Introduction

The Malaysian Competition Act 2010 (the Act) came into effect on 1 January 2012, and prohibits anti-competitive agreements between enterprises as well as abuse of dominance. 

The objects of the Act include the promotion of economic development by promoting and protecting the process of competition thereby protecting the interests of consumers, and the Act was enacted following the New Economic Model unveiled by the prime minister in March 2010 which aimed to double Malaysia’s per capita income by the year 2020 and make Malaysia a more competitive, market-driven and investor-friendly country.

The Act is enforced by the Malaysia Competition Commission (MyCC), a body corporate established under the Competition Commission Act 2010, whose members are appointed by the prime minister on the advice of the minister charged with the responsibility for domestic trade and consumer affairs. The MyCC is comprised of representatives from both the public and private sectors who have experience in business, law, economics, public administration, competition law and consumer protection.

In the two years that the Act has been enforced, the MyCC’s enforcement priorities have focused on cartel activity, and the MyCC’s first finding of infringement related to a cartel at trade association level. The MyCC is presently investigating several cases of alleged cartel activity and there is a pending case of alleged market sharing between two airlines. Despite the emphasis on cartels, the MyCC has also initiated an investigation and proposed finding of infringement of abuse of dominance in the steel sector.

While these are early days, the MyCC has unequivocally announced that its enforcement activity will be ramped up. The legislation expressly empowers the MyCC to work with other competition authorities and the MyCC has benefited from cooperation and capacity building exchanges from other competition authorities, which are also expected to lead to cooperation in cartel investigations. Enterprises are therefore advised to not delay compliance as a penalty for infringement can apply to turnover of the enterprise over the entire duration of the infringement, and relate back to the period commencing 1 January 2012.

Scope

The Act applies to commercial activities within Malaysia, as well as commercial activities undertaken outside Malaysia that have an effect on competition in any market in the country. The communications and energy sectors are, however, excluded from the application of the Act and competition matters relating to these two sectors are enforced by sector regulators: the Malaysian Communications and Multimedia Commission and the Energy Commission under the Communications and Multimedia Act 1998 (communications sector); and the Energy Commission Act 2001 (energy sector).

Application 

The Act applies to enterprises. ‘Enterprise’ is defined as any entity carrying on commercial activities relating to goods or services. This would include, for example, companies, partnerships, businesses, trade associations, individuals operating as sole traders, state-owned corporations and non-profit-making bodies. It is expected that the MyCC will apply a functional approach to determining whether an enterprise is engaging in commercial activity.
Commercial activity does not, however, include:

 

• any activity, directly or indirectly, carried out in the exercise of governmental authority;
• any activity conducted based on the principle of solidarity; or 
• any purchase of goods or services done not for the purposes of offering goods and services as part of an economic activity.

Malaysia does not have a merger control regime and there is presently no procedure to notify the MyCC of a merger. Where there are concerns that a merger or acquisition may result in a dominant position, the parties to the transaction can either conduct self-assessment that the benefits to competition outweigh the detriments or apply for an individual exemption.

 

Liability Within A Single Economic Unit 

Where an employee engages in a conduct that would infringe the Act, liability for such infringement may be imputed to the employers. Similarly, a parent company may be liable because a parent and subsidiary company shall be regarded as a single enterprise if, despite their separate legal entity, they form a single economic unit within which the subsidiaries do not enjoy real autonomy in determining their actions on the market.

Chapter 1 Of The Competition Act: Prohibition On Anti-Competitive Agreements

Chapter 1 of the Act prohibits horizontal and vertical agreements between enterprises which have the object or effect of significantly preventing, restricting or distorting competition in any market for goods or services. This is substantively similar to the provisions of article 101 of the Treaty on the Functioning of the European Union.

The term ‘agreement’ is deliberately defined broadly and includes any form of contract (both written and oral), arrangement or understanding between enterprises, whether legally enforceable or not, and includes a decision by an association (such as trade and industry associations) and concerted practice. The concept of ‘concerted practice’ is adopted from European case law and has been defined to mean any form of coordination between enterprises which knowingly substitutes practical cooperation between them for the risks of competition. This usually involves some form of informal cooperation or collusion where parties enter into an informal arrangement or understanding.

