The New Myanmar Companies Law
The new Myanmar Companies Law (MCL) will replace the old Myanmar Companies Act (MCA) 1914 and come into force on 1st Auguest 2018. The new law drafted by the Directorate of Investment and Company Admiistration (DICA) and techinical assistant by Asian Development Bank (ADB), has been signed by President U Htin Kyw on 6th December 2017. The distinction between a “Myanmar company” and a “foreign company” remains in the new law, a number of the proposed changes will lead to deregulation of foreign ownership (to an extent) from a company law perspective. Investors should note that foreign investment in specific sectors is regulated through other laws such as the Myanmar Investment Law 2016 and laws on property ownership. The New Companies Law will remove the requirement on foreigners wishing to purchase shares in a “Myanmar company” to obtain prior approval from the regulator. Instead the regulator only needs to be notified when foreign ownership exceeds the prescribed limit which leads to the relevant company being classified as a “foreign company” (and vice versa). The 35% ownership threshold is therefore not a cap and shares can be freely exchanged between foreign and local investors.
Changes in new MCL
1. Local companies can have up to 35% foreign shareholding
2. Minimum number of shareholders reduced to one
3. At least one director to be ordinarily resident
4. Objects clause abolished
5. Foreign companies no longer required to obtain Permit to Trade
6. Memorandum and articles of association replaced by Constitution
7. Requirement for authorised capital and par value abolished
8. Preference shares, shares with weighed voting rights, convertible securities and options
9.Pre-emptive rights may be removed from the constitution
10. Dividends may be made other than in cash
11. Court approval no longer required for capital reduction
12. Directors’ duties codified
13. Removal of concept of managing agent
14. Overseas corporations carrying on business in Myanmar
2. Minimum number of shareholders reduced to one
3. At least one director to be ordinarily resident
4. Objects clause abolished
5. Foreign companies no longer required to obtain Permit to Trade
6. Memorandum and articles of association replaced by Constitution
7. Requirement for authorised capital and par value abolished
8. Preference shares, shares with weighed voting rights, convertible securities and options
9.Pre-emptive rights may be removed from the constitution
10. Dividends may be made other than in cash
11. Court approval no longer required for capital reduction
12. Directors’ duties codified
13. Removal of concept of managing agent
14. Overseas corporations carrying on business in Myanmar
New ownership ratios
Under the New Myanmar Companies Law, foreigners will be permitted to obtain ownership in a “Myanmar company” up to the prescribed threshold (expected to be set at 35%) and the company will still be categorised as a “Myanmar company”.
A company would only be characterised as a foreign company if foreign shareholding in the company is exceeds 35% .
Foreigners will be authorised to invest up to 35% in local companies without changing the characterisation of that company from a local to foreign company and, indirectly undertake activities which is restricted to wholly-owned Myanmar entities, such as trading (i.e. importation and distribution of finished goods). From now on foreigner may also hold stakes of up to 35% in Myanmar companies and can traded on the Yangon Stock Exchange (YSX), which was prohibited in earlier regulations.
A number of investment activities (set out in paragraph 1(b) of Myanmar Investment Commission Notification 15/2017) will become open for minority investment by foreign investors. Other economic activities currently restricted to “Myanmar companies” – such as ownership of land, or listing on the Yangon Security Exchange – should also become accessible to foreigners to the extent of them being able to take this 35% ownership interest in a “Myanmar company”.
Minimum number of shareholders reduced to one
Under the new MCL, a company can be incorporated with a minimum of one share, and can correspondingly have one shareholder. Fomerly, the Companies Registration Office (“CRO”) and Directorate of Investment and Company Administration (“DICA”) require companies incorporated in Myanmar to have at least two shareholders.
Resident Directors: At least one director to be ordinarily resident
Under the MCL,( new companies law) a company in Myanmar must have at least one director who is ordinarily resident in Myanmar (i.e. present in Myanmar for a minimum of 183 days in a relevant 12 month period). The resident director need not be a Myanmar citizen.
Objects clause abolished
Under the MCA, all companies incorporated in Myanmar are required to set out business objects in the memorandum of association. These objects limit the type of business activities which a company can undertake. However, this requirement is removed under the MCL which expressly states that companies are free to undertake any business, activity or transaction, subject to any restrictions which may be provided for in its Constitution, and compliance with applicable laws and regulations. This would mean that existing restrictions under other laws, including sector-specific restrictions on foreign ownership will continue to apply. For companies enacted under the MCA, the objects clauses within their memorandum and articles of association (“M&AA”) will continue to apply until the end of the transition period (i.e. 12 months from the commencement date of the MCL).
