Where now for Malaysia, a nation strapped in for dramatic change following an election result that shook the region. Reforming the institutions and laws that support transparency and prosperity are just the beginning, writes John Church

In the aftermath of historic elections in Malaysia, the excitement in Kuala Lumpur was palpable. The defeat of the United Malays National Organization (UMNO) on 9 May after six decades in power was as much a surprise as it was a sea change.

Although a surprise, the reasons for the result were quite clear: Corruption at the very top level had become imbedded in institutional frameworks by a government that had come to view itself as entitled to power, having governed since the nation’s independence in 1957. To a lesser extent the result was also due to the marginalization of the nation’s minorities courtesy of entrenched policies.

Malaysia’s deposed prime minister Najib Razak stands accused of personally taking US$731 million, while a total of around US$4.5 billion has disappeared from the now infamous fund named 1Malaysia Development Berhad (1MDB). National debt has also been revised by the new government upwards, from US$170 billion to US$250 billion.

“The 1MDB saga faced by the nation will need a long time to unravel, and for the wrongdoers to be brought to justice,” says Chew Phye Keat, a partner at Raja Darryl & Loh in the capital. “It is widely acknowledged that there were leakages and corrupt practices that are now being properly investigated, and the full facts will soon make their way to the public square.”

Chew-Phye-Keat,-Raja-Darryl-&-Loh

Meanwhile, he says, one realizes that 1MDB was perhaps symptomatic of the prevailing way of doing business in Malaysia, or at least dealing with government-related projects, that became prominent mainly because of its quantum of losses or ill-gotten gains. “Hence there needs to be a whole business or corporate culture change whereby integrity, transparency and good governance should become the order of the day, and the default way of carrying on business in Malaysia,” he says. “It is a tall order but many in Malaysia feel that finally we are on the right path with the legal and institutional reforms being considered and proposed.”

Pushing the new broom is a 93-year-old wily political fox, Mahathir Mohamad, formerly a prime minister under the regime of the party he has deposed, who led the Pakatan Harapan (PH) alliance to victory. He currently enjoys a popularity rating in excess of 70%. Even more curiously, his party deputy is Anwar Ibrahim, the man he had jailed a couple of decades ago for sodomy, the very one who dared inflame the nation’s youth and threaten Mahathir’s rule with cries of Reformasi!

How things have changed. Or, some are asking: have they? Foreign interests have reacted cautiously to the result, says Grace Yeoh, managing partner at Shearn Delamore & Co. “Many international clients were concerned for a time due to the deterioration in corporate governance and perceived selective prosecution under the old regime,” she says. “We are not out of the woods yet, as there is some uncertainty on the stability of the new regime, which is still finding its feet. Many of the new ministers … have not had any exposure in government.”

Yeoh says this has been reflected in the big drop in foreign investors’ holdings in Malaysian-listed companies, with net foreign selling almost every day since the election results. “The new government will, in my view, have to do more to earn its stripes in the eyes of foreign investors, and to attract them back. It will not happen on its own just because there has been a regime change.”

Read more: Patent problems – Shearn Delamore & Co’s managing partner, Grace Yeoh, highlights the operational IP problems their clients still face in Malaysia

Judicial reform

In Kuala Lumpur at the beginning of the first week of the new parliament, on 16 July, the local media were obsessed with politics. Popular newspapers screamed their headlines while local TV news moved through an endless pool of political stories, and covered quite a bit of chaos. From MPs habitually going through the wrong parliamentary door towards the wrong sides of parliament (understandable perhaps after 60 years) to the downright sour grape reactions from the now opposition during its first-day walkout over the appointment of speaker rules, and bickering over other piecemeal issues.

