In late September 2024, Malaysia saw significant developments in its environmental sector when the Ministry of Natural Resources and Environmental Sustainability (“NRES”) announced the new national policy on climate change (“NPCC 2.0”). A consultation paper (“Consultation Paper”) for a national climate change bill (“NCCBill”) followed soon after, inviting public opinion and input for Malaysia’s climate change act.

The release of both documents was long awaited and arguably overdue, given that Malaysia’s last climate change policy (“NPCC 1.0”) was released almost 15 years ago. Since 2019, both the Pakatan Harapan and Perikatan Nasional administrations have made various announcement about an upcoming climate change act.

What does NPCC 2.0 contain and how does it differ from NPCC 1.0? What does Malaysia’s climate change act aim to achieve and how does it compare against climate change legislation in other jurisdictions? Most importantly, how does the NPCC 2.0 affect Malaysia and Malaysians? Amin Abdul Majid and Cheng Yen of Zaid Ibrahim & Co.’s (in association with KPMG Law) Infrastructure, Energy and Utilities Practice Group briefly explore these important questions.

National Policy on Climate Change 2.0

NPCC 2.0 is a formidable instrument, more than double the length of NPCC 1.0 and similarly extensive in reach.

NPCC 2.0 was released in the context of Malaysia having recently gone through various extreme climate events, including suffering RM7.9 billion losses from floods, while on the other hand, increasing greenhouse gases emissions by more than 30% since 2005. In the light of these sobering statistics, NPCC 2.0 pushes for and authorises the development of regulatory instruments for Malaysia’s climate related strategies, to help put things right.

NPCC 2.0 attempts to do this through its four guiding principles:

• upholding the principle of “common but differentiated responsibilities” which lies at the heart of the Paris Agreement;
• ensuring a just and equitable transition;
• adopting a whole of society and nation approach; and
• forming integrated and multi-sectoral solutions to address climate mitigation and adaptation.

The first principle was one that we had already seen in NPCC 1.0, but the other guiding principles in NPCC 2.0 displays a more serious commitment to our national climate agenda and international obligations.

There are five strategic thrusts arising from the guiding principles, and they are depicted below.

Interestingly, unlike the earlier NPCC 1.0, NPCC 2.0 contains what appears to be deliverables for the Malaysian Government, termed ‘catalytic initiatives’ under each Strategic Thrust, which are intended to boost Malaysia’s climate actions. They are as follows:

There are no fixed timelines for each of these catalytic initiatives and it would appear that they can all be implemented concurrently. This will allow Malaysia to adopt what is commonly known in climate change circles as the “all of the above” approach for climate action.      

In summary, the NPCC 2.0 is a promising development for Malaysia and has the potential to encourage initiatives and investments in the many areas and activities that it covers. As one example, and which we discuss in more detail below, the prospective climate change act can facilitate the collection of reliable data, leading to the strengthening of confidence in our climate research, our proposed climate actions and direction of travel. The focus on carbon pricing and carbon markets in NPCC 2.0 also means that the business community and investors can anticipate active developments in this area, most likely following the path that led to Malaysia’s voluntary carbon market and our responses to the European Union’s Carbon Border Adjustment Mechanism.

A final point that should be mentioned is that Malaysia would benefit from learning our lessons from NPCC1.0 and assessing how it fared, and how the new policy can do better. It is not insignificant that the NPCC 1.0 sets out important principles, strategic thrusts and key actions, yet did not appear to consistently guide Malaysia’s development of climate strategies. In fact, the NPCC 1.0 received no specific mention in Parliament when climate-related legislation such as the Renewable Energy Act, Sustainable Energy Development Authority Act and Energy Efficiency and Conservation Act were debated and passed. It would be advisable for NRES to investigate the reasons for this and come up with improvements to better facilitate the successful implementation of NPCC 2.0, upon which so much of our environment and wellbeing depends.    

National Climate Change Bill

In 2019 and 2020, the Malaysian Government announced that a national climate change framework was being drafted and a climate change act for Malaysia was imminent. Working on these announcements, and given that no legislation was in fact introduced, in 2021 our Infrastructure, Energy and Utilities Practice Group attempted to envisage what the important legislation would prescribe, and an article was published with the aim to facilitate discussion.

Our article expressed expectations and hope that the legislation would at least contain a definite emissions target; the concept and application of accountability to achieve such target; the establishment of an institution to assist the Malaysian Government to obtain independent advice on climate change; and regulations on an emissions trading scheme or system. Looking at the Consultation Paper issued by NRES in early October 2024, it appears that the NCC Bill will have these and more.

One can gather from the Consultation Paper that the NCC Bill would have the following sections and provisions:

Of these proposed provisions, the following subject matters are of special interest:

• the formulation and implementation of national targets, with clear benchmarks for emission reductions sustainable practices;
• the establishment of a regulatory entity to administer, implement and enforce the legislation;
• the mandating of data and information requirements through the development of a national integrated climate data repository;
• the establishment and regulation of carbon trading and an emission trading scheme (“ETS”); and
• the establishment of a national registry for climate change.

