Can I say no?

A recent decision issued by the Malaysia Competition Commission (MyCC) imposed what I saw one of the heftiest penalty on a single entity for an infringement of Section 10 of the Competition Act 2010 – RM17mil. For some reason, this is much lower than the collective sum of RM33k in the earlier proposed decision on 7 tuition and day care centres for price fixing conduct, you can read my post on it here (which I am still waiting for any updates/ appeal/ decision *cough cough*).

The recent decision concerns the MyCC proposing to fine Dagang Net Sdn Bhd for abuse of its monopolistic decision (full proposed decision can be read here). Dagang Net seems to intend to challenge the Commission’s’ proposed decision and has also indicated to MyCC its intention to make an oral representation before the commission.

1. The alleged infringement

Dagang Net Technologies Sdn Bhd is a wholly-owned subsidiary company of Dagang NeXchange Berhad (“DNeX”) and has a dominant position for Trade Facilitation under the National Single Window. According to the website, its’ e-services for trade facilitation include as follow:

Dagang Net Technologies is in the business of eService Trade Facilitation in which the exchange of trade documents among businesses and approving authorities and agencies is done electronically. An initiative by the Government in 2009 was to launch the National Single Window in order to simplify clearance procedures, facilitate the electronic exchange of trade-related data, reduce the cost of doing business and thereby enhancing trade efficiency and national competitiveness. Dagang Net Technologies had a contract and is now extended to 31st August 2019 for the said trade facilitation business.

Under the proposed decision, Dagang Net had provisionally infringed section 10 CA 2010 which subsection 10(1) reads: “ An enterprise is prohibited from engaging, whether independently or collectively, in any conduct which amounts to an abuse of a dominant position in any market for goods or services.” The proposed decision assumes a “monopoly” position by Dagang Net with restrictive conducts such as refusing to supply and imposing barriers to entry.

2. Refusing to supply

Normally the first step is to identify the relevant market to determine its’ market position to determine if it really is in a monopoly position as claimed. However, based on this phrase taken from their website: “In Malaysia, the NSW for Trade Facilitation system is developed, operated and managed by Dagang Net Technologies Sdn Bhd (Dagang Net).” I think I am safe to say that it is in a monopoly position for most of the process.

(Disclaimer: I don’t have hard evidence to prove or determine if they are indeed abusing their dominant position but merely analysing if they are based on the proposed decision and stating out the relevant law to it. Ps, I am waiting for MyCC cases judgment to be substantial enough to be quoted in each other’s cases…)

On Refusing to Supply, the Commission claims: The investigation has provisionally found that “Dagang Net … (refused) to supply new and/or additional electronic mailboxes to end users who utilized front-end software from software solutions providers which were not considered to be Dagang Net’s authorised business partners.” It was established in Commercial Solvents v Commission that a refusal to supply could amount to an abuse of dominant position as the reasons given for the refusal is often anti-competitive such as affecting competition on another market, dealings with a rival firm etc.

However, Refusal to supply is also difficult hard to be claimed as anti-competitive because there are equally good reasons as well. In Bronner, Advocate General Jacobs pointed out that the right to choose one’s trading partners and freely to dispose of one’s property are generally recognised principles in the laws of the Member States and incursions on those rights require careful justification. Hence the laissez-faire economic system dictates that parties are free to contract with whomever they choose and the terms to contract on.

→ Dagang Net currently holds a monopoly position and parties, therefore, have no other party to obtain the required services.

Secondly, sometimes duplication of facilities of a network is not feasible and may result in a loss-making situation for both parties. This is why most of the more regulated industries in the country such as water in Selangor is provided only by Air Selangor, electricity is only by Tenaga Malaysia and others.

→ This is unclear as the NSW for Trade Facilitation is still relatively new and it is not an essential facility per say since corporations may still use the longer and more tedious manual process.

Thirdly and most importantly, stated also in Bronner, it decentivises corporations to innovate and improve if it means that they would need to share it to ‘free riders’. In the Guidance, an obligation to supply and provide information or service may undermine an undertakings’ incentive to invest and innovate, even for a fair remuneration.

→ As provided in Dagang’s website, “the NSW for Trade Facilitation system is developed…. by (Dagang Net)” hence by forcing it to supply more may be detrimental to Dagang Net who perhaps invested a lot into developing the system and platform in which the NSW now runs on.

3. Deeper analysis

Now, onto the facts of the case. The basis that the Commission had identified as the reason for refusal to supply is because the “end users who utilized front-end software from software solutions providers which were not considered to be Dagang Net’s authorised business partners”. On a plain reading with no other facts given, this is prima facie an abuse of dominant position because

(1) It restricts what end users can choose as being their front-end software,

(2) It wants to affect the competition in another market by using its’ monopoly position in the trade facilitation market and

(3) it may or may not be a situation of tying/ bundling where only if the end users used software solution providers which were Dagang Net’s authorised business partners would Dagang Net provide new or additional mailboxes.

In Commercial Solvent, the factors leading to the finding of abuse were (amongst others):

1. Using its dominant position on the raw material market to affect competition in the derivatives market
2. Refusing to supply to an existing customer because it wanted to compete it downstream and the refusal risked eliminating the customer from the downstream market.

This seems to be quite apt to the current situation where Dagang Net where it seems to refuse to supply to again, affect competition in the front-end software by only providing services where the entities use their business partners services and it risked eliminating competition downstream. The distinguishing factor, however, is that in Commercial Solvent, it had a subsidiary who was also competing in the downstream market as the complainant and it refused to supply so that the complainant could not continue to produce a drug-related to the treatment of tuberculosis but its’ subsidiary could. In Dagang Net, the downstream was by its business partners hence not the same entity. Regardless, it seems pretty convincing to me that Dagang Net wanted to restrict competition perhaps because it was obtaining monetary benefits.

3.1 Essential facility doctrine

Also, “With great power comes great responsibility” (yes, I just quoted Uncle Ben from Spiderman) A quote apt to describe what monopoly players should note about the market obligations and responsibilities their position puts them in. Entities in a dominant position generally have an unspoken special obligation to maintain, protect or improve competition.

Currently, Dagang Net holds an “essential facility”. In Sealink, ‘essential facilities’ were defined as ‘a facility or infrastructure without access to which competitors cannot provide services to their customers’. This definition provides only a starting point. The challenge is to uphold the right of the undertakings under contracts and ensuring competition levels is maintained. In determining whether a refusal to supply amounts to abuse, a few issues must be addressed:

• Is there a refusal to supply?
• Does the accused undertaking have a dominant position in an upstream market?
• Is the product to which access is sought indispensable to someone wishing to compete in the downstream market?
• Would a refusal to grant access lead to the elimination of effective competition in the downstream market?
• Is there an objective justification for the refusal to supply

And more.

Most often, this doctrine comes into play in the realm of patent and infrastructure. Dagang Net’s refusal to supply is very much like Bronner where it wanted to have access to the highly developed home-delivery distribution system of its much larger competitor, Mediaprint. The court preferred to use the term “indispensability” instead of “essential facility”. It stressed that the refusal must be likely to eliminate all competition from the undertaking requesting access, not merely making it harder to compete. Access must also be indispensable, not desirable or convenient and there must be no actual or potential substitute for the requested facility (Jones & Sufrin). It might be arguable that Dagang Net’s services were not “indispensable” because it was merely a simplification of the process from application to approval under the NSW system. Corporations and enterprises may still use the preceding method to obtain approval.

3.2 The balance between promoting competition and upholding contractual rights

On the contrary, other situations to consider are whether it is justifiable to force Dagang Net to provide new/ additional mailboxes for end-users who utilized front-end software who are not their business partners? There may be reasons such as to provide a more holistic and integrated to improve user experience because they are more familiar with business partners services and maybe some functions are catered to the needs of their business partners.

A prime example of streaming end-to-end processes is that you will never find an iPhone which runs on an Android system or an Android phone running on the iOS system. This is because Android phones are catered to maximise the user experience by only using the Android system whilst Apple users who prefer the iOS system will opt for the iPhone instead. One complements the other hence it makes sense to not deviate from the current business strategy.

Secondly, MyCC should not be concerned is because what Dagang Net holds is a contractual right given by the government for its’ exclusivity. In return for this exclusivity, Dagang Net may have invested a lot of money, manpower and time to develop the Trade Facilitation system in which forcing it to share with others might frustrate its’ incentives for further innovation.

However, it is not so straightforward and these arguments can fail. There is clear logic why the intervention of competition law to mandate shared access to a property is controversial. For example in Magill, only a hypothetical secondary market was affected but despite this, the courts ruled against its’ intellectual property rights and granted access. Magill is like the Genesis of Refusal to Supply under Competition law. Really, it all comes to where a balance can be obtained.

So… Can I say no?

Maybe (The most truthful answer you’ll get from every lawyer). In law, there is no hard and fast answer. This is even more where there are other elements such as economics and intellectual property rights into play. Competition law being the watchdog over the conduct of all industries will have to balance various stakeholders’ concerns and determine is a fair and just manner whether there was an infringement.

