Foreign and Single Shareholders, Resident Directors and Companies Exempt from Auditors

The New Companies Act in Practice (1):

Foreign and Single Shareholders, Resident Directors and
Companies Exempt from Auditors

The Myanmar government has finally proposed to change the Companies Act after more than 100 years. The Draft Myanmar Companies Bill 2017 (“Draft”) was tabled at the Union Parliament, Amyothar Hluttaw for discussions on 21 July, 2017 by the Deputy Minister of Planning and Finance, U Maung Maung Win. The Draft is intended to be consistent with international best practices and expected to replace the Myanmar Companies Act 1914 (“MCA”), which regulates the corporate law regime in Myanmar.

The Draft provides a detailed governance regime, provisions for the acquisition of shares by a foreigner in a Myanmar company, an increase in minority shareholder protections/rights and a more streamlined and transparent incorporation process.

This note is the first of the series of notes attempting to understand corporate laws in Myanmar by comparing the MCA and the Draft. We outline the path ahead for Myanmar with the new company law by looking at the key features of the Draft. In this first note, we will review the pros and cons of the changes in the general principles, and the introduction of new concepts and implications of the same, as well as the incorporation and constitution of the company.

Foreign ownership in “Myanmar” companies

The MCA distinguishes Myanmar companies and foreign companies. A Myanmar company is at all times owned and controlled by Myanmar citizens whereas a foreign company may be owned and controlled by foreign shareholders.

The distinction is important because foreign companies established under MCA might want to convert to local companies if they wish to engage in restricted activities after meeting the conditions, pursuant to MIC Notification 15/2017.

Until recently, it was administratively impossible for foreigners to acquire shares in a Myanmar company– except through the creation of a new legal entity which was incorporated as a foreign company. However, now in order to effect a transfer of shares in a Myanmar national company to a foreigner, the nature of the Myanmar national company would necessarily change to a foreign company. Not only was this process time-consuming due to transfer of licenses, assets and employees etc. from the old company to the new one, but it was also expensive and filled with uncertainties, with all the tax consequences and formalities involved.

Myanmar’s Directorate of Investment and Company Administration (“DICA”) on March 2017, for the first time, implemented a transfer of shares in a company wholly owned by Myanmar citizens and registered as a Myanmar company to a foreigner. The most important development is that, foreigners in Myanmar can now acquire shares in wholly Myanmar-owned companies, subject to case by case approval and conditions which apply to this “conversion with continuing legal personality”. In other words, investors no longer need resort to beneficial ownership or other solutions using intermediaries or agents.

The Draft further relaxes the rules on foreign companies. Thus, a foreigner can acquire a stake of up to a certain threshold in a Myanmar company without effecting a change in form to a foreign company.

Foreign investors are under the Draft permitted to obtain a minority ownership interest in a Myanmar company (see below). The percentage of such ownership interest is yet to be defined but the new concept means that foreign investors can now engage in restricted activities. Thus, a Myanmar company can have one or more foreign shareholders; this is vastly different from the MCA, where no shares could be held by a foreign investor.

Nominee structures addressed in new definitions

Ownership interest is in the Draft and defined by broader than just legal shareholding. It is a legal, equitable or prescribed interest in a company, which may arise through means including (i) a direct shareholding in the company; (ii) a direct or indirect shareholding in another company, which itself holds a direct shareholding, in the first company; (iii) through an agreement, which provides the holder with a direct or indirect right to exercise control over the voting rights, which may be cast on any resolution of the company. The effect of this is that contractual arrangements with local partners, so called nominee structures, will be reconsidered as the power to influence the company, based on a contract, and would be considered as an ownership interest.

One “Resident Director” required

The Draft states that a company in Myanmar must have at least one resident director. The Draft doesn’t specify whether the “resident director” is required to be a Myanmar citizen. It may be assumed that even a non-citizen who is an “ordinary resident” can be considered as a “resident director.” An ordinary resident is a person who is a permanent resident of the Union under an applicable law or is a resident in the Union for at least 183 days in each 12 month period. Under the MCA there is no requirement for a resident director.