On the subject matter of national targets, it is encouraging that the Government intends to prescribe that the NRES Minister will regularly set targets, consistent with Malaysia’s obligations to submit Nationally Determined Contributions under Article 4, Paragraph 2 of the Paris Agreement. Unlike legislation in other jurisdictions, such as the United Kingdom and Denmark, the responsibility of the Minister does not appear to extend to bearing responsibility for the targets set. It seems also that the important commitment to come up with targets that are progressively better has been omitted – making it possible that Malaysia’s targets at some point may be less ambitious than the previously declared aspiration. This is also rather disappointing, considering the need to introduce and implement the catalytic initiatives discussed above.

The proposed sections on data and a national registry in the NCC Bill are commendable, not least in facilitating the collection of reliable data that will enable repeatable research and analyses. Malaysia already has considerable expertise in data collection as demonstrated in the databases hosted by the Department of Statistics, the Energy Commission and National Hydraulic Research Institute of Malaysia, to name a few. The intended mandating of data input is likely to improve this process, especially if contributions from all agencies and States can be secured on a regular basis. It is possible too that the data required for the implementation of the eventual Climate Change Act will need to focus on carbon emissions, measurements and monitoring; some of which are new areas for Malaysia. It should be noted that other jurisdictions may not have this component in their climate change legislation, but this is often because countries such as New Zealand, the Philippines and the state of Victoria in Australia already have legislation relating to access to information and data.

In as far as carbon trading and the ETS are concerned, the Malaysian Government’s intent to introduce carbon taxes have been made clear in the recent Budget speech in October. Malaysia must therefore implement carbon taxes and other related initiatives in accordance with best practices. This includes adopting a phased approach to allow for refinements, as has been the practice in Singapore. Singapore’s Government seta carbon tax of S$5/tCO₂e for the first five years from 2019 to 2023 to provide a transitional period for emitters to adjust. To support its net zero target, Singapore raised its carbon tax to S$25/tCO₂e with effect from 2024. It will be raised to S$45/tCO₂e in 2026 and 2027,with a view to reaching S$50-80/tCO₂e by 2030. This phased approach has given the Singapore Government more time to socialise the new fiscal measure, making it more palatable.

One general observation is that the NCC Bill, as currently proposed, will facilitate our collective achievement of international climate commitments. But this may not be enough to address other interplaying issues that arise from climate change. From the information that can be gleaned from the Consultation Paper, there is a focus on greenhouse gases, carbon emissions and credits but the NCC Bill could perhaps benefit from more directly addressing other matters raised in the new NPCC, such as utilising climate action to catalyse economic growth and climate justice.

As mentioned in the NPCC 2.0, the transition to a low carbon economy and climate resilient development must be careful and responsible, taking into account and being empathetic towards the livelihoods of Malaysians, particularly vulnerable groups. Since we wrote on the potential climate change legislation for Malaysia, the country has seen the introduction of various relevant policies such as the Renewable Energy Roadmap, the National Energy Transition Roadmap and the National Industrial Masterplan which focuses on a just transition, but it is unclear if and how these national plans will be facilitated by the NCC Bill.

Furthermore, we have noticed that civil society organisations have highlighted that the Bill focuses more on mitigation when adaptation and loss and damage should also be prioritised. Delay in paying attention to these areas can lead to poor upholding of climate justice in Malaysia.

The NCC Bill could be more robust from a climate justice perspective by introducing provisions to empower the Minister to prescribe regulations on adaptation and loss and damage and give national plans on these areas the force of law. Such regulations could, for instance, provide for funding to be given to local governments to enable them to implement necessary changes to adapt to loss and damage.

The regulations could also create mechanisms to enable vulnerable communities who have been impacted to have their say on measures to address loss and damage. Inspiration could be taken from other countries, for example:

• Japan’s Climate Change Adaptation Act 2018 allows authorities to take effective adaptation measures in various fields based on reliable scientific information. It also requires municipalities to establish local climate change adaptation plans.
• Philippines’ Climate Change Act 2009 expressly requires local government units to formulate local climate change action plans in accordance with the Local Government Code, the Framework and National Climate Change Action Plan of Philippines and treat adaptation as one of the irregular functions.

Conclusion

The recent release of the NPCC2.0 and the NCC Bill are very much welcome developments in Malaysia. However, in as far as the NCC Bill is concerned, there are a few aspects that can be improved. It is encouraging that NRES has opened an avenue for feedback, giving the public more than one month to provide their inputs. It is hoped that this opportunity of input and feedback created by NRES can be fully utilised. Given the complexities of a seminal legislation such as a climate change act, stakeholders including civil societies must be given sufficient time to provide their views.

