16 April, 2014
On 9 August 2011, Malaysian Airline System Bhd (“MAS”), and two AirAsia entities, namely AirAsia Berhad and AirAsia X Berhad (collectively referred to as “AirAsia”), entered into a Collaboration Agreement with the stated aim of sharpening the focus on core competencies, delivering better products and choice for customers, and ultimately creating greater value for all stakeholders. The Collaboration Agreement was entered into in conjunction with a share-swap arrangement which was subsequently unwound.
In a decision made on 31 March 2014 (“Decision”), the Malaysia Competition Commission (“MyCC”) found that MAS and AirAsia had infringed section 4(2)(b) of the Competition Act 2010 by agreeing to share markets within the air transport services sector in Malaysia under the Collaboration Agreement, which MyCC considered as anti-competitive. The proposed fine of RM 10m each against MAS and AirAsia was confirmed. While the parties are appealing the decision to the Competition Appeal Tribunal, there are lessons to be learnt from the decision published by MyCC.
Here are 10 key points and valuable lessons for businesses looking to collaborate:
Lesson 1: Be Careful How You Negotiate And Draft Your Collaboration Contracts
A prime consideration for MyCC was the expressly articulated object of the Collaboration Agreement, where the parties set out the principle objectives of the collaboration which was to be further fleshed out by a Joint Collaboration Committee (“JCC”). MyCC found that the parties had agreed that MAS was to be only a full-service premium carrier, while AirAsia Berhad and AirAsia X Berhad (“AAX”) would be regional low-cost and medium-to-long haul low cost carriers respectively. This raised a red flag for MyCC, who considered that the restriction of competition enabled each airline to operate freely within the designated market segments and provide them the freedom to impose higher prices to maximize profitability without competition.
Although MyCC states that once an anti-competitive object is shown between competitors (i.e. in a horizontal agreement), there is no need for MyCC to show anti-competitive effects, MyCC noted that MAS’ wholly owned subsidiary, Firefly’s withdrawal from certain routes between Kuala Lumpur and four East Malaysian destinations was a direct result of the Collaboration Agreement.
Additionally, the fact that the JCC comprised top management officers from MAS and AirAsia underscored, for MyCC, that the purpose of the JCC was essentially to implement the market sharing arrangements contemplated in the Collaboration Agreement.
Thus, in crafting collaboration agreements, one should be careful to avoid language which could be interpreted by a competition authority as anti-competitive restraints.
Lesson 2: Be Careful Of The Public Statements You Make
MyCC also took into account a press release issued by MAS and AirAsia on 9 August 2011, when they entered into the Collaboration Agreement. That press release expressly stated that, pursuant to the Collaboration Agreement, MAS was only to be a full-service premium carrier, while AirAsia would be regional low-cost and medium-to-long haul low-cost carriers respectively. In MyCC’s eyes, the press release gave credence to the fact that the object of the Collaboration Agreement was to split the aviation market between MAS and AirAsia.
Lesson 3: Be Careful Of Actions Of Subsidiaries In The Wake Of A Collaboration Agreement
The withdrawal of MAS’ wholly owned subsidiary, Firefly, from servicing the four Kuala Lumpur – East Malaysia routes, leaving AirAsia as the sole low cost carrier on those routes, coupled with the Collaboration Agreement was, to MyCC, a result of the agreement to share the aviation market. MyCC considered this act to be in line with the stated object in the Collaboration Agreement despite MAS’ position that Firefly’s operations were already under review at the time of the Collaboration Agreement.
Firefly was not a signatory to the Collaboration Agreement. Nevertheless, MyCC held that being its wholly-owned subsidiary, MAS has the power to direct Firefly’s flight services operations. This meant that MyCC viewed MAS and Firefly as a single economic unit and the act of withdrawing from the four Kuala Lumpur – East Malaysia routes was attributed to MAS.
Lesson 4: The Corporate Shield Is No Shield
The prohibitions in the Competition Act 2010 apply to enterprises i.e. every entity engaged in an economic activity regardless of the legal status of the entity.
Although there were three signatories to the Collaboration Agreement, MyCC found that the enterprises to the infringement were MAS and AirAsia. AirAsia Berhad and AAX were held to form a single economic unit taking into account that AirAsia Berhad held AAX’s shares and they were companies with common shareholders and directors. The largest shareholders of AirAsia Berhad and AAX were also directors in both companies. They were also the Group Chief Executive Officer and Deputy Group Chief Executive Officer of the AirAsia Group.
The Competition Act 2010 empowers MyCC to impose financial penalties of up to 10 per cent of the worldwide turnover of the infringing enterprise i.e. the turnover of every legal entity within the economic unit.
