The Malaysian Aviation Commission Act 2015 came into force on 1 March 2016 and introduced the first sectoral merger control regime in Malaysia, which applies to the aviation service market.

Under the act, mergers that result, or may be expected to result, in a substantial lessening of competition (SLC) in any aviation service market are now prohibited.

On 20 April 2018, the Malaysian Aviation Commission (MAVCOM) issued: (1) the Guidelines on the Substantive Assessment of Mergers; and (2) the Guidelines on Notification and Application Procedure for an Anticipated Merger or a Merger.

Both guidelines provide long-awaited guidance on the substantive and procedural issues surrounding the voluntary merger control regime.

Substantive assessment guidelines

The merger control regime under the act covers a wide spectrum of mergers, including horizontal, vertical and conglomerate mergers, as well as any long-term joint venture that is created to perform all the functions of an autonomous economic entity.

The substantive assessment guidelines explain how MAVCOM will assess whether a merger may result in an SLC, and set out a number of factors that MAVCOM will consider in making such an evaluation, some of which are highlighted below:

  1. The definition of the relevant market to identify the aviation service market within which the competitive effects of the merger would be assessed;
  2. Market power of the merging parties;
  3. The difference in the market concentration of the relevant aviation service market pre-merger and post-merger;
  4. Competitive effects that may arise from the merger. MAVCOM will consider the counterfactual scenario, i.e. the market condition and degree of competition in the market in the absence of the merger;
  5. Whether there is any entry of new competitors or expansion of operation of existing competitors that can pose competitive constraints on the merging parties; and
  6. Whether there is countervailing buyer power that can constrain or diminish the market power of the merging parties.

MAVCOM recognizes that competitive effects arising from vertical or conglomerate mergers are, in general, less likely to be anti-competitive as
compared with horizontal mergers.

While a merger that results, or may be expected to result, in an SLC is an infringement of the prohibition under the act, it may nevertheless be justified if there are significant economic efficiencies or social benefits arising directly from the merger that outweigh such SLC effect. MAVCOM sets out extensive examples of such economic efficiencies and social benefits in the substantive assessment guidelines, such as economies of scale and scope, an increased network of aviation services, and benefits of “one-stop shopping”.

Ultimately, whether a justification would outweigh any SLC effect requires a balancing exercise to be carried out by MAVCOM, and no single justification can conclusively exclude a merger from infringement without such a balancing exercise being undertaken first.

Procedural clarity

The procedural guidelines add clarity to the procedures that notifying parties have to adhere to when making an application to MAVCOM. The key takeaway points are summarised below:

Do I have to make an application to MAVCOM before closing the transaction? The merging parties should carry out a self-assessment to determine whether a merger will result in an SLC. The notification regime is voluntary and parties can close the transaction before making the application to MAVCOM, or before approval from MAVCOM in respect of the application is received. However, if MAVCOM initiates an investigation into the merger transaction and finds the merger to have an SLC effect, it can order, among others, that the merger be dissolved or modified.

What are the filing thresholds? The procedural guidelines state MAVCOM is more likely to investigate a merger if:

  1. The combined turnover of the merger parties in Malaysia in the financial year preceding the merger is at least MYR50 million (US$12.3 million); or
  2. The combined worldwide turnover of the merger parties in the financial year preceding the merger is at least MYR500 million.

What is the timeline for the application process? The duration for the assessment of an application will be determined on a case-by-case basis, depending on the complexities of the issues and the timeliness and completeness of the information provided by the merger parties.

Does MAVCOM provide for an undertaking procedure? Yes, a merger party may, at any time, propose a written undertaking to MAVCOM to do, or refrain from doing, anything to address any actual or potential competition concern raised by MAVCOM in connection with the merger.

Alternatively, an undertaking may also be proposed by MAVCOM if it finds that the anti-competitive effects arising from a merger may be remedied by undertakings.

Most countries have adopted a mandatory and ex ante approach to merger control, i.e. clearance must be obtained from the relevant competition authorities before the transaction can be completed. Only a handful of jurisdictions in the world have established a voluntary merger control regime – Australia, Singapore, New Zealand and the UK are examples.

However, for young authorities such as MAVCOM, a system of voluntary notification may be more suitable as analysing merger filings is a highly time and resource-consuming process. A voluntary notification system will enable MAVCOM to focus on its other responsibilities under the act, including investigating other potential anti-competitive agreements and abuses.

MAVCOM has taken a great step forward in producing these guidelines, especially since the main competition legislation in Malaysia – the Malaysian Competition Act 2010 – has yet to include a general merger control regime. Merger control is an effective policy tool to safeguard against the creation or strengthening of concentrated market power.

Implemented properly, the merger control regime will become a key weapon in preventing and addressing changes in concentrated market structures. MAVCOM will now need to apply the guidelines coherently and in an objective manner to push the regime forward and build its credibility.

Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker McKenzie by emailing Danian Zhang at danian.zhang@bakermckenzie.com.