If you have any questions or require any additional information, please contact  Amin Abdul Majid or the partner you usually deal with in Zaid Ibrahim & Co. (in association with KPMG Law). This article was prepared with the assistance of Cheng Yen, Associate at Zaid Ibrahim & Co (in association with KPMG Law).

This alert is for general information only and is not a substitute for legal advice.

‍Introduction

Following the LIBOR scandal in 2012, many countries and financial centers have taken steps to transition their benchmark interest rates from Interbank Offered Rates (IBOR) to more objective Risk-Free Rates (RFR). IBOR rates are generally set by a rate setting body, to which financial institutions would submit the interest rates which such financial institutions have agreed (or theoretically agree) to lend to one another, for collation, setting and publication by the rate setting body.

Generally, RFR are set based on data on interest rates that are transacted in an open and liquid financial market, derived from actual financing and derivatives transactions. For such reason, RFR are generally seen to be more robust, more reflective of the actual market, and less susceptible to manipulation.

BNM Discussion Paper on KLIBOR Transition

On 27 September 2024, Bank Negara Malaysia (BNM) issued a Discussion Paper on the proposed full transition from the Kuala Lumpur Interbank Offered Rate (KLIBOR) to the Malaysian Overnight Rate (MYOR) and Malaysian Islamic Overnight Rate (MYOR-i), and the cessation of KLIBOR.

The issuance of the Discussion Paper marks the first public concrete step taken by BNM to transition Malaysia’s interest rate benchmark from KLIBOR, which has been the benchmark for Malaysian interbank lending rates since 1987, to MYOR/MYOR-i, which promises to be a more robust benchmark. MYOR is the volume-weighted average rate of unsecured overnight Ringgit interbank transactions. It was introduced by BNM in 2021 and has been quoted in parallel with KLIBOR since its introduction.

The transition from KLIBOR to MYOR/MYOR-i mirrors developments which have been taking place over the past decade in major financial centers around the world, such as:

• In the United Kingdom, LIBOR has ceased to be used since 2023. Banks have largely transitioned to RFR such as the Secured Overnight Financing Rate (SOFR) and Sterling Overnight Index Average (SONIA).
• In the United States, LIBOR has ceased to be used since 2023 and the main US Dollar interest rate benchmark is now the SOFR.
• In Singapore, the Singapore Interbank Offered Rate (SIBOR) will be discontinued by 31 December 2024 and be taken over by the Singapore Overnight Rate Average (SORA).

Proposed Timeline for KLIBOR Transition – a 3-year Roadmap

The Discussion Paper proposes a 3-year roadmap, to allow ample opportunity for Malaysian market participants to prepare for and support the transition to new financial products referencing MYOR/MYOR-i, with actual cessation of KLIBOR in 2028.

During the 3-year transition, market participants who continue to enter into KLIBOR transactions should draft appropriate transition provisions and fallback positions into their contracts, to take into account the impending cessation of KLIBOR.

Legacy KLIBOR Transactions and Contracts

Legacy contracts are transactions and contracts that reference an KLIBOR which extend past the KLIBOR cessation date. Effective management of these transactions and contracts are crucial to mitigate market disruption in the event of KLIBOR’s cessation.

The Discussion Paper sets out two main approaches to address legacy transactions and contracts:

• Active transition – where the parties actively amend legacy contracts to switch the reference away from KLIBOR to MYOR/MYOR-i ahead on the cessation date.
• Fallback provisions – where parties find difficulty in implementing active transitions, fallback provisions may be incorporated into legacy contracts. Fallback provisions govern scenarios where an IBOR has permanently ceased. Generally, fallback provisions specify the trigger event, the replacement rate and the adjustments needed to address the structural difference between the replacement rate and the IBOR. Fallback provisions will only apply following the actual cessation of an IBOR.

Feedback Deadlines

Market participants may submit feedback on the Discussion Paper to BNM electronically, by no later than 27 October 2024, using the hyperlinks set out in the Discussion Paper, which may be accessed here.

Conclusion

Sufficient and timely efforts by market participants are crucial to manage the risks of the transition from KLIBOR to LIBOR.

Malaysia has the advantage of observing IBOR transition processes in other jurisdictions such as the United Kingdom, United States, Singapore, Hong Kong and Japan. Hopefully, this will ease the transition process as many of the issues would have been fleshed out and dealt with in those jurisdictions.

The KLIBOR transition process will not only involve banks and financial institutions, but also their customers and borrowers. It is expected that the banks and financial institutions would normally take the lead in the transition process, but customers and borrowers (especially those that have large financing facilities and derivatives transactions pegged to KLIBOR) will have vital roles to play as well.