But apart from the sideshows there were meaningful developments, among which were the appointments of a new president of the Court of Appeal and a new chief justice. Clearly the nation’s new attorney-general has no qualms about getting down to the business of legal reform. “The judiciary plays a critical role in Malaysia since ours is a constitutional democracy with a common law tradition, which means that judges give life to the law,” says Elaine Yap, founder of Elaine Yap Law Office. “The appointment of Tan Sri Richard Malanjum as the chief justice was as radical as the appointment of Tommy Thomas as attorney-general – because it was unthinkable before 9 May 2018.

“I am confident that these appointments were made for good reason, and that is to bring about positive transformation. As an institution, however, much needs to be done to transform the judiciary in Malaysia into one that we can be truly proud of in terms of fairness and impartiality, intellectual supremacy and administrative efficiency. Standards have to be raised, and that will be an evolutionary process that will take time.”

Yeoh says that during the previous regime, and for the past 25 years or so, there has been a strong perception that the judiciary may not have been as independent as it should be. “This started with the current prime minister’s (who was then also prime minister) involvement in the removal of some judges who stood up for their principles,” she says, adding, “Hopefully, lessons have been learnt and will not be repeated.”

This situation has led to an erosion of confidence in the Malaysian judicial system, Yeoh says, resulting in foreign parties to contracts insisting on arbitration clauses that require arbitration outside the country.

“It should now be a priority to take proactive steps to dispel such perceptions,” she says. “More attention should be paid to the separation of powers, the lines of which have become very blurred in recent years.

On the other hand, cases are now moving a lot faster through the court system and our judiciary should be commended for that.

“More judges have also been recruited from the pool of practitioners, which has been a good move as we now have judges who have practical experience and are experts in their field of practice. Malaysia has been actively encouraging alternative dispute resolution and we now have the Asian International Arbitration Centre (AIAC), which not only deals with arbitrations but also mediation and adjudication. They have quite an impressive pool of arbitrators that can be called upon, who are not only experts in their field, but are able to conduct arbitrations on complex and technical matters in English, the international lingua franca.”

Read more: New brand, new era – Asian International Arbitration Centre’s director, Sundra Rajoo, on the rebranding of the former Kuala Lumpur Regional Centre for Arbitration and its impact

Andre Gan, managing partner in Kuala Lumpur at Wong & Partners, a member firm of Baker McKenzie International, says early indications of judicial reform in Malaysia were being signalled prior to the recent poll. “Even before the recent general elections, the PH had stated in its election manifesto that they would separate the roles of the Attorney-General’s Chambers (AGC) and the Office of the Public Prosecutor. The conflict of interests of the joint roles has been that the AGC as legal adviser could potentially have to prosecute government officials.”

Post elections, Gan says three significant events have occurred. “One of the earliest actions taken by the new government was to form a Committee on Institutional Reforms, and the committee has already suggested several reforms concerning corruption, the Malaysian Anti-Corruption Commission (MACC), the AGC and the decentralization of powers at the Prime Minister’s Office,” he says.

“Next, the resignation of Tun Md Raus Sharid and Tan Sri Zulkefli Ahmad Makinuddin from the posts of chief justice of the Federal Court and president of the Court of Appeal, respectively, clears the way for impending reform of the judicial system. And finally, the termination of former attorney general Tan Sri Mohamed Apandi Ali and the appointment of Tommy Thomas in his place.”

Gan also says Datuk Liew Vui Keong, the new minister in the Prime Minister’s Department, has proposed the setting up of a Law Ministry and of a Law Commission. The latter will be tasked with coming up with recommendations on law reform, which will in turn be checked for feasibility and viability by the AGC.

Concerns have been raised that the new chief justice, under retirement rules, has only nine months of tenure, hardly a great amount of time to institute reform. But, according to Yeoh, “It isn’t relevant how long the new CJ has. Institutional reforms have already commenced and he just needs to see them through to the best of his abilities and for as long as he remains in office.”

Yeoh says the offices of the chief justice and other members of the judicial hierarchy will continue irrespective of the individual holders. “Hopefully, he will have a worthy successor, free of controversy, unlike his predecessors, where the Malaysian Bar had taken the position that the appointments as additional judge to hold the positions of CJ and President of the Court of Appeal were blatantly unconstitutional.”