Monopoly or not, most corporations are profit-seeking but not all profits are obtained with an infringement of competition law. Here, I think there was an infringement if the Commission could prove that the infringement was due to the non-usage of business partners product. Additionally seeing as the monopoly position was ‘granted’ by the government, Dagang Net should not that it is not completely shielded by contract and impose restrictions to its’ whims and fancies.

I anticipate seeing more development in the case in the coming months/ years and also for the outcome of My E.G. Services Bhd & My E.G. Commerce Sdn Bhd’s infringement of Section 10 CA 2010.

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Related or not related?

Identifying a related party transaction (RPT) is similar to playing detective and spotting the difference. If you’ve ever watched Suits (or the ongoing case of 1MDB), these transactions go from bank accounts to bank accounts, countries to countries and ending up settling in an offshore bank account. Tracing the chain of transactions is challenging at its simplest and are complicated to weave through the webs of thousands of transactions.

RPT is not always damaging to the companies as they might mutually benefit. For example, the principal company might award a contract to its subsidiary because of financial reasons and to save cost. However, RPT’s bad reputation and connotation stem from the fact that it is the most common way Directors and Trustees syphon out money from the company for personal benefit and money laundering.

1. What is Related Party Transaction

As a basic and simple definition, a related-party transaction refers to any transaction involving the acquisition or disposal of interests in securities/assets by a company or any of its subsidiaries from or to a related party. The interest need not be financial or monetary interest. The Companies Act 2016 loosely defines “related” between corporation as:

Read that 3 times and see if you understand. Especially subsection (c ).

Interpretation:

1. A and B are deemed related because A is the holding company of B (assuming full control). Nothing difficult.
2. A and B are deemed related because A is the subsidiary of B. Nothing difficult.
3. C and B are deemed related because C is the subsidiary of the holding company A of another corporation B.

(C ) is obviously the most contentious one because the question is then how far can you stretch this concept? Is C’s subsidiary’s subsidiary’s subsidiary deemed related to B? This would be the moot point of most RPT.

2. Who are related parties?

In addition to the above, transactions between the corporation and individuals/ other corporations which the directors of the company or substantial shareholder are connected to are considered a Related Party Transaction. Companies Act 2016 defines the how a person can be connected:

However, under section 221(3), a director shall NOT be deemed to be interested in any contract or proposed contract by reason only (a)relates to any loan to the company that the director has guaranteed or party to the loan; or (b) for the benefit of a corporation by virtue of section 7 is deemed to be related to the company that he is the director of that corporation.

As mentioned earlier, RPT are dangerous and are scrutinized because directors may enter into certain transactions at a grossly overvalued or undervalued price in which the director gets a personal benefit to the companies’ detriment. For example, Director A sells a piece of land to Individual B at 40% the market price who then sells it to Individual C at market price and splits the profit with Director A. This transaction, however, will be caught under the following provision:

This means that the transaction would be void unless shareholder approval is obtained at a general meeting or company approval at a Board meeting.

3. When and how is approval needed and obtained?

By default, RPT of any value requires a shareholders’ approval. At the general meeting,

• An interested director in a RPT, must inform the Board of Directors of the Company the details of the nature and extent of his interest, including all matters in relation to the proposed transaction that he is aware or should reasonably be aware of, which is not in the best interest of the Company.
• The director with interest, direct or indirect must abstain from deliberation and voting on the relevant resolution in respect of the RPT at the Board meeting. In a general meeting to obtain shareholders’ approval, a director or major shareholder, with any interest, direct or indirect, or person connected to them must not vote on the resolution approving the transaction.
• Votes are to be taken on poll.

A similar provision to section 228 is encapsulated under section 223 Companies Act 2016. This deals with substantial transactions rather than RPT but I’m including this if RPT also happens to be a substantial value transaction which has additional requirements.

What approval procedures to follow would depend on the type of company involved in the transaction.

1. Where a company’s shares are listed on the stock exchange

Under Chapter 10.08 of the Listing Requirements, “where any one of the percentage ratios of a related party transaction is 0.25% or more, a listed issuer must announce the related party transaction to the (Bursa Malaysia) as soon as possible after terms of the transaction have been agreed”. The valuation for the percentage ratio is calculated from the value of the assets compared to the net assets of the corporation so for example, the value of a piece of land a company intends to sell to the net asset of the corporation.

However, exceptions apply where the value is less than RM0.5mil or that it is a Recurrent Transaction.

If the percentage ratio is more than 5%, the corporation must announce the transaction to Bursa Malaysia + send a circular to shareholders + obtain approval at a general meeting + appoint an independent advisor before the transaction is agreed upon.

If the percentage ratio is more than 25%, the corporation must, in addition to the above requirements, also appoint a Principal Adviser who, inter alia, advise whether such transaction is carried out on fair and reasonable terms and conditions, ensure that such transaction complies with the relevant laws & regulations, ensure full disclosure and all the necessary approvals have been obtained, that it has discharged its responsibility with due care in regard to the transaction.

More regulations apply where it is a very substantial transaction (close to 100%) and where the company is a property developer with core business in development and real estate with development potential,

B. Where it is an unlisted subsidiary whose holding company is a listed company

Directors of the Holding company would obtain a shareholders’ approval in a general meeting in addition to shareholders’ approval of the unlisted subsidiary.

C. “Dan Lain-lain”

A substantial value undertaking or property or a substantial portion is when it either:

1. Exceeds 25% of the value of the assets of the company
2. The net assets attributed to it amounts to more than 25% of the total net profit
3. The value exceeds 25% of the issued share capital

Whichever is highest

For this, approval procedure for substantial value transaction and RPT are the same– shareholders’ approval at a general meeting.

4. What is not a RPT?

Under the Chapter 10.08 of the Listing Requirements, the below are not normally regarded as RPT:

• The payment of dividend, issue of securities by the Company by way of a bonus issue or for cash
• An acquisition or disposal by the Company or its subsidiaries, from or to a third party, of an interest in another corporation, where the related party holds less than 10% in that other corporation other than via the Company;
• The provision or receipt of financial assistance or services by a licensed institution upon normal commercial terms and in the ordinary course of business;
• Directors’ fees and remuneration
• the entry into or renewal of tenancy of properties of not more than 3 years, the terms of which are supported by an independent valuation

…. And more.

The case is less clear for “Dan Lain-Lain” but we can gain some inspiration from the Listing Requirements about what is expected.

Conclusion:

RPT particularly acute hence it is highly regulated and scrutinised to ensure the company has its’ checks and balances on its’ directors under the required rules and regulations. A breach of these regulations entails not only civil liability but also under criminal law where the director can be imprisoned and have a heavy fine upon them. Corporations must ensure that they are conducting business in an ethical, moral and legal manner hence the Companies Act 2016 places much more responsibility and liability on directors compared to Companies Act 1965.

4 facts about Malaysia’s Tax that you probably didn’t know

2 things are definite in this world: Tax and Death. Even after you die, if you owe the government tax payable, you would still need to pay it, without a doubt. After all, taxes are what funds the low-cost medical services (tooth extraction in government dental clinic is RM1.00 by the way), building of roads and highways, provision of public transport and as well as means to mitigate income inequality.

There are various types of taxes: Personal Income Tax, Corporate Tax, Goods and Service Tax, Real Property Gain Tax and Road Tax. Loosely speaking, tax could be divided into two categories: progressive tax and regressive tax. Progressive tax is a tax that takes a larger percentage of a larger income and a smaller percentage of a smaller income. ie Income Tax and Corporate Tax whereas Regressive Tax is a tax that takes a larger percentage from low income-earners and less from high income-earners i.e. Goods and Service Tax.

Here are some facts about Malaysia’s Tax that you probably may or may not know!

Fun fact 0.5: Malaysia is the first country in the world to be repealing an indirect tax act! (albeit being replaced by another soon in September 2018).

1. Who is taxed?

The straightforward answer is everyone. When you purchase a car, you pay consumption tax; when you sell a house, you pay capital gains tax; when you renew your car license, you pay road tax. However, not everyone pays income tax.

According to NST, Malaysia with a population of 32 million people, shockingly only 2.3 million people contribute to income taxes. Presently, employees who earn RM 3,100  or more each month, their employer will deduct an amount of income tax from the monthly salary.

For the larger proportion of the population whose income is not accounted for, correctly reported or under the threshold, GST and SST is a way to gain some income for the government from them as it would be very onerous if 2 million people had to shoulder most of the tax income from the 32 million population.

2. Amount of tax revenue

In the year 2017, the Inland Revenue Board (IRB) was able to collect a total of RM123.33bil, an 8.2% or RM9bil increase compared to the same period in 2016. This means that tax accounts for 56% of the nations’ RM220.406bil revenue.

From the RM123.33bil tax revenue, the-soon-to-be-repealed-GST contributed RM44bil (35%). In comparison, the SST fared quite behind at only RM20bil historically.

3. Malaysia doesn’t have a “Netflix tax” regime yet.

Presently, most countries are looking into the implementation and design of a new tax regime called “Netflix tax” aka digital tax. The rise in internet users and the simplicity of using the internet for various entertainment and services has made it much easier for any entrepreneur to sell their goods and services across the globe. However, on the topic of tax, they are mostly subjected to the tax of the country they’re in rather than the country they’re selling to, many of which go unreported. Corporations which might be affected by this include Netflix, Uber, Grab, Amazon to name a few. According to the government, this untapped segment is worth “billions of ringgit.”