Based on the experience from other jurisdictions, these are the general steps which market participants have to go through when faced with a potential cessation of KLIBOR:

1. Understand the regulatory changes and their impact on outstanding financing and derivatives contracts and transactions;
2. Review all outstanding financing and derivatives contracts and determine the best way to transition from KLIBOR;
3. Formulate an implementation plan to amend all outstanding KLIBOR-denominated contracts and transactions;
4. Identify the group companies and entities which would be affected by the implementation plan;
5. Identify the counterparties to such contracts and transactions;
6. Negotiate the revised contracts and transactions with the identified counterparties; and
7. Identify, amend and upgrade (where necessary) all affected systems and processes, which may include IT, accounting, compliance and other systems and processes.

There would also be tax, accounting and legal issues to consider. Early involvement of the market participant’s lawyers and legal departments in the KLIBOR transition process would be critical in preventing disputes, by ensuring all terms are clear and compliant with regulatory standards.

If you have any questions or require any additional information, please contact  Loo Tatt King or the partner you usually deal with in Zaid Ibrahim & Co. (in association with KPMG Law).

This alert is for general information only and is not a substitute for legal advice.

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The Department of Town and Country Planning (PLANMalaysia) under the Ministry of Housing and Local Government (KPKT) undertook a public consultation on the national Guideline on Short Term Rental Accommodation in Malaysia through the Unified Public Consultation platform. While efforts to create a national framework for STRA has been in motion since 2019, the questions remains: Is the Government finally ready to provide regulatory certainty for STRA activities?

Our Partner and Head of the Government Advisory Department, Mohamad Izahar bin Mohamad Izham and Associate, Muhamad Hilmy bin Mohd Yazid outline the key elements of the proposed guideline and examines the potential way forward for better regulation of Short-Term Rental Accommodation or “STRA” in Malaysia.

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With the growing popularity of short term rentals, many countries are looking at regulating short term accommodation/rentals. Platforms such as Airbnb or Booking.com make it easier for property owners to list their properties and allow tourists and visitors a diverse range of accommodation options. However, there have been complaints as the influx of tourists and visitors, particularly in residential areas, led to noise pollution, traffic congestion, and other disturbances that impact the quality of life for long-term residents. In response to this, the Penang State Government introduced the guidelines for short term accommodation imposing strict conditions on how properties can operate within residential buildings, ensuring that the rights and safety of permanent residents are not compromised. Airbnb has also launched its Guide to Responsible Hosting in Buildings, which provides hosts with resources and best practices to ensure they operate within the legal and community standards. In this article, Partner, Jeyakuhan Jeyasingam, looks at the key aspects of Penang’s Guidelines and Airbnb’s Guide and its impact on the market.

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Introduction

Foreclosure is a legal mechanism through which a lender (“Chargee”) attempts to recover the balance of a loan from the owner of the land (“Chargor”) who has defaulted by forcing the sale of the asset used as collateral, typically real estate. In Malaysia, the foreclosure process is a critical component of debt recovery, particularly incases involving secured loans. The process is governed by a stringent legal framework that ensures the protection of both the Chargee’s and the Chargor’s rights. This article delves into the intricacies of foreclosure proceedings in Malaysia, outlining the legal framework, procedural steps, the Chargor’s rights, challenges, and recent developments in the industry.

Legal Framework Governing Foreclosure in Malaysia

Foreclosure in Malaysia is primarily regulated by the National Land Code 1965 (“NLC”). The NLC prescribes the procedures and legal requirements that must be followed when a Chargee seeks to foreclose on a property. Malaysian law mandates that the Chargee obtain an Order for Sale before proceeding with the foreclosure. This legal requirement ensures that the foreclosure process is conducted under judicial oversight, providing a safeguard against arbitrary or unjust actions by the Chargee.

An application for an Order for Sale can be made either to the High Court or the Land Office, depending on the type of land title. For land held under a Registry title, the application must be made to the High Court, while for land under a Land Office title, the application must be made to the Land Office.

The Foreclosure Process in Malaysia for Land Titles Held under Registry Title

Chargor’s Rights and Defenses

Chargors are afforded several rights and defenses in foreclosure proceedings. One of the most critical rights is the Right of Redemption, which allows the Chargor to prevent the foreclosure by paying off the outstanding debt before the sale. This right provides the Chargor with an opportunity to retain their property if they can secure the necessary funds.

Chargor may also challenge the foreclosure on the ground that there is an existence of a Cause to the Contrary, such as proving exceptions to indefeasibility under sections 340(2), (3), and (4) of the NLC, or alleging that the Chargee failed to comply with procedural requirements — e.g., disputing the validity of the Notice of Default, or arguing that the grant of the Order for Sale would be contrary to some rule of law or equity.

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Challenges in Foreclosure Proceedings

Despite the structured legal framework, foreclosure proceedings in Malaysia are not without challenges. Delays in the legal process are common, particularly if the Chargor raises multiple defenses or if there are disputes over the property’s valuation. These delays can prolong the uncertainty and financial strain on both parties.

