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10 June 2019

Legal Updates May 2019

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Dear valued clients and business partners,

We are pleased to highlight the following legal updates for May 2019.

Click here to download the PDF version: Legal Updates May 2019.

CORPORATE/M&A

Amendments to Main Market Listing Requirements (“MMLR”) and Ace Market Listing Requirements (“ACE LR”)

Bursa Malaysia Securities Berhad (“Bursa”) recently introduced amendments to the MMLR and ACE LR in relation to continuing disclosure obligations and other amendments, which will be effective from 3 June 2019 onwards.

In this review, Bursa has enhanced the MMLR in the area of continuing disclosure obligations, primarily on disclosures in announcements and circulars for transactions, as well as simplified the requirements relating to corporate disclosure policies. Apart from this, Bursa has also liberalised requirements which pose insignificant risks to shareholders, where appropriate.

The key amendments to the MMLR and the Ace LR are as below:

  1. Ensuring transaction circulars and announcements are coherent, relevant and easy to understand by:
    1. Enhancing presentation of announcements and circulars relating to transactions to improve readability by rearranging and clustering prescribed information under key areas of transactions; and
    2. Enhancing the contents of announcements and circulars relating to transactions to codify existing practices, ensure consistency in requirements, and continue to provide shareholders with key information.
  2. Promoting clear, relevant and practical requirements relating to corporate disclosure policies and other disclosure requirements by:
    1. Simplifying the requirements on corporate disclosure policies; and
    2. Deleting certain immediate announcement requirements under paragraph 9.19 of the MMLR and Ace LR as such requirements are already prescribed in Chapter 10 or 13 of the respective documents.
  3. Promoting balanced regulation by easing regulatory compliance through liberalisations, which includes:
    1. Disapplying the restrictions to vary the tenure of convertible securities and change the number of shares received or pricing mechanism due to the exercise or conversion of the convertible securities to debt securities; and
    2. Only requiring immediate announcement of material reorganisation of the group structure and acquisition or disposal of a subsidiary which triggers the relevant percentage ratio for announcement of a transaction.
  4. Addressing gaps to safeguard shareholder interest, which includes:
    1. As part of the periodic disclosure obligations, if a listed corporation extends its financial year end to beyond 18 months from the last financial year end, Bursa may require an interim audited financial statements for the 18-month period or such period as Bursa may deem fit to be issued; and
    2. Requirement for shareholder approval to be sought for a material change in the utilisation of proceeds raised from IPO or new issue of securities as part of the listed corporation continuing listing obligations.

Issuance of the Guidelines on Mergers and Acquisitions and Guidelines on Authorisation of Conduct

On 17 May 2019, the Malaysian Communications and Multimedia Commission (“MCMC”) published two sets of guidelines known as “Guidelines on Mergers and Acquisitions” (“Merger Guidelines”) and “Guidelines on Authorisation of Conduct” (“Conduct Guidelines”).

The Merger Guidelines are premised on increasing transparency and providing clarity to the industry on the approach taken by MCMC when assessing mergers and acquisitions as well as authorisation of conduct which could be construed as substantially lessening competition.

Guidelines on Mergers and Acquisitions

Recognising the benefits of M&A to a functioning economy, and the need to balance this benefit against potential anti-competitive effects, MCMC will assess M&A transactions affecting the communications and multimedia sector which are voluntarily submitted to it in the manner set out in the Merger Guidelines. The procedures established through these Guidelines can enable M&A parties to:

  1. obtain MCMC’s view in respect of the competitive effects of an M&A transaction; and
  2. decide whether to apply to MCMC for authorisation of an M&A transaction subject to various undertakings to be given by the M&A parties or to proceed with the M&A in a substantially restructured form to avoid breaching the provisions of the Communications and Multimedia Act 1998 (“CMA”). 

Guidelines on Authorisation of Conduct

The Conduct Guidelines create a process by which licensees may voluntarily apply to MCMC to assess whether their M&A transaction breaches or would breach the prohibition in section 133 of the CMA or would require MCMC to exercise its power to direct the licensees to cease the conduct which has or may have the effect of substantially lessening competition in any communications market under subsection 139(1) of the CMA.

MCMC will permit licensees to submit an application for authorisation of conduct in accordance with the procedure set out in the Conduct Guidelines, in respect of a merger or acquisition before, during or after submitting an application for assessment under the Merger Guidelines.

Licensees who apply for authorisation of conduct may qualify for immunity from any legal proceedings that may be undertaken by MCMC for contravening the competition provisions of the CMA.

For further information regarding corporate/M&A matters, please contact our Corporate/M&A Practice Group.

DISPUTE RESOLUTION

Police Report — Absolutely Privileged?