The MyCC is likely to follow European cases on exchange of commercially sensitive information, including cases on the hub-and-spoke cartel where the parties to a cartel use a third party (eg, in a vertical agreement) as a conduit for exchanging such in formation. Parties to vertical agreements should thus approach the exchange of information with caution, lest they be found to facilitate collusive conduct.

Agreements are prohibited only if they have or are likely to have a significant restriction or distort competition in any market for goods or services in Malaysia. The MyCC has interpreted the term ‘significant’ to mean that the agreements must have more than a trivial impact. The impact would be assessed in relation to the identified relevant market. When defining the relevant market, the MyCC will identify close substitutes for the product under investigation in the relevant product market as well as the geographic market.

As a starting point, the MyCC’s Guidelines on Anti-competitive Agreements provide that the MyCC will generally not consider agreements between competitors in the same market whose combined market share does not exceed 20 per cent of the relevant market to have a ‘significant’ effect on competition, provided that such agreements are not hard-core cartels. Under certain circumstances, an agreement between competitors below the threshold may nonetheless have a significant anti-competitive effect and the MyCC reserves the ability to take enforcement action against the parties to such agreement.

When assessing whether an agreement has the object of restricting competition, the MyCC will not only examine the actual common intention of the parties but will assess the aims of the agreement taking into consideration the surrounding economic context. If the object of any agreement is highly likely to have a significant anti-competitive effect, then the MyCC may find the agreement to have an anti-competitive object. Once an anti-competitive object is shown, the MyCC does not need to examine the anti-competitive effect of the agreement. However, if the anti-competitive object is not found, the agreement may still infringe the Act if there is an anti-competitive effect. Provisions in agreements that infringe the Act will be unenforceable as it is considered illegal under the Contracts Act 1950.

Prohibition On Anti-Competitive Horizontal Agreements

The prohibition on anti-competitive horizontal agreements applies to enterprises operating at the same level in the production or distribution chain. Even though the term ‘object’ is not defined in the Act, there are certain horizontal agreements between enterprises which are deemed as having the object of significantly restricting competition and the MyCC does not need to examine and prove any anti-competitive effects of such agreements. The agreements that are deemed to be anti-competitive include those which:

 

• fix, directly or indirectly, a purchase or selling price or any other trading conditions;
• share markets or sources of supply;
• limit or control production, market outlets or market access, technical or technological development or investment; or
• perform an act of bid rigging.

Section 5 of the Act provides relief from liability provided all of the criteria are satisfied.

Prohibition On Anti-Competitive Vertical Agreements

Vertical agreements refer to agreements by enterprises operating at a different level in the production or distribution chain. Generally, the MyCC considers vertical agreements to be less harmful to competition compared to horizontal agreements. This is because parties to a vertical agreement usually have a joint interest in ensuring that the final product or service is competitive as opposed to horizontal agreements which are between competitors operating at the same level in the production or distribution chain.

The MyCC has expressly indicated that it considers resale price maintenance, including other similar schemes which achieve this, such as maximum or recommended retail pricing which serves as a focal point for downstream collusion, as highly anti-competitive. This may apply even where the market shares of the parties are less than the 25 per cent de minimis threshold. 

For example, where a manufacturer sets a price which is to be followed by its wholesaler, distributor and retailer, these distribution channels do not compete on price, thus hurting competition. Agreements which established fixed prices and margins prior to the Act will need to be amended to remove such pricing structures. Generally, maximum prices and genuine recommended prices would be permissible provided that they are not guises for fixed resale prices.

It is possible, although as yet untested, that the MyCC will follow the European position and consider true agency structures as falling outside of the ambit of the chapter 1 prohibition. In a true agency structure, the principal bears all commercial risks and is thus able to dictate the prices at which the agent enters into a sale on its behalf. This would not be applicable where the ‘agent’ assumes commercial risk for the sale or collections.
Anti-competitive non-price restraints are generally not considered significant where the market shares of the seller or buyer do not exceed 25 per cent of their relevant market. Examples of such restraints include the following: 

 

• Exclusivity or single branding, where the competitors are foreclosed from the market. This could include loyalty and other rebates or cumulative discounts which incentivise a buyer to buy exclusively or nearly all of its needs from a single supplier. 
• Exclusive territorial allocation, where a distributor is given exclusivity over a demarcated area within Malaysia, thereby limiting inter-brand competition.
• Exclusive customer allocation, which similarly raises competition issues where there is no significant inter-brand competition. 
• Tied sales, where a customer who purchases a product is forced to also purchase another product (the tied product). Such tying could restrict access to the tied product market by competitors, particularly if the first product is a ‘must have’. 
• Upfront access payments, which suppliers pay to distributors to get exclusive access to distribution, for example, the best shelfspace in a retail outlet.

