The Myanmar Companies Law 2017 (MCL), which entered into force on 1 August 2018, introduces a modern legal framework for foreign investment in Myanmar. The Draft Companies Regulations 2018 (DCR) was published by with the Myanmar Directorate of Investment and Company Administration (DICA) on 2 May 2018. The MCL replaces the abolished Myanmar Companies Act 1914 (MCA).
The MCL introduces a number of key changes to the regulation of companies of Myanmar that you need to be aware of, in order to avoid harsh penalties for non-compliance. Below is an outline of the most important changes introduced by the MCL.
Electronic Registration System and Re-Registration of Existing Companies
Upon the entry into force of the MCL, a new online electronic registration system called Myanmar Companies Online Registration (MyCR) will also be launched.
Existing companies have to re-register on MyCR within six months from the entry into force of the MCL (so called "re-registration period". An existing company which does not re-register on the MyCR within the re-registration period will be struck off the companies' register. Upon publication in the Gazette of the relevant notice by the Registrar, the company will then be dissolved.
Regulation of Foreign Companies
Foreign Shareholding in Myanmar Companies
The MCL changes the definition of a Myanmar company to include any company incorporated in Myanmar where foreign ownership does not exceed 35%.
This change will allow foreigners to hold a minority 35% interest in companies that are:
- engaged in sectors which are currently closed to foreign investorsunderparagraph 1(b) of the MIC Notification no. 15/2017 as well as banking and insurance sectors.
- listed on the Yangon Stock Exchange which is currently limited to local investors.
- active in a wide range of import, export and trading activities, which were, until recently, largely restricted to Myanmar citizens and entities (see section on liberalisation of trade).
- own land – which is otherwise prohibited for foreigners under the Transfer of Immovable Property Restriction Act 1987.
Upon reregistration, existing companies with foreign shareholding up to 35% will be considered Myanmar companies.
Overseas Corporations
With the MCL in effect, overseas corporations that carry on business in Myanmar will no longer register as branch offices or representative offices, but rather as overseas corporations.
While the MCL does not define activities which constitute carrying on a business in Myanmar, it states that an overseas corporation is not deemed to be carrying on business in Myanmar merely because it maintains a bank account, conducts an isolated transaction that is completed within a period of 30 days (not being one of a number of similar transactions repeated from time to time), holds property, becomes a party to legal proceedings, or lends money.
Accordingly, overseas corporations that conduct an isolated transaction that is not completed within a period of 30 days or conducts an isolated transaction that is completed within 30 days but is related to a number of similar transactions repeated from time to time, the overseas corporation will need to consider registering with DICA as an overseas corporation in order to avoid penalties for non-compliance.
Overseas corporations registered with DICA must, among other things, comply with a number of obligations under the MCL upon (re)registration. These include the obligation to (1) appoint an ordinarily resident authorised officer who is authorised to accept the service of documents in Myanmar on behalf of the overseas corporation, (2) notify DICA of any changes relating to the overseas corporation and (3) annually file financial statements.
Non-compliance with the requirement to notify DICA of changes or to annually file financial statements renders the company, each director and the authorised officer liable to a fine of MMK250,000 (approx. USD160). The penalty for making a false statement in the application for registration – including in relation to the authorised officer – is MMK5,000,000 (approx. USD 3,200).
It is important to be aware that the above obligations will create new burdens for existing branch and representative offices - which will become overseas corporations upon reregistration – and also for overseas corporations with non-recurring, contract based work in Myanmar (that is not completed within 30 days or is completed within 30 days but is related to a number of similar transactions repeated from time to time) that will no longer be able to avoid registering a business presence in Myanmar by operating as foreign contractors.
Constitution
The Memorandum and Articles of Association (M&AA) used by existing companies under the MCA will be replaced by a company constitution in the Myanmar language.
In this regard, already existing companies may decide to:
- Have the existing M&AA of a company take effect as its constitution following the commencement of the MCL, althoughprovisions of the existing M&AA will have no effect to the extent that they are inconsistent with the MCL;
- Adopt the model constitution (a draft model constitution was published by DICA in January 2018) by special resolution of members: or
- Draft an individualised company constitution that caters to its needs and adopt this by special resolution of members. This option is particularly attractive for JV companies who will now have the opportunity to bring the company constitution in line with the JV or shareholders' agreement.
Existing companies as at 1 August 2018 will have six months to re-register their companies – which requires the filing of a company constitution or a statement that the company adopts the model constitution - on the electronic registry system.
Business Objectives
The MCL removes the requirement of including the business objectives of a company in its constitution (referred to under the MCA as the M&AA). This means a duly established company, which has the required permits or licences, is free to engage in any activities permitted by law.
The business objectives of an existing company will be automatically removed after the end of the 12 month transition period following the commencement of the MCL. A company has the option of removing its business objectives before the end of the transition period by way of special resolution passed by its members. A company can also decide to keep its business objectives after the end of the transition period by filing a special resolution with DICA along with a notice in the prescribed form. This option may be attractive to companies which require licences to operate in particular sectors as specific objects e.g. telecommunications services and microfinance services are required in order to obtain licences for these sectors.
In the interests of avoiding unnecessarily compromising the validity of contracts concluded by the company by virtue of the activity potentially being ultra vires, it would be beneficial for most companies engaged in commercial activities to remove objectives from their constitutions at the earliest opportunity.
Directors
Minimum Number of Directors
The MCL reduces the minimum number of directors of a company. A private company will be required to have at least one director, while a public company will need at least three directors.
