The Merger Control Review: Malaysia
There is currently no general merger control regime specified in the Malaysian Competition Act 2010. The Malaysia Competition Commission (MyCC) has, however, indicated that a merger control regime is likely to be introduced in Malaysia by the end of 2020. MyCC has also stated that the merger control regime in Malaysia is likely to be a mandatory pre-merger notification regime,2 although no further details have yet been formally issued.
Notwithstanding the absence of a general merger control regime in Malaysia, MyCC has the authority to investigate the behavioural conduct of parties post-merger. This was highlighted in the recent acquisition of Uber's South East Asia business by Grab. While MyCC did not have the authority to unwind the transaction under the Competition Act, the acquisition triggered an investigation by MyCC into Grab, which subsequently resulted in a proposed infringement decision being issued against Grab, under which it was alleged that Grab had abused its dominant position in the e-hailing market.
Also, while there is no general merger control regime in Malaysia at present, there are sector-specific merger control regimes, namely in the aviation services sector under the Malaysian Aviation Commission Act 2010 (MACA), and in the communications sector under the Communications and Multimedia Act 1998 (CMA).
i Aviation services sector
Under the MACA, mergers that have resulted, or may be expected to result, in a substantial lessening of competition in any aviation services market are prohibited. 'Aviation services' is defined to mean the provision of any of the following services:
- the carriage of passengers, mail or cargo for hire or reward by air or by the use of any aircraft between two or more places, of which at least one place is in Malaysia;
- the provision in Malaysia of any ground handling services as specified in the Second Schedule to the MACA;
- the operation of an aerodrome in Malaysia for the take-off and landing of any aircraft engaged in the carriage of passengers, mail or cargo for hire or reward; or
- any other service determined by the Commission to be necessary or expedient for the carriage of passengers, mail or cargo referred to in point (a), whether or not such service is provided by a licensee, permit holder or otherwise.
Under Section 54 of the MACA, a merger occurs if:
- two or more enterprises, previously independent of one another, merge;
- one or more persons or enterprises acquire direct or indirect control of the whole or part of one or more enterprises;
- the result of an acquisition by one enterprise (the first enterprise) of the assets (including goodwill), or a substantial part of the assets, of another enterprise (the second enterprise) is to place the first enterprise in a position to replace or substantially replace the second enterprise in the business or, as appropriate, the part concerned of the business in which that enterprise was engaged immediately before the acquisition; or
- a joint venture is created to perform, on a lasting basis, all the functions of an autonomous economic entity.
The Malaysian Aviation Commission (MAVCOM), which is the regulatory body regulating all economic and commercial aspects relating to the civil aviation industry in Malaysia, has indicated in its Guidelines on Notification and Application Procedure for an Anticipated Merger or a Merger (the MAVCOM Merger Guidelines) that it is likely to investigate a merger if:
- the combined turnover of the merger parties in Malaysia in the financial year preceding the merger is at least 50 million ringgit; or
- the combined worldwide turnover of the merger parties in the financial year preceding the merger is at least 500 million ringgit.
Merger parties that meet the above thresholds may voluntarily notify MAVCOM of a proposed merger to obtain clearance. Even if the above-mentioned thresholds are not met, however, MAVCOM has the power to investigate the merger if it is of the view that the merger is likely to result in a substantial lessening of competition in any aviation services market in Malaysia.
MAVCOM recognises a failing firm defence in which a merger party may claim that, without the merger, it would be forced to exit the relevant aviation service market, with the resultant loss of competition provided by the failing firm. In assessing whether a failing firm is able to invoke the failing firm defence, MAVCOM will give due consideration to the following factors:
- whether the merger party is in such a dire situation that it would exit the relevant aviation service market within the near future;
- whether the merger party is unable to meet its financial obligations in the near future;
- whether there is any serious prospect of reorganising the business; and
- whether there is any less anticompetitive alternative to the merger.
ii Communications sector
Mergers are prohibited if they result in a substantial lessening of competition in the communications market. Under the CMA, 'communications market' is defined as an economic market for:
- a network service;
- an applications service;
- goods or services used in conjunction with a network service or an applications service; or
- access to facilities used in conjunction with either a network service or an application service.
