The New Competition Act 2010 & How It Affects the Oil and Gas Sector

The New Competition Act 2010 & How It Affects the Oil and Gas Sector Corporate & Commercial Corporate Secretarial Department Competition Law & Antitrust Dispute Resolution Employment & Administrative Law Energy, Natural Resources & Green Technology Environmental Financial Services Immigration Infrastructure & Projects Intellectual Property Personal Data Protection Real Estate Regulatory Compliance & Enforcement Tax & Revenue Telecommunications & Technology Anand Raj anand@shearndelamore.com Advocate & Solicitor Partner

PURPOSE OF THE COMPETITION ACT 2010 “An Act to promote economic development by promoting and protecting the process of competition, thereby protecting the interests of consumers and to provide for matters connected therewith.” “Whereas the process of competition encourages efficiency, innovation and entrepreneurship, which promotes competitive prices, improvement in the quality of products and services and wider choices for consumers: And WHEREAS in order to achieve these benefits, it is the purpose of this legislation to prohibit anti-competitive conduct:”

Note : -There Are Some Exclusions - CA comes into effect on 1st Jan 2012 APPLICATION Section 2 CA – “market” means a market in Malaysia or in any part of Malaysia, and when used in relation to any goods or services, includes a market for those goods or services and other goods or services that are substitutable for, or otherwise competitive with, the first-mentioned goods or services; Part II CA – prohibits anti-competitive horizontal and vertical agreements & abuses of dominance. No merger control.

ANTI-COMPETITIVE AGREEMENTS Prohibited horizontal and vertical agreement Section 4 (1): 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. Section 2: Horizontal agreement – an agreement between enterprises each of which operates at the same level in the production or distribution chain. Section 2: Vertical agreement – an agreement between enterprises each of which operates at a different level in the production or distribution chain.

“AGREEMENT” • “Means any form of contract, arrangement or understanding, whether or not legally enforceable, between enterprises, and includes a decision by an association and concerted practices”. “CONCERTED PRACTICE” • “Means any form of coordination between enterprises which knowingly substitutes practical co-operation between them for the risks of competition and includes any practice which involves direct or indirect contact or communication between enterprises, the object or effect of which is either – • (a) to influence the conduct of one or more enterprises in a market; or • (b) to disclose the course of conduct which an enterprise has decided to adopt or is contemplating to adopt in a market, in circumstances where such disclosure would not have been made under normal conditions of competition.”

ANTI-COMPETITIVE AGREEMENTS – Cont’d • “Section 4 (2): Without generality of subsection (1), a horizontal agreement between enterprises which has the object to – • (a) fix, directly or indirectly, a purchase or selling price or any other trading conditions; • (b) share market or sources of supply; • (c) limit or control - • (i) production; • (ii) market outlets or market access; • (iii) technical or technological development; or • (iv) investment; or

ANTI-COMPETITIVE AGREEMENTS – Cont’d (d) perform an act of bid rigging, is deemed to have the object of significantly preventing, restricting, or distorting competition in any market for goods or services. Section 4 (3): Any enterprise which is a party to an agreement which is prohibited under this section shall be liable for infringement of the prohibition. Note : The CA does not spell out examples of prohibited vertical agreements. Must await guidelines and clarification from MyCC.

Marine Hose – 21 year Cartel (2009) • EC imposed €131 mil in fines on 5 of 6 companies • Annual EU Market only worth €32 mil • 1 company got immunity from fines • Dawn raids included private homes • Prosecutions and Private Actions • Implications?

Netherlands Bitumen Cartel (2006) • EC imposed approximately €267 mil in fines • 1994 to 2002 – delegation of bitumen suppliers met with 6 biggest road construction companies • “Bitumen Consultation” • Gross Prices & Rebates • 14 companies fined but 2 got reductions (of whom 1 received 100% immunity) • Implications?

Other Oil & Gas Cases/Issues • EC Cases • Potential risks: • - Information Exchanges, • - Productions vs. Marketing, • - R & D, • - Purchasing, • - Commercialisations, • - Standardisation. • Pro-competitive considerations (?): efficiency gains, indispensability, pass on to consumers, no elimination of competition • Have Malaysian enterprises reviewed pre-Act Agreements and practices??

Vertical Agreements Had Exclusivity Arrangements Coca Cola (EU case) Tying Coke with less popular products Tying free freezer with exclusivity Rebates on growth and targets Coke gave undertakings that it will • Cease exclusive arrangements save if through competitive tender • Will not use Coke to sell less popular products • 20% space in Coke coolers provided for competitors’ products • Stop offering rebates to reward purchases of the same amount or more of Coke’s products than in the past

Relief of Liability – Section 5 (Pro-Competitive considerations?) • An enterprise may relieve its liability for the infringement of the prohibition under section 4 based on the following reasons: • there are significant identifiable technological, efficiency or social benefits directly arising from the agreement; • the benefits could not reasonably have been provided by the parties to the agreement without the agreement having the effect of preventing, restricting or distorting competition; • the detrimental effect of the agreement on competition is proportionate to the benefits provided; and • the agreement does not allow the enterprise concerned to eliminate competition completely in respect of a substantial part of the goods or services. * Note: Individual and Block Exemptions

ABUSE OF DOMINANT POSITION Section 10(1) CA – 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. Section 2 CA – “Dominant position” – Situation in which one or more enterprises possess such significant power in a market to adjust prices or outputs or trading terms, without effective constraint from competitors or potential competitors.