Resident Director
According to the MCL, private companies must have at least one ordinarily resident director in Myanmar (Myanmar or foreign citizen), whereas public companies must have at least one director who is a Myanmar citizen and ordinary resident of Myanmar.
Existing companies must appoint a director who is ordinarily resident in Myanmar within 12 months from the entry into force of the MCL (so called "transition period"). "Ordinarily resident" is defined as a person who is a permanent resident of Myanmar or resident in Myanmar for at least 183 days in each 12 month period commencing from the date of the commencement of the MCL (for existing companies) or from the date of registration of the company (for new companies). Companies will have to file relevant forms with the DICA to show that the resident director requirement has been met.
Under the DCR if a company carries on business for more than six months without having at least one director who is ordinarily resident in Myanmar, each shareholder who has knowledge of this will be personally liable for the payment of all the debts of the company contracted during the period after the expiration of those 6 months for which no director was ordinarily resident.
Given the potential liability of shareholders of companies that do not comply with the resident director requirement, existing and new foreign investors need to start preparing for the long term appointment of a resident director as well as consider a contingency plan for a replacement resident director should that availability of the nominated resident director change.
Shareholders, Share Capital
Shareholders
The MCL, in line with other common law jurisdictions, will allow companies to be incorporated with one shareholder. This will provide the possibility for overseas companies to incorporate wholly-owned subsidiaries in the country.
In relation to the duty to act in good faith in the company's best interest, directors of subsidiary companies or JVs will be able to act in the best interest of their holding company or the JV partner, respectively, rather than the best interests of the company where this is permitted by the constitution.
Share Capital Management
The MCL introduced new out-of-court procedures that can be used by a company to reduce its share capital provided that certain conditions such as solvency post share capital reduction, fairness to shareholders, ability to pay creditors and shareholders' approval are satisfied.
Non-compliance with the share capital reduction requirements under the MCL renders the company and directors liable to a fine of MMK5,000,000 (approx. USD3,200). Directors of the company are also liable to the company's creditors if the company becomes insolvent following the share reduction.
Abolition of authorised capital and nominal or par value of shares
The MCL abolishes the concepts of authorised capital and nominal or par value of shares. According to the DCR all shares issued by existing companies will be converted into shares with no par value and the authorised capital will no longer apply upon re-registration of an existing company.
This means that concepts related to par value such as share premium and discounted issue are no longer necessary and are abolished. Companies with share premium accounts or capital redemption reserves will be able to transfer premiums and reserves to the share capital account.
Share Classes
The MCL allows companies to issue and determine the terms of different classes of shares and other types of securities. Shares can be of different classes, redeemable, and have special, preferential or restricted rights to distribution of capital and voting rights. Shares with no voting rights can also be issued.
Providing for different classes of shares in the constitution will enable companies to have more flexibility in regulating voting and capital distribution rights and will improve opportunities for venture capital or private equity funds to participate in the shareholding of a company.
Minority Rights
Under the MCL, any existing or former member, however small their part in the equity may be, may request the court to make an order if the conduct of the company's affairs or related act is oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members.
In order to avoid frivolous, vexatious or abusive minority shareholder actions, JV and/or shareholder agreements should be drafted to include a detailed description of what can be expected as a minority shareholder as well as details of what is unlikely to constitute "oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members".
Dividends
The MCL enables dividends to be paid in cash, share issues, option grants or asset transfer and provides that a company cannot pay a dividend unless it meets certain requirements.
If the company issues dividends without complying with these requirements, it and each director who voted for the issue of dividends is liable to a fine of MMK500,000 (approx. USD320). Directors will also be liable towards the creditors of the company if they wilfully and knowingly permitted the issue of dividends without the company satisfying the above requirements.
As the payment of dividends is also subject to a company's constitution, companies which adopt the old M&AA as their constitution would need to pay dividends out of the profits of the year or any other undistributed profits. Companies wishing to avoid compliance with this provision should consider adopting either the model or a tailored constitution.
Compliance Obligations and Penalties
The MCL introduces significant penalties for non-compliance that range up to MMK10,000,000 (approx. USD6,400) and can be imposed on the company and each officer and director. DICA will also be able to impose penalties through penalty notices without court intervention.
Given the harsher penalties under the MCL for non-compliance, companies should consider appointing a company secretary who will deal with the company's legal and regulatory compliance matters.
Our team of experienced lawyers in our Dentons Myanmar Limited office, supported by our lawyers across the globe, are here to assist you with ensuring compliance with the MCL.
Please consult our lawyers for advice on the following aspects of the new corporate law regime:
- Investing as a minority shareholder in a Myanmar company and/or investing in economic sectors that have recently become available to foreign investors;
- Drafting an individualised company constitution that is tailored to your company's needs, including regulating voting and capital distribution rights through the creation of various share classes;
- Compliance with directors' duties codified in the MCL; and
- Share capital reduction and dividend declarations.
Our company secretarial and regulatory compliance team is also available to provide you with a broad range of services:
- Registration of companies, branches, representative offices, and overseas companies;
- Assistance with re-registration under the MCL;
- Obtaining other required licences;
- Obtaining CBM approval for cross-border shareholder loans and loans generally;
- Winding up companies, branches and representative offices;
- Building relationships and negotiating with relevant authorities;
- Foreign to Myanmar company conversions (for minority foreign shareholdings of 35% or less);
- Annual corporate secretarial and compliance services;
- Annual MIC compliance services;
- Registered office services;
- MIC permit and endorsement applications.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