According to section 9 of the GST act (will update accordingly once the SST Act has come back into force), “A tax known as goods and service tax, shall be charged and levied on

1. Any supply of goods and services made in Malaysia, including anything treated as a supply under this Act; and
2. Any importation of goods into Malaysia

As above, services are only taxed where they are made in Malaysia and this requires a place of business in Malaysia. However, if the place of supply is outside Malaysia, they won’t be taxed. The prime example is Netflix. Netflix, unlike Astro, exists on the internet and in an intangible sphere beyond the reach of current regulations. There is a fixed membership fee to pay to enjoy their streaming services but they do not charge any GST if you bought a membership in Malaysia.

In fact, the government has been looking into taxing the digital economy for a while now but due to the change in government, we’ll wait and see what happens. Countries which has successfully implemented the regime includes Australia, Japan, Korea and the UK.

4. What to expect for the transition from GST to SST

I think the number one concern when the government announced that all corporations must reduce their prices pending repealing the GST is whether there will be enforcement and how effective enforcement will be. Larger corporations had been reducing prices post-GST (which led to abnormally weird price figures i.e. RM4.67 for a sandwich) but it’s the SMEs which will be reluctant to reduce prices.

Under the Section 14 Anti-Profiteering Act, “any person who, in the course of trade or business, profiteers in selling or offering to sell or supplying or offering to supply any goods and services commits an offence” where ‘profiteer” means “making profit unreasonably high”. Now, what means unreasonably high is not in the Act but in the regulations. During the transition specifically, it is an offence to profiteer where your profit margin is higher on 1st June than they were before 1st June. If your cost is RM5 whereas the selling price of the product is RM10, your profit margin is 50%. If you did not reduce your price but the cost goes down to RM4.30, your profit margin is now (5.7/10) 57%. Therefore, you profiteered. However, the mathematical equation and economic analysis and taking inflation into consideration allow for some leeway. (The equation is >50 pages long but just know it’s not very straightforward)

Consumers are always welcome to report any case of suspected profiteering to the Domestic Trade, Cooperatives and Consumerism Ministry.

Conclusion:

Tax regimes are necessary to provide resources for the government to carry out various projects i.e. MRT 2 and LRT 3 but also an economic tool to prevent too much economic disparity between citizens. Personally, I prefer the GST regime instead of SST because the latter has many loopholes which were solved by the implementation of the GST. Example: Under the SST regime, fraudulent claims and forged cheques are common occurrences and the GST dispelled all of these. GST is also more straightforward in its implementation and enforcement with only one threshold across all industries whereas SST has various threshold across different ones.

Furthermore, the Anti-Profiteering & Price Control Act 2011 may require some amendments and diligent enforcement to have any positive impact on the economy. The problem also lies in the penalty provided in the act which states:

In a hypothetical situation where such person is a body corporate, and he commits and is convicted for an offence under the Act but makes a profit of RM10mil, he is only liable to pay RM0.5mil on the first offence and RM1mil on any subsequent offence. To the body corporate, he might as well happily pay the penalty and continue to profiteer and just sign a cheque to the court for each offence. There isn’t a deterrent element such as if such person were NOT a body corporate i.e. imprisonment to prevent any rampant behaviour of a body corporate under this Act.

Rumours have it that the SST to abolish the GST will be tabled next Monday so stay tuned!

Protecting shareholders’ rights

In light of recent events, this would be a good time to refresh and get relevant about Company Law and as the title suggests, shareholders’ rights in a company. Shareholders, being investors of the company, pour their money into a company in hopes to get a return on investment from the company so what can they do if they find RM2.6 billion appear in one of the directors’ bank account?

At its most fundamental level, the determination of shareholders’ rights depends on the types of shares they hold but this needs to be spelt out in the constitution. The type of shares they hold may confer preferential rights to distributions of capital or income, confer special, limited or conditional voting rights and also not confer voting rights (known as preferential shares).

Section 71 of the Companies Act 2016 provides that a company share, other than preference shares, confers on the shareholder the following rights:

(a) the right to attend, participate and speak at a meeting

(b) the right to vote on a show of hands on any resolution of the company

(c) the right to one vote for each share on a poll on any resolution of the company

(d) the right to an equal share in the distribution of the surplus assets of the company, or

(e) the right to an equal share in dividends.

1. The right to vote at the AGM

By law, all public companies are required to have an Annual General Meeting once a year and failure to do so is a contravention to the law (s340). The change to the Companies Act 2016 has done away with the compulsory need for private companies to have one.

This is perhaps the most fundamental and powerful right of a shareholder– the power to influence the decisions of the company (#GE14). No shareholders should be denied the right to vote unless the share held doesn’t give the right to do so or other extraordinary reasons.

A key case dates back to the 19th century in Pender v Lushington wherein the Articles of Association, no one is allowed to vote on more than 100 shares in any meeting. Mr Pender who held 1000 shares split his votes and registered them under the names of a number of nominees. The Directors refused to have his votes counted. The court allowed an injunction for the votes to be counted. In a meeting, the company cannot look behind the ownership. A right to vote is a property right and an individual right in respect of which the member can sue. (Ps, this also allows a personal claim against the Directors for refusing to let the shareholders to vote).

(2) Statutory derivative action

A derivative action is made by a member of the company in respect of a cause of action vested in the company and in which relief is sought on behalf of the company. This is because the company is incapable of taking action against the directors who are controlling the actions of the company hence an action is brought by the concerned shareholders. As with the rule under Foss v Harbottle, the proper plaintiff in the action is the company and not individual shareholders.

Of course, the courts have been creating exceptions to the Foss v Harbottle rule where it assumes the appropriate body to decide whether litigation should be brought is the shareholders in a general meeting and leaves minimal scope for shareholders to commence derivative litigation (Kershaw). However, the new Company Act 2016 has done away with Common Law Derivative action and we only have the Statutory Derivative Action under the Act under section 347.

Therefore, Derivative proceedings can only be brought with leave of court and it will consider if (a) the complainant is acting in good faith; and (b) it appears prima facie to be in the best interest of the company that the application for leave is granted. Complainant is defined under s345.

It appears to give wide discretion to the courts whether leave will be granted. In Mohd Shuaib Ishak v Celcom (Malaysia) Berhad (the first reported case under S181A Companies Act 1965 which was the statutory derivative action then) Indeed there was no need to prove ‘wrongdoer control’, doesn’t exclude negligence and no set bar to the claim. This case serves as a wake-up call for directors to carefully consider how they handle a company’s affairs as their decisions can be subject to scrutiny by minority shareholders who have a statutory right to challenge the same in court if the requirements under section 181A of the Act are satisfied.

However, as seen in the Federal Court case of Perak Integrated Networks Services Sdn Bhd v Urban Domain Sdn Bhd & Ors, Section 347 have since abrogated the common law derivative action. Any derivative actions can now only be done by way of statutory derivative action as canvassed under Section 347. However, the case was useful in highlighting that even where there are no minority shareholders, a case of derivative action can still be brought i.e. 50/50 in this case.

(3) Oppressive action

The difference between Oppressive action and Derivative action is that for the latter, any damages reaped after litigation will go to the company instead of the member of the company. In other words, a derivative action is brought when the member does it (out of the goodness/ anger/ dissatisfaction of his heart OR) when the company is unable to sue for any wrongdoings done against itself.

An oppressive action is where the rights and interests of a shareholder are affected and hence the aggrieved shareholder would want to bring an action to protect those rights. An action of this nature is that the shareholder would bring a claim in its own name and any damages goes to the shareholder directly.

This means that the shareholder can bring an action against the directors of the company (or whoever is exerting the oppressive force). First, the shareholder would be required to prove 2 things to the court: that there was an element of unfairness and that it has affected interests as members, shareholders or debenture holders of the company.

This is a remedy that allows shareholders to bring an action when they had suffered a personal wrong. The courts will also scrutinize at any agreements between the shareholders and the directors to see if there had been any understandings or legitimate expectations. If there are any, the shareholders would have a stronger case for proving oppression.

Whilst there is no one rule for all test as to what amounts to oppression, Kumagai Gumi Co Ltd v Zenecon-Kumagai Sdn Bhd [1994] 2 MLJ 789 has the following to say: “With the wide wording employed in the statute, it is clear that the categories or examples of actions which would constitute oppression are not closed or limited. Having said that, oppression of minority shareholders usually occurs when an act of the majority infringes upon the rights of the minority shareholders. Usually, this involves actions which are unfair or actions which depart from standards of fair dealing“.

Simply put, it is where the directors (or similar) was aware of the complainant’s rights and interests but had deliberately chosen to ignore or act against those interests. Examples include where the director has breached its obligations under the company constitution to call an AGM, to allow a shareholder to vote or non-disclosure of company affairs and even non-payment of dividends.

Just note the case of Ng King Chong & Anor Nation Park Sdn Bhd & 2ors that the name of the oppressors must be named as a party to the action as the court finds that it gives them an opportunity to defend themselves.

(4) Statutory Injunction

The Companies Act 2016 now has inherited Section 368A of the Companies Act 1965 under Section 351 which allows for statutory injunction relief.