Foreign companies no longer required to obtain Permit to Trade
Under the MCA, foreign companies are required to obtain a Permit to Trade when applying for a certificate of incorporation. The Permit to Trade, notwithstanding the name, is a general business licence for all foreign companies in Myanmar and does not actually permit foreign companies to undertake trading activities in Myanmar. MCL removes the requirement for foreign companies to hold a separate “permit to trade”, significantly reducing another regulatory burden and levelling the playing field which may well simplify and expedite the existing incorporation process.
Memorandum and articles of association replaced by Constitution
Under the MCL, the constitutive document of a company will be referred to as the “Constitution”, as opposed to M&AA under the MCA. The existing M&AAs of companies incorporated under the MCA prior to commencement of the MCL will be deemed to be the Constitution, to the extent it is consistent with the MCL.
Requirement for authorised capital and par value abolished
Under the MCA, a company is permitted to hold shares only up to the amount of authorised capital stated in its memorandum of association registered with the CRO. Any capitalisation beyond the authorised capital requires the company to amend its memorandum of association, a process which typically takes up to five weeks. However, the MCL states that a share will not have a nominal or par value. This removes the authorised capital requirement as well as concept of share premium, thus reducing administrative hurdles in respect of capital raising by companies.
Preference shares, shares with weighed voting rights, convertible securities and options
MCL clarified the types of shares and securities which a company may issue which include;
(i) shares of different classes;
(ii) shares which may be redeemable;
(iii) shares which have preferential or restricted rights of distributions of capital or income;
(iv) shares which have special, limited or conditional voting rights;
(v) shares with no voting rights;
(vi) options to acquire shares; and
(vii) securities convertible into shares.
Naturally, the ability of a company is subject to any restrictions in Constitution and compliance with applicable laws on the issuance.
(i) shares of different classes;
(ii) shares which may be redeemable;
(iii) shares which have preferential or restricted rights of distributions of capital or income;
(iv) shares which have special, limited or conditional voting rights;
(v) shares with no voting rights;
(vi) options to acquire shares; and
(vii) securities convertible into shares.
Naturally, the ability of a company is subject to any restrictions in Constitution and compliance with applicable laws on the issuance.
Pre-emptive rights may be removed from the Constitution
Under the MCL, the pre-emptive right no longer applies unless the company has decided to incoporate such a right within the Constitution. Previously under the MCA, existing shareholders have a pre-emptive right to purchase shares in proportion to their existing shareholding in the event of new share issuance.
Dividends
Under the New MCL, a company may not declare dividends unless:
a) the company will, immediately after the payment of the dividend, satisfy the solvency test;
b) the making of the dividend is fair and reasonable to the company’s shareholders as a whole; and
c) the payment of the dividend does not materially prejudice the company’s ability to pay its creditors.
a) the company will, immediately after the payment of the dividend, satisfy the solvency test;
b) the making of the dividend is fair and reasonable to the company’s shareholders as a whole; and
c) the payment of the dividend does not materially prejudice the company’s ability to pay its creditors.
Court approval no longer required for capital reduction
Under the MCA, reduction of share capital requires sanction from the Court, which may be applied by way of petition. However, under the MCL, the Court’s approval of the capital reduction is no longer required. Instead, the MCL prescribes the level of shareholders’ approval required depending on the type of capital reduction. For example, if the capital reduction is an equal reduction (i.e. ordinary shares, applied to each shareholder in proportion, on the same terms and conditions), only an ordinary resolution at a general meeting of the company is required.
Directors’ duties codified
The MCL prescribed a set of directors’ duties, which largely reflects common law principles on director’s duties and broadly include: (i) duty to act with care and diligence; (ii) duty to act in good faith in the company’s best interest; (iii) duty to not abuse position or misuse information; (iv) duty to abide by law and Constitution of the company; and (v) duty to avoid reckless trading. This is considerably more extensive than what is currently set out in the MCA.
Removal of concept of managing agent
The MCL removed the concept of managing agent, all the arrangement must be terminated from the commencement date, and any such person shall be deemed to be a director of the company. Under the MCA, managing agent is defined as “a person, firm or company entitled to the management of the whole affairs of a company, by virtue of an agreement with the company and under the control and direction except to the extent, if any, otherwise provided for in such agreement and includes any person, firm or company occupying such position by whatever name called”.
Overseas corporations carrying on business in Myanmar
The new MCL clarifies the position on its regulation of overseas incorporated corporations who transact in Myanmar.
The general position is that an overseas corporation would be required to register under the New Companies Law in order to carry on business in Myanmar.
There are certain actions which are not deemed as “carrying on business” and they include: (i) becoming a party to legal proceedings; (ii) maintaining bank accounts; and (iii) lending money and securing of and collection of debts.
Any overseas corporation with regular business activity and transactions in Myanmar needs to consider these new regulations to see whether registration is required.
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