The auction process can also pose challenges, especially if the property attracts low bids or if there is limited buyer interest. This scenario may result in the property being sold below its market value, which can be detrimental to the Chargor and insufficient for the Chargee to recover the full debt.

Recent Developments

1.      A Speedy Departure – Thameez Nisha Hasseem v Maybank Allied Bank Bhd [2023] 5 CLJ 874

Conventionally, actions filed in court are bound by the Limitation Act 1953. However, the issue of whether foreclosure is an “action” coming within the Limitation Act 1953 was recently clarified by the Federal Court.

In 2020, the Federal Court in CIMB Bank Bhd v Sivadevi Sivalingam [2020] 2 CLJ 151 decided in the majority that applying for an Order for Sale within the act of foreclosure is not considered an “action”, thus having liberty over the 12 year limit stated in section 21(1) of the Limitation Act 1953. This was supported by the preceding case of Kandiah Peter v Public Bank Bhd [1994] 4 CLJ 332, which stated that a Chargee merely “enforces their rights” by exercising their statutory remedy against the Chargor in default – i.e., not an “action”.

Just three years later, however, the Federal Court then departed from that decision. In 2023, the Federal Court ruled in Thameez Nisha Hasseem v Maybank Allied Bank Bhd that the act of foreclosure is in fact an “action” when read in conjunction with the NLC, the Rules of Court 2012, and the Courts of Judicature Act 1964, hence being bound by the Limitation Act 1953, wherein no action can be enforced after 12 years from the date of the first payment default.

2.      How Fatal is Fatal? – MIDF Amanah Investment Bank Bhd v Vahana Offshore (M) Sdn Bhd  [2024] CLJU 31

In January 2024, the Plaintiff in MIDF Amanah Investment Bank Bhd v Vahana Offshore (M) Sdn Bhd failed to exhibit the NLC charge in its affidavit in support of its application for an Order for Sale. The key issue was whether it is possible for the Plaintiff to still be granted the Order for Sale despite this technical error which most would consider fatal.

As per Order 83 Rule 3 of the Rules of Court 2012, the Affidavit in support of the Originating Summons “shall comply with the following provisions of the rules”, one of the rules being “the Affidavit shall exhibit a copy of this charge”. The Defendant challenged the application on, inter alia, this ground of failure to exhibit the charge.

The Plaintiff then asserted that the requirements under Order 83 can be waived under Order 1A and Order 2 Rule 1 Rules of Court 2012. This was as it was a genuine oversight wherein the charge was mentioned in the affidavit although it was inadvertently not exhibited and even the Defendant had already acknowledged the charge. Moreover, the Plaintiff had also filed an amended affidavit, quelling the error.

In the High Court, Leong Wai Hong JC ruled in favour of the Plaintiff, highlighting that no prejudice was caused to the Defendant with the exclusion of exhibiting the NLC charge at first instance, suggesting that non-compliance of Order 83 may not necessary be fatal to the entire claim.

However, it is to be noted that the decision of the High Court has since been overturned by the Court of Appeal, suggesting a possible contrary view that compliance with Order 83 is indeed crucial. The grounds of judgment of the Court of Appeal, which has yet to be made available, remains much anticipated to provide clarity on the issue at hand.

Conclusion

When dealing with foreclosures in Malaysia, the NLC sets out the procedural and legal requirements to be followed. When applying for an Order for Sale it has to be clarified that the Order is bound by the 12 year limit stipulated in the Limitation Act 1953, while non-compliance of Order 83 could very well be fatal to an application for Order for Sale.

The law aims to bring a measure of certainty and fairness to legal matters, despite its imperfections. In the case of foreclosure proceedings, it would be prudent to carefully comply with the procedures as have been laid out by the laws.

If you have any questions or require any additional information, please contact Chuah Jo-Shua, Foo Lyn Min, or the partner you usually deal with at Zaid Ibrahim & Co (in association with KPMG Law). This article was prepared with the assistance of Leim Ivan.

This article is for general information only and is not a substitute for legal advice.

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This article highlights predictions from Corporate and M&A professionals from the KPMG global Legal Operations Transformation Services practice concerning the expected changes in mergers and acquisitions (M&A) markets. We focus on how these changes are expected to affect future legal functions and legal practice. As predictions, they are not intended to guarantee any specific outcomes.

After a strong rally post-pandemic, the world’s M&A markets have been quiet in recent months as ongoing high interest rates, inflation and global political uncertainty continue to create financing challenges and dampen appetites for new transactions.

While deal volumes may be muted, digitalization continues its rapid advance, with innovations such as Generative AI (Gen AI) being embraced by businesses and their legal teams with increasing enthusiasm. When M&A markets ultimately rebound — as is widely expected before the end of 2024 — the pressure and pace of the deal making process will likely create significant challenges for legal professionals.

How will rapidly changing approaches to M&A transform the legal functions of the future?

