Merger Control on the Horizon?
31 December 2019
To’ Puan Janet Looi and Tan Shi Wen discuss issues that may arise from the implementation of merger control.
While Malaysia’s competition law was perhaps rarely a key consideration for many in the context of a merger and acquisition (“M&A”) transaction happening in Malaysia, this may be about to change if the ongoing talks about extending competition law to cover mergers come to fruition.
As background, the primary competition legislation in Malaysia, namely the Competition Act 2010 (the “Competition Act”), came into force on 1 January 2012, and applies to any commercial activity that has an effect on competition in any market inside Malaysia. While the Competition Act contains prohibitions on anti-competitive agreements and abuse of dominance, it has no provisions on merger control.
The competition law enforcement authority in Malaysia, the Malaysia Competition Commission (“MyCC”), is currently the only competition authority in Southeast Asia without the power to regulate M&As. Based on news reports, however, it is understood that the MyCC has begun the process of amending the Competition Act to incorporate power to regulate M&As in Malaysia. It has been said that this may be implemented in the first-half 2020.
WHY IS “MERGER CONTROL” RELEVANT TO M&As?
The purpose of merger control
Merger control refers to a set of procedures for reviewing M&As under competition law. Over 130 countries have merger control laws and the majority of such jurisdictions have mandatory merger control systems i.e. when filing of a transaction is compulsory. This allows regulators to review in advance whether a proposed M&A will have significant anti-competitive effects on competition before a transaction is implemented. Compliance with such procedures is therefore important because before completion can take place, certain M&A transactions may need to be notified to and/or approved by competition authorities in a number of different jurisdictions.
In the context of a mandatory merger control regime, if parties fail to notify a transaction before completion, and that failure comes to the attention of the competition authority, the transaction may be declared invalid and fines for non-compliance can be significant. Even if the non-notified transaction does not come to the attention of the relevant competition authority, a failure to notify can also affect the validity of the transaction as a whole. The risk of this is particularly high where multiple competition authorities are involved. This is because competition authorities often liaise with each other in reviewing transactions and the notification procedure in certain jurisdictions may require the disclosure of all competition authorities to whom the transaction will be notified.
As a result, there will typically be a gap between signing and completion of a transaction while merger clearances are obtained. In this interim period, the buyer may incur costs in maintaining financing for the transaction until completion. More crucially, parties can also be exposed to significant risks, including changes in market conditions and a deterioration of the target’s business and its relationship with its customers and suppliers. It is therefore advisable for parties to take proactive steps to address merger control issues at an early stage in order to reduce the duration of merger control processes.
The period for a party to obtain merger control clearance will depend on a number of factors such as the requirements in each jurisdiction and the complexity of the transaction. In general, transactions can be subject to either one or two phases of review, depending on whether there is any competition issue raised. Transactions which do not raise significant competition law concerns (or if such competition concerns are likely to be remedied by commitments) will typically be cleared during a first phase review which takes up to 4 weeks in most jurisdictions. More problematic transactions can be subject to a lengthier second phase review of up to 32 weeks. It is therefore essential for parties to obtain advice at an early stage on the implications of merger control requirements and assess if a lengthy merger control process is envisaged. This will facilitate determination of certain terms of the transaction documentation such as an appropriate long stop date for the transaction.
Structural changes to the transaction
Where a competition authority considers that a M&A transaction will result in significant anti-competitive effects, it can require the parties involved to enter into commitments to remedy those anti-competitive effects. An example of these commitments can be found in acquisition of Spectrum Brands Holdings, Inc by Energizer Holdings, Inc whereby the merged entity would become the largest supplier of batteries and related products in several countries in the European Economic Area. To address competition concerns raised by the European Commission, the applicants proposed commitments, which were accepted by the Commission, to divest certain regional business of the target and to enter into exclusive supply and licence agreement with purchaser of such regional business (Case M.8988 Energizer/Spectrum Brands (Battery and Portable Lighting Business). In the event merger clearance is required from several competition authorities, diverse commitments may also be imposed by different competition authorities to address competition concerns in each jurisdiction. Parties will need to ensure that they are in a position to implement such commitments across a global framework and ensure compliance with the different requirements in each jurisdiction.
A competition authority can also prohibit a transaction which will result in significant anti-competitive effects entirely. Based on publicly available information, at least 29 M&A transactions with a value of at least EUR46.3 billion were prohibited or abandoned in major jurisdictions in 2018 as a result of competition law intervention. Hence, parties should assess at the outset whether a transaction is likely to have an impact on competition in the relevant jurisdictions and perhaps whether a buyer would rather look at more “competition-law friendly” targets. This will enable them to take steps to mitigate any costs and adverse impacts of merger control processes.