She says the task now is to ensure that cases are disposed of quickly and efficiently by judges with the relevant expertise and experience. “The exercise of continuing with and upgrading the Malaysia’s eCourts digitization system will also facilitate the processes in the judicial service.”

Law firms: where do they stand?

Some law firms will be affected more than others by the change of government.

“It really depends,” says Yon See Ting, a partner with Christopher & Lee Ong, which is a member of the Rajah & Tann Asia network. “Those law firms who used to receive government work due to their relationships with either highly placed officials who were members in the former government, or heads of government-linked companies (GLCs), or of government-linked investment companies (GLICs), are faced with totally different faces now, and are likely to be impacted,” she says.

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“There are, however, law firms who, although they may have started off by having a former head of firm or senior partners who became, or whose relatives became, members of the former government, the changed landscape may not impact them as much if they have evolved and grown over the years, especially if they have a lot of expertise within the firm.

“And there is yet another category of law firms who are not politically aligned, but who obtained work from the former government due to their expertise and competency. I do not see any changes for law firms in this category.

“In any event, the new government has announced that going forward they will implement open tenders instead of directly awarding projects. I anticipate that procurement of legal services will also go down this route. Firms with legal skills and who are competitively priced will find plenty of opportunities opening up to them.”

Philip Koh, a senior partner at Mah-Kamariyah & Philip Koh, agrees. “The recent elections ushered in a new group of political and business elites, and a new generation of professionals having fresh access to markets,” he says. “Some firms that have their corporate work, which were aligned to the former ruling party … may experience adjustments. However if they have specific expertise and experience they could still thrive upon adapting to the new environment.”

Yon observes that fees for Malaysian lawyers are generally lower compared to its regional peers, especially legal practitioners from Singapore and Indonesia. “This is strange, as many Malaysian corporate lawyers are English-trained lawyers. Litigation counsel may, however, command a premium if they are well known and highly skilled. Our fee structure has not changed very much over the years despite a depreciation in the ringgit, the local currency, against the US dollar.”

Yon says if the required legal service to be provided falls within the type of work for which a scale of fees has been prescribed by the Solicitors’ Remuneration Order, such as conveyancing and security documentation, the fees are then regulated by law and a lawyer is not permitted to give a discount exceeding the maximum discount permitted by law. In line with global trends, Malaysian clients generally prefer a fixed fee/capped fee for their assignments.

She believes the smaller and mid-sized law firms are likely to merge and consolidate in the coming years. “The pace of doing business has increased, requiring more resources or alternatively significant investments in IT. Without merging, there will be lost opportunities for certain types of work.”

A recent example of this was the recent merger between Chooi & Company and Cheang & Arif, who merged to form Chooi & Company + Cheang & Ariff in June. “I expect more consolidation in this space in the next couple of years,” says Yon. “Those smaller firms who are holding out have sustained because they have formed alliances or became part of a regional or international network of law firms. For example, Foong & Partners is a member of the Singapore-based WongPartnership’s network.”

Koh says law firms should expect a number of sectors to be impacted by the political climate in the coming months. “The sectors will involve construction and engineering contracts, both in dispute resolution and contract management, major commercial arbitration disputes, white collar crimes prosecution, civil tort and equitable claims, and also some shifts in M&A and joint venture issues,” he says.

Philip-Koh,-Man-Kamariyah-&-Philip-Koh

Ongoing reforms

A number of major energy and infrastructure projects are now under review in Malaysia. The new government is determining whether its predecessor’s cost estimates are accurate, as well as examining the conditions and negotiations under which projects were awarded. Importantly it is looking to see whether they are viable, particularly it seems in a list of projects involving China investment. Mahathir’s recent visit to China was underlined by the cancellation of two oil pipelines and a Belt and Road rail link, with more projects reportedly in his cross-hairs for cancellation.

