This country-specific Q&A provides an overview to M&A laws and regulations that may occur in Myanmar.
This Q&A is part of the global guide to Mergers & Acquisitions. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/mergers-acquisitions-3rd-edition/
What are the key rules/laws relevant to M&A and who are the key regulatory authorities?
The main laws governing business combinations are the 2017 Myanmar Companies Law (MCL), the 2016 Myanmar Investment Law (MIL) and the 2015 Competition Law.
The MCL was passed on 6 December 2017 and entered into force on 1 August 2018, replacing the 1914 Myanmar Companies Act (MCA). It modernised the MCA (for example, improving companies’ ability to manage their capital structure) and removes some barriers to foreign investment.
Importantly, companies incorporated under the MCL (as under the MCA) are classified as either a “foreign company” or a “Myanmar company”. This distinction is important as there are a number of legal and practical restrictions to foreign companies doing business in Myanmar. For example, the 1987 Transfer of Immoveable Property Restriction Law (TIPRL) in practice has prohibited the transfer of immoveable property to, or its acquisition or lease for more than one year by, a foreign company, limiting such companies’ participation in mergers and acquisitions in sectors involving significant land use (such as agriculture or construction). However, while under the MCA, a Myanmar company was defined as a company with no foreign shareholding, under the MCL up to 35 per cent foreign shareholding is permitted in such companies.
The MCL also abolishes the requirement for foreign companies to obtain a permit to trade, required under section 27A(3) of the MCA for a foreign company to carry on business in Myanmar, and which in practice, was only very rarely given for foreign companies intending to engage in trading activities.
Foreign investment regulations
The MIL, which was passed on 18 October 2016, also simplified and deregulated the investment regime in Myanmar. It combined the previous local and foreign investment laws into one law and provided for a streamlined investment approval process. Generally, a permit will be required under the MIL from the Myanmar Investment Commission (MIC), which administers the MIL, for large-scale projects, including investments that are strategically important, capital intensive, have a large potential impact on the environment or local community, use state-owned land and other designated investments. MIC approval will also be required for the direct or indirect acquisition of a majority of shares or controlling interest in a company with an MIC permit or endorsement (described in question 22 below).
In terms of the restrictions under the TIPRL noted above, the MIL permits foreign investors with an approval under the MIL to lease land for an initial term of up to 50 years (with two extensions of 10 years each). Such approval under the MIL may be in the form of an MIC permit or endorsement, together with a land rights authorisation. MIC endorsements were introduced in the MIL as a streamlined approval where an MIC permit was not required. However, while they are easier to obtain than an MIC permit, they have not proved as streamlined an approval in practice as originally envisaged, and the MIC generally requests detailed documentation as part of endorsement applications, based on the application process for MIC permits.
MIC issued the 2017 Myanmar Investment Rules (MIR) on 30 March 2017 setting out the process of obtaining approval under the MIL, and Notification No 15/2017 titled List of Restricted Investment Activities in relation to section 42 of the MIL (Negative List) on 10 April 2017, setting out the types of investments that are restricted to foreign investment, require approval of a Myanmar government ministry or may only be made through a joint venture with a Myanmar company. While the Negative List was intended to be a comprehensive list of all such restrictions, it has not proved to be so in practice, and legal advice should be obtained on the specific restrictions applicable to particular mergers and acquisitions.
Myanmar’s Competition Law entered into force on 24 February 2017. This law prohibits collaborations that ‘intend to raise extremely the dominance over the market’, or lessen competition in a limited market; or would result in a market share above the prescribed amount.
Business combinations prohibited under the Competition Law may be exempt in certain circumstances, including if the acquired business is at risk of insolvency or if it will promote exports, technology transfer or productivity. However, it is not yet clear how its requirements will be applied in practice.
The Ministry of Commerce (MOC) issued the Competition Rules, set out in Notification No 50/2017, on 9 October 2017 providing primarily for the establishment of the Myanmar Competition Commission (Commission), which was then established on 31 October 2018 under Notification No 106/2018 of the Myanmar Government. The Commission is expected to administer the Competition Law, and clarify its operation. In December 2018, the MOC published Form 1, which provides for the submission of complaints under the Competition Law to the Commission.