ABUSE OF DOMINANT POSITION – Cont’d Section 10(2) CA a) directly or indirectly imposing unfair purchase or selling price or other unfair trading condition on any supplier or customer; b) limiting or controlling – i) production; ii) market outlets or market access; iii) technical or technological development or; or iv) investment, …; c) refusing to supply to a particular enterprise or group or category of enterprises; d) applying different conditions to equivalent transactions with other trading parties …; e) making the conclusion of contract subject to acceptance by other parties of supplementary conditions which by their nature or according to commercial usage have no connection with the subject matter of the contract; f) any predatory behaviour towards competitors; or g) buying up a scarce supply of intermediate goods or resources required by a competitor, …

SOME MICROSOFT CASES

CA - Investigations & MyCC’s Powers • Investigations may be initiated by: • the Commission itself (Section 14); or • by Ministerial directive (Section 14); or • Complaint received (Section 15); • Commission officer shall have the powers of a police officer in police investigations of seizable cases provided under the Criminal Procedure Code; • Powers to require information, to retain document, access to records etc.; • Many similarities with tax legislation e.g. Income Tax Act 1967, proposed GST Bill and also PCAPA 2011

SOME OFFENCES • Section 23 - Giving False & Misleading Info, Evidence, Doc. • Section 24 - Destruction, Concealment, Mutilation, Alteration • Section 32 – Obstruction / assaulting / hindering / delaying • Section 33 – Tipping off SEARCH AND SEIZURE • Section 25 – Search & seizure with warrant • Section 26 – Search & seizure without warrant • Section 27 – Access to computerized data • * Note: Generally similar provisions exist in PCAPA & GST Bill

INFRINGEMENT – PENALTIES, DAMAGES & RISKS • Section 40CA – Finding of an infringement • Up to 10% of worldwide turnover of the Enterprise – financial penalty • CC may give other directions, steps to be taken etc. • Section 42CA – Enforcement • * Note: Leniency and undertaking sections • Section 64 CA – private action against infringing enterprises • Collateral actions/arguments?

CRIMINAL SANCTIONS • Section 61CA – General Penalty • body corporate – fine up to RM5 million for 1st offence and up to RM10 million for a subsequent offence • individuals – fine up to RM1 million for 1st offence and up to RM2 million for each subsequent offence, in addition to imprisonment for a term not exceeding 5 years or to both • Section 18 PCAPA – Penalty • body corporate – fine up to RM500k for 1st offence and up to RM1 million for a subsequent offence • individuals – fine up to RM100k or imprisonment for a term not exceeding 3 years or both for 1st offence and fine up to RM250k for each subsequent offence or imprisonment for a term not exceeding 5 years or both

Section 63 of CA / Section 59 of PCAPA Offences by body corporate, directors, management staff etc. (1) If a body corporate commits an offence under this Act, any person who at the time of the commission of the offence was a director, chief executive officer, chief operating officer, manager, secretary or other similar officer of the body corporate or was purporting to act in any such capacity or was in any manner or to any extent responsible for the management of any of the affairs of the body corporate or was assisting in such management -

Section 63 of CA / Section 59 of PCAPA – Cont’d • may be charged severally or jointly in the same proceedings with the body corporate; and • if the body corporate is found to have committed the offence, shall be deemed to have committed that offence unless, having regard to the nature of his functions in that capacity and to all circumstances, he proves – • that the offence was committed without his knowledge, consent or connivance; and • that he had taken all reasonable precautions and exercised due diligence to prevent the commission of the offence.

Section 63 of CA / Section 59 of PCAPA – Cont’d (2) If any person would be liable under this Act to any punishment or penalty for his act, omission, neglect or default, he shall be liable to the same punishment or penalty for every such act, omission, neglect or default of any employee or agent of his, or of the employee of the agent, if the act, omission, neglect or default was committed - • by that person’s employee in the course of his employment; • by the agent when acting on behalf of that person; or • by the employee of the agent in the course of his employment by the agent or otherwise on behalf of the agent acting on behalf of that person.

REMEMBER! • Do not discuss, fix or set prices or other trading conditions with your competitors

REMEMBER! • Do not participate in meetings or gatherings or discussions (even if it is a ‘by the way’ conversation) with competitors, in regard to pricing and other trading conditions

REMEMBER! • Do not agree to share or divide markets or business opportunities with competitors

REMEMBER! • Do not be picky or selective in dealing with customers and do not practice discriminatory pricing terms amongst customers

REMEMBER! • Do not conduct business in a predatory manner or seek to destroy your competitors

REMEMBER! • Careful when you send internal memos, emails, notes, with discriminatory information on pricing or trading conditions or suggesting predatory behaviour !!!