Here are our top predictions:

1. Legal professionals who use technology effectively in the deal-making process can gain a competitive advantage by boosting the speed and efficiency of M&A transactions.

Around the world, M&A deal-making will continue at a more rapid rate and complexity as advancing technology and more available data drive new efficiencies and transparency across the deal cycle. From matching buyers and sellers to post-integration planning, the role of M&A lawyers will likely evolve as routine tasks are standardized and automated.

With the huge volumes of data that are typically relevant in international reorganizations, legal professionals will increasingly assign technology to do more basic work. This includes scanning and producing documents, summarizing information, preparing reports and tracking time and expenses.

Approaches to due diligence will also change. Technology tools, especially Gen AI will streamline the scope of the legal review by delivering reliable information summaries quickly on matters such as standardized contracts, litigation, market terms and insurance policies. With Gen AI facilitating first drafts and research, the lawyer’s legal knowledge and review capabilities will need to be updated to ensure quality and accurate deliverables.

In fact, the opportunities that technology can bring to M&A transactions are so vast that they can seem overwhelming. As deals continue to pick up pace and workflows are adapted, it will be important for lawyers to understand that their role in the process remains fundamentally the same: to negotiate sound terms, execute and optimize buy-sell agreements, apply prior deal knowledge and create strategic business solutions for their clients.

Technology is designed to make the journey faster and smoother, but the destination is unchanged. The most successful legal teams will likely be those who use technology appropriately and efficiently to bring more added value services to their clients in a collaborative format.

2. Rapid technological adoption can help level the playing field for players in developing countries.

The digital divide between developed and developing countries will continue to narrow as businesses in countries such as Indonesia and Vietnam skip over previous technologies, and create the new infrastructure to support Gen AI, mobile, 5G and other contemporary advances. The latest wave of technology offers another opportunity for developing countries to “leapfrog” in areas such as developing precedents and running major due diligence exercises.

This may level the playing field by allowing new M&A players in developing markets to ramp up their capabilities quickly and compete on more equal footing with established investors and strategic buyers in developed jurisdictions. This speed of development will require extra effort and vigilance in areas such as training, the ethical use of AI and cybersecurity.

3. Proliferating environmental, social and governance (ESG) rules will require more detailed due diligence and access to significant volumes of previously unreported data.

New ESG reporting regulations are set to take effect in Europe, and similar rules are likely to be adopted in the Asia-Pacific and other regions. This aims to greatly expand the level of due diligence and data that potential buyers will need to manage to meet new compliance, reporting and other requirements.

While these rules are scheduled to come into effect over a period of years, companies should currently be developing systems to track the relevant information needed for future deal-making. This will be no small task since companies will have to provide detailed information and potentially obtain external assurance about topics that they may never have reported on before. Complying with the rules and opening new windows of transparency into the acquired company may also prompt changes to a target’s operations, structure and supply chain.

Similarly, deal lawyers will need to consider what diligence needs to be conducted to assess the maturity of target businesses to comply with these obligations and the associated representations, warranties and covenants that provide the contractual protections that underpin the diligence.

4. Evolving international tax rules will complicate international structures, planning and due diligence.

Following the pandemic, escalating trade tensions between the US and China and more recent geopolitical conflict in Europe, the Middle East and other areas, have caused many international companies to reconsider the locations of their operations and supply chains.

At the same time, the sweeping international tax rules developed by member countries of the OECD’s Inclusive Framework are being implemented by many global jurisdictions. Commonly referred to as BEPS 2.0, the two-pillar framework of the rules will reallocate a portion of corporate profits to market jurisdictions (Pillar One) and impose a minimum tax to ensure corporate profits are taxed at a 15 percent minimum.

In view of these new rules, many international companies and investors are streamlining their subsidiaries and holdings to minimize complexity and tax exposure. More attention is being paid to the location of their business’ value drivers. Increasing tax transparency under BEPS 2.0’s reporting rules is also influencing the structure of M&A transactions, with some buyers seeking to carve out activities, entities or geographies from agreements to insulate the core business or obtain watertight indemnities around potential liabilities that may come with the target business.

Legal teams will have their hands full dealing with the impacts of these new rules as jurisdictions set different effective dates and impose their own variations of safe harbors and other aspects of the BEPS 2.0 package. During this implementation period, it will be particularly important for due diligence teams to include a full complement of tax professionals to identify and advise on specialty areas such as international corporate tax, transfer pricing and indirect tax.

5. As the balance of deal-making shifts to Asia and developing countries, legal teams will require more linguistic and cultural diversity to prosper in all M&A markets.

Legal practice will continue to become more universal. Due to the historical and increasing dominance of US legal firms in global markets, English will likely continue to be the common legal language and concepts rooted in common law will continue to dominate training, deal negotiations and transaction arrangements. But legal teams of the future will need to include legal professionals with skills and experience to understand and manage the differences between US law and other common-law jurisdictions such as the UK, Malaysia and other Commonwealth countries.