An injunction relief carries traits of an equitable relief hence parties claiming injunction must come with clean hands, must contravention or attempts to contravene of the law and that the Honourable Court is of the opinion that such relief is in the interest of justice.

(5) Winding up

If all attempts to properly settle the matter had failed, a shareholder may apply to the court for just and equitable winding up.

A just and equitable winding-up situation is not a primary remedy given by the Courts as the general approach is that the majority shareholders should buy out the minority shareholders for sustainability of the business. Actions of this nature often connote elements of legitimate expectation, shareholders’ deadlock, breakdown of mutual trust and confidence among the shareholders and/or management of the company which may justify the request to wind up the company.

Being an equitable relief, Lord Wilberforce explained in Ebrahimi v Westbourne Galleries Ltd [1973] AC 360. that through the just and equitable clause, certain obligations common to partnership relations may come in; the analogy to partnership is convenient because the concepts of probity, good faith, and mutual confidence, developed in partnership law, become relevant considerations once the elements stated above are found to exist

Conclusion

The Companies Act 2016 has provided for vast improvements in protecting minority shareholder rights such as lower thresholds to amend the Articles of Association and shareholders meeting and gained the right, inter alia, for management review.

In conclusion, the law does give shareholders remedies for when their rights are being infringed and those rights were illegally exercised. It will be also useful to know about what director’s duties are such as promoting the success of the company, duty to exercise independent judgment and duty to exercise reasonable care, skill and diligence are amongst the core duties of company directors. Active participation on the part of shareholders will ensure that directors are held accountable and will not accumulate RM38 billion debt. (Illustrations are inspired by real-life stories hence any similarities may be coincidental).

 

Too much of a google thing is a bad thing?

People use Google for one of two things: to search something online or to check if their internet connection is working. If you’re the first, you may or may not have seen products being displayed on the top bar when you search for an object, for example:

Google generates about 0.3 billion USD daily and most of that revenue comes from advertising as you may see. Google shopping is no stranger to the world of shopping (indicated by the symbol sponsored) but in June 2017, Google was asked to change its ways on google shopping by the EU Competition Commission and was slapped with the largest fine imposed on a single entity in EU Competition history– €2.4bn fine. There are several reasons as to why this is justified but others argue that it is disproportionate and harms product innovation. Google search engine is used by 90% of worldwide internet users and to prevent exploitation of customers and preserving competition, someone needs to start sending a wakeup call to dominant players that doing as they please will be heavily penalised.

Facts:

In 2010, the EU Competition Commission decided to open an investigation as to whether Google Shopping was a violation of competition rules. Google shopping allows consumers to compare products and prices online and find deals from online retailers of all types, including online shops of manufacturers, platforms (such as Amazon and eBay), and other re-sellers.

The opening of formal proceedings follows complaints by search service providers about the unfavourable treatment of their services in Google’s unpaid and sponsored search results coupled with an alleged preferential placement of Google’s own services. Google’s internet search engine provides for two types of results. These are unpaid search results, which are sometimes also referred to as “natural”, “organic” or “algorithmic” search results, and third party advertisements shown at the top and at the right-hand side of Google’s search results page.

In its media statement, the Commission mentioned that it will investigate whether Google has abused a dominant market position in online search by allegedly lowering the ranking of unpaid search results of competing services which are specialised in providing users with specific online content such as price comparisons and by according preferential placement to the results of its own vertical search services in order to shut out competing services.

After 7 years, the case has come with a €2.4bn fine.

The theory of harm

So what the Courts have told Google is that Google Shopping cannot favour its own product ads (where Google gets its revenue from) over those of other competitors. To illustrate what this means, a useful analogy may be to think what the Commission is doing is the equivalent of asking a newspaper company to carry/publish the advertising service of competing newspapers and in equal conditions whatever that means and without getting the revenue.

This might be shocking to some who don’t understand Competition Law but it is founded on the very rationale that its existence is to prevent “market exploitation”. Companies in a dominant position (such as Google with a whopping 90% market share in internet search engines in the EU) owe a “special obligation” to not distort and obtain an extra advantage from another market compared to other entities already existing in the secondary market.

Example: Windows was fined in the year the 2000s for having pre-installed the Windows Media Player into computers running the Windows system. Other media player companies lodged a complaint that this was an abuse of dominant position by using a pre-existing dominant position in one market (computer software market) to impute and create a dominant position in another market (the media player market). The Court agreed.

Some might argue that this is illogical because as consumers, we want convenience and reasonable price so by forcing Windows to remove the Windows Media Player (which it gave for free!!) isn’t it creating more trouble for consumers to have to search and download another media player? Also, what’s wrong with using what you’ve successfully created (through blood, sweat, tears and a lot of money) to promote something else you’re working on?

It is a little counterintuitive, but the argument on the flip side of the coin is that well, would you like it if one company dominated your whole life? It was to prevent a company from creating too many dominant positions that consumers are compelled if that dominant position became a monopoly position. Also, there are many considerations such as maintaining the level of competition, “too big to fail” and promoting consumer choices.

Back to Google, the EU Competition Commissioner, Margrethe Vestager, describes Google as obtaining an “illegal advantage by abusing its dominance in general Internet search” by promoting its own comparison shopping service in organic search results and demote rival comparison shopping services. The basis of the Commission’s decision is not spelt out on any relevant established anti-competitive practices such as constructive refusal to supply, price discrimination or tying but it was based on an overarching jurisprudence of competition law that dominant firms owe a “special obligation” as I’ve mentioned earlier.

Evidence of the foreclosure involved an in-depth analysis of Google Shopping’s effects on the market. It was found that as a result of Google’s illegal practices, traffic to Google’s comparison shopping service increased significantly, whilst rivals have suffered very substantial losses of traffic on a lasting basis.

• Google’s comparison shopping service has increased its traffic 45-fold in the United Kingdom, 35-fold in Germany, 19-fold in France, 29-fold in the Netherlands, 17-fold in Spain and 14-fold in Italy.
• The Commission found specific evidence of sudden drops of traffic to certain rival websites of 85% in the United Kingdom, up to 92% in Germany and 80% in France. These sudden drops could also not be explained by other factors. Some competitors have adapted and managed to recover some traffic but never in full.

Therefore, the theory of harm lies in that it was using its dominant platform (Google Search) to help establish another dominant position (Google Shopping) and this is supported with the exponential increase of traffic to Google Shopping and a fall in competitors. Also, it distorts reduces the level of relevancy in search results by displaying certain products over others.

Commentary:

I must admit first-hand that I am not a big fan of market liberalisation because it creates lesser competition and lowers competitive pressure. I am especially an opponent to the thought that “less is more” in the context of competition. For example, a self-sufficient country like China which holds one of the largest economies in the world has only a few companies running the bank by the billions/trillions: Tencent, Alibaba and Baidu to name a few. Competition is pretty dire there with only a handful of *very strong* players.

However, this decision is one where I am unconvinced of but understand the underlying rationale (and desperateness) of the decision. It’s a good decision but the explanation part leaves more to be desired.

Firstly, it stifles product innovation and improvement. The whole reason for the integration of the price comparison function into Google shopping is so that consumers like you and me need not individually check Amazon, Zalando, Asos, Missguided, Ebay to find the cheapest place to buy a shirt. A function which disadvantages rivals is not automatically anticompetitive practices but a balancing process needs to be taken place before it can be called an infringement of competition laws. Through improving and updating its price comparison function, Google was able to obtain a solid market standing which is not a “Google privilege” but maybe it offered something other price comparing websites don’t– the added convenience. But as seen in Windows/ Windows Media Player, added convenience isn’t always looked upon favourably.

Secondly, it’s quite unclear what kind of infringement this is. This is important because different tests are used for different infringements. At its closest, this appears to be a tying case such as Windows/ Windows Media Player but it wasn’t like consumers were prevented from using an alternate price comparison website and consumers didn’t need to buy Google Search to get Google shopping for free (welcome to the 21st century!). It is possible that this is a constructive refusal to supply case where if it can be proven ‘indispensability’ lead to a ‘margin squeeze’ and ‘a secondary market to be affected’. Bronner, Commercial Solvents, Magill and IMS Health all demonstrate this point (to a certain extent). The Commission notes in its Guidance that the existence of an obligation to supply – even for a fair remuneration – may undermine undertakings’ incentive to invest and innovate, which could be detrimental to consumers; and that, where a competitor can take a ‘free ride’ on the investment of the dominant firm, it is unlikely itself to invest and innovate, again to the detriment of consumers. So… What does it want Google to do exactly?

The part which baffled me the most is, as per the usual EU Competition Commission style, it did not tell Google how to remedy the problem but wants Google to figure out by itself on how it can be remedied and what commitments it plans to give. This is after 7 years of negotiation and various compromises being discussed hence it should be reasonable for the EUCC to at least give an idea of how to give a remedy the issue.