We would require stay permit as a proof for resident director. It might create difficulties for a newly incorporated company, as the criteria might be satisfied, only after examining the stay permit. The consequence of this might be that initially the directors might have to be a Myanmar national in order to satisfy the 182 day criteria.

Related Party – Sharper Rules on Conflict of Interest

A related party means a person who controls the body corporate, which was earlier not defined in the MCA. A body corporate means a holding company, a subsidiary or subsidiary of a holding company of the body corporate. Even though MCA had provisions regarding conflict of interest, related parties was not expressly defined. Ideally, the company must enter into transactions at arm’s length. The conflict of interest provisions will apply equally to every board member. Thus, where a director, prescribed officer or member of board committees knows that a related person has a personal financial interest in a matter to be considered at a meeting of the board, or knows that a related person has acquired a personal financial interest in a matter, after the board has approved that agreement or matter, he or she should disclose that fact to the board.

AOA and MOA replaced by a single Constitution

The Draft provides for a single constitutional document (“Constitution”), replacing the company’s memorandum of association and articles of association. Even though the purpose is the same, the Draft removes the requirement of stating the objectives (“Objects Clause”) and gives a company “legal capacity to carry on any business or activity”. Furthermore, it also removes the requirement to obtain a Permit to Trade (though it is yet to be seen how this is implemented).

Under the Draft, the memorandum and articles of association of an existing company shall take effect as the Constitution of that company. The Objects Clause of companies established under the Act will lapse 12 months from the passing of the Draft. The objectives expressed will continue to apply until the end of the transition period and will be deemed to be removed thereafter. The significance of such removal of the Objects Clause will broaden a company’s power on incorporation.

Objectives clause will no longer be necessary to be mandatory to state in the constitutional documents. This will imply that companies don’t need to restrict themselves to a particular business, they may change their agenda of the company anytime without any amendment to the constitutional documents or notification to DICA as long they are in compliance to . This provides flexibility to the company in conducting business. After the Draft comes into force, the objectives will be applicable till 12 months. The company has the option to remove it before the transition period, if it wishes so. In cases where companies do not take any action, the objects clause will automatically be removed after the transition period. I’ve already mentioned this above. We recommend that the companies requiring more flexibility in their activities may consider early removal of their objectives before the completion of the transition period. Alternatively, companies wanting to retain their objectives, especially if the clause was drafted as a shareholder protection measure must do so by passing a special resolution of the shareholders.

Please note that an alteration of a Constitution by special resolution is permitted, provided it is registered with DICA within 28 days.

Incorporation of a company

The Draft provides for a checklist which enumerates essentials that a company registered in Myanmar must have:

Topics	Draft Companies Law Bill, 2016	Myanmar Companies Act, 1914
Name	Limited to be added in case of a private company	Two documents; Memorandum and article of association
Constitution	One document	Two documents; Memorandum and article of association
Objectives	Not required	Required
Minimum no. of shares	1	2
Minimum no. of members	1	2
Maximum of members	50	50
Minimum no. of directors	1 resident director	2 or more directors, who may or may not be a resident of Myanmar
Minimum no. of shareholders in a Public company	3 or more	7 or more
Minimum no. of directors in a public company	3 or more	3 or more

Under the MCA, a Myanmar private company is required to have between two and 50 shareholders. However, the Draft requires a company to have “at least one member” and “at least one share in issue” (excluding companies limited by guarantee). This means one shareholder is enough and that 100% subsidiaries may be incorporated; existing companies have the opportunity to amend their share structures.

Under the Draft, a public company is now required to have a minimum of three directors, a reduction from seven required under the MCA. The Draft also does away with the requirement for a company to appoint a Myanmar national as a director and instead replaces it with a prerequisite of having at least one resident director. The procedure of incorporation is very detailed under the Draft. This is likely to make the process more reliable and more predictable than it is under the MCA.

One person company

The concept of a one person company has been introduced by the Draft. This concept opens up new vistas of business opportunities and particularly spectacular possibilities for sole proprietorships and entrepreneurs who can enjoy the advantages of limited liability, and the benefit of separate legal entity as well. A company may now be registered as a private company with one member and one director. Adequate safeguards in case of death and disability of the sole person should be provided through appointment of another individual as a nominee director. On the demise of the original director, the nominee director will manage the affairs of the company till the date of transmission of shares to legal heirs of the demised member.