In addition, capital flows from outside the historical largest players tend to be much more complex and harder to tap into than was once the case since there are now major companies, banks and funds doing deals from a greater array of countries. For example, big Indian corporates are making acquisitions in countries such as Brazil and Indonesia; Malaysian companies are making acquisitions in Türkiye and other parts of the world. This is not new, but as the number of economies providing outbound capital, or local banks become able to fund larger deals (and not rely on US/European/Japanese or Chinese banks), the need for a different footprint becomes more acute. To capture global M&A deal flows, there is an ever-increasing requirement to have relationships in a broader array of business centres and have senior lawyers in country who can build those relationships and execute those deals.

This will be particularly important in the Association of Southeast Asian Nations (ASEAN) region. With the region’s broad diversity of cultures and legal foundations, legal teams there may need to comprise lawyers who can deliver advice, review documents, negotiate terms and navigate cultural differences to deal with outbound, and especially inbound, transactions involving such disparate jurisdictions as China, Japan, Taiwan and India.

6. As deal cycles tighten, legal teams will need strong information management skills to get deals done quickly while mitigating risk.

Speed is vital for competitive due diligence work, but as the pace of deal making increases, risk management and controls will become even more important. For example, when one or both parties are involved are public companies or in a regulated industry, the due diligence process can involve 100 or more people. Beyond legal professionals, the proposed transaction may also need review by and input from banking, finance, tax, ESG, IT consultants and other specialists.

Each individual should be assigned the right level of access to different layers of information, much of it proprietary or confidential. The security of data rooms is a huge concern since inadvertent leaks could create problems preserving privilege, expose sensitive information and impair negotiations.

Further, as technology automates many common, lower-level due diligence tasks, junior-level stakeholders at investment banks and insurers, may lack the experience or training they need to properly recognize and manage sensitive information.

Due diligence in the future will therefore require robust information management, and legal teams will increasingly lead the process. This will likely include:

• deciding who needs access to what information
  
• coordinating the work of specialists
• sensitizing participants to matters of confidentiality, legal privilege and cybersecurity
• synthesizing key information for decision-makers
• maintaining high standards of risk management.

Skills in information management can enable legal teams to take charge of maintaining the fast flow of documents while mitigating confidentiality, regulatory and other risks. Communication and stakeholder relations skills will also be key.

Conclusion

As the world of M&A evolves, the legal profession is being given a tremendous opportunity to utilize new technologies and approaches to enhance deal flow and improve client results. However, lawyers should also be aware that these new technologies and approaches also require a new skill set. Lawyers who are able to respond quickly to shifting global attitudes, an increased use of AI and new regulations will likely be able to gain a substantial advantage both for their own teams and their clients.

This article is prepared by Hanim Hamzah, Head of Asia Pacific, KPMG Law; Gilbert Gan, Managing Partner, Zaid Ibrahim & Co. (in association with KPMG Law);  Stuart Bedford, Head of KPMG Law UK, KPMG in the UK; Franck Bernauer, Partner, Head of Legal, Avocat; Jeffrey Issacs, Head of GLS Strategy Implementation, KPMG in the US and Director, Global Legal Managed Services, KPMG International; and Lucia Lorenti, Partner, Ferraz de Camargo e Matsunaga Advogados Associados.

During the recent parliamentary session in July 2024, the Customs (Amendment) Bill 2024, Excise (Amendment) Bill 2024, Free Zones (Amendment) Bill 2024, Sales Tax (Amendment) Bill 2024 and Services Tax (Amendment) Bill 2024 was passed to designate Pulau 1 as a duty-free island similar to Langkawi, Labuan and Pangkor islands. The Bills have yet to be gazetted and the date of Royal Assent has yet to be determined. However, it is anticipated that the implementation of the Bills will promote the trade and tourism aspects of the Iskandar region as less stringent restrictions will be imposed on tax permits and applications for the sale of duty-free goods.[1]

Forest City, covering 14 square kilometres of reclaimed land on four artificial islands near the border of Malaysia and Singapore, is a mega project developed by Country Garden Pacificview Sdn. Bhd., a joint venture between Country Garden Pacificview Sdn.Bhd.  and Esplanade Danga 88 Sdn. Bhd.