In other related thought, maybe EUCC has been overzealous with Google? It does have 2 cases pending with Google on it’s Adsense and Android workings…

The Gruber Deal

(I know I said in my previous post that Google Shopping would be the next post but since this is more recent… some urgent comments about it)

For people who can’t drive, people who do not want the trouble of finding a car park, people want to go out for lunch and people who would miss the last train (thanks to OT), Grab and Uber would be a staple app in the phone. According to The Edge Markets, Grab itself offers 3.5million rides a day which shows how reliant people have become on ride-hailing services compared to the traditional taxis.

I won’t talk about why the merger happened (you can read more here and here) but rather I want to focus on the market implications of the merger. Indeed it as raised red flags amongst Competition Commissions in Singapore, Vietnam and Philippines about what the implication of the merger will bring as it will be a monopoly in the region. Unfortunately, Malaysia has yet to have merger controls in place as the recent Competition Act focuses on dominant players and anti-competitive practices.

How might this concern me?

If all goes well and as expected, Grab would be a monopoly player in the ride-hailing market. For the society as a whole, we would want to prevent the existence of a monopoly if possible. Imagine if you could only go to Tesco for your groceries, wanting to buy a carton of milk and it costs you RM20? Sure you’ll be unhappy and unwilling to buy it but you have no alternatives, hence you plan what you can save throughout the week to afford that bottle of milk. Monopoly players might just do that, jacking up prices for their own profit gains.

Competition authorities are more cautious when approaching the topic of mergers compared to anti-competitive activities for 2 reasons:

1. A merger would lead to a permanent structural change in the market and may damage the competition of the market. Once it is done, you cannot undo it. It has a much more lasting change than a cartel/ price-fixing agreement.
2. A merger can actually lead to efficiencies and higher productivity compared to anti-competitive activities. For example, firms may want to combine IP resources to create a better product/ service.

Of the two possible outcomes, Competition authorities can only predict and make assumptions about the post-merger entity possible moves. They would have to look in the long term, such as 7 years from now, what economic benefits the entity would bring and at what cost to the society. It’s all based on speculation. This is a very onerous and risky decision just like how it is hard to speculate whether a 5-minute ride might either cost you an arm or just RM5.

How do Competition authorities come to a decision?

(I’m referencing merger control in place in the EU since Malaysia lacks one currently)

Currently, the test for whether mergers would affect competition negatively in the EU is the SIEC test: Will the concentration Significantly Impede Effective Competition in the common market?

The burden is on the Commission to establish that the merger is either compatible or incompatible with the internal market. In making the determination, the merger must be assessed in the context of the position that would exist were the merge not to be completed (counterfactual). The standard of proof is the balance of probabilities.

In fact, EU authorities have previously prevented several mergers such as O2/3 and Ryanair/ Aer Lingus.

For O2/3, they are both strong players in the telecommunications market which appears to be an oligopoly market. Market regulators focus on promoting competition and ensuring competition remains strenuous by keeping it fragmented. The mobile telecoms sector should be competitive so that consumers can enjoy innovative mobile services at fair prices and high network quality. The principle that efficiency claims can be put forward to outweigh any negative effects is more rhetoric than reality. Competition authorities are more prudent and cautious for merger cases and efficiencies play only a marginal role compared to the perceived negative effects.

In Ryanair/ Aer Lingus, the parties would have very high combined market shares on a large number of routes, but that the merger would eliminate competition between 2 closest competitors on the routes and that barriers to entry into the market were very high. The parties closely monitored the other’s marketing campaigns and price changes and constrained each other’s behaviour in relation to both price and other parameters of competition.

In cases where the parties are found not be close competitors, such as Facebook/Whatsapp, an unconditional clearance decision is likely. In contrast, a merger between firms which produce products with high degree of substitutability is more likely to produce anti-competitive consequence i.e. Ryanair/ Aer Lingus.

The reason for CCSS to delay the merger until May 9th is perhaps to assess either to allow the merger to pass and give commitments to ensure competition structure, prevent it and as such “Gruber” is not allowed.

But what if Uber said that because it keeps making losses hence selling off the SEA entity was to improve its business?

This is also called the “rescue merger” where a firm takes over another to prevent the latter from “failing”. This defence is well established in US antitrust practice where it seeks to give a “second chance” involving a firm which would face an inevitable liquidation. There are various advantages for this such as to protect all stakeholders, creditors, employees, and the economy. This approach is seen to be involved with distributive justice instead of focusing on efficiency gains by forcing a loss-making company to stay alive for the benefit of competition at the expense of others.

However, there are 3 criteria which the authorities will consider:

1. The failing firm would in the near future be forced out of the market because of financial difficulties
2. There is no less anti-competitive alternative purchase than a notified merger and in absence of a merger
3. The assets of the failing firm would inevitably leave the market.

Note that this is a “last resort defence” and should be assessed very strictly to prevent abuse. Companies may record losses but have valuable assets such as Twitter and Instagram.

In Aegan/ Olympic II, the Commission approved it unconditionally accepting that Olympic was a failing firm and would be forced. The ongoing Greek financial crisis meant that domestic air travel would drop drastically. Absent the merger, it would leave the market completely and the merger would have no adverse effects on competition.

In Grab/ Uber’s case, Uber has been recording losses for years especially in SEA whilst Grab has been innovating rapidly with various initiatives. Uber, with various protocols and guidelines, has been said to lose to Grab due to lack of local preference. However, the situation does not seem to be as dire and critical as Aegan/ Olympic II because they are airlines which focuses on Greece region and there is a financial crisis ongoing. In fact, just a few weeks before the merger announcement, Uber said that it would invest more in SEA region to improve its market position.

It is probable that this argument will fail if we follow EU’s merger regulations and it’s (often criticised) strict approach to competition regulation. I personally prefer Uber over Grab for various reasons but I’ll leave this to the Competition authorities.

Okay, but can’t competition authorities stop Grab for anti-competitive practices post-merger?

Competition authorities would normally have 2 options if later they find the merger to be unfavourable: to unwind the merger or to assess the post-merger entity on anti-competitive practices legislation. Authorities are less likely to unwind a merger because of the significant cost involved and the structural changes to the market already caused. In the EU, once a merger is said to satisfy certain features, it must notify the Commission of intention to merge or else if it “gun-jumps”, a hefty fine can be penalised on it.

This brings us to the second option– under the Competition Act. Most Malaysian Uber/ Grab users would every now and then receive a text “free RM60 off your next 10 rides!” or “book now and redeem up to RM5 on your next ride!” but once that competitive pressure is off-loaded, would we still continue to see these rebates? According to Grab Malaysia Country Head Sean Goh, the merger would not make things any different and prices would remain the same. How much confidence or scepticism should Competition Authorities have on this statement?

Analysis of anti-competitive practices often takes much longer than preventing a merger. The previous may require months of overseeing, various economic theories and it is less obvious. For the latter, it’s all about speculation (and common sense), goes to the root of the problem instead of just plucking the weed and the Commission makes a judgment much faster than anti-competitive practices as businesses want finality and a decision fast before either party changes their mind. As mentioned previously, once a merger goes through, the damage is done. Catching them after the merger is definitely possible, but one that is less preferable than stopping it before and takes more time.

Comments

Personally, I don’t look the merger in a favourable light and 120% sceptical about the merger. My reasons are as follows

1.Monopolies are nightmares

When I was in the UK and Uber was the dominant player, Uber rarely ever had any promotion, discounts or rebates like I’ve been receiving in Malaysia where it’s almost every other week that I’ll receive a text about one. As such, I can imagine the same to happen here where it’s a matter of time where Malaysians would bid goodbye to those promotion texts and are forced to pay higher prices. Without Uber to offer those promotions, Grab would similarly find no reason to give offers as well. As such, it’s just a matter of time.

2.The efficiency gains might not be able to compensate for the reduction in competitive pressure

Unfortunately, and strangely, we live in a decade where monopolies are “normal” and hostile takeovers may be an everyday affair. China is an excellent example where the whole country’s technology lies in the hanof on a few who holds a monopoly in every market. Perhaps the citizens are more patriotic and hence support local apps more than foreign ones (Didi vs Uber) but within China itself, a country with a huge economy, there are very few players in each market i.e. Alipay dominates the card-less payment, Wechat reigns over Whatsappp and Weibo is the new Facebook there. It creates a no-choice, no-second option if I dislike any of them.

I’m really not a big fan of the theory “the bigger the more efficient” theory but I advocate for “the bigger the more risky to fail” theory. The bigger the company gets, the more it absolutely cannot fail and the more the need to sustain it. Call me a pessimist but when it comes to competition, no allowance should be made and no risk left unaccounted for. Look at the Financial crisis 2008/ 2012 and it’s obvious why.

Withholding tax 101

My Civil Procedure lecturer would always say this: There are 2 things that are certain in this world– death and tax, even when you die, you still need to pay tax. Now, most of us would know that there are certain types of taxes we need to pay to the country i.e. Income tax, Goods and Services Tax (GST), Capital Gains Tax (CGT) but the lesser few know about Withholding tax (WHT). Withholding tax isn’t one of those tax you might incur on a daily basis but it’s good to know about it to determine whether it applies to you (or risk IRB penalties)

1. What is withholding tax

Withholding tax is an amount withheld by the party making payment (payer) on income earned by a non-resident (payee) and paid to the IRB. For example, A engages B who is a foreign consultant to give consultation on a project and pays $100,000. Under the S109B Income Tax Act 1967, A would need to withhold 10% of that amount as withholding tax, paying B only $90,000. (unless otherwise agreed)

Failure to withhold by the payer would have to pay an increase in tax of a sum equal to ten percent of the amount and no deduction is given for the payment made to a non-resident payee against business income in the income tax computation of the payer

WHT only applies to services/ income and not goods. Goods would incur import duty or GST instead. Under the Income Tax Act, the various types of services that would incur withholding tax and their respective rates are (accurate at the time of writing)

Full list can be found here

2. How do I determine if I need to pay withholding tax

I’ll explain this via examples of some types of payments taxable.

i) Contract Payments

Under the Income Tax Act, it reads 107A.