RED FLAG 1 Exclusive/Non-Compete/Solus Agreements • An agreement restricting retailer from selling competitor’s products • To consider the duration of non-compete, market share of manufacturer, scope of the non-compete clause etc Be careful if you are dominant!

RED FLAG 2 Tying/Bundling • The supply of one product conditional upon the purchaser also buying the tied product Be careful if you are dominant!

RED FLAG 3 Provision of incentives • grant of rebates, discounts which are based on loyalty, growth or target • mechanism which offers incentives, such as free storage space tied with exclusivity Be careful if you are dominant!

RED FLAG 4 Resale Price Maintenance (“RPM”) • the restriction of a purchaser's ability to determine its sale price • outright RPM where a minimum price is specified • mechanism which applies pressure to a purchaser to only sell above a certain price • what is permissible? Ceiling vs. Floor? • recommend a resale price provided it is clear that purchaser is not obliged to follow the recommended price

RED FLAG 5 • Exclusive distributor agreements? • supplier agreeing to sell products to only selected distributor for resale • agreements restricting the territory or channel of sales • e.g. in EU, there could be a distinction between active (permissible to restrict?) and passive (not permissible to restrict?) sales

KEY TAKEAWAYS – Competition Law • Competition law review & due diligence required to test application of the CA to businesses. • In dominance cases, build case for commercial justifications to defend business practices. • Identify risks areas in your business and take remedial steps, if required. • Create internal awareness of the prohibitions. • Make compliance part of company’s business culture. • Be prepared for dawn raids and investigations !!!

Mr. Anand Raj was admitted as an Advocate & Solicitor of the High Court of Malaya in 1996 after obtaining an LLB (Hons) degree from the University of London in 1994 and the Certificate in Legal Practice in 1995. Anand Raj has been a partner of Shearn Delamore & Co. since 2003 and is a member of the Competition Law & Antitrust Practice Group. Anand is also a member of the Competition Law & Antitrust Sub-Committee of the Bar Council, Malaysia. He presently Chairs the Bar Council’s Tax and GST Subcommittee. Anand is active in providing feedback to the relevant authorities and agencies on Competition Law in Malaysia. Anand represents and advises foreign, multinational and Malaysian enterprises on Competition Law & Antitrust. He is actively engaged in reviewing documentation, practices and compliance and risk levels in such enterprises and in conducting trainings and workshops for clients and event organisers. He has extensive experience in advising corporate and multinational clients covering a broad spectrum of commercial activities and investments including, amongst others, oil and gas companies and related service providers / equipment suppliers etc, manufacturing companies, IT companies, telecommunications, broadcasting, service providers, professionals, housing and commercial developers, holding companies, insurance and financial institutions etc. on tax and corporate law matters. Over the years Anand has been recognised for his work as Tax Counsel in, amongst others, successive editions of the Asia Pacific Legal 500, Asialaw Profiles, Asialaw Leading Lawyers, the International Tax Review and Chambers Asia. The legal firm of Shearn Delamore & Co. has been recognised as Malaysia’s Tax Litigation Firm of the Year for 2007, 2008, 2009 and 2010 by the International Tax Review. Shearn Delamore & Co. was named an ASIAN-MENA COUNSEL “IN-HOUSE COMMUNITY FIRM OF THE YEAR, 2011” in Malaysia for: ANTITRUST / COMPETITION. Anand practises in all aspects of tax and revenue law advisory, structuring, planning, transfer pricing, audit, investigation, dispute resolution (including advising taxpayers on the settlement of tax cases with the Revenue or in dealings with governmental authorities) and litigation (including tax appeals, declaratory proceedings, judicial review applications, civil suits, windings up etc.) work. Anand has appeared extensively as Counsel for taxpayers before the Special Commissioners of Income Tax (“SCIT”) and the Superior Courts of Malaysia. A number of cases in which he has appeared as Counsel have been reported. He has wide experience in all areas of Tax and Revenue Law and is a member of the International Fiscal Association (“IFA”), Malaysia Branch and is a committee member of IFA Malaysia. Anand has presented papers on Malaysian Tax and Revenue Law both domestically and internationally. T: +603 2027 2828F: +603 2072 5499E: anand@shearndelamore.com

Thank You Competition & Antitrust Practice Group •Training - Essentials of Competition Law •Documentation (Agreements, Templates etc) Reviews •Business Practice Reviews •Compliance Programmes & Manuals •Competition Law Advisory & Representation •How to deal with Dawn Raids These slides only contain a summary of selected issues and are not a substitute for a competition law review nor do they constitute legal advice on any general or specific documents or business practices. Corporate & Commercial Corporate Secretarial Department Competition Law & Antitrust Dispute Resolution Employment & Administrative Law Energy, Natural Resources & Green Technology Environmental Financial Services Immigration Infrastructure & Projects Intellectual Property Personal Data Protection Real Estate Regulatory Compliance & Enforcement Tax & Revenue Telecommunications & Technology

The New Competition Act 2010 & How It Affects the Oil and Gas Sector