News Flash : Significant Modifications Brought By The 2017 Draft Myanmar Companies Act
The Directorate of Investment and Company Administration (the “DICA”), with assistance from the Asian Development Bank (the “ADB”), has prepared a new Myanmar Companies Act (the “Draft MCA”) that was submitted to the Parliament in July 2017.
The law will govern the registration, ownership, management and internal affairs of all companies in Myanmar, and reflect tried and tested reforms from the UK, Singapore, Malaysia, New Zealand, and Hong Kong.
Definition of Foreign companies:
- Today, a foreign company (the “Foreign Company”) is a company in which at least one share is owned by a foreign investor. A local company is thus a company in which all the shares are owned by Myanmar investors (the “Local Company”). The Draft MCA provides that a Foreign Company is “a company incorporated in Myanmar in which a foreign person controls an ownership interest of more than the prescribed ownership amount”. The ownership interest threshold should be limited to 35% in further implementing rules but could be changed in the future as the economy develops.
This is a great change since Local Companies should be able to engage in businesses subject to business restrictions (f.ex. international trading) provided that they abide by other applicable laws and regulations.
However, foreign investors could be reluctant to invest as minority shareholders except where Local Companies may freely use different class of shares (voting rights, dividend entitlements etc.) for the benefit of the foreign investor. The definition of Foreign Company is not clear in that regard.
- Under the current regulatory framework, it is difficult for a foreign investor to purchase the shares of a Local Company. This possibility has been recently implemented and notably requires the registration of a new structure under a new registration number. The Draft MCA provides that a Foreign Company may be transformed into a Local Company, and vice-versa, without the preliminary authorization of the authorities. Instead, the company will have to inform the DICA if it becomes a Foreign Company (more than 35% of foreign owned shares).
Companies’ constitution and registration:
• The Draft MCA provides with the possibility to incorporate one-person company with a unique director which is currently not possible since a minimum of 2 shareholders and 2 directors is applicable to private companies under the current framework. This should ease the corporate governance of 100% owned companies and the organization of group structures.
• However, the Draft MCA does not provide with a possibility to produce consolidated financial statement. It is still required that any company shall adopt audited financial statements individually. In addition, holding companies shall attach to their own financial statements the financial statements of their subsidiaries.
• The Draft MCA provides that any company shall have at least one resident director. This provision is in line with the better definition of the company directors’ powers and liabilities. Further to tax laws and regulations, a director should be deemed resident if he resides more than 183 days within the financial year.
• A single constitutional document (the Constitution) will replace the Memorandum of Association and the Articles of Association (the “M&AA”). A form of Constitution will be provided but its use will not be mandatory. The use of the M&AA DICA template is currently not mandatory, however, the M&AA DICA may not derive from the disposition provided in Table A of the 1914 MCA. In practice, the use of a customized Constitution should be less cumbersome under the new law.
• The Draft MCA eliminates the requirement for Foreign Companies to obtain a permit to trade (the “Permit to Trade”) from the DICA and Companies will no longer need to state their intended objectives in the Memorandum of Association and in the Articles of Association. They will have “full legal capacity to carry on any business and activity”, in compliance with the law and provided that they enjoy appropriate licenses and authorizations from relevant authorities. This change will enhance the ease of doing business in Myanmar for Foreign Companies.
• The Draft MCA sets an official frame to pre-incorporation expenses. The expenses incurred before the registration can be paid out on the company’s assets if they are ratified by the general assembly of the company or a court. Similarly, pre-incorporation contracts may be ratified and executed by and against the company.
Other significant changes:
• More flexible capital structures and changes to share capital will allow companies to raise or reduce capital with fewer procedural requirements. The Draft MCA will in that regard introduces share buy-backs in order to allow company to buy its own shares.
• The Draft MCA allows the creation of different types and classes of shares as convertible shares, redeemable shares, preference shares, shares with arranged voting rights etc. The company will also be able to issue options to acquire shares, securities which convert into shares and other interests.
• A company will be able to grant a security interest over any of its property, which is forbidden today. Myanmar companies will be able to give security in relation to loans to other companies (in Myanmar or abroad) for reasons such as “corporate benefit” or where the relevant companies are part of the same group of companies.
• The various duties and powers of directors are clearly set out in the law for the first time, when the 1914 Myanmar Companies Act was not effusive about them. A balance is set between encouraging corporate activity and properly considered risk taking behavior with the need to protect shareholder interests. In some circumstances directors may become individually liable to penalties if they breach their duties.
• Minority shareholders will have the right to sue on behalf of the company, even if the directors of the company do not approve of the claims. They may also be able to call meetings or put resolutions forward for approval and have enhanced rights to inspect company’s documentation. The obligation for the auditor to attend any general annual meeting is as well in favor of the protection of minority shareholders.
• The Draft MCA will make it easier for Myanmar’s public companies to attract new investment, technology and knowhow by permitting foreign investors to own shares. Therefore, foreign investors will be able to buy shares on the Yangon Stock Exchange.
• A private company may apply to the Registrar to become a public company, as a public company can apply to become a private company. Under the 1914 Myanmar Companies Act, a private company could become a public company but the contrary was not provided.
• Small companies (“Small Companies”) will enjoy a lower regulatory obligations and will notably no longer be required to hold annual general meetings or prepare audited annual financial statements, except in limited circumstances. A Small Company is defined as a company other than a public company, rather a Local Company or a Foreign Company which, included its subsidiaries, has no more than 30 employees and an aggregate annual revenue not exceeding MMK 50,000,000.
• The Draft MCA introduces written resolutions of directors and shareholders in lieu of meetings if respectively all shareholders or all directors sign the resolution containing a statement declaring they are in favour of the resolution. Separate copies can be given by each director or shareholder which shall ease the decision taking for foreign investors.
• The Draft MCA specifies the conditions under which an oversea corporation may conduct business in Myanmar. This Oversea Corporation shall notably be registered with the DICA and provide it with financial statements on a yearly basis.
This reform of the Myanmar Companies Act has been long awaited and will put the Myanmar legal framework in line with the regional practice and addresses a number of needs of foreign investors. This reform should therefore be warmly welcomed by the international business community. Clarification and simplification of the companies’ registration process and of the rules applicable to corporate governance should give foreign investors more flexibility and means to organize and secure their investment.
The adoption of this reform is an important signal made to foreign investors. Uncertainties remain however great at this stage. The real impacts of the reform will be measurable only if the relevant administration is capable to implement and enforce the changes. The challenge will be for the authorities concerned to pursue their efforts to modernize the functioning of the administration and increase their actions towards capacity building and empowerment of civil servants in charge of the day to day implementation of the reform.