The Federal Court, on 30 January 2019, issued its grounds of decision with regard to the case of Noor Azman Azemi v Zahida Mohamed Rafiq[efn_note][2019] 3 CLJ [/efn_note]. Through this decision, the Federal Court held that the publication of the contents of a police report by its maker to the public at large is not protected by absolute privilege.

This decision is significant, as the Federal Court had to weigh public policy considerations such as freedom of speech as well as to continue encouraging honest and well-meaning persons to lodge police reports without the fear of being sued for something said in the police report.

Facts

The respondent (“Zahida”) lodged a police report against the appellant (“Noor Azman”) which referred to Noor Azman by his name and alleged that he ran off with her money. After lodging the report, Zahida was approached by reporters and she repeated the contents of the report to the reporters. Harian Metro later published an article which Noor Azman contended contained defamatory statements (“Impugned Words”).

Subsequently, Noor Azman commenced a defamation suit against Zahida on the ground that the article was defamatory and tainted his reputation and character. Zahida raised the defence of absolute privilege and justification.

The defence of absolute privilege applies where there is an argument of public policy justifying the alleged defamatory statements. If this defence applies, it is irrelevant if a person had acted with malice or knew the statements were false.

Decision of the High Court

The High Court allowed Noor Azman’s claim and held that the Impugned Words were defamatory and were not covered by absolute privilege. Further, Zahida had failed to prove the defence of justification.

In reaching its decision, the High Court found that Zahida failed to give a reasonable excuse that necessitated the regurgitation of the police report.

Decision of the Court of Appeal

Dissatisfied, Zahida appealed to the Court of Appeal. The Court of Appeal overturned the decision of the High Court and held that the Impugned Words were nothing more than a regurgitation of the words in the police report and therefore attracts the same privilege as that attached to the police report. Further, the Court of Appeal found that the defence of justification applies.

Decision of the Federal Court

The Federal Court granted leave on the question of whether the publication of the contents of a police report by its maker to the public at large is protected by absolute privilege.

The main issue before the Federal Court was whether the defence of absolute privilege should be extended to the subsequent publication of the contents of a police report by its maker to the public at large.

In reaching its decision, the Federal Court considered the following:

  1. The extension of absolute privilege must be viewed with “the most jealous suspicion and resisted unless its necessity is demonstrated”.
  2. There is no valid public policy reason why the maker of a police report should be free from accountability and be allowed to publish any defamatory words contained in the police report to the world at large.
  3. Absolute privilege must give way and allow an individual access to the courts to seek a remedy for any alleged defamation caused unto him.

Ultimately, the Federal Court decided that absolute privilege will not attach to the subsequent publication of the contents of the police report to the public at large save where the contents were made in or in connection with judicial or quasi-judicial proceedings.

Notwithstanding that, the Federal Court had answered the question in favour of Noor Azman, it did not affect the result of the appeal as the Court of Appeal’s finding that the defence of justification applies remained intact and, therefore, Noor Azman’s appeal was dismissed.

Conclusion

The Federal Court decision has clarified the extent to which absolute privilege attaches to a police report as well as ensures that if a police report contains defamatory statements and is then reproduced to the world at large, action can still be taken against the maker of the report. This strikes an important balance between encouraging honest persons to lodge a police report and ensuring that any affected persons still have access to the courts.

For further information regarding dispute resolution matters, please contact our Dispute Resolution Practice Group.

FINANCIAL SERVICES

Securities Commission Malaysia Issues Guiding Principles on Business Continuity

The Securities Commission Malaysia (“SCM”) issued the Guiding Principles on Business Continuity (“Guide”) which took effect on 14 May 2019. The Guide applies to all entities regulated by the SCM (via licensing, authorisation, approval or registration as required under securities law) save for:

  1. financial institutions which are registered persons under Part 1 of Schedule 4 to the Capital Markets and Services Act 2007;
  2. entities registered under the SCM’s Guidelines on the “Registration of Venture Capital and Private Equity Corporations and Management Corporations”; and
  3. Pengurusan Danaharta Nasional Berhad and its subsidiaries.

The Guide is intended to be a guidance on the SCM’s expectations on the business continuity as well as a platform to increase awareness on the importance of having an effective business continuity arrangement.

The Guide sets out six principles (which are not prescriptive) as minimum standards that a capital market entity is encouraged to adopt, taking into account the nature, size and complexity of its business operations.

Bank Negara Malaysia Issues Policy Document on Trade Credit Insurance and Trade Credit Takaful

Bank Negara Malaysia (“BNM”) issued a policy document on Trade Credit Insurance and Trade Credit Takaful (“PD”) which took effect on 3 May 2019.

References to trade credit insurance or trade credit takaful in the PD refers to insurance or takaful cover that protects:

  1. sellers against the risk of non-payment of goods and services by buyers; or
  2. banking institutions from risk of non-payment associated with their trade financing portfolio. 