Small companies do not need auditors

Small companies will have a lower regulatory burden. They are exempted from a number of reporting and meeting requirements such as appointment of auditors, filing of financial reports and the holding of the Annual General Meetings. The Draft introduces simplified statutory requirements for small companies.

As a rule, the “Small Company” status may also apply to foreign owned companies. In that case, the Directorate of Investment and Company Investment (“DICA”) will determine whether or not a “foreign company” qualifies as a small company.

Pursuant to the draft, a small company is a company, other than a public company or subsidiary of a public company, which satisfies the conditions that (i) it and its subsidiaries have no more than 30 employees and (ii) it had an aggregated annual revenue in the prior financial year of less than 50,000,000 Kyat.

Initially a company will be established, then after one financial year has passed, DICA will decide the status of the company. After the above mentioned criteria is met, only then will DICA declare the company to be small company. Please note a company which is eligible to be known as a small company in one particular year may not be eligible to have the status of a small company in the subsequent year. This status is to be determined on the basis of the Annual Return/ annual revenue which is filed after the end of every financial year. The DICA will then issue a certificate which shall certify the company to be a small company. If the company is no longer a small company, along with the change in status, the benefits which are accorded to a small company are also withdrawn.

Solvency Test

There is a new solvency test. The test plays an important role in the management of the companies. It is pertinent to disclose a company’s ability to pay its debts and to show it has more assets than liabilities, so that the creditors are secured. It applies when the company undergoes certain transactions such as payment of dividends, buy-back of a company’s own shares, and redemption of redeemable preference shares by the company. This means that the Draft provides better creditor protection but also provides for a possible personal liability of the directors.

The solvency test comprises of two tests: (a) the liquidity or cash flow test; (b) the balance sheet solvency test. Both must be met, immediately after implementation of the relevant transaction, in order for the solvency test to be satisfied. The liquidity test requires the company to be able to pay its debts as they become due in the normal course of business; and the balance sheet solvency test requires the value of the company’s asset to exceed the value of its liabilities, including contingent liabilities. The director’s would be required to form an opinion on company’s cash flow solvency, balance sheet solvency and the impact of the corporate exercise in order to provide assurance to stakeholders including shareholders and creditors.

In determining whether the balance sheet solvency test will be met, directors must have regard to:

• The most recent financial statements of the company; and
• All other circumstances that the directors know (or ought to know), affect (or may affect) the value of the company’s liabilities, including its contingent liabilities.

Contingent liabilities may include, by way of example, guarantees, uncalled share capital, letters of credit, bills of exchange, pending litigation, lease obligations, performance bonds, underwriting obligations, and deferred payment obligations. Please note that the Draft does not expressly provide for contingent assets to be taken into account, when determining whether the solvency test will be met.

Ultimate holding company must be disclosed

Ultimate holding company has now been expressly defined under the Draft, which was not the case earlier. According to the Draft, there are few important inclusions with respect to the ultimate holding company: (i) while incorporating a company, it must be disclosed whether the proposed company has an ultimate holding company; (ii) any benefit of kind accrued with directors, officers or other related parties may be given if it is approved by the members at a general meeting of the company; and (iii) annual return must include names of the company’s subsidiaries, holding companies and the ultimate holding company, if any; this marks an important move in making the company more transparent and accountable.

Activities prior to registration

Founders can now engage in the company prior to incorporation. Any contracts entered before the company incorporation will have validity retroactively, after it has been ratified. The founder will be liable to the contracting parties. The company must ratify such contracts within a specified reasonable time. To avoid the liability, contracting parties can sue the company to make it ratified. In the case of failure to ratify a contract, the foreign investor can resort to court proceedings and institute an action against the proposed company. This is useful because the founder would be entitled to the same amount of damages recoverable against the company for damages for unperformed obligations under the contract as if the contract had been ratified and cancelled.

This was earlier not expressly stated in the MCA. This indicates that there is more clarity and provides pre-corporation rights to the other parties contracting with the proposed company.