Where vertical restraints raise competition issues, they can nevertheless be relieved from liability where the criteria in section 5 are proven.

Section 5 Of The Competition Act: Relief From Liability For Chapter 1 Prohibition

In principle, no activity is precluded from the application of section 5 which allows parties to an agreement which restricts competition to defend the restriction based on pro-competitive grounds. However, in practice, extremely convincing evidence is needed to satisfy the MyCC that the benefits to competition outweigh the detriments. 

Section 5 of the Act provides that an anti-competitive agreement prohibited under chapter 1 of the Act may be relieved from liability where all the following criteria are proven by the parties to the agreement:

 

• there are significant identifiable technological, efficiency or social benefits directly arising from the agreement;
• the benefits could not reasonably have been provided without the agreement having the anti-competitive effect;
• the detriment to competition is proportionate to the benefits provided; and
• the agreement does not eliminate competition in respect of a substantial part of the goods or services.

All four criteria must be cumulatively met and the parties claiming this relief have the onus of proving that the benefits gained are passed on to the consumers.

Parties to an agreement should conduct a self-assessment and determine whether it is able to justify its conduct under section 5. If it is able to make a case, and desires certainty before proceeding with a course of action, it can apply for an exemption under the Act which provides for

 

• individual exemptions granted to specific applicants; and
• block exemptions granted to a class of enterprises.

As filing for an exemption is not a precondition to raising a section 5 defence, some enterprises choose not to apply for an exemption and instead raise their defence arguments when the MyCC investigates the conduct or issues a notice of a proposed finding of infringement.

Leniency Regime

The Act empowers the MyCC to establish a leniency regime which provides for reduction of up to a maximum of 100 per cent of any penalties, which would otherwise have been imposed (ie, full immunity). The leniency regime is only available in cases where the enterprise has:

 

• admitted its involvement in an infringement of chapter 1 prohibition of the Act; and 
• provided information or other form of cooperation to the MyCC which significantly assisted, or is likely to significantly assist, in the identification or investigation of any finding of the infringement against any other enterprises.

The leniency regime permits different percentages of reductions to be available to an enterprise. This would depend on whether the enterprise was the first person to bring the suspected infringement to the attention of the MyCC, as well as the stage in the investigation at which it admits its involvement in the infringement. Given the illicit nature of cartels, the leniency regime is designed to encourage cartelists to race to be the ‘first in’ to supply as much information as possible in order to expedite the MyCC’s investigation.

An infringing enterprise that is second in line may still benefit from the leniency regime. However, the percentage of reduction would largely depend on the stage in the investigation at which it admits its involvement in the infringement and the value of the incremental information or other cooperation it is able to provide. Such percentage of reduction is expected to commensurate with the additional information and assistance such enterprise is able to provide to the MyCC.

Parties would in practice consider:

 

• whether the MyCC is already investigating the cartel, which may affect its position in the leniency queue;
• the possibility that another cartelist has blown the whistle; 
• the competition law implications in other jurisdictions, as the MyCC is able to disclose the information to competition authorities in other jurisdictions, some of which may have criminal sanctions; 
• whether concurrent leniency applications should be made in multiple jurisdictions; and
• whether the enterprise can offer an undertaking on acceptable terms to the MyCC.

The MyCC recently released draft guidelines on the leniency regime, which are available for public consultation. These provide guidance on the reduction, as a percentage, of financial penalties; the procedure for making a leniency application; and the grant of leniency.

Related: Antitrust Overview: Part 2

 

 

For further information, please contact:

 

Sharon Tan, Partner, ZICOlaw

[email protected]

 

ZICOlaw Competition & Antitrust Practice Profile in Malaysia