On 17 May 2019, the Malaysian Communications and Multimedia Commission (MCMC), which is the regulatory body for communication and multimedia matters in Malaysia, issued its Guidelines on Mergers and Acquisitions (the MCMC Merger Guidelines) and its Guidelines on Authorisation of Conduct (collectively, the MCMC Authorisation Guidelines). These Guidelines aim to provide greater clarity on the substantial assessment of mergers and merger procedures within the communications sector.
As is the case with the merger control regime for the aviation services sector, licensees under the CMA may voluntarily notify MCMC of a merger if:
- the merger results in a licensee under the CMA obtaining a dominant position in a communications market; or
- one of the parties to the merger is already in a dominant position in a communications market.
In the communications market, dominance is likely to be established if the merged or acquired entity has a market share of 40 per cent or more in the relevant communications market. Also note that the threshold for dominance in the communications market is significantly lower than the dominance threshold adopted by MyCC in general, which is 60 per cent or more. This is due to the highly concentrated nature of the communications market, in which there are only a handful of market players, which, in turn, warrants a lower dominance threshold.
The MCMC Authorisation Guidelines provide an avenue for licensees to seek authorisation from MCMC for particular conduct, including a merger. In other words, if licensees are of the view that a merger is likely to substantially lessen competition in the communications market but it is in the nation's interest, they should seek authorisation from MCMC for the merger. In determining whether the merger is crucial to the nation's interests, MCMC will adopt the national policy objectives stipulated in the CMA as the basis for arriving at its decision; that is, the merger will have to meet the following objectives:
- to establish Malaysia as a major global centre and hub for communications and multimedia information and content services;
- to promote a civil society where information-based services will provide the basis for continued enhancements to quality of work and life;
- to grow and nurture local information resources and cultural representation that facilitate national identity and global diversity;
- to regulate the long-term benefit of the end user;
- to promote a higher level of consumer confidence in the delivery of services in the industry;
- to ensure an equitable provision of affordable services over ubiquitous national infrastructure;
- to create a robust applications environment for end users;
- to facilitate the efficient allocation of resources such as skilled labour, capital, knowledge and national assets;
- to promote the development of capabilities and skills within Malaysia's convergence industries; and
- to ensure information security and network reliability and integrity.
MCMC also recognises a failing firm defence in which a merger is unlikely to have an anticompetitive effect on the market if the merger involves a firm that is facing imminent failure and that would cause the assets of that firm to exit the relevant communications market. For a firm to invoke the failing firm defence, the following conditions must be established:
- the failing firm must be in such a deteriorated financial situation that it and its assets would exit the market in the near future if the merger does not take place;
- there must be no serious prospect of restructuring the business in any other way; and
- there should be no available alternatives to the merger that would be less anticompetitive.
Year in review
i Aviation services sector
Based on publicly available information, MAVCOM has yet to issue any clearance in respect of a merger within the aviation services sector. MAVCOM has, however, granted several individual exemptions in respect of collaboration arrangements and contractual joint ventures entered into between companies operating in the sector. Interestingly, prior to the enactment of the MACA, all matters pertaining to the aviation services sector fell within the purview of MyCC. During that period, MyCC imposed a financial penalty of 10 million ringgit each on Malaysia Airlines Berhad (previously known as Malaysian Airline System Berhad (MAS)), AirAsia Berhad and AirAsia X Sdn Bhd (collectively, AirAsia) for purporting to enter into a collaboration agreement that resulted in parties sharing the market with each other.