Nevertheless, the government has been keen to announce that it is still very welcoming of foreign investments overall, and it is hoped new investor friendly policies are being developed and will be announced by the administration shortly.

The government has already announced it will repeal controversial laws such as the Anti-Fake News Act 2018, and the Security Offences (Special Measures) Act 2012. The latter was introduced ostensibly to combat security threats from extremists, but was regarded by some quarters as a tool to muzzle critics of the government.

Gan says other legal reforms which have taken place or have been proposed include:

  • Expanding specific legal provisions to cover civil servants, politicians and public officials, which will allow for punitive action against officials who cause leaks and/or wastage of government funds under a proposed Public Officials Misconduct Bill;
  • A new law to regulate political funding to prevent corruption, currently known as the Political Funding Bill;
  • A Racial and Religious Hatred Bill to be tabled soon to deal with remarks and actions intended to cause racial and religious strife;
  • The AGC announced that it will repeal order 53 Rule 3(3) of the Rules of the Court 2012, which will require all cause papers be served on the AGC for judicial review cases. It is believed that this repeal will promote the development of judicial review of administrative action;
  • Lowering the voting age from 21 to 18 years old, which will increase the number of registered voters by approximately 25%.

Gan says a newly established National Centre for Governance, Integrity and Anti-Corruption, headed by former anti-graft official Abu Kassim Mohamed, was also set up to govern the overlapping objectives of the National Integrity and Good Governance Department, Institute of Integrity Malaysia, Public Complaints Bureau and the Enforcement Agency Integrity Commission.

Andre-Gan,-Wong-&-Partners

“While many of these pieces of reforms have just been put into motion, it seems promising that the new government will succeed in effecting judicial and institutional reforms as promised in the PH Election Manifesto,” he says.

Yeoh agrees that the new government has already taken an impressive number of steps to repeal or amend laws that are either repressive from a human rights or personal liberties viewpoint, as well as the abolition of the goods and services tax, which was one of Pakatan Harapan’s main election promises.

But she says there is yet to be dealt with some legislation that gives very wide powers to the authorities. One instance of this is the Companies Act 2016 (CA), which she says gives the relevant minister wide powers to exempt from compliance with the requirements of the CA. This contrasts sharply with the predecessor to the CA where such powers were very limited.

“Such powers give rise to the possibility of administrative abuse,” says Yeoh. “For example, under the previous regime, nothing was done when there was a failure by the infamous 1MDB to file its accounts continuously, whereas other companies were fined for late filing.”

Chew, from Raja Darryl & Loh, explains, however, that the new Companies Act 2016 realigned Malaysian company law and practice (the earlier was a 1965 act) with other similar common law jurisdictions such as Singapore and the UK. “One can immediately see the impact of the new act as modernizing, liberalizing or removing some of the older company law concepts,” he says. These include:

  • Removing par value for shares;
  • Enhancing directors’ powers on dividends;
  • Allowing financial assistance for purchase of own shares;
  • Allowing single shareholder/director companies; and
  • Dispensing with general meetings for private limited companies.

“Companies have over the past year-and-a-half have grappled with teething problems in implementing the new act and deciding what to keep and what to change, where such an option was available,” he says. “There were also various gaps and unclear provisions in the act, perhaps due to haste with which it was brought to parliament, resulting in an expectation that there will be clean-up amendments coming soon.”

Yeoh points to two other matters that she says need to be implemented. “First, selective enforcement was very marked during the previous regime. Institutions such as the tax authorities and the police were perceived by some quarters as being used to harass political opponents and businessmen who supported them financially. This needs to stop,” she says.

“Second, insufficient time given to debate bills or to discuss matters of national importance in parliament. Hopefully, with a more open and transparent government and a speaker of parliament that is more bipartisan, as well as a Public Accounts Committee headed by an opposition member of parliament for the first time, this will cease to be the case.”