(1) Where any person (in this section referred to as “the payer”) is liable to make contract payment to a non-resident contractor in respect of services under a contract, he shall upon paying or crediting such contract payment deduct therefrom tax at the rate of—

(a) 10% of the contract payment on account of tax which is or may be payable by that non-resident contractor for any year of assessment; and

(b) 3% of the contract payment on account of tax which is or may be payable by employees of that non-resident contractor for any year of assessment,

This provision was included to allow the collection at the source of tax due by non-resident contractors and professional firms engaged in services under a contract. This tax is not a final tax and will be refunded to the contractor upon finalization by the tax authorities.Payments made by Malaysian residents to non-resident contractors for services under a contract carried out and performed in Malaysia are subject to withholding tax of 13% (10% + 3%) on the service portion of the contract.

This would be akin to the example I gave above where A engages B, a foreign consultant for consultation services.

ii) Royalties and interest

Both come from the same statutory provision which is s109A of the Act.

However, the Finance Act 2017 has expanded the definition of Royalties. General understanding of the word “royalty” would encompass from common copyrights and trademarks i.e. payment to McDonald HQ for carrying out business in Malaysia using the brand “McDonald”.

Now, the definition includes any consideration for the right to use software, the reception of or the right to receive visual images or sounds transmitted to the public by satellite, cable, fibre optic or similar technology or in connection with television or radio broadcasting. Further, royalties paid for the use of or the right to use radio frequency spectrums. This is a much more comprehensive list and to my mind, would include everything and anything related to the use of others’ assets.

iii) Technical services

Amount paid in consideration of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme is subjected to WHT. However, day to day administrative work, such as bookkeeping and other routine services (no specialized knowledge, skills or expertise are needed) does not fall under the category “administration”; those amounts are not subject to WHT.

The definition of what amounts to “technical services” has also been enlarged and increased by the Finance Act 2017. Previously, the WHT provisions for service fees, WHT would only be applicable to service fees falling within Sections 4A(i) and (ii) where the services are rendered in Malaysia. From the enactment of the Act onwards, all payments made by a Malaysian resident taxpayer to a non-resident taxpayer for technical services are subject to 10 % WHT regardless where the services are physically performed.

For example, A UK based consulting firm provides consulting services to a Malaysian taxpayer, the services have been wholly performed in Singapore. Previously, the service fee paid to the legal firm was not subject to WHT. Under the new rules, the Malaysian service recipient has to withhold 10 % WHT on the whole amount.

3) Additional:

Now, you might be thinking why I said “unless otherwise agreed” in para 1 (and if you did, Good Job!!) and no, you cannot contract out of the Income Tax Act. This is because sometimes, especially with online advertising platforms, they ask that whatever price they name is the price you’ll pay them, and you’ll have to top up that amount as withholding tax.

As stated in Google’s Advertising Program Terms:

7. Payment. Customer will pay all charges incurred in connection with the Program… Charges are exclusive of taxes… Customer will pay (i) all taxes and other government charges ….

The formula works like this: if the advertising cost was $100,000, you would need to divide it by 0.9 and then multiply it by 0.1 and the withholding tax payable to the IRB would be $11,111. Hence, you are not entitled to say that from the $100,000, you would withhold 10% making it $10,000 but you would need to spend additional resources for the payment, making an additional burden because you’ve agreed to take on the supplemental cost.

If you’re interested more about taxing on online advertisement, you can read more here and here which talks more about Facebook and Google adverts where it is unclear whether the WHT is under royalties or technical services.

 

Teaser: next week I’ll be writing on the largest fine the EU Competition Commission has ever imposed on a single entity so stay tune!

Resources:

1. HLB Malaysia, Malaysia Understanding Withholding Taxes
2. Techmonitor, Understanding Withholding Tax
3. Azmi & Associates, Withholding tax in Malaysia
4. Deloitte, International Tax Malaysia Highlights 2017
5. Malaysia Luther News, Malaysia Enacts Finance Act 2017 – Expanded Scope of Withholding Tax
6. KPMG: Malaysia: Withholding tax, royalty and service fee payments to non-residents

Life at LSE

London has always been one of my dream cities to live in. I’ve previously had the privilege to live in one of the most interesting city in the world (Dubai) but still, nothing compared to the excitement when I knew I was going to London to the school of my dreams– LSE. LSE was also my dream university since IGCSE hence it is exhilarating to be educated in one of the top political science institutions in the world

LSE is amazing. No question about that. In the 3 years of law school, I was there, there was so much to learn and so much LSE could give. It was pretty much like a pot of gold on the end of the rainbow which wouldn’t stop giving. However, there were nights that I would just hide under my blankets to sleep off the stress and demotivating that is LSE. So what was it like studying in LSE and how is it different from studying locally? I’ve listed quite a few points below as well as my life in London in general.

 

1. Why LSE for Law? Isn’t it like, for economics?

That is very much not true. To be honest, I wanted to do economics when I doing my IGCSE. I did economics then and in A-Levels and thoroughly enjoyed every part of it. Well, it didn’t go as plan and I had to do another discipline. In college, I was very involved in MUN and since then I did develop the interest in international debates, pointing fingers and pressing liability as well as making alliance whilst destroying others. It definitely helped in building my confidence and even more my passion for talking very loudly argumentatively. Therefore, I chose law.

2. What was law school in LSE like?

Unlike the CLP I’m doing now, we only had at max 15 hours of lectures and tutorial (here, it can as many as 30 hours a week) and even then if we ever had 2 hours back-to-back, we’ll start groaning. Throughout all 3 years of university, we were needed to take 4 full modules each year. In my first year, they were all compulsory modules: Criminal Law, Introduction to Legal System (0.5), Property I (0.5), Contract Law (0.5), Tort Law (0.5) and Public Law. The (0.5) meant you’ll do one each semester. By the end of the school year, there will be a final exam.

Second year is when life gets more interesting. All the modules are free to choose so I chose: EU Law, Taxation Law, Commercial Contracts and Property II (Land and Trust). I loved every module of it and in it was so much to learn.

In my third year, all but one was free to choose. The compulsory module was Jurisprudence whilst for elective modules, I chose Elements of Accounting and Finance, Competition law and Company Law. Final year started with like a chocolate, it was bittersweet. It was the last 22 weeks in LSE of my university life and then it was adulthood. I chose the first because I wanted some knowledge on accounting whilst Competition Law was a module I was determined to take since the summer of 1st year (it was the closest I could get to anything Economics related).

© the BLSAdvocate

3. Why do you have so few hours of lectures?

12 hours of lecture is certainly not as it amounts to about 2-3 hours a day or classes. Most of my days start at 10am with the first lecture, a 2-hour break then a class at 2pm followed by another 1-hour window and then another class. You’re given this amount of free time to ideally spend it in the library doing extended and extra readings. After all, LSE isn’t called to have one of the largest libraries in the UK devoted to the social sciences for nothing.

Extended readings and reading list are mandatory for Law School students to compensate the short lecture hours you have. Lecturers just can’t afford to go at length about everything from A-Z about a case so well you’re just going to need to find that out yourself: from facts to court judgment and even read the judgment at length. For example, a chapter in Company Law was concerning “Piercing the corporate veil” where the reading was about 80 pages of pure court language and this is normal. Average individual reading time per chapter is about 4 hours for me. Unfortunately, reading lists are barely in existence here.

You’re also required to be very prepared during tutorial classes to get the full advantage. They’re much smaller in size, normally about 20 people at max. The teacher will just go in and start asking “what does the judge mean when it means “by object” doesn’t create any economic efficiencies?” “In what circumstances can an agent be made liable to the principal despite having done so outside the scope of his job?” “Why do you think the court was wrong in dissenting that the director did not breach his duties?” It’s not meant to be a mini and summary lecture but an avenue for you to demonstrate your understanding and test yourself as to how much you actually understand the subject matter. And indeed, you’ll feel small and tiny if you do not speak up.

I might sound like a total nerd but I LOVED my reading list. What I’ll often do to get different perspective is after having done the core reading, I’ll do the reading on the same chapter but from another book with another author. For any module, there are many textbooks available out there and each provides a different commentary on the matter concerned. Unfortunately, I now couldn’t afford the time due to the increase in lecture hours.

