The National Assembly has passed the Myanmar Companies Law (the “Law”). After extensive debate on various aspects of this long awaited Myanmar corporate reform the Law is finally here, pending signing into law by The President.

Key areas, which were hotly debated in recent weeks, included the highly contentious question of whether small companies are still required to appoint an external auditor, or whether they can benefit from an audit exemption.

In this briefing note we detail several issues which were integral to the parliamentary debate, and outline the final parliamentary result.

It should be noted that the full force of this Law is contingent upon the signature of The President. There is the possibility that further changes may be applied to the Law. However, we do not expect further changes and The Presidential signature as required to bring the Law into full force is merely a formality.

The Resident Director.

The Law still retains, as was stated in the earlier draft of the Law, the requirement for a company to have a resident director for all private companies. In respect of private companies, the resident director must be ordinarily resident in Myanmar for at least 183 days in a 12 month period. The resident director requirement may prove to be an issue for companies, as any company which does not have a resident director must appoint one.

However, the position for public companies has been modified with the requirement of a Myanmar Citizen resident director. For now, the impact of this rule on foreign investment is limited as there are no public companies with foreign shareholders at this time.

Foreign ownership of Myanmar Companies.

The Law has adjusted the definition “not a Myanmar company” to “a foreign company”. Now, under the Law, a foreign company is defined as a company with an ownership interest of more than 35% by a foreign corporation or a foreign individual, or a combination of the two. This can be contrasted with the earlier draft which stated that the ownership threshold would be prescribed at a later stage by the Directorate of Investment and Company Administration (DICA).

Once signed into law this 35% ownership interest ruling will also mean that foreign corporations or individuals would be allowed to hold up to 35% ownership in a Myanmar company without the company being classified as a “foreign company”. This could potentially unlock otherwise restricted sectors and encourage foreign investors. It will allow for the first time in Myanmar foreigners to be involved, albeit indirectly, in areas such as banking and insurance. However, it is also possible that the regulators of these activities may impose their own restrictions.

The Law also allows foreign companies and investors to trade shares on the Yangon Stock Exchange. This has been described as a game changer.

Statutory audit exemption and small companies.

The controversial requirement for audit exemptions for small companies has been retained. Despite early Parliamentary resistance and disquiet in some commercial circles, small companies are no longer required to submit their financial statements for auditing. In practice this will offer small companies considerable savings in time and resources. We expect that the new audit exemptions will help the development of smaller companies.

Ability to appoint only one shareholder.

In relation to the requisite amount of shareholders the Law provides that a company must have at least one member. This allows companies to appoint only one shareholder and would in practice make the formation of small businesses less onerous than was previously the case under the 1914 Act, which required at least 2 shareholders.

The transitional provisions.

The transition period of 12 months, within which a company may either redraft or uphold their objects, has been retained and is the same as in the draft law. Companies could elect to uphold their pre-existing corporate objects by passing a special resolution. The default position would be that upon the expiration of the transition period the pre-existing objects of the company will lapse.

In relation to winding up, commenced under the Myanmar Companies Act 1914 (the “1914 Act”) the Law provides that such winding up proceedings shall be resolved by application of the 1914 Act.
Finally, the Law, much like the earlier draft, provides that documents executed under the 1914 Act shall be valid under the 1914 Act.
Options to draft tailor made constitutions.

The Law removes a provision which was contained in the draft which provided that a template constitution will be published. This removal of a template from the Law means that companies may draft customised constitutions to meet their specific business exigencies and particulars.

The Law also adds that the constitution cannot contravene the Law itself. While this may be an obvious statement of law, it does somewhat restrict options for companies to draft a completely customised constitution. Time will tell if DICA and other authorities will honour the legislators’ liberal intention and allow shareholders to organise their company as they see fit.

Distribution of dividends without profit.

The Law provides, in accordance with the draft version, that dividends may be paid subject to compliance with the solvency test. The solvency test itself remains unchanged and can be contrasted with the position under the 1914 Act, which required dividends to be paid out of company profit. Consequently, a company had to be in a profit-making position to pay dividends.

The solvency test itself requires the company to:-

a) Be able to pay their debts as they become due, and
b) For the company’s assets to exceed its liabilities.

There are other considerations which must be complied with in addition to the solvency test, such as requiring the dividend to be fair and reasonable to the company’s shareholders and for the dividend not to prejudice materially the company’s ability to pay its creditors.
The reduction of share capital is made easier.

The position on reduction of share capital under the draft remains the same under the Law, namely, compliance with the solvency test is required. The position under the Law is favourable to companies as it does not unduly restrict reduction of share capital by requiring a court order as was the case under the 1914 Act.

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