Yvonne Beh, a partner from the tax, trade and wealth management practice of Wong & Partners, says the transition from the multi-tiered consumption tax (GST, or goods and services tax) to the new single-stage tax (SST) regime means Malaysia will once again adopt a single-stage tax imposed on importation of taxable goods into Malaysia, or manufacture of taxable goods in the country.

“Under the proposed sales tax regime, the list of goods exempted from sales tax is expected to be wider than the exempted goods under GST,” says Beh. “Meanwhile the proposed service tax will only be imposed on services that are specifically identified as taxable services.”

She says the narrower scope of taxable goods and services under the SST regime will likely result in lower revenue compared to historical collections from the previous two years, despite howls to the contrary from the new opposition. “What we do know is that the proposed service tax rate is at 6% and the proposed sales tax rates will either be 0% for exempted goods, 5% or 10%, depending on the category of the goods.”

The road ahead

Overall, Gan thinks the 12-month period after the recent election will be one of two halves. “I believe the first half will be one in which activity will be relatively muted as new leaders try on the mantle of leadership and as the new government takes time to come up with policies to give direction to the market,” he says.

The government will also be preoccupied with investigations into alleged wrongdoings of the previous administrations. “Businesses will likely adopt a ‘wait and see’ attitude as the shifting sands settle. Therefore, I think transactional practices – M&A, private equity, projects and finance – will be less busy in the third and last quarter of this calendar year.

“I don’t see clear market indications for the capital markets and I believe capital market lawyers will continue to see some lethargy in capital raising activities. I would not say there are clear trends for disputes and arbitration practices at least in the immediate few months from here.”

He says tax advisory practices will see activity due to the rollback of the GST system and reintroduction of the SST system. Furthermore, as the government continues with tax collection activities to make up for the reduced revenue collections, tax disputes practices will continue to grow.

“If the new government introduces clarity on business friendly policies and the world economy does not come up with any shocks to the system, I believe renewed vigour will return to the markets in the second half of the 12-month period post the election. I do believe that with more government action against corruption and the introduction of greater transparency in areas such as policy making, government procurement and public accountability, local and foreign investors will see long-term favourable growth prospects in the country and invest in its economy.”

There will hopefully also be the effect of the release of pent-up investments and spending, which had been held back in the period of uncertainty and slower economic activity during the first six months after the May election. “From the policy and legal reform perspectives, investors will be trying on new ideas under new polices and administrative emphases – these, in themselves, often results in fresh activities. For example, any policy shifts in government ownership of government-linked companies and economic activity will see fresh activity in practices such as M&A, banking and private equity.

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Yap says the new government has to guard against adopting overly populist policies. For example, a properly implemented GST regime is fair, and there is no good reason to abolish it. “The new government also has to guard against over-reliance on personalities and really gear the society towards a merits-based one at all levels,” she says.

“Malaysia has been set back by decades as an economy due to policies that encouraged the brain drain, quite apart from the decades of corruption and wastage that resulted in an inferior public education system, which in turn justified depressed wages. These are the perennial challenges, but I have yet to hear any policy announcements that address these underlying problems.”

Lawyers say they will continue to advise clients that Malaysia is a favourable investment destination for foreign investors due to the transparency of laws, regulations and policies, a well educated populace, effective administration and export-led economic growth, not to mention a stable middle class and social mobility.

Moreover, says Gan, there is no better testament to the resilience and stability of the Malaysian political structure than the fact that a handover of power by a previous coalition government, which had been in power for over 60 years, took place in a day, democratically and peacefully at the ballot box.

Read more:

Patent problem – Shearn Delamore & Co’s managing partner, Grace Yeoh, highlights the operational IP problems their clients still face in Malaysia

New brand, new era – Asian International Arbitration Centre’s director, Sundra Rajoo, on the rebranding of the former Kuala Lumpur Regional Centre for Arbitration and its impact