Five Potential Pitfalls in the Myanmar Companies Law

In our previous client briefing note, we outlined five key things to look forward to under the Myanmar Companies Law (“MCL”). Following on from this, and as part of our continued coverage of the MCL, we will outline five potential drawbacks with regard to the MCL and how they may affect companies in practice.

1. Registration problems for overseas corporations

The MCL provides that an overseas corporation or any other body corporate must not carry on business in Myanmar unless it has registered under the MCL. This could have onerous implications on a wide range of companies, such as drilling and other service companies, which may now need to register under the MCL when they were not previously required to do so.

However, the MCL indicates several exceptions in the form of activities that are not deemed as ‘carrying on business’ in Myanmar. Accordingly, if a company engages, inter alia, in any of the following activities, registration is not required:

• Maintaining a bank account;
• Conducting an isolated transaction which is completed within 30 days; or
• Investing funds or holding property.

 2. Uncertainty in Transitional Period

The MCL implements a transitional phase of 12 months from the date of commencement of the act (the “Transition Period”). During the Transition Period, the objects clause in the current memorandum of association will remain in force unless the company decides to abolish it. Once the Transition Period has passed, the objects clause of the company will lapse by default.

Other transitional issues, however, are less clear. For instance, although several provisions of the MCL refer to rules for clarification, such rules have yet to be issued. Until these rules are published by the authorities, companies will be lacking crucial guidance on how to interpret and apply the new law.

Similarly, the MCL indicates that a template constitution will be published by the Directorate of Investment and Company Administration (“DICA”). However, with the enactment of the MCL fast approaching, a template constitution has not been published yet nor is there any indication as to when it will be published. Companies wishing to incorporate in the near future will have to either draft their own constitution, which is expensive and uncertain, or wait for the template.

The most pragmatic way to avoid these uncertainties would be for the authorities to provide a period between the enactment of the new law and its entry into force. Although this would mean that Myanmar would have to wait a couple of months more before it benefits from a modernized corporate law, this would probably be preferable to rushing into a prolonged period of uncertainty.

3. Increased risk of shareholder interference

The MCL adds two causes of action that shareholders of the company may take; the first is a cause of action to address oppressive conduct by the company against the applicant shareholder’s interest. The second cause of action is one allowing, for the first time in Myanmar, intervention in proceedings to which the company is a party.

The right to sue is vested in any member of the company (i.e., any person who holds a share in the company) who has received a share either by operation of law or by will. This means that holding just one share entitles a member to bring the above causes of action.

At best, these tools are an effective means of protection for minority shareholders; however, at worst, they will provide opportunities for obstruction and petty account settling.

The MCL contains a certain number of provisions that may protect the company against frivolous lawsuits, e.g., requiring the claimant to act in good faith or in the interest of the company. However, these provisions are still abstract and it will be up to the courts to make them effective. In the short term, companies are well advised to keep the circle of shareholders as small and controlled as possible.

4. The conversion of incorporation documents into a singular constitution

The MCL indicates that the memorandum and articles of association in existence under the previous Myanmar Companies Act 1914 (the “1914 Act”) shall automatically be converted into one ‘constitution’. This is meant to avoid unnecessary costs for existing companies.

However, there is a catch. A great majority of companies refer to the default provisions contained in Table A of the 1914 Act. The MCL provides no guidance as to how such references should be treated. Are they void because they refer to an abolished law? If so, then an important number of corporate issues would be regulated by the default provisions of the MCL. On the other hand, is the reference to Table A valid because its provisions can still be consulted and applied? Then the company’s constitution would deviate from the MCL on certain issues. It should be noted that both interpretations appear plausible.

The question is not merely academic. Take pre-emptive rights as an example: the 1914 Act and Table A grant the existing shareholders a right to acquire newly issued shares to avoid dilution of their participation in the company. Under the MCL, such right is not granted by default but must be contained in the constitution. Depending on the interpretation of the reference to Table A, a shareholder may or may not enjoy a pre-emptive right.

Unless the rules to be issued after the enactment of the MCL provide clear and authoritative guidance, companies should consider amending their constitution and removing the reference to Table A. They may then replace their existing articles of association with the new template if and when this template is available.

5. The resident director

The MCL provides that a company registered pursuant to the MCL must have “at least one director who must be ordinarily resident” in Myanmar. The MCL requires that in order for a director to be considered a resident director in the proper sense, such “person”, which may extend to legal persons, must be resident in Myanmar for at least 183 days during every calendar year.

Companies might find this requirement unduly burdensome in practice, as it means that companies would need to arrange for a full-time resident director in Myanmar. According to the MCL, companies established under the 1914 Act will have until the end of the Transition Period to appoint a resident director.