Transparency of the Regulatory System
In July 2013, the Malaysian Government initiated a National Policy on Development and Implementation of Regulations (NPDIR). Under this policy, the federal government embarked on a comprehensive approach to minimize redundancies in the country’s regulatory framework. The benefits to the private sector thus far have largely been reduced licensing requirements, fees, and approval wait-times for construction projects. The main components of the policy have been: 1) a regulatory impact assessment (a cost-benefit analysis of all newly proposed regulations); and 2) the creation of a regulations guide, PEMUDAH (similar to the role MIDA plays for prospective investors), to aid businesses and civil society organizations in understanding regulatory requirements affecting their organizations’ activities. Under the NPDIR, the government has committed to reviewing all new regulations every five years to determine with the new regulations need to be adjusted or eliminated.
Despite this effort to make government more accountable for its rules and to make the process more inclusive, many foreign investors continue to criticize the lack of transparency in government decision making. The implementation of rules on government procurement contracts are a recurring concern. Non-Malaysian pharmaceutical companies claim to have lost bids against bumiputera (ethnic Malay)-owned companies despite offering more effective medicines at lower cost.
International Regulatory Considerations
Malaysia is one of 10 Member States that constitute ASEAN. On December 31, 2015, the ASEAN Economic Community formally came into existence. For many years ahead of that date, and since, ASEAN’s economic policy leaders have met regularly to discuss promoting greater economic integration within the 10-country bloc. Although trade within the 10-country bloc is robust, Member States have prioritized steps to facilitate a greater flow of goods, services, and capital. No regional regulatory system is in place. As a member of the WTO, Malaysia provides notification of all draft technical regulations to the Committee on Technical Barriers to Trade.
Legal System and Judicial Independence
Malaysia’s legal system generally reflects English Law in that it consists of written and unwritten laws. Written laws include the federal and state constitutions as well as laws passed by Parliament and state legislatures. Unwritten laws are derived from court cases and local customs. The Contract Law of 1950 still guides the enforcement of contracts and resolution of disputes. States generally control property laws for residences, although the Malaysian government has recently adopted measures, including high capital gains taxes, to prevent the real estate market from overheating. Nevertheless, through such programs as the Multimedia Super Corridor, Free Commercial Zones, and Free Industrial Zones, the federal government has substantial reach into a range of geographic areas as a means of encouraging foreign investment and facilitating ownership of commercial and industrial property.
In 2007 the judiciary introduced dedicated intellectual property (IP) courts that consist of 15 “Sessions Courts” that sit in each state, and 6 ‘High Courts’ that sit in certain states (i.e. Kuala Lumpur, Johor, Perak, Selangor, Sabah and Sarawak). Malaysia launched the IP courts to deter the use of IP-infringing activity to fund criminal activity and to demonstrate a commitment to IP development in support of the country’s goal to achieve high-income status. These lower courts hear criminal cases, and have the jurisdiction to impose fines for IP infringing acts. There is no limit to the fines that they can impose. The higher courts are designated for civil cases to provide damages incurred by rights holders once the damages have been quantified post-trial. High courts have the authority to issue injunctions (i.e., to order an immediate cessation of infringing activity) and to award monetary damages.
Labor Courts, which the Ministry of Human Resources describes as “a quasi-judicial system that serves as an alternative to civil claims,” provide a means for workers to seek payment of wages and other financial benefits in arrears. Proceedings are generally informal but conducted in accordance with civil court principles. The High Court has upheld decisions which Labor Courts have rendered.
Certain foreign judgments are enforceable in Malaysia by virtue of the Reciprocal Enforcement of Judgments Act 1958 (REJA). However, before a foreign judgment can be enforceable, it has to be registered. The registration of foreign judgments is only possible if the judgment was given by a Superior Court from a country listed in the First Schedule of the REJA: the United Kingdom, Hong Kong Special Administrative Region of the People’s Republic of China, Singapore, New Zealand, Republic of Sri Lanka, India, and Brunei.
To register a foreign judgment under the REJA, the judgment creditor has to apply for the same within six years after the date of the foreign judgment. Any foreign judgment coming under the REJA shall be registered unless it has been wholly satisfied, or it could not be enforced by execution in the country of the original Court.
If the judgment is not from a country listed in the First Schedule to the REJA, the only method of enforcement at common law is by securing a Malaysian judgment. This involves suing on the judgment in the local Courts as an action in debt. Summary judgment procedures (explained above) may be used to expedite the process.
The U.S. Embassy is not aware of instances in which political figures or government authorities have interfered in judiciary proceedings involving commercial matters.
Laws and Regulations on Foreign Direct Investment
The government established the Malaysia Investment Development Authority (MIDA) to attract foreign investment and to serve as a focal point for legal and regulatory questions. Organized as part of the Ministry of International Trade and Industry (MITI), MIDA serves as a guide to foreign investors interested in the manufacturing sector and in many services sectors. Regional bodies providing support investors include: Invest Kuala Lumpur, Invest Penang, Koridor Utara Malaysia (Malaysia's Northern Corridor), the East Coast Economic Region Development Council, the Iskandar Regional Development Authority (IRDA), the Sabah Economic Development and Investment Authority (SEDIA), and the Sarawak Economic Development Corporation.
As noted, the Ministerial Functions Act authorizes government ministries to oversee investments under their jurisdiction. Prospective investors in the services sector will need to follow requirements set by the relevant Malaysian Government ministry or agency over the sector in question.