© lse.ac.uk

4. Do you get time off studies to do something else?

With 12 hours of lecture and at least 16 hours of reading time and 10 hours of homework time each week, it can average to about 8 hours of work time each day. 8 hours to sleep, 8 hours to work, the remaining 8 hours can be put into areas to gain experience and knowledge beyond the walls of your classroom. In my uni days (wow I feel so old now) I participated in quite a few student societies but the two societies where I was more involved in were International Council of Malaysian Scholars and Associates (ICMS) and the Kesatuan Penuntut Undang-Undang Malaysia (KPUM).

ICMS is a cross-border student society with an establishment in 6 different countries. It’s a very engaging and interesting society and knowing people of different backgrounds in different cities gives an interesting outlook on things. I was part of the Malaysian Public Policy Competition committee back then and it is one of the most memorable experiences of my student years.

On the other hand, KPUM is a law society but it was in the process of reforming then so there was a lot going on and a shortage of manpower too. I helped in 2 events which were dated back to back so my days were filled with 10pm meetings, Skype calls before going to school and running errands throughout the City of London. There is also much more to do such as debating society, music society, MUN and netball for example. Life at the LSE, and London, in general, is very fast paced and it only depends how much time you’re willing to invest in it.

5. What did you enjoy most and disliked the most?

Wow, how do I start? I loved

• The amount of independence you get for your studies
• The lecturers in LSE are so helpful and emphatic
• Classmates and friends are helpful
• The accessibility of public lectures and lots of them too.
• The busy and lively life of London
• Student society activities taught me a lot
• LSE taught me a lot
• Public transport is just amazing
• Traveling is accessible and affordable
• All those Tumblr posts you’ve seen

What I did not enjoy so much?

• The stress.
• The school fees and cost of living (£17000 a year and £1200 a month, yikes)

Conclusion:

Looking back at the wonderful 3 years I had in London, I truly would not have it any other way. It taught me a lot from the independence of how to fix a light bulb to moving houses by myself, from zero knowledge about cases and statutes to flipping 200 pages of judgment in 2 hours. It taught me about resilience and most importantly, about how strong you can be once you put your mind to it.

I had my nights just asking “why I did law school?” but I never regretted taking a law degree. There were times when I look at my parents and how I felt “if only I knew the law, I could help” or “if only I could be a qualified lawyer, I could help my parents on X and Y”. Instead of saying the law is to give justice, I think it’s more about fairness and equality.

My advice to all law students, chin up and be strong. Take your time in university to explore the world much more and find what you enjoy most. Go do some volunteering or helping to organise an event. If there isn’t a committee you can join, make one! It’s going to be all worth it and you’ll make it through this.

The “right” in copyright

(I hope you’ve understood the pun)

Foreword: During the summer after my first year of law school, I did 2 internships in 2 different law firms. One of the law firms gave us a training session every week which was very interesting and something my first internship did not have. The IP partner then told us about this story and this is THE CASE that got me interested in IP law. It’s an old case but nevertheless an interesting one. Enjoy 🙂

Maxis Sdn Bhd v Suruhanjaya Syarikat Malaysia [2004] 2 MLJ 84

Maxis is one of the strongest names in Malaysia and I’m sure that whenever someone says the word “Maxis”, a distinct green squiggly line will appear in your head. What if, Maxis was not the Maxis you knew?

The two parties in the case are Maxis Sdn Bhd on one side and the Registrar of Companies along with Maxis Group of Companies on the other (the latter is the one that we are well versed with). Maxis Sdn Bhd was incorporated in 1992 and was engaged in the business of information and system services provider in 1993. Then after, it ceased operations and became dormant. On the other hand, the principal companies in the Maxis Group of Companies do not previously carry the forename ‘Maxis’. They were formerly known by their principal name: ‘Binariang’. With subsequent changes made to their names, all the companies in the Maxis Group of Companies have the word ‘Maxis’ as its leading character. The latter was established in 1995 and was one of the first mobile communications providers in Malaysia.

Maxis Sdn Bhd sought a declaration that the Registrar was wrong in approving the use of the name “Maxis” by Maxis Group Companies and therefore, should be canceled. Maxis Group Companies counterclaimed for an interim injunction and several others for passing off. This case concerns the counterclaim.

Maxis Group of Companies now allege the defendants of passing off or assist in passing off the defendants’ business as and for that of the Maxis Group of Companies. Some of the instances are as follows:

1. Saw and Yeoh had acquired Maxis Sdn Bhd in 2001, a then inactive company with the intention to revive it.
2. They have incorporated Maxis Capital Sdn Bhd in 2001 by using the name Maxis as the lead name.
3. They have caused a name change in Maxis Biotech Sdn Bhd which previously does not carry the word Maxis.
4. Maxis Sdn Bhd, Maxis Capital Sdn Bhd and Maxis Biotech Sdn Bhd took premises in Menara Maxis that housed most of the offices of the Maxis Group of Companies.
5. Printing letterheads and distributing name cards which carry the name Maxis in similar fashion and style as the brand name used by Maxis Group of Companies.

Defendant’s defence:

The Defendants deny that they had in any way “passing off” business as being part of Maxis Group of Companies because Maxis Sdn Bhd existed before Maxis Group of Companies did. They also stressed the fact that although they had at one point rented an office in Menara Maxis, they said it was due to the advantage of the location. Also, Maxis’s business activities are only confined to telecommunication; they have not acquired goodwill for goods or services outside this area.

*pause and drink a sip of coffee*

First things first, what is “passing off”?

Passing off occurs when someone uses very similar traits of a product/ service/ brand to create some false representation likely to induce a person to believe that the goods or services are those of another. Example:

 

It occurs when the following are satisfied in the landmark case of Reckitt & Colman Products Ltd v Borden Inc

• The trader must establish goodwill or reputation attached to the goods/ services
• The trader must demonstrate that the defendant made a misrepresentation
• The trader must demonstrate that he will suffer damage by reason of erroneous belief

Each will be discussed below.

 

1. Goodwill/ reputation

Unlike above, goodwill is easy to describe, difficult to define. It is the one thing which distinguishes an old established business from a new business at its first start. In other words, it is the business interest that the claimant is trying to protect.

Whether the claimant has the reputation (or goodwill) is a question of fact and entirely dependent on evidence showing that consumers recognize the sign as indicating origin. In simpler terms, it is the attractive force which brings in custom and that which distinguishes old business from a new. (Fletcher Challenge Ltd v Fletcher Challenge Pty Ltd)

Adding up the above, a passing off action is a remedy for the invasion of the right of property, not in the mark, name or get-up improperly used, but in the business or goodwill in which it has been used.

An argument tender by the defendant is that passing over should only exist in the line of business or services that the applicant was in. They are of the view that the applicants’ business activities are only confined to telecommunication; they have not acquired goodwill for goods or services outside this area, namely for their company Maxis Capital Sdn Bhd and Maxis Biotech Sdn Bhd.

However, case law has suggested that this is insufficient to protect the goodwill of businessman from appropriation and misuse by another businessman. It may very well extend to any business that may mislead anyone into thinking that the products or services were the goods and services of the plaintiff. This is especially where a business is a conglomerate.

Example: AirAsia also owns Tunehotel and Tunetalk. If TuneTaxi pops up, I would think 70% Malaysians (modest estimation) would think it relates to Tune Group.

This is the case EVEN IF the defendant promises that he would never enter into the same business line as the applicant. Where there is an invasion or likelihood of invasion into the rights of the property of the applicants, the cause of action is a well-founded one. Maxis has expended huge sums of money to promote and market the name ‘Maxis’ aggressively throughout this country in the field of telecommunication, which they are primarily engaged in but also to other fields of business the Group owns. It doesn’t take a lot for one to think it’s unfair that someone else should usurp the benefit when another has spent millions to develop the name.

For now, Maxis Group 1 – 0 Maxis Sdn Bhd

*Pause and eats a chocolate*

2. Misrepresentation

What is funnier than having a Maxis-named non-Maxis company breathing existence in Maxis Tower. *facepalm*

The D’s argument was that they mistook that this building is within the Multimedia Super Corridor and since such setup taking up premises there would be advantageous when it wasn’t. They even declared that they would not move into this building and reiterated that they will never set up an office there, even if they are successful in this suit.

(still, the thought of it is already baffling)

I don’t think anyone would be convinced and the judge was certainly not amused. The judge considered them to have an intention to deceive and where Kuala Lumpur being so vast and wide, and filled with available office space could have easily accommodated the defendants’ companies, they had to choose Menara Maxis. The judge notes the similarity of the name made the slip-up of by the building management into allowing them to penetrate this fortress of the Maxis Group of Companies.

On the point of Maxis using the word “Maxis”. Maxis Sdn Bhd was incorporated before Maxis Group of Companies used the name “Maxis” and as such, they had every right to use the name. They stressed that at no time they had represented themselves to be part of Maxis Group of Companies.

(Perhaps Maxis Group of Companies knew this because all the companies under the parent are named Maxis XXX Sdn Bhd)

They claimed that and yet the judge found the use of the shape, style, and character of the word ‘Maxis’ printed on these documents are almost identical to that trade name which the applicants are promoting. (I couldn’t find the exact logo of Maxis Sdn Bhd which is regrettable) Similar to the above, there are about 69 fonts in Microsoft word so why choose the one that Maxis uses and in such a form and fashion so similar to that of the applicants’ unless they did it with some sinister intentions. The crucial issue is what effect the false statement has on the minds of the claimant’s customer and make them think that this was ‘something for which the (claimant) was responsible’

On the contrary, if the consumer is not confused and does not mistaken, then there can be no misrepresentation and no liability for passing off. Looking at the above, it is difficult for this court to accept the defendants’ explanation that their actions as being reasonable and are devoid of any intention to deceive and mislead.