Pulau 1, a 700-acre artificial island, is the most developed out of the four planned islands. It currently comprises a sales gallery, sales spaces, Marina Hotel, commercial units, duty-free shops, an international school, a small office/home office tower offering co-working space, waterpark, beach bar, and a beach activity area.[2]

As a duty-free island, Pulau 1 is set to offer duty free products, like liquor, chocolate, cosmetics and perfume, provided that the necessary eligibility criterias have been met. Deputy Finance Minister Lim Hui Ying proposed that the visitors who leave the island for Malaysia must submit receipts, invoices or documents of their purchases to the Royal Malaysia Customs Department, proving that the visitor has been in Pulau 1 for no less than 40 hours to ensure transparency and law enforcement in Pulau 1.[3]

The Johor government has also proposed for the Forest City Special Financial Zone to be included within the Johor-Singapore Special Economic Zone to boost the economy in Iskandar Malaysia. The incentives proposed, among others, include granting knowledge workers a 15% flat income tax rate, and companies and individuals will be offered special-rate tax incentives and expedited immigration lanes to facilitate the entry of experts from aboard.[4] The incentives shall result in lower cost of doing business and to attract talent and international businesses into the zone. The said incentives for Forest City Special Financial Zone, as stated by Johor Menteri Besar Datuk Onn Hafiz Ghazi, is targeted to be finalized in August before the signing of the Johor-Singapore Special Economic Zone agreement between Malaysia and Singapore.[5]

Forest City has additionally applied for Malaysia Digital status recognized by the Malaysian Digital Economy Corporation to attract hi-tech sector investors where enterprises related to digital centres, smart technology and green intelligence fields such as big data analysis, artificial intelligence and financial technology will enjoy income tax exemptions up to 10 years.[6]

There have also been on-going discussions for infrastructure projects, including the Kuala Lumpur-Singapore High-Speed Rail, and the Johor-Singapore Special Economic Zone, embarked for the area to increase cross-border economic connectedness as Forest City is at the most ideal location which had a significant influence in pioneering these new measures on tourism and economic activity.[7]

The enactment of the Bills and the continuous development at Forest City are poised to usher in a new era of economic vitality in the Johor region. This transformation provides job opportunities and represents a gateway to a thriving economy and a vibrant business landscape. As the development unfolds, it is expected to open doors to a myriad of work opportunities, attracting a diverse pool of talent and fostering innovation and growth for Johor.

If you have any questions or require any additional information, please contact Lee Lily @ Lee Eng Cher, or the Zaid Ibrahim & Co (in association with KPMG Law) partner you usually deal with. This article was prepared with the assistance of Lee Jean, Associate at Zaid Ibrahim & Co (in association with KPMG Law).

[1] ‘Pulau 1 in Johor’s Forest City to be duty-free island’ (Malay Mail,18 July 2024) <https://www.malaymail.com/news/malaysia/2024/07/18/pulau-1-in-johors-forest-city-to-be-duty-free-island/144135>.

[2] Ben Tan, ‘What is Pulau Satu in Johor’s Forest City, Malaysia’s next duty-free island?’ (Malay Mail, 31 July 2024) <https://www.malaymail.com/news/malaysia/2024/07/31/what-is-pulau-satu-in-johors-forest-city-malaysias-next-duty-free-island/145199>.

[3] 'Pulau 1 in Johor’s Forest City to be duty-free island’ (Malay Mail,18 July 2024) <https://www.malaymail.com/news/malaysia/2024/07/18/pulau-1-in-johors-forest-city-to-be-duty-free-island/144135>.

[4] Jassmine Shadiqe, ‘Forest City granted special financial zone status to attract foreign investment, PM reveals’ (New Straits Times, 25August 2023) <https://www.nst.com.my/news/nation/2023/08/947406/forest-city-granted-special-financial-zone-status-attract-foreign>; Official Portal of Ministry of Finance, ‘Special Financial Zone to be created in Forest City –PM Anwar’ <https://www.mof.gov.my/portal/en/news/press-citations/special-financial-zone-to-be-created-in-forest-city-pm-anwar>.

[5] Jassmine Shadiqe, ‘Forest City’s SFZ to be integrated into Johor-Singapore SEZ’ (New Straits Times, 12 August 2023) <https://www.nst.com.my/news/nation/2024/08/1090368/forest-citys-sfz-be-integrated-johor-singapore-sez>.

[6] Malaysia Digital Economy Corporation, ‘Announcement on the official launch of Malaysia Digital (MD) Tax Incentive’ <https://mdec.my/announcement/md-tax-incentive>; ‘Forest City expansion fuels growth’ (The Star, 5 August 2024) <https://www.thestar.com.my/news/nation/2024/08/05/forest-city-expansion-fuels-growth>.

[7] ‘Immediate returns on investment, 5 Highlights of Forest City Prime Commercial Units with Lease’ (Forest City, 2 August 2024) <https://forestcitycgpv.com/news/245-immediate-returns-on-investment-5-highlights-of-forest-city-prime-commercial-units-with-lease>; ‘KL-S’pore high speed rail to boost sentiment on the property sector’ (The Star, 29 January 2024) <https://www.thestar.com.my/business/business-news/2024/01/29/kl-spore-high-speed-rail-to-boost-sentiment-on-the-property-sector>.

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Corporate governance in Malaysia has seen significant efforts to advance transparency, integrity and sustainability within companies. This article discusses three key areas of focus in the context of corporate governance.