Updated: Apr 19, 2019
The new Myanmar Companies Law 2017 (Pyidaungsu Hluttaw Law No. 29) (MCL), passed on 6 December 2017, replaces the century-old Myanmar Company Act 1914 (MCA). The MCL modernizes Myanmar’s corporate framework and provides new opportunities for local and foreign companies that didn’t exist under the MCA.
This is a great win for domestic and foreign investors in Myanmar. The MCL has been in the draft stage for around three years, dating back to the former USDP government. Under the MCL, foreigners can now buy equity in Myanmar companies and Myanmar companies have greater access to foreign capital. This couldn’t come at a better time as Myanmar companies in need of capital can now expand their businesses more easily with foreign collaboration.
Under the MCL, foreign companies/foreigners are now permitted to:
Acquire share ownership of up to a prescribed threshold of 35 percent in a Myanmar company and still have the company considered as a Myanmar company.
Under the MCA, companies were classified as either a Myanmar company or a foreign company. One of the main problems under the MCA was that a Myanmar company was required to be 100 percent “locally” owned unless approval to change the classification was given by the Directorate of Investment and Company Administration (DICA). In practice, such approval was hard to obtain and often not given. Accordingly, most Myanmar companies were largely off-limits to foreign companies. The MCL changes all this.
Some investment activities falling under the purview of 1(b) Notification 15/2017 will become open for minority foreign investment.
Purchase shares in a Myanmar company without obtaining advanced permission from DICA. The MCL means that DICA will only need to be notified when the foreign ownership of a Myanmar company exceeds the prescribed limit of 35 percent. In such a case, the company will need be recategorized as a foreign company.
Myanmar’s legislature, the Pyidaungsu Hluttaw, has recognized that under the MCA, there was little protection for minority shareholders and this needed to be updated by including legislative protections inline with more developed jurisdictions. Importantly, foreign shareholders will for the most part be minority shareholders—holding 35 percent or less of the shares in a Myanmar company. The MCL provides that minority shareholders now have rights to commence legal proceedings against the company for “oppressive conduct” that is unfairly prejudicial to or discriminatory to them as a class of members. Minority shareholders can also now call meetings, propose resolutions and obtain company records easier.
Own 35 percent of the shares in public Myanmar companies listed on the Yangon Stock Exchange (YSX).
This is a big win. Public Myanmar companies will now be able to access foreign capital to list their entity on the YSX. This will promote the development of the YSX by allowing foreign participation from new institutional investors.
Allow a board of directors to determine the form of consideration for an issuance of shares.
Consideration must be fair and reasonable to the company and its shareholders, and the cash value cannot be less than the amount credited for the issued shares.
Have the option of drafting customized company constitutions providing they do not breach the MCL.
This means companies may now have the ability to issue different classes of shares to assist with corporate fundraising initiatives; structuring respective shareholders’ rights accordingly, so a particular class of shareholder may have distribution of dividend rights (even without the entity making profit if the company passes the solvency test); and voting rights, etc. This opens up different fundraising mechanisms as share options and convertible shares may also now be issued.
Companies will no longer be required to have objects under Articles of Association/Memorandum of Association (Articles) unless this is pre-approved by the members.
Investors should consider whether it is worth updating existing Articles to benefit from these changes under MCL.
What Is the MCL’s Impact on M&A Activities?
The MCL is expected to open Myanmar to a second wave of increased foreign investment that has not been experienced since the enactment of the Foreign Investment Law in 2012 (repealed and replaced by the Myanmar Investment Law 2016).
Since former U.S. President Obama’s executive order in 2016 lifted the last remaining American sanctions against Myanmar, foreign investors, family offices, private equity firms and VCs have spent 2017 identifying potential Myanmar companies as targets with a view to acquire an interest. We are expecting a significant uptick in M&A activity going into 2018. We understand this to affect certain key sectors of Myanmar’s economy which have been largely off-limits to foreign investors in the past. Certain areas of interest include banking, distribution, trading and insurance.
What Are the Potential Implementation Challenges?
We expect there to be regulatory and policy challenges going through the yearlong transitional phase. The authorities and foreign investors alike will need to deal with both pending and new market entries under the MCL. One notable challenge will be the absence of the implementing regulations (MCL Rules) for guidance, which are not passed, nor is there a clear indication of when they will be passed.
Under the MCL, a company must have at least one “resident” director that is a resident in Myanmar for at least 183 days per year. There is no requirement that this director be a Myanmar citizen. Foreign companies will struggle with implementing this new requirement, as to do so may mean that a new full-time foreign or local Myanmar director is employed for this purpose. The MCL prescribes that the companies will have a year to appoint the residential director.
What MCL Lacks
The law lacks clear guidance on how stakeholders should deal with uncertainty during the transitional period, other than by applying the MCL literally. This will be problematic going forward.
There is now clear law stipulating that an overseas corporation must not engage in business in Myanmar unless it is registered under the MCL. This creates issues for overseas companies already operating in Myanmar without having previously being required to have a registered presence in the past. Our recommendation to those overseas companies falling to into this category is that they obtain advice promptly.
Under the MCL there are a few exceptions to registration in Myanmar for companies: “maintaining a bank account; undertaking an isolated transaction completed within thirty (30) days; or investing funds or holding property.”
What Does the MCL Mean for Local Myanmar Companies in the Context of the YSX?
The real winners under the MCL are public Myanmar companies that want to access foreign capital to list on the YSX. The MCL will also benefit companies already listed. Presently only four companies are listed on the YSX: First Myanmar Investment Co Ltd (FMI), Myanmar Thilawa SEZ Holdings Public Ltd (MTSH), Myanmar Citizens Bank Ltd (MCB), and First Private Bank Ltd (FPB). (Duane Morris & Selvam acted for FMI in its inaugural listing on the YSX.) The MCL will result in increased foreign investment in Myanmar companies, and these businesses will be able to expand their market share through better access to foreign funds and greater liquidity. The MCL will provide opportunities for foreign investors to invest and buy shares in YSX listed companies. This will mean the YSX as a whole will become a more functional stock exchange. With more foreign participation permitted, trading volumes on the YSX are expected to rise. We expect to see a sharp increase in the number of public Myanmar company listings in 2018.
Rory J. Lang, Duane Morris & Selvam