Myanmar passed the Securities and Exchange Law in 2013 (SEL) and established the Yangon Stock Exchange (YSX) pursuant to that law in 2015. However, the YSX is still developing as a stock exchange, and there are currently only five listed companies.
An impediment to the growth of the YSX is the restriction on foreign participation. Under Instruction 1/2016 of the Securities and Exchange Commission of Myanmar (SECM), foreign companies cannot trade on the YSX. Since the implementation of the MCL, the YSX and SECM have been working to permit foreign trading on the YSX, however it is not yet clear when this will be finalised.
The key regulatory authorities applicable to mergers and acquisitions are the Directorate of Investment and Company Administration (Dica), which administers the MCL, MIC, YSX, SECM and Commission.
What is the current state of the market?
The Myanmar Government implemented a number of important reforms in 2018, including implementation of the MCL, which has given fresh impetus to the local market. Some examples of such reforms include the liberalisations of trading restrictions and the banking and insurance sectors.
On 9 May 2018, the MOC issued Notification No 25/2018, setting out the criteria for foreign and local companies and foreign-local joint ventures to engage in retail or wholesale distribution in Myanmar. The MOC issued News Bulletins No. 2/2018 and No. 3/2018 on 26 July 2018 clarifying its standard operating procedures and administrative requirements for applications to engage in retail or wholesale distribution in Myanmar, and the list of priority goods which would be permitted for trading by foreign companies and foreign-local joint ventures.
There is considerable interest in this reform given the size of the market and lack of sophisticated trading companies. As of 5 February 2019, one wholly foreign-owned entity, and one foreign-local joint venture had already been registered with the MOC to engage in wholesale distribution, while one wholly local-owned entity and one foreign-local joint venture had registered to engage in retail distribution, in Myanmar.
The banking and insurance sectors are also generating interest from foreign investors. The Ministry of Planning and Finance (MOPF) also announced in Notification No 1/2019, dated 2 January 2019, the liberalisation of the insurance sector. It proposed to licence up to three foreign life insurers as wholly foreign-owned life insurers, and also to permit foreign life and non-life insurers to enter the Myanmar market through a joint venture with a local insurer. MOPF issued the application documents and information about the application process on 21 January 2019.
As of 5 February 2019, no foreign insurer has been awarded a licence under the Insurance Business Law of 1996 to undertake an insurance business in Myanmar (they may only conduct such a business in partnership with Myanma Insurance, the state-owned insurer, or in special economic zones under Notification 2/2017 of the Insurance Business Regulatory Board of Myanmar). The opening of the sector has therefore generated considerable interest among foreign insurers, particularly given the size of Myanmar’s market and the lack of penetration of local insurers.
Similarly, banking businesses are regulated by the Central Bank of Myanmar (CBM) under the 2016 Financial Institutions Law (FIL). Under the FIL, a foreign bank may only sell its business or acquire a local bank’s business (or a substantial part of either) with the approval of CBM. In addition, prior CBM approval is required for the (direct or indirect) acquisition of a ‘substantial interest’ in a bank (defined as 10 per cent or more of the shares in, or the capacity to control the management of, a bank). While no approval has been provided to date for such acquisitions, on 29 January 2019, the CBM issued Letter No. ma ba ba/baan si sit/1/(1/2019), permitting up to 35 per cent foreign investment in local banks with its approval.
This represents the latest step in the gradual deregulation of the banking sector since the first issuance by the CBM of a banking licence to a foreign bank in 2015. Thirteen foreign banks had established branches in Myanmar as of 5 February 2019, and while previously, they were only permitted to offer corporate and wholesale banking services to foreign-owned companies and Myanmar banks, on 8 November 2018, the CBM issued Directive No. 6/2018 permitting foreign banks to lend to Myanmar companies.
Which market sectors have been particularly active recently?
Dica statistics show that as of 31 December 2018, foreign investment has been particularly strong recently in transport and communications and manufacturing, and that historically it has also been strong in oil and gas.
As we noted in question 2 above, there has also been considerable interest in investing in a distribution business, and the insurance and banking sectors recently.