In light of the current covid-19 pandemic, numerous airlines across the world are reported to have suffered grave financial losses that have resulted in them dissolving the business, retrenching employees, requiring government bail-outs or merging with competing airlines to stay in business during these trying times. In Malaysia, there have been recent unconfirmed reports of a potential merger between MAS and AirAsia, which are essentially two of the largest airline operators in Malaysia. If such a merger were to materialise, the merging parties would be required to demonstrate to MAVCOM that the merger would give rise to efficiencies and cost-savings that would be passed on to consumers as the merger would inevitably create an 'airline giant' in Malaysia.
ii Communications sector
There have also been very few merger cases in the communications sector. The most recent high-profile merger that MCMC sought to review was the proposed merger of Axiata Group Bhd (Axiata Celcom) and the Asian operations of Telenor ASA (Digi.com Bhd) in May 2019. The proposed merger would have been likely to create the largest cellular operator in Malaysia, considering that Axiata Celcom and Digi.com are two of the largest telecommunications companies in the country. The proposed merger was, however, called off in September 2019 with the parties citing 'complexities involved in the proposed transactions'3 as the reason for merger discussions ending. Although there have been reports stating that the proposed merger may still take place, there have not been any official statements issued by the relevant parties on this front.
The merger control regime
i Aviation services sector
The merger control regime in the aviation services sector is a voluntary regime under which parties can decide, on their own volition, whether or not to notify MAVCOM of a merger or anticipated merger.
Under the MAVCOM Merger Guidelines, the amount of time that MAVCOM will take to assess a notification and application is subject to a wide variety of factors, including, but not limited to, the complexity of the issues as well as whether the information and documentation furnished by the applicants are complete and adequate. In brief, if MAVCOM is satisfied that the transaction that is the subject of an application meets the definition of a merger under the MACA during its Phase 1 assessment, it will publish a summary of the application on its website for public consultation, and members of the public are then able to provide their feedback on the merger within a period of 30 days of the date of publication. Upon expiry of the 30-day period, MAVCOM will evaluate the possible competitive effects of the merger by assessing the information provided by the applicants and the public. If MAVCOM is satisfied that the merger will not raise any competition concerns, a proposed decision will be published on its website for a further 30 days to enable feedback to be obtained from the public. MAVCOM will only issue its final decision of non-infringement upon expiry of this 30-day period. Once issued, a non-infringement decision will only be valid for a specific period, as prescribed by MAVCOM. Merger parties will, therefore, be required to complete the merger within the specified period.
If, on the other hand, MAVCOM is of the view that the merger is likely to raise competition concerns, it will proceed with a Phase 2 assessment, which will entail a more detailed and extensive examination of the competition effects of the merger. After such examination, MAVCOM will publish its proposed decision on its website for a period of 30 days for public consultation purposes. The parties will also have the opportunity to submit a written presentation to MAVCOM in respect of the merger, which may include an undertaking to refrain from, or remedy, any anticompetitive conduct arising from the merger.
If MAVCOM issues an infringement decision, the relevant parties may apply to the Minister of Transport within 14 days of them being notified of the infringement decision, requesting that the merger be exempted from the prohibition under the MACA on public interest grounds (i.e., where the merger promotes public or national security and defence interests). Separately, the merger parties also have the option to appeal the decision to the High Court within three months of the date on which they were notified of the decision.
Due to the voluntary nature of the merger control regime under the MACA, the regime is non-suspensory, and the parties may choose to carry out the anticipated merger while an application is pending before MAVCOM.
ii Communications sector
The merger control regime in the communications sector is also voluntary in nature and licensees have the option of notifying MCMC and obtaining clearance if the parties are of the view that the merger is likely to result in a substantial lessening of competition in the communications market.
Upon receipt of a notification or application from a licensee, MCMC will undertake a preliminary review to determine if the transaction (1) falls within the definition of a merger as prescribed under the CMA, and (2) meets the notification threshold set out in the MCMC Merger Guidelines. The results of MCMC's preliminary review will then be communicated to the licensee within 10 business days of receipt of the notification or application.
If the transaction constitutes a merger and the parties meet the notification threshold, MCMC will then proceed to a Phase 1 assessment, which must be completed within 30 business days of the date MCMC notifies the licensee that its application has been received, subject to an extension of time if MCMC deems fit. Upon completion of its Phase 1 assessment, MCMC will then issue a notice of 'no objection' to the licensee or inform the licensee that the application will proceed to a Phase 2 assessment. In general, MCMC will only be required to conduct a Phase 2 assessment if it is unable to determine the anticompetitive effect of the merger, if any, during the Phase 1 assessment.
As is the case with a Phase 2 assessment undertaken by MAVCOM, a Phase 2 assessment by MCMC will entail a more detailed and extensive assessment of the effect that the merger will have on competition in the communications market. A Phase 2 assessment will generally be completed within 120 days of the date of commencement, subject to a further extension as MCMC deems fit. If, upon completion of the Phase 2 assessment, MCMC is of the view that it is likely to issue a decision that is unfavourable to the licensee, a statement of issues will be given to the licensee, setting out the grounds for MCMC's findings, and the licensee will be given 30 days to provide a written response.
A merger that is unlikely to result in a substantial lessening of competition will be cleared by MCMC and licensees will receive a notice of 'no objection', pursuant to which the merger will have to be completed within a specific period as prescribed by MCMC. On the flip side, if the merger is deemed likely to result in a substantial lessening of competition, MCMC will issue a notice of objection to the licensees pursuant to which the licensees may be required to, among other things, cease particular types of conduct and implement appropriate remedies as directed by MCMC. Licensees can apply for a review of the decision by submitting an application to the Appeal Tribunal, or can request a statement of reasons from MCMC. It is only after exhausting all available remedies that licensees may apply for judicial review of the decision by the High Court.
Other strategic considerations
As there is currently no real precedent in Malaysia in the merger scene, it remains to be seen how the relevant regulators will handle a merger application, especially where the merger is carried out under extenuating circumstances. If the merger between MAS and AirAsia comes to fruition, this will set a precedent in Malaysia. The key questions that MAVCOM would have to consider in such an instance would be whether MAS would be able to satisfy the failing firm defence, and if so, what factors MAVCOM should take into consideration in allowing companies to rely on this defence. It remains to be seen whether any decision made by MAVCOM will be of persuasive effect in MyCC proceedings.
In South Korea, for example, the Korean Federal Trade Commission recently approved the acquisition of Eastar Jet by its competitor Jeju Air on the grounds that Eastar was construed to be 'unrecoverable' under the Fair Trade Act and the company was therefore granted an exemption for a horizontal merger.4
Outlook and conclusions
MyCC has announced that it is reviewing amendments to the Competition Act 2010 (slated to come into effect by the end of 2020), which will include merger control provisions. At present, it appears that MyCC is inclined to adopt a pre-merger mandatory notification regime, although no further details are available at the time of writing.
Further, in the civil aviation scene, the government of Malaysia had previously decided to merge MAVCOM (the body overseeing commercial and economic activities within the aviation sector) with the Civil Aviation Authority of Malaysia (CAAM) (the regulatory body overseeing safety and security in the aviation sector). The proposed merger has been met with mixed responses, particularly from industry players, as there is concern that a merger of the roles of MAVCOM and CAAM may have a detrimental and counterproductive effect on the industry. To date, however, the merger has yet to be formalised.
1 Azman bin Othman Luk is a managing partner, Penny Wong is a principal associate and Yeo Sue May is an associate at Rahmat Lim & Partners.
2 Directorate for Financial and Enterprise Affairs Competition Committee of the Organisation for Economic Co-operation and Development, Global Forum on Competition, 'Merger Control in Dynamic Markets – Contribution from Malaysia', 6 December 2019.
3 TheStar Online, 'Axiata, Telenor call off merger due to complexities involved', 6 September 2019, www.thestar.com.my/business/business-news/2019/09/06/axiata-digi-halt-trading-proposed-merger-deal-off.