Maxis Group of Companies 2 – 0 Maxis Sdn Bhd

3. Likelihood of damages suffered by reason of erroneous belief

The applicant must now show that they have suffered or likely to suffer losses and must affect the goodwill of the company. The test is that the applicants need not prove “actual damage in order to succeed. Likelihood of damage is sufficient. One of the ways in which a business reputation may be injured is by the appropriation of that reputation or part of it by a third party. Such appropriation may be brought about by the adoption of a name which suggests that the person or company adopting it is in some way connected or associated with the person or company enjoying the reputation.

It is quite obvious that Maxis Group of Companies would be adversely affected by the use of the word “Maxis” by another. If any undertakings that go by the name “Maxis” were to conduct illegal dealings or be bankrupt, the general public would understand it to be somehow related to the applicant instead of being distinct.

Owing to the above reasons, Maxis Group of Companies obtained interim injunction and Maxis Sdn Bhd was precluded from conducting business using the word ‘Maxis’. An intriguing point to add is according to Bloomberg, as of January 18, 2006, Maxis Sdn Bhd operates as a subsidiary of Maxis Communications Bhd.

Comment:

Whilst reading the facts of the case and the judgment therein, I can’t help but think about the prominent staircase shot widely shared on Instagram in APW Bangsar. Before going to APW Bangsar myself, I’ve always thought that the staircase was within the property/ vicinity of BT. Little did I know when I went there, it was directly below a sushi burrito shop and NOT on the same structure as where BT was located and most commonly tagged on Instagram. The sushi burrito shop owns the stairs (or at least the landlord I presume) and not BT but since the latter popularise it so hypothetically, does it justify that BT should be allowed to call it their stairs?

I do acknowledge that Maxis Sdn Bhd had overstepped the line and became from dormant to active very shortly after Maxis was listed to be very suspicious indeed. However, where does one draw the line where a product came first but some other undertaking popularised it? The staircase (I would consider) was part of the structure of the sushi burrito shop but Breakfast Thieves was the one who popularised it so does that mean the staircase belonged to Breakfast Thieves instead?

Maxis Sdn Bhd was registered prior to Maxis Group of Companies changing their name so was it right that Maxis Sdn Bhd should be allowed to continue trading in its name? Even the judge acknowledged that this legal issue is debatable. The basic rule is that reputation and goodwill should be exclusive to the claimant but sometimes there may be a sharing of reputation such as where two companies, by coincidence, acquire a separate reputation and neither can stop the other from using the name. An example is Anheuser-Busch Inc v Budejovicky Budvar NP where BUDWEISER was the trademark of both and the net outcome was that they were forced to co-exist, neither having a right of priority over the other.

Personally, I do think it’s unfair if, by market power, one were to be allowed to dominate (and steal) another’s business because they have better resources for marketing and investing. Perhaps the truth is, the bigger company knew about the smaller company but figured it could overpower it (not suggesting this was the case in Maxis). However, market power also isn’t everything. In 2009, McCurry (short for Malaysia Chicken Curry) won it’s lawsuit against McDonald when the latter sought an injunction to prevent the former from using the prefix “Mc” in its business. The Court of Appeal stated that there were several distinguishable grounds such as the business logo was noticeably different, none of McCurry’s menu had used the prefix “Mc” and the menu was very different in that it only sold Indian food. What amounts to a “passing off” seems to me to vary quite acutely depending on the parties in the case and many other factors.

In the end, it’s up to the courts to weigh on where the balance of convenience lies and the degree of damage that would cause one an undertaking should the application be refused based on reasonable judicial principles.

Resources:

1. Compagnie Generale Des Eaux v Compagnie Generale Des Eaux Sdn Bhd
2. Bulmer v Bollinger
3. Commissioners of Inland Revenue v Muller and Co Margarine
4. https://asia.nikkei.com/Company/00C8GY-E
5. Fletcher Challenge Ltd v Fletcher Challenge Pty Ltd
6. Anheuser-Busch Inc v Budejovicky Budvar NP
7. Reckitt & Colman Products Ltd v Borden Inc
8. Helen E Norman, Intellectual Property Law

About the proposed decision on 7 Tuition and Daycare Centres: Sharing is not caring

They say sharing brings joy and happiness… but when the Malaysian Competition Commission comes knocking on your door? Not so much joy.

(Below is based on the Proposed Decision under Section 36 of the Competition Act – Infringement of Section 4(2)(a) of the Competition Act by 7 Tuition and Daycare Centre. When the full judgement is released, this post will be updated accordingly. Certain facts may be circumstantial or speculative.)

The facts are as follows. 7 tuition and day care centres were penalised with a financial penalty of RM33K for collectively agreeing to fix and standardise the fees charged for the tuition and day care services in the SS19 Subang Jaya area. The price fixing agreement caught the Commission’s attention and were penalised accordingly. (The Commission is allowed to impose a financial penalty not exceeding 10% of the undertaking’s worldwide revenue given in the Competition Act 2010)

Competitors collude more frequently than consumers might think and it is extremely naive to think that only high profile companies collude. It exists from your neighbourhood bakery sellers ((No. MyCC.0045.2013)) to ice manufacturers ((No. MyCC.700.2.0001.2014)) [Suggestion: the MYCC should come up with a shorter name for each case]. Healthy competition means competitors are striving to better serve customers than their rivals. As a result, competitors are never sure what their competitors will do next in trying to gain a competitive advantage. However, especially in oversaturated and concentrated markets, instead of going head-to-head with their competitors, why not just make a phone call to the CEO and collude? Where competition is stiff and there’s a lack of consumer choices in a concentrated market,  that sure seems like a win-win situation for the undertakings but not for consumers… or themselves when they find themselves within MYCC’s list.

Article 4(1) of the Competition Act 2010 states that “A horizontal or vertical agreement between enterprises is prohibited insofar as the agreement has the object or effect of significantly preventing, restricting or distorting competition in any market for goods or services.” (An improvisation of Article 101 TFEU) agreement cannot be examined in isolation from the earlier context, that is, from the factual or legal circumstances causing it to prevent, restrict or distort competition. Firstly, it is necessary to assess the impact on the relevant market and then weigh them with any possible efficiency gains or positive effects. Price-fixing agreements would predominantly fall under the object category because it’s quite clear that price-fixing would only benefit themselves and have pecuniary effects on the consumers.

It’s no surprise for information exchange to be regarded as a waving red flag to competition authorities for the presence of a cartel. In fact, information exchange is often considered as the no.1 ingredient of a cartel. However, information exchange can be a double edged sword. On one hand, information exchange allows concerted practice amongst undertakings which means this allows collusion amongst the parties. On the other hand, they may also be a source of efficiency gains to remedy some market failures such as information asymmetries. In Asnef‐Equifax case, information sharing can help to reduce the disparity between the information available to credit institutions and that held by potential borrowers.

So where does one cross the line when sharing information is deemed anti-competitive or not? As a general thought, information exchange restricts competition by object if the exchange of information is individualised (as opposed to aggregated) and the exchange concerns firms’ future conduct (removes strategic uncertainty). Features of the relevant market such as concentration, nature of the product or nature of the market plays an important role.

In Bananas (EU Case), the Commission found the bananas importers had engaged in direct bilateral pre-pricing communication had taken part in a concerted practice to coordinate quotation prices for bananas. It was found that the parties communicate frequently and the conversations which took place were about future pricing policies. It would be easy to assume that the undertakings would take the information into account when determining the policy which they intended to pursue on the market. The court laid down an interesting point where in Competition law, the requirement of independence precludes direct or indirect conduct between operators designed to disclose to actual or potential competitors decisions or intentions concerning their own conduct on the market.

There are however several circumstances where information sharing is legal such as between franchisors and franchisees since communication is vital for the success of both parties to profit. Another example is where the following criteria are satisfied: (i) the arrangement must contribute to improving the distribution of the services in question or economic progress as a whole; (ii) consumers must be allowed a fair share of the resulting benefit, (iii) it must not impose any non-essential restrictions on undertakings and (iv) it must not afford the possibility of eliminating competition in respect of a substantial part of the services in question. (Asnef‐Equifax)

Comment:

Price fixing is a straightforward case because it has a ‘pernicious’ effect on competition and to be so unlikely to produce efficiencies. This is why it is a “by object” restriction instead of “by effect” because to prove the latter is harder, takes longer time and more resources.

There are, however, many much more complicated situations. I’ll touch on what was the European Competition Commission’s biggest fine ever of £2.1million on an undertaking we used everyday– Google.

Sources:

1. Proposed decision on seven tuition and day care centres for price fixing conduct
2. Competition Act 2010
3. MYCC Guidelines on Anti-competitive Agreements
4. https://www.twobirds.com/en/news/articles/2007/ecj-preliminary-ruling-information-exchanges-between-competitors
5. Jones & Sufrin Competition law