Lesson 5: Public And Stakeholder Acceptance Of The Collaboration And Its Effects Are Important
MyCC disclosed in its written grounds that it started investigations after it received a letter of complaint from the Federation of Malaysian Consumers Association (FOMCA) on 24 February 2012. This was some 6 months after the parties made the fact of collaboration public. The complaint may well have been triggered by public anger at rising prices and the withdrawal of Firefly services from the Kuala Lumpur – East Malaysia routes. While MyCC does have the power to investigate transactions of its own accord, a complaint from the public could prompt MyCC to investigate. The importance of public perception should not be underestimated.
Lesson 6: It Is For The Parties To Show That The Net Economic Benefit Of The Collaboration Agreement Outweighs The Anti-Competitive Effects
In this case, MyCC was investigating an infringement of section 4(2) Competition Act 2010, i.e. that the Collaboration Agreement was a prohibited horizontal agreement (between competitors) which had the object of sharing the market in relation to aviation services. MyCC deems such agreements to have the object of significantly preventing, restricting, or distorting competition in the market.
MyCC held that once the “object” of the agreement has been proven, it was under no obligation to prove the subjective intention of the parties, to carry out any precise market definition or to establish the anti-competitive effects of such an agreement.
The burden then shifted to MAS and AirAsia to demonstrate by evidence that the Collaboration Agreement’s net economic benefit outweighs its anti-competitive effects. Section 5 Competition Act 2010 may be relied on as an absolute defence for an infringement under section 4. A party seeking relief of liability under section 5 must satisfy all its requirements, which includes that there are significant identifiable technological, efficiency or social benefits directly arising from the agreement and that the benefits could not reasonably have been provided without the agreement having the effect of preventing, restricting or distorting competition, the restraint is proportionate to the benefits and there is no elimination of competition.
Not every restraint is prohibited. Where there are grounds to justify the conduct by demonstrating that the benefits outweigh the detriments to competition, this can form a defence or grounds for an application for exemption.
Lesson 7: Have In Place A Competition Compliance Programme And Ensure That The Party You Intend To Collaborate With Has One In Place As Well
The basic amount of financial penalty that MyCC would have imposed is a proportion of the flight turnover earned during the period of the infringement. In the MAS-AirAsia case, it was the amount earned between 1 January 2012, when the Competition Act 2010 came into force and 2 May 2012, when a Supplemental Agreement was signed which removed the anti-competitive object of the Collaboration Agreement and disbanded the JCC. Based on this alone, the penalty imposed on MAS would have been RM 24,143,350 and for AirAsia, it would have been RM 18,557,665. The penalty was reduced to RM 10m each as MyCC also considered certain mitigating factors, one of which was that the companies had in place a competition compliance programmes.
Lesson 8: Cooperation Has Its Rewards
In addition to Lesson 7, MyCC held that the fact that the parties were fully cooperative in the investigations to be a mitigating factor. Conversely, parties who are subject to investigations should note that obstruction or failure to cooperate with an investigation is an aggravating factor which may result in a higher fine.
Lesson 9: Even Agreements Prior 1 January 2012 Need To Be Compliant
When the possibility that the Collaboration Agreement could be construed as anti-competitive behaviour, MAS and AirAsia voluntarily entered into a Supplemental Agreement to remove references to routes and market focus stated in the Collaboration Agreement. MyCC saw this as a mitigating act to reduce the financial penalty.
Despite the fact that the Collaboration Agreement and the withdrawal of the Firefly’s East Malaysia routes occurred before the Competition Act 2010 came into effect, these became the subject of the investigation which led to the fines. It is thus important to review past arrangements, and where there has been any conduct which is at risk of being anti-competitive, active steps need to be taken to stop the clock for the purposes of calculating the financial penalty.
Lesson 10: Be Properly Advised From Start To End
Businesses need to be advised from the start of the collaboration through to the implementation of the collaboration. Collaborations would need to be looked at from legal, economic and public relations angles. In the MAS-AirAsia case, the clauses in the Collaboration Agreement and the mechanism for implementation; the public response to the announcement of the Collaboration Agreement and the withdrawal of Firefly’s Kuala Lumpur – East Malaysia routes; and the subsequent actions taken in the aftermath and during the investigations, all figured prominently in both the manner in which MyCC arrived at its decision and the quantum of the financial penalty that was imposed. If there is a single lesson to be learnt from the MAS-AirAsia case, it is that business collaborations are no longer private transactions and subject to scrutiny by MyCC.
For further information, please contact:
Sharon Tan, Partner, ZICOlaw
Nadarashnaraj Sargunaraj, ZICOlaw
ZICOlaw Competition & Antitrust Practice Profile in Malaysia