New Companies Law Passes Parliament

What Are the Last Minute Changes?

The National Assembly has passed Myanmar Companies Law (the “Law”) after extensive debate on various aspects of the, Myanmar’s long awaited 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 still required the use of an external auditor or whether they could avail of an audit exemption. In this briefing note we outline several issues which were integral to the parliamentary debate and what the final parliamentary say on these points is.

Please note however that since the full force of the Law is contingent upon the signature of the President there is a possibility that further changes may take place to the Law. Nonetheless, we do not expect any further changes to take place at this stage and the Presidential signature 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, such 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 a headache for companies as any company which does not have a resident director must appoint one.

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

Foreign ownership of Myanmar Companies

The Law has tweaked the definition not of a Myanmar company, but of 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 DICA.

Once signed into law, this 35% ownership interest will mean that foreign corporations or individuals could hold up to 35% ownership in a Myanmar company. This could potentially unlock otherwise restricted sectors to foreign investors by allowing, for the first time in Myanmar, foreigners to be involved, albeit indirectly, in areas like banking and insurance. It is however also possible that the regulators of these activities impose their own restrictions. 

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 may now dispense with a requirement to have their financial statements audited. In practice, this will afford small companies considerable savings in time and resources. It is likely that the new audit exemptions will facilitate the development of smaller companies at early stages of market penetration.

Ability to have only one shareholder?

In relation to the requisite amount of shareholders, the Law provides that a company must have at least 1 member. This paves the way for the possibility of companies having only one shareholder and would in practice make the carrying out 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.

Liberty 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 have liberty to draft customized 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 nonetheless restricts somewhat the liberty of companies to draft a completely customized constitution. Time will tell if DICA and other authorities will honor the legislators’ liberal intention and let shareholders organize 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. Hence, 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 materially prejudice the company’s ability to pay its creditors. 

Reduction of share capital 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 favorable 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.