Competition and Anti-Trust Laws
On April 21, 2010, the Parliament of Malaysia approved two bills, the Competition Commission Act 2010 and the Competition Act 2010. The Acts took effect January 1, 2012. The Competition Act prohibits cartels and abuses of a dominant market position, but does not create any pre-transaction review of mergers or acquisitions. Violations are punishable by fines, as well as imprisonment for individual violations. Malaysia's Competition Commission has responsibility for determining whether a company's "conduct" constitutes an abuse of dominant market position or otherwise distorts or restricts competition. As a matter of law, the Competition Commission does not have separate standards for foreign and domestic companies. Commission membership consists of senior officials from the Ministry of International Trade and Industry (MITI), the Ministry of Domestic Trade, Cooperatives, and Consumerism (MDTCC), the Ministry of Finance, the Prime Minister’s Economic Planning Unit and, on a rotating basis, representatives from academia and the private sector.
In addition to the Competition Commission, the Acts established a Competition Appeals Tribunal (CAT) to hear all appeals of Commission decisions. In the largest case to date, the Commission imposed a fine of RM10 million on Malaysia Airlines and Air Asia in September 2013 for colluding to divide shares of the air transport services market. The airlines filed an appeal in March 2014. In February 2016, the CAT ruled in favor of the airlines in its first-ever decision and ordered the penalty to be set aside and refunded to both airlines.
Expropriation and Compensation
The U.S. Embassy is not aware of any cases of uncompensated expropriation of U.S.-held assets, or confiscatory tax collection practices, by the Malaysian government. The government's stated policy is that all investors, both foreign and domestic, are entitled to fair compensation in the event that their private property is required for public purposes. Should the investor and the government disagree on the amount of compensation, the issue is then referred to the Malaysian judicial system.
ICSID Convention and New York Convention
Malaysia has signed and ratified the Convention on the Settlement of Investment Disputes between States and Nationals of Other States. Malaysia became a Contracting State on October 14, 1966 when the Convention entered into force, granting jurisdiction over investment disputes between the Government of Malaysia and non-Malaysian citizens to the International Center for Settlement of Investment Disputes (ICSID). Malaysia also is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Although the domestic legal system is accessible to foreign investors, filing a case generally requires any non-Malaysian citizen to make a large deposit before pursuing a case in the Malaysian courts. Post is unaware of any U.S. investors’ recent complaints of political interference in any judicial proceedings.
Investor-State Dispute Settlement
Malaysia’s investment agreements contain provisions allowing for international arbitration of investment disputes. Malaysia does not have a Bilateral Investment Treaty with the United States.
Post has little data concerning the Malaysian Government's general handling of investment disputes. In 2004, a U.S. investor filed a case against the directors of the firm, who constituted the majority shareholders. The case involves allegations by the U.S. investor of embezzlement by the other directors. The case remains in the appeals process.
The Malaysian government has been involved in three ICSID cases; in 1994, 1999, and 2005. The first case was settled out of court. The second, filed under the Malaysia-Belgo-Luxembourg Investment Guarantee Agreement (IGA), was concluded in 2000 in Malaysia's favor. The 2005 case, filed under the Malaysia-UK Bilateral Investment Treaty, was concluded in 2007 in favor of the investor. However, the judgment against Malaysia was ultimately dismissed on jurisdictional grounds, namely that ICSID was not the appropriate forum to settle the dispute because the transaction in question was not deemed an investment since it did not materially contribute to Malaysia’s development. Nevertheless, Malaysian courts recognize arbitral awards issued against the government. There is no history of extrajudicial action against foreign investors.
International Commercial Arbitration and Foreign Courts
Malaysia’s Arbitration Act of 2005 applies to both international and domestic arbitration. Although its provisions largely reflect those of the UN Commission on International Trade Law (UNCITRAL) Model Law, there are some notable differences, including the requirement that parties in domestic arbitration must choose Malaysian law as the applicable law. Although an arbitration agreement may be concluded by email or fax, it must be in writing: Malaysia does not recognize oral agreements or conduct as constituting binding arbitration agreements.
Many firms choose to include mandatory arbitration clauses in their contracts. The government actively promotes use of the Kuala Lumpur Regional Center for Arbitration (http://www.rcakl.org.my), established under the auspices of the Asian-African Legal Consultative Committee to offer international arbitration, mediation, and conciliation for trade disputes. The KLRCA is the only recognized center for arbitration in Malaysia. Arbitration held in a foreign jurisdiction under the rules of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States 1965 or under the United Nations Commission on International trade Law Arbitration Rules 1976 and the Rules of the Regional Centre for Arbitration at Kuala Lumpur can be enforceable in Malaysia.
Malaysia's Department of Insolvency (MdI) is the lead agency implementing the Bankruptcy Act of 1967. The distribution of proceeds from the liquidation of a bankrupt company's assets generally adheres to the "priority matters and persons" identified by the Companies Act of 1965. After the bankruptcy process legal costs are covered, recipients of proceeds are: employees, secured creditors (ie, creditors of real assets), unsecured creditors (ie, creditors of financial instruments), and shareholders. Bankruptcy is not criminalized in Malaysia. The country ranks 46th on the 2017 World Bank Group’s Doing Business Rankings (compared to 45th last year) for Ease of Resolving Insolvency, just behind Switzerland and just ahead of Romania.