Examining the Companies Act
THE draft Companies Act, which is currently discussed by Amyotha Hluttaw, will introduce significant changes in the legal definition of foreign companies, the registration process and capital structures. Notably, foreign firms no longer need to obtain a permit to trade from the authorities and foreigners will be allowed to buy shares on the Yangon Stock Exchange for the first time.
Filip Lauwerysen, executive director of the European Chamber of Commerce in Myanmar (EuroCham), has written to The Myanmar Times to detail his analysis on the significant changes entailed by the draft Companies Act, which was submitted to Amyotha Hluttaw, the upper house of the parliament, in July.
The bill was drafted by the Directorate of Investment and Company Administration (DICA) with technical assistance from the Asian Development Bank (ADB). It was submitted to Pyithu Hluttaw, the lower house, in early January this year.
The legislation will replace a colonial-era Myanmar Companies Act from 1914 which is replete with antique stipulations – companies have to seek presidential approval to change their names, and court approval to change business objectives. It will govern the registration, ownership, management and internal affairs of all companies in Myanmar.
By streamlining requirements for small and family-owned businesses, improving corporate governance standards, liberalising the economy and removing outdated regulations, the authorities hope this will make it easier for local companies to attract international funding and expertise.
The real impacts of the reform will be measurable only if the relevant administration is capable to implement and enforce the changes. – Filip Lauwerysen, EuroCham Myanmar
Legal definition of foreign companies
Currently, a “foreign company” is a company in which at least one share is owned by a non-Myanmar investor. A “local company” is hence a company in which all the shares are owned by Myanmar investors.
The bill provides that a foreign company is “a company incorporated in Myanmar in which a foreign person controls an ownership interest of more than the prescribed ownership amount”.
Foreign-owned companies will be defined as those where foreign ownership exceeds 35 percent, but the Ministry of Finance and Planning can adjust this ratio as the economy develops.
Mr Lauwerysen stated that this is a great change since local companies should be able to engage in businesses subject to business restrictions, such as international trading, provided that they abide by other applicable regulations.
But he added that international investors could be reluctant to invest as minority shareholders except where local companies may freely use different class of shares, such as voting rights and dividend entitlements, for the benefit of the foreign investor. The definition of foreign company is not clear in that regard.
The current regulatory framework makes it difficult for a foreign investor to purchase the shares of a local company. Entities involved are required to set up a new structure under a new registration number.
The bill streamlines the process by allowing a foreign firm to turn into a local one, and vice-versa, without the preliminary authorisation of the authorities. The company will have to inform DICA if it becomes a foreign company (i.e. with more than 35pc of foreign owned shares).
Registration of businesses and corporate governance
The draft law provides with the possibility to incorporate one-person company with a unique director, which is currently not possible. Mr Lauwerysen noted that this change should ease the corporate governance of 100pc-owned companies and the organisation of group structures.
However, he said that the bill does not allow businesses to produce consolidated financial statement. It is still required that any company shall adopt individual audited financial statements. In addition, holding companies shall attach to their own financial statements the financial statements of their subsidiaries.
The bill states that any company shall have at least one resident director. The EuroCham executive director noted that this provision is in line with the better definition of the company directors’ powers and liabilities.
A single constitutional document (the company’s constitution) will replace the current Memorandum of Association and the Articles of Association. A form of constitution will be provided but its use will not be mandatory. Mr Lauwerysen said that, in practice, the use of a customised constitution should be less cumbersome under the new legislation.
The bill also eliminates the requirement for foreign firms to obtain a permit to trade from DICA. Besides, businesses will no longer need to state their intended objectives in the Memorandum of Association and in the Articles of Association. They will have “full legal capacity to carry on any business and activity”, in compliance with the law and provided that they have the necessary authorisations from relevant authorities.
This change will enhance the ease of doing business in the country for foreign businesses, according to Mr Lauwerysen.
Capital structures and share capital
The bill includes a number of considerable revisions in procedures and restrictions on capital structures and changes to share capital, and power of directors. Mr Lauwerysen stated that more flexible capital structures and changes to share capital will allow companies to raise or reduce capital with fewer procedural requirements.
The bill introduces share buy-backs in order to allow a company to buy its own shares.
The bill also allows the creation of different types and classes of shares as convertible shares, redeemable shares, preference shares, shares with arranged voting rights, etc. The company will also be able to issue options to acquire shares, securities which convert into shares and other interests.
A company will be able to grant a security interest over any of its property, which is forbidden under the current legal framework. Domestic companies will be able to give security in relation to loans to other Myanmar or foreign companies.
The various duties and powers of directors are clearly set out in the law for the first time. In some circumstances, directors may become individually liable to penalties if they breach their duties.
Minority shareholders will have the right to sue on behalf of the company, even if the directors of the company do not approve of the claims. They may also be able to call meetings or put resolutions forward for approval and have enhanced rights to inspect company’s documentation. The obligation for the auditor to attend any general annual meeting is as well in favour of the protection of minority shareholders.
Foreign investors will be able to buy shares on the Yangon Stock Exchange under the new law.
Small companies will enjoy a lower regulatory obligation and will notably no longer be asked to hold annual general meetings or prepare audited annual financial statements, except in some circumstances. A small company is defined as a company which, including its subsidiaries, has no more than 30 employees and an aggregate annual revenue not exceeding K50,000,000.
The draft law specifies the conditions under which an overseas corporation may conduct business in the country.
Mr Lauwerysen told The Myanmar Times that the long-awaited reform efforts of the Companies Act will place the country’s legal framework in line with the regional practice and tackle a number of needs of international investors.
“Clarification and simplification of the companies’ registration process and of the rules applicable to corporate governance should give foreign investors more flexibility and means to organise and secure their investment,” he said.
Mr Lauwerysen noted, however, that the change brought about by the bill will depend on whether the authorities can enforce the reforms effectively.
“Uncertainties remain however great at this stage. The real impacts of the reform will be measurable only if the relevant administration is capable to implement and enforce the changes.
“The challenge will be for the authorities concerned to pursue their efforts to modernise the functioning of the administration and increase their actions towards capacity building and empowerment of civil servants in charge of the day to day implementation of the reform,” he added.
Cheah Swee Gim, director at law firm Singapore-headquartered Kelvin Chia Partnership, said the bill is expected to be approved during this parliamentary session, possibly as soon as this month or the next.
Author: Thompson Chau