A draft law to replace the century-old Myanmar Companies Act will improve transparency and corporate governance while at the same time easing the burden on small and medium enterprises.
By AUNG NAING OO & WINFRIED WICKLEIN | FRONTIER
MYANMAR IS transforming rapidly into a democratic, market-based economy. Today, it is among the fastest growing economies in the world. Momentous change is also sweeping the Myanmar corporate sector.
The Yangon Stock Exchange opened last year and a Securities Exchange Commission of Myanmar has been established. The Financial Institutions Law passed by the Pyidaungsu Hluttaw, or Union Parliament, earlier this year is helping modernise the banking sector. A new Investment Law has been passed to streamline investment approvals and encourage increased investment in many sectors of the economy. An Arbitration Law was passed earlier this year and will provide an alternative dispute resolution regime for commercial transactions.
Given these developments and Myanmar’s economic potential, more investors are looking to set up businesses here. The total number of companies in Myanmar has almost tripled since 2011, from 20,000 to almost 55,000 today. This figure is only set to grow. These new companies have the potential to bring much needed capital, technology, innovation and know-how to the economy and create jobs for the population.
To maintain momentum and create a stable business environment, a strong and clear legal framework for company affairs is important. A robust Companies Law can instil sound corporate practices that safeguard investors, creditors and other stakeholders in companies ranging from small businesses to large conglomerates.
At this crucial stage of economic growth, Myanmar needs clear, transparent and stable regulation of its nascent corporate sector to build investor confidence and a competitive private sector.
The Myanmar Companies Act of 1914 – the primary legislation regulating the affairs of companies in Myanmar – has not been comprehensively updated since its enactment over century ago. It shares many similarities with the company laws of neighbouring jurisdictions such as Singapore, Malaysia, India and Hong Kong. Yet while they have updated their laws to reflect the realities of modern businesses, the Myanmar Companies Act has remained in a time warp.
Change is coming. A new Myanmar Companies Law has been prepared by the Directorate of Investment and Company Administration with assistance from the Asian Development Bank. Like the current Companies Act, it will govern the registration, ownership, management and internal affairs of all companies in Myanmar. The proposed law draws on proven reforms in the UK, Singapore, Malaysia, Australia, New Zealand and Hong Kong, and is expected to be submitted to parliament for approval in th coming months.
What are the key changes?
Firstly, the new legislation will remove outdated provisions of the Companies Act that are no longer applicable. This includes the requirement to seek presidential approval to change company names, the requirement for companies to seek court approval to change their business activities or reorganise share capital, and the requirement for foreign companies to hold a “Permit to Trade” which no longer has any regulatory purposes. The ability to maintain “British registers” or appoint managing agents for companies will also be abolished, along with other relics from the colonial era.
To foster entrepreneurship and private sector growth, the new law will make it easier to form companies and for people to do business. Companies may be established with a single shareholder and single director under the proposed law. Company registration requirements will be clearly set out and the law will also contain clear rules for parties dealing with companies and their capacity to act.
Companies will no longer be limited in their business activities by an “objects” clause in their memorandum of association. A company constitution will replace the current requirement for memoranda and articles of association to streamline internal governance arrangements. Companies will be free to pursue whichever business their investors want them to (subject to compliance with relevant laws).
Corporate governance standards have been substantially raised and are fully set out in the new law, with the introduction of a comprehensive set of duties for directors and officers of companies. These duties reflect the law on directors’ duties in many common law countries, such as duty of care and diligence, duty to act in good faith, and duties not to misuse their position or information.
The new law also contains clear rules on related party transactions and provisions of benefits to directors. Minority shareholder rights and remedies are clearly set out to provide protection for investors, and shareholders will have the right to take direct action if directors abuse their powers. The law also promotes better disclosure to shareholders and other stakeholders, thus improving corporate transparency and accountability.
The proposed law will make it easier for Myanmar-owned companies to attract new investment, technology and knowhow by enabling foreign investors to hold shares. The government will be able to permit higher foreign ownership thresholds in Myanmar-owned companies, liberalising current restrictions on foreign ownership. Sm given relief from certain regulatory requirement a company easier and lin managing their share cower compliance costs.
Companies will have more flexibility in managing their share capital to meet business requirements.
The proposed new law relaxes some of the rules relating to capital maintenance in line with the deregulatory initiatives in other countries. The law now expressly permits companies to issue all types of shares and securities in accordance with specified procedures.
Concepts such as authorised capital and par value of shares have been abolished to reduce burden on companies in managing their share capital. Dividend distributions and share capital reductions can be made provided that the company is solvent and can pay its creditors, and that the action is fair and reasonable to its shareholders.
The powers of the companies registrar, held by DICA, and its action for offences under the law reforms will promote the adoption of an audit-based approach to regulation of companies and the introduction of compliance tools, such as fines and penalties, director disqualification orders and investigation powers. Mechanisms to ensure a new company registry is properly resourced will be included – for example, by ensuring that companies pay reasonable fees for filing documents and penalties for late filings.
Once approved, the new law will also lead to the reform of the companies registry. A new electronic registry is planned – one that will be online and up to date, publicly searchable, and reliable. It will provide an efficient and cost-effective way for companies to file documents with DICA, for DICA to maintain and track company filings electronically, and for people engaging with companies, such as trading partners and lenders, to understand more about the companies they are dealing with.
What’s not changing?
The proposed new law does not discard the existing Companies Act in its entirety. Many parts of the current law that are still relevant have been retained, including provisions on public companies’ prospectus requirements and registration of security interests.
Areas such as financial reporting requirements for companies have not been amended in substance, other than to align the provisions with other laws such as the Myanmar Accountancy Council Law. The procedures for winding up and liquidation of companies have not been changed. They will be subject to a separate insolvency law reform process to be carried out in the future.
Most importantly, the fundamental principles of company law are not changing under the new law. The types of companies that can be registered under the law and their basic rights – such as the issuing of shares and setting of rules for internal management and decision making in a constitutional document – remain the same. The basic obligations of companies under the law are also the same – to have a company name and a registered office, to maintain share registers and company records, and to notify DICA of changes to company details.
The rules for internal management and decision making for companies will not be substantially different. Shareholder meetings and director meetings are called and conducted in the same way except that the new law will now allow electronic notices and written resolutions to be passed in lieu of meetings to make company administration easier.
DICA will continue to be the regulator, meaning it will monitor compliance and take enforcement action when needed.
Creating a better business environment
The reforms aim to build a robust private sector in Myanmar by increasing flexibility for managing companies, improving regulatory and governance standards, and reducing compliance burdens, particularly for small and family-owned businesses. This reflects the new government’s priority of supporting small and medium enterprises, creating opportunities and jobs, and promoting transparency and the rule of law.
The new law will support reform of state-owned enterprises by providing a clear legal framework for their corporatisation. This will enhance transparency in public finances and accountability of public administration. The proposed reforms will also raise governance standards of public companies and help build confidence in the YSX.
The new electronic companies registry will have a direct impact on the way business is done in Myanmar. It will facilitate business transactions and trade, and enhance confidence among the business community. Experience in other countries shows the registry will become an important tool to gauge the integrity and risk of companies small and large, and help banks and investors make important investment decisions.
The reforms will also promote enhanced regulatory performance by DICA, with streamlined procedures and clear rules enabling greater efficiency and consistency.
Ultimately, these reforms will create better conditions for businesses in Myanmar, and build a sound framework through which businesses can make long-term investments. Together with the Investment Law, the Companies Law will be at the front line of transformative changes underway for Myanmar’s business landscape, helping to drive economic growth and long-term prosperity for its people.