EXISTING MERGER CONTROL REGIMES IN MALAYSIA
Notwithstanding the lack of generic merger control provisions applicable to all industries under the Competition Act, there are sector-specific laws and guidelines that regulate mergers in the context of competition law. These sectors are aviation services and the communications and multimedia sectors, enforced by the Malaysian Aviation Commission (“MAVCOM”), and the Malaysian Communications and Multimedia Commission (“MCMC”) respectively.
Aviation services sector
The Malaysia Aviation Commission Act 2015 (“MACA”) is presently the only statutory merger control regime in Malaysia. Apart from also dealing with anti-competitive agreements (section 49) and abuse of dominant position (section 53), section 54 of the MACA states that any mergers which ‘have resulted, or may be expected to result, in a substantial lessening of competition in any aviation service market’ is prohibited.
According to 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 of the assets (including goodwill), or a substantial part of the assets, of another enterprise is to place the first-mentioned enterprise in a position to replace or substantially replace the second-mentioned enterprise in the business or, as appropriate, the part concerned of the business in which the second-mentioned 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 MACA merger control is a voluntary regime. Accordingly, for notification and assessment of a merger, parties should self-assess whether a merger can result in a substantial lessening of competition within any market affecting Malaysia, and whether a merger notification should be made to MAVCOM. MAVCOM is more likely to investigate a merger or proposed merger where:
- the combined turnover of the merger parties in Malaysia in the financial year preceding the transaction is at least RM50 million; or
- the combined worldwide turnover of the merger parties in the financial year preceding the transaction is at least RM500 million.
Communications and multimedia sector
The communications and multimedia sector in Malaysia is regulated by the MCMC under the Communications and Multimedia Act 1998 (“CMA”). The existing Guideline on Substantial Lessening of Competition issued by the MCMC expressly states that the regulator considers that mergers involving telecommunications and multimedia licensees must be investigated as ‘conduct which has the purpose of substantially lessening competition in a communications market’ (under section 133 of the CMA). The definition of a merger is similar to that set out in the MACA.
As the CMA does not contain any express provisions for merger control and assessment, there is no process nor is there a legal requirement that parties to a merger or acquisition should notify the MCMC in respect of such transactions. Despite the lack of clear provisions under the CMA, section 140 of the CMA broadly allows a licensee to seek the MCMC’s prior approval of any proposed merger. If the merger is implemented without seeking the MCMC’s approval under section 140, the MCMC may initiate an investigation on its own accord if it is of the view that the merger would result or has resulted in a substantial lessening of competition in the market. The recent Guidelines issued by the MCMC on Mergers and Acquisitions and Authorisation of Conduct introduced two routes that a licensee may take in relation to clearance of a merger: (a) notification to obtain MCMC's views in respect of the competitive effects of a merger or acquisition (where the applicant receives a no-objection or objection letter, as the case may be); and (b) authorisation of a merger where the merger will promote national interest.
Although the MACA and CMA contain merger control provisions from the competition perspective, what remains unclear is the application of the merger regimes to mergers between parties from sectors other than the aviation services and communications and multimedia sectors. However, regardless of the form and structure that the incoming merger regime will take (e.g. whether reporting will be pre- or post-merger, whether reporting will be made voluntary or involuntary, or what thresholds and tests will be applied), competition law will become an important consideration at the preparatory and due diligence stages of M&A transactions once the proposed merger control regime comes into effect.
In the event of an investigation, competition authorities will usually request a large number of internal documents that will be used to assess the transaction. Preparatory documents evidencing a company’s rationale for the transaction, e.g. the commercial justification and/or pro-competition aspect of the transaction can therefore be very important in any later competition law assessment, in particular since such documentation may need to be disclosed to competition authorities.
With the increasing enforcement of competition laws in Malaysia and competition authorities worldwide uncovering more cross-border cartels, it is also important that buyers conduct due diligence to assess whether the target company has engaged in any competition law infringement and address it. At a minimum, the transaction documentation should include appropriate safeguards to ensure apportionment of risk, such as via a specific indemnity indicating who bears the financial risk if following completion a competition authority uncovers a breach of competition law by the target, and whether liabilities should be capped and subject to past conduct only. This will avoid significant problems not only financially but also potential reputational repercussions at a later stage.