The government is also in the process of finalising its tenders to upgrade its aged infrastructure, including road, rail and port infrastructure, and this is likely to drive further investment. The Myanmar Ministry of Construction announced on 6 December 2018 that it had shortlisted 10 bids to construct the 20 km Yangon express way, designed to alleviate traffic congestion by linking downtown Yangon to Yangon International Airport and the expressway to Mandalay in the north of the city, under a public-private partnership. The winner would be announced in June 2019.
What do you believe will be the three most significant factors influencing M&A activity over the next 2 years?
A key factor likely to influence mergers and acquisitions activity is the extent and manner of implementation of the reforms Myanmar has been undertaking since opening to foreign investment, and the extent to which Myanmar adapts and modernises its local practices and regulatory culture in implementing such reforms.
A second challenge is whether Myanmar can improve its infrastructure to support foreign investment. Around two thirds of Myanmar’s population does not have access to the national electricity grid, and reliable access to power and transport continues to impact the conduct of business in Myanmar.
A final factor likely to affect foreign participation in mergers and acquisitions is Myanmar’s reputation as a place to invest. For example, the US has sanctioned five Tatmadaw and police officers and two Tatmadaw units under the Global Magnitsky Act for human rights abuses, while the EU has sanctioned fourteen Tatmadaw, border guard and police officers. It was reported in October 2018 that the EU was considering removing Myanmar from its “Everything But Arms” program, which provides duty-free access to the European market for a range of Myanmar products, including textiles. While there is no suggestion of broad-based sanctions being applied at this stage, the threat of sanctions can increase risks (including reputational risks) for investors.
What are the key means of effecting the acquisition of a publicly traded company?
As noted in question 1 above, it is currently not possible for a foreign company to acquire shares in a company listed on the YSX. Whether, and the terms on which, such acquisitions are permitted in future will be the subject to a forthcoming instrument of the YSX and SECM. In terms of share acquisitions more broadly, under Notification No 1/2016 of SECM, an extraordinary report would be required in connection with share acquisitions that result in a change in the parent company or major shareholder (defined as a shareholder with greater than 20 per cent shareholding), or a transfer of the company’s material undertaking.
Unsolicited, hostile transactions are in practice not possible in Myanmar. In relation to listed companies, there are currently no takeover regulations in Myanmar and there is no history of unsolicited transactions involving YSX-listed companies.
In addition to share acquisitions, as with all companies, it is possible to acquire the business or assets of a publicly listed company.
Schemes of arrangement are also possible under the MCL and permit the acquisition of a company subject to court supervision where 75 per cent of the shareholders’ vote has been obtained, however these have not historically been used in Myanmar.
What information relating to a target company will be publicly available and to what extent is a target company obliged to disclose diligence related information to a potential acquirer?
Technically under the MCL, companies registered in Myanmar are required to maintain registers, among others, of shareholders at their registered office or principal place of business and make them available to shareholders, and in the case of public companies (defined as companies with more than 50 non-employee shareholders or which issue invitations to the public to subscribe for its shares), also to the public at a reasonable price. However, few companies currently comply with this requirement and in general limited information is publicly available about the shareholders of unlisted companies registered in Myanmar.
Under the MCL, any person may obtain an extract of the corporate information of a registered company from Dica’s electronic register, called MyCo, on payment of the prescribed fee. Dica published Notification No 57/2018 on 9 July 2018 setting out its filing fees, including the fees to request an extract of the corporate information of a company.
YSX-listed companies are required under the Securities Listing Business Regulations of YSX to disclose earnings information and corporate decisions on important matters (or any other important fact) regarding the operation, business, assets or stock of the company which will have a considerable impact on investment decisions.
Potential acquirers will need to negotiate due diligence disclosure with target companies.
To what level of detail is due diligence customarily undertaken?
Due diligence continues to be a challenge in Myanmar, reflecting the poor record keeping and compliance of Myanmar companies, lack of familiarity with due diligence and sensitivity to disclosing company information. Prospective acquirers are advised to engage early with potential target companies to explain the purpose and nature of due diligence procedures and build the relationships required to ensure an appropriate quality of disclosure.
What are the key decision-making organs of a target company and what approval rights do shareholders have?
The key decision-making organs are the general meeting and board of directors.
In terms of approval rights, as noted in question 5, 75 per cent of shareholders must approve a scheme of arrangement. In addition, under the MCL, the directors of a public company, a subsidiary of a public company or (if its constitution provides) a private company, cannot sell or dispose of such company’s main undertaking without the consent of the company in a general meeting.
What are the duties of the directors and controlling shareholders of a target company?
Directors owe statutory directors’ duties under the MCL, such as to act with due care and diligence and in good faith in the company’s best interests. These duties would apply to a directors’ conduct in the context of overseeing business combinations, although this is not expressly stated in the MCL.
Minority shareholders also have rights under the MCL in respect of controlling shareholders to take action against conduct that is oppressive.
Do employees/other stakeholders have any specific approval, consultation or other rights?
To what degree is conditionality an accepted market feature on acquisitions?
Myanmar does not have any takeover regulations and there are no laws dealing with tender offers on the YSX. Conditions are not prohibited with respect to business transfers, such as for satisfactory due diligence, and schemes of arrangement could in principle be conditional subject to the court’s supervision.
What steps can an acquirer of a target company take to secure deal exclusivity?
Exclusivity arrangements are negotiated contractually in Myanmar.
What other deal protection and costs coverage mechanisms are most frequently used by acquirers?
Deal protection and cost coverage mechanisms typical to mergers and acquisitions (such as confidentiality or non-disclosure agreements, non-solicitation agreements and break-up fees or reverse break-up fees) are not prohibited in Myanmar and may be used to protect deals from third party bidders as in other jurisdictions.
Which forms of consideration are most commonly used?
Consideration is most commonly in the form of cash. Such consideration can be financed through retained earnings or loans, but in the case of loan financing, in general the practice in Myanmar is not to deal with financing in the transaction documents because Myanmar’s banking sector is still developing. Such finance is generally obtained offshore.
In terms of financing Myanmar investments, it is generally understood that in practice all transfers of funds into or from Myanmar are governed by the 2012 Foreign Exchange Management Law. Prior approval from CBM is likely to be required in practice for loans, while equity fund transfers need only to be declared to CBM.
At what ownership levels by an acquiror is public disclosure required (whether acquiring a target company as a whole or a minority stake)?
The disclosure obligations applicable to acquisitions of shares in listed companies are set out in questions 5 and 6 above.
As noted in question 6, under the MCL, companies are required to maintain a register of shareholders and make such registers available to shareholders during business hours, and in the case of public companies, the public. While this could be a source of disclosure of acquisitions in a company, as noted in question 6, in practice few companies are in compliance with this requirement.
More broadly, companies are required to file an annual return with Dica. Under the MCL, the annual return must list, for public companies, their 50 largest shareholders, and for private companies, all shareholders. Under the FIL, banks are also required to submit an annual report to CBM of all shareholders having a substantial interest in the bank and their details.
At what stage of negotiation is public disclosure required or customary?
Subject to the disclosure obligations of companies listed on the YSX, which are set out in questions 5 and 6, no specific public disclosure obligations apply to acquisitions of companies in Myanmar. If the acquiring company is a company listed overseas, public disclosure may be required under the listing rules applicable to such acquiring company.
Is there any maximum time period for negotiations or due diligence?
Are there any circumstances where a minimum price may be set for the shares in a target company?
There are generally no restrictions on the price of the shares in a target company, but schemes of arrangement are subject to court supervision.
Is it possible for target companies to provide financial assistance?
While the financial assistance provisions of the MCL are not clear, they appear to permit private companies to give financial assistance in connection with the acquisition of their shares without limitation and for public companies (whether listed or not) to provide such assistance, with the approval of the board of directors and shareholders.
Which governing law is customarily used on acquisitions?
Under Myanmar law, parties are free in principle to choose any foreign law as the governing law of an agreement, subject to the operation of any applicable mandatory rules. In practice, state-owned enterprises and Myanmar government agencies will rarely agree to a choice of foreign governing law, and Myanmar private parties also prefer that Myanmar law applies to the transaction agreements. For agreements that are subject to scrutiny under the MIL, the MIC will generally require a choice of Myanmar law.
What public-facing documentation must a buyer produce in connection with the acquisition of a listed company?
There are currently no takeover regulations in Myanmar applicable to listed companies, and this is not specifically regulated.
What formalities are required in order to document a transfer of shares, including any local transfer taxes