The PD: 

  1. sets out the approval process and requirements on the offering of trade credit insurance by a licensed insurer and trade credit takaful by a licensed takaful operator;
  2. sets out the treatment of trade credit insurance or trade credit takaful as credit risk mitigation (“CRM”) by a banking institution under the Capital Adequacy Framework applicable to it; and
  3. supersedes paragraph 3 of Part B of the circular on Pengeluaran Bon/Jaminan Kewangan oleh Penanggung Insurans (BNM/RH/CIR/003-7) issued on 11 August 2007.

For further information regarding financial services matters, please contact our Financial Services Practice Group.

INTELLECTUAL PROPERTY

Guidelines on Intellectual Property Rights and Competition Law

The Malaysian Competition Commission (“MyCC”) Guidelines on Intellectual Property Rights and Competition Law (“IPR Guidelines”) came into force on 6 April 2019.

These IPR Guidelines are to be read together with other Guidelines issued by the MyCC, that is, Guidelines on Chapter 1 Prohibitions (“C1 Guidelines”) and Chapter 2 Prohibitions (“C2 Guidelines”). The MyCC recognises the rights of exclusivity granted to owners of intellectual property rights (“IPR”), and is of the view that such rights incentivises enterprises to be more innovative and competitive, which is in line which the aims of competition law which are to prohibit or restrain anti-competitive activities.

IP licensing is generally considered to be pro-competition but care must be taken to ensure that dealings with IPR do not fall within the following restrictions imposed by the Competition Act 2010 (“Act”):

  1. Chapter 1 Prohibitions — An IP-owning enterprise enters into an anti-competitive agreement (section 4 of the Act);
  2. Chapter 2 Prohibitions — Any dominance created by the IPR is abused by the IP-owning enterprise (section 10 of the Act).
Chapter 1 prohibitions — anti-competitive agreements

In addition to the conventional restrictions such as price fixing, tying and bundling in the context of IPR dealings, the IPR Guidelines provide some guidance on certain IP-specific vertical arrangements, which are:

Territorial and field-of-use restrictions

While restricting a licensee’s use of an IP to a particular territory or field of use is permissible, IP owners should ensure that these restrictions are justifiable and beneficial to all parties. In a patent licensing arrangement, the restrictions which have the result of:

  1. Foreclosing access to competing technology;
  2. Preventing licensees from developing their own technology;
  3. Facilitating market allocation;
  4. Fixing price for any products or service supplied by the licensee; or
  5. Restricting resale of the patented product (principle of exhaustion); 

may be regarded as anti-competitive.

Exclusive licensing

In an exclusive licensing arrangement, the licensor gives up his right to use his IPR as well as the right to license others. This arrangement is not anti-competitive unless it is coupled with other anti-competitive conditions.

Exclusive dealings

It is permissible to restrict a licensee from obtaining, distributing or selling competing technologies for newly developed technology where the licensee is required to focus his time and energy on the newly developed technology. However, this restriction may be viewed as unreasonable for more mature technology.

Grant-backs

A clause which requires any improvements to the licensed IP to be licensed or assigned back to the licensor may be anti-competitive if the grant-back licence is exclusive or if the competition for the assignment is not adequate.

A clause which allows a licensee to own the rights to fully exploit any improvements to the licensed IP, and the licensor is granted a non-exclusive licence to use those improvements, is viewed as having a pro-competitive effect as the licensee is incentivised to come up with improvements and the licensor is not deprived of the benefits of any improvements made to his IPR.

Although the explanations and illustrations may aid in ascertaining the MyCC’s stance on whether an arrangement is pro/anti-competition, it should be kept in mind that the IPR guidelines are not conclusive and other factors would also have to be taken into account to determine whether the effect of such arrangements are anti-competitive.

The IPR Guidelines also provide illustrations of horizontal agreements in the IPR context which may be prohibited under section 4(2) of the Act. IPR owners should ensure that they are not a party to such arrangements as they are deemed to be anti-competitive and the MyCC does not have to determine the anti-competitive effect:

  1. Sharing market or sources of supply
    1. Agreeing with actual or potential owners of competing technologies to divide up the customers to whom each will operate, for example, on the basis of geographical territory.
    2. Agreeing with competitors to impose an obligation on their licensees to obtain their supplies from a particular source.
  2. Limiting or controlling certain activities or markets
    1. “Pay-for-delay” agreements where a patent owner may enter into agreements with generic companies to delay the production and release of their generic products into the market in order to extend the monopoly granted by the patent even when the patent had expired.
    2. Output restriction, where owners of competing IP agree on the number of products that can be produced in total by the licensees.
    3. Patent pooling of substitute technologies, as this will foreclose other substitute technologies to licensees and also reduce incentive to invest in better substitute technologies. According to the IPR Guidelines, two patents are considered substitutes if they cover alternative technologies and are non-blocking, and can be used in parallel without infringing the other patent.
    4. Exclusive licence agreements with the purpose of protecting absolutely the marketing of products within a particular territory against the importation of identical products (parallel imports). This is not allowed as, in general, parallel importation is allowed under the relevant IP statutes, and competition which would otherwise have been possible is now prevented.
  3. Technical or technological development
    1. Agreeing with owners of competing IP not to license a potential new entrant to use the IP, so as to foreclose competition as well as technical or technological development of the product embedded in the IP.
  4. Investment
    1. Agreeing with owners of competing IP to reduce investment in relation to either production or R&D.
Chapter 2 prohibitions — abuse of dominant position

The IPR Guidelines clarify that ownership of IPR will not necessarily confer market power upon its owner, but does not elaborate on how the MyCC ascertains “dominance”, hence, reference needs to be made to the MyCC’s guidelines on the C2 Guidelines.

The IPR Guidelines provide illustrations of circumstances which may constitute an “abuse of dominant position”. Most of these are IP-variants of unfair conduct, which are excessive pricing (though it may be more lenient as IPR owners may need to recoup R&D costs), tying, post expiration royalty, non-competition clause and price squeeze. There are however some notable explanations:

Product hopping

Prior to facing generic competition, a brand drug company may withdraw its original product to force a switch to a reformulated brand drug in order to keep market exclusivity. Although it may be justifiable to discontinue an old formulation, this may nevertheless be abusive if the conduct is done to foreclose the market for generic products. The example provided by the IPR Guidelines shows a distinction between “hard-switch” and “soft-switch”.

When the company withdraws virtually all its original products from the market in order to force patients to switch to the reformulated drug, this “hard-switch” crosses the line from persuasion to coercion and would be regarded as anti-competitive; whereas when the company persuades patients and doctors to switch to the reformulated drug based on factual information while both are on the market, this “soft-switch” will not likely be anti-competitive.

Refusal to license IPR

The IPR Guidelines draw a distinction between a primary market (market in which the IPR enterprise is dominant due to its IPR); and a secondary market (market where the dominant IPR enterprise’s technology or product is an indispensable input). A refusal to license the IPR for the secondary market may not be permissible.

Standard-Essential Patents (“SEP”), Fair, Reasonable and Non-Discriminatory (“FRAND”) Terms, and royalty stacking

If the IPR is a SEP which manufacturers would have to use to ensure that their products are standard-compliant, refusal to license such SEP could be considered abusive. Patent owners, by virtue of the FRAND Terms, are also not allowed to increase the royalty rate of their patents which are elevated to SEP(s). Even if the FRAND Terms are complied with, the MyCC may still view certain arrangements to be abusive, for example, in standards which are covered by numerous patents, as this may result in royalty stacking.

Conclusion

The IPR Guidelines are definitely welcomed as they provide much needed clarity in reconciling the inherently differing aims of IPR (exclusivity) and competition law (free competition). The Guidelines, however, seem to be more patent-oriented and do not provide further guidance on issues such as dealings with trade marks, research agreements and franchises.

For further information regarding intellectual property matters, please contact our Intellectual Property Practice Group.

TAX AND REVENUE

Income tax

The following rules have been gazetted on 25 April 2019 and have effect for the years of assessment 2019 and 2020:

  1. Income Tax (Deduction for Expenditure on Issuance of Retail Debenture and Retail Sukuk) Rules 2019;
  2. Income Tax (Deduction for Expenditure on Issuance of Sukuk) Rules 2019.

The Inland Revenue Board of Malaysia (“IRB”) has recently issued the following operational guidelines:

  1. Operational Guidelines No. 1/2019 on Special Program for Voluntary Disclosure (to replace Operational Guidelines No. 1/2018 dated 29 March 2019);
  2. Prosedur Pengemukaan Borang Nyata Terpinda (available in Malay language only).

Sales tax

A Specific Guide on Sales Tax Exemption under Schedule C, Sales Tax (Persons Exempted from Payment of Tax) Order 2018 (as at 24 April 2019) has been published on the Royal Malaysian Customs Department’s MySST website.

Goods and Services Tax (“GST”)

The revised versions of the following GST Guides have also been published on the Royal Malaysian Customs Department’s MySST website:

  1. Declaration and Adjustment After 1st September 2018 (as at 8 May 2019);
  2. Tax Invoice, Debit Note, Credit Note and Retention Payment After 1st September 2018 (as at 9 May 2019).

For further information regarding tax and revenue matters, please contact our Tax and Revenue Practice Group.

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This Alert is issued for the information of the clients of the Firm and covers legal issues in a general way. The contents are not intended to constitute any advice on any specific matter and should not be relied upon as a substitute for detailed legal advice on specific matters or transactions.