customer allocation; and up-front access payments.

Nonetheless the Commission has indicated that anti-competitive non-price vertical agreements may not be considered to have a significant anti-competitive effect if the market share of both the seller and buyer is less than 25% of their relevant market.

It is significant to note that the Commission distinguishes between foreign and domestic suppliers of goods and services. In respect of foreign suppliers appointing a sole Malaysian distributor, it is expressly stated in the Commission's guidelines that it will not examine such agreements because practically the alternative may be no supply at all.

The Act and its corresponding guidelines are currently very general and it will continue to be challenging for enterprises to effectively monitor and modify their internal practices to ensure compliance, subject to the issue of more specific Commission guidelines targeting particular industries or categories of agreements.

Safe harbours and carve-outs

The Act excludes certain activities from its jurisdiction and the Commission intends to interpret such exclusions very narrowly. In the absence of any guidelines or explanatory notes, it remains to be seen how the carve-out provisions should be interpreted. Carve-outs include: any activity, directly or indirectly in the exercise of governmental authority; any activity conducted based on the principle of solidarity; and any purchase of goods or services not for the purposes of offering goods and services as part of an economic activity.

Schedule 2 of the Act further excludes the following activities from constituting anti-competitive agreements: an agreement or conduct to the extent to which it is engaged in an order to comply with a legislative requirement; collective bargaining activities or collective agreements in respect of employment terms and conditions and which are negotiated or concluded between parties which include both employers and employees or organisations established to represent the interests of employers or employees; an enterprise entrusted with the operation of services of general economic interest or having the character of a revenue-producing monopoly in so far as the prohibition under Chapter 1 and Chapter 2 of Part II of the Act would obstruct the performance, in law or in fact, of the particular tasks assigned to that enterprise.

The most clear cut exclusions arise from those complying with a legislative requirement.

By illustration, advocates and solicitors in Malaysia must impose scale fees for non-contentious land conveyance matters pursuant to the Solicitors' Remuneration Order 2005 (SRO). The SRO fixes what must be excluded from remuneration, late payment interest rates and prohibits discounts. This is a source of contention among and between lawyers and clients as it undercuts competitive pricing and disallows negotiation of legal fees on a willing buyer, willing seller basis. Such price-fixing is practically and commercially anti-competitive however its application constitutes an order to comply with a legislative requirement.

Other professional bodies such as the Board of Engineers are similarly subject to minimum scale fees for rendering professional services in connection with housing developments pursuant to the Notification of Scale of Fees for Housing Development Act 1997, and the Board of Architects are bound by the Architects (Scale of Minimum Fees) Rules 1986.

In developing a mature and competitive economy, liberating professional service providers would seem a reasonable first step. Consumers would benefit having a range of fee quotes to choose from and the choice may eventually create a more discerning market that values quality of output and improvement of deliverables.

Exclusions under the Act are not so easily identifiable when traversing into the realm of services of general economic interest or having the character of a revenue-producing monopoly. The Act and guidelines to date lack any constructive direction and the onerous terms economic, interest and monopoly remain undefined. As with section 5 relief discussed below, the burden is on the enterprise claiming an exclusion to prove it applies to their circumstances. It will be difficult to prove such exclusions where the parameters are still subject to interpretation.

Relief from liability

An anti-competitive agreement that infringes the Act is not void but merely voidable. A party to an anti-competitive agreement can seek relief for liability under section 5 of the Act provided it can show:

  • there are significant identifiable technological, efficiency or social benefits directly arising from the agreement;
  • the benefits could not reasonably have been provided by the parties to the agreement without the agreement having the effect of preventing, restricting or distorting competition;
  • the detrimental effect of the agreement on competition is proportionate to the benefits provided; and
  • the agreement does not allow the enterprise concerned to eliminate competition completely in respect of a substantial part of the goods or services.

The claiming party must prove these benefits conjunctively and show that they are passed on to consumers.

Safe harbour relief is available via individual or block exemption. Section 5 relief can also be invoked during the course of an investigation by the Commission.

Exemption applications are subject to an application fee of RM50,000 ($16,022) Upon approval, a yearly charge is payable at RM10,000 per year for individual exemptions, and RM20,000 per year per enterprise for block exemptions. The fees are said to "cover manpower costs incurred to study and review the applications, while also acting as an incentive for companies and industries to conduct their own assessments instead of leaving the task to MyCC".

The Commission acting as judge and jury may not currently have the relevant commercial or technical understanding of a particular industry or category of agreements to meaningfully evaluate the benefits claimed by enterprises. Section 17(2)(d) of the CCA does however, empower the Commission to "appoint such agents, experts or consultants as it deems fit to assist the Commission in the performance of its functions", so it is assumed that economic analysts and industry experts will be engaged by the Commission as and when necessary.

The Commission

The Commission is a creature of statute established by the Competition Commission Act 2010 (CCA) and falling under the ambit of the Minister of Domestic Trade, Co-Operatives and Consumerism. Headed by former Chief Judge of Malaysia Tan Sri Dato' Seri Siti Norma Yaakob as chairman, the Commission is ten-men strong and is currently supported by an executive arm of seven officers.

Principal functions of the Commission include advisory, enforcement, implementation, educational and investigatory powers. The CCA empowers the Commission to do all things necessary or expedient for or in connection with the performance of its functions, such as imposing penalties of a financial or non-financial nature, accessing computerised and non-computerised records of persons under investigation, searching premises and seizing information in whatever form with or without a warrant.

The Act does not prescribe any criteria or mechanism for the Commission to consider the merits of initiating or pursuing an investigation, granting the Commission discretion to select which cases to investigate, the scope of any investigation and the consequences arising from an infringement, subject to any directions of the Minister. Decisions of the Commission may be subject to review under the exclusive jurisdiction of a Competition Appeal Tribunal that has yet to be constituted.

An investigation can be closed at any time without any finding of infringement or imposition of any penalty on an enterprise where the Commission has considered appropriate:

  • After making preliminary inquiries, the Commission decides not to investigate a complaint.
  • After launching an investigation, the Commission is of the opinion that continuation would not be the best allocation of the Commission's resources.
  • After launching an investigation, the Commission has received an undertaking from the enterprise(s) under investigation to do or to refrain from doing anything the Commission considers appropriate.

The Commission's limited manpower, resources and low general public awareness of competition and compliance issues in Malaysia are foreseeable challenges for the Commission to overcome. It has yet to be seen if the Commission will be able to effectively undertake its various functions. As the Commission will have to manage and allocate financial and human resources very selectively, one can begin to understand the Commission's emphasis on independent self-assessment by enterprises.

Self-assessment

The Act does not implement or provide for mandatory or optional reporting or guidance mechanisms between enterprises and the Commission, and the Commission will not entertain any application for guidance or approval of any potentially anti-competitive agreements unless it is specifically provided for under the Act. Enterprises must undertake self-assessment of their business conduct, procedures, management and control systems to substantiate any claim for relief of liability and ensure compliance with the Act.

Barring multinational companies and government-linked companies which have the benefit of experience in other jurisdictions with established antitrust frameworks, this is foreseen to be a challenge for small-medium sized enterprises and Malaysian-focused businesses.

The Act professes to "promote economic development by promoting and protecting the process of competition, thereby protecting the interests of consumers". According to a keynote address by the Minister of Domestic Trade, Co-Operatives and Consumerism on September 30, 2010, consumer interests are considered to be "a lynchpin in the competition law", and the Act "empowers consumers who suffer loss or damage as a direct result of infringement of any prohibition".

This focus on consumer interests provides an appreciable context for the manner in which the Act has been drafted, acting as a sword rather than a shield for consumers. Enterprises are undesirably exposed to investigation and potential liability following from:

complaints to the Commission, who will then consider the merits of an investigation and whether the relevant player(s) have abused their dominant positions or have entered into anti-competitive agreements; requests of the Minister for the Commission; or the Commission acting on its own initiative.

When operating in a self-assessment framework, enterprises must tread with caution when communicating with industry competitors or association peers, either in person or by telephone, letters, email or through any other means. Enterprises should also ensure that employees, personnel, agents and/or representatives refrain from disclosing or discussing any pricing matters or internal procedures, policies, with persons from outside the enterprise's organisation. Strict standards of disclosure and confidentiality should be streamlined throughout the organisational structure and should apply notwithstanding the enterprise's membership in any trade associations.

Notwithstanding any mitigation undertaken by enterprises, the risk of anti-competitive behaviour cannot be entirely eradicated. Section 5 relief therefore, can be a saving grace for enterprises able to prove the requisite benefits.

Current snapshot

Since the Act's coming into force, Malaysian trade associations have been the first to publically respond to the new legislative framework, seeking clarification from the Commission and filing official applications for exemptions.

As at the date of writing, the Commission is known to have received three applications for block exemptions from (i) Malaysia Shipowners Association, Shipping Association of Malaysia and Federation of Malaysian Port Operators Council; (ii) Association of Malaysian Hauliers; and (iii) Life Insurance of Malaysia, and one application for individual exemption from Nestle Products. It has also engaged in unofficial communications with the Malaysian Automotive Association on the question of information sharing; and is in the midst of preparing its first proposed decision on anti-competitive behaviour in the context of associations triggered by the Cameron Highlands Floriculturist Association's announcement that its members have agreed to fix and increase pricing for sale to distributors and wholesalers in Malaysia.

In addition, the Commission is still investigating the controversial share swap between Malaysia Airlines and Air Asia that took place in 2011, notwithstanding the fact that the deal was aborted in May 2012 amid pressure from Malaysia Airlines' workers' union.

Chief executive officer of the Commission, Shila Dorai Raj has stated that the Commission is currently monitoring the activities of all trade associations, including professional bodies to ensure their activities do not impede competition. As such, many Malaysian trade associations are eagerly awaiting the Commission's proposed decision wherein they must detail their reasoning pursuant to section 36(2) of the Act. This proposed decision will mark the first official insight into the Commission's regulatory approach.

The challenges facing the young competition watchdog are numerous and their progress and developments are being monitored with anticipation. Until the Act is put to the test, enterprises who undertake commercial activity in a market in Malaysia may wish to seek further legal advice and adopt a conservative approach to avoid falling foul of the Act.

Loong Caesar

Raslan Loong
Suite 08-03, Level 8 Wisma Mont Kiara
No. 1 Jalan Kiara, Mont Kiara
50480 Kuala Lumpur, Malaysia

T: +603 6205 2778
F:  +603 6205 2771
E: rexlex@raslanloong.com
W: www.raslanloong.com

Loong Caesar, chief executive partner of Raslan Loong, is a senior corporate and commercial practitioner with extensive experience in all areas of corporate and commercial law. These include M&A, investment funds, capital markets, securities, listings, public offering, corporate banking, structured finance, power and corporate restructuring.

He was trained at Raffles Institution, Singapore, the London School of Economics and Political Science (LSE) and Caius College, Cambridge University. He was admitted as a Barrister of the Middle Temple, London in 1983 and as an Advocate & Solicitor of the High Court of Malaya in 1985. In 1994 he was admitted as an Advocate and Solicitor of the Supreme Court of Singapore.


Cara Yasmin
 

Kamaruddin
Raslan Loong
Suite 08-03, Level 8 Wisma Mont Kiara
No. 1 Jalan Kiara, Mont Kiara
50480 Kuala Lumpur, Malaysia

T: +603 6205 2778
F:  +603 6205 2771
E: rexlex@raslanloong.com
W: www.raslanloong.com

Cara Yasmin Kamaruddin is a junior partner in Raslan Loong's corporate and commercial division. She advises on corporate and commercial matters including acquisitions, capital markets, competition, joint ventures, and renewable energy. Her other areas of work include foreign investments into Malaysia and corporate advisory work.

Cara graduated from the University of Bristol with a Hons degree in 2007. She has since been admitted as a Barrister of Lincoln's Inn, London and as an Advocate & Solicitor of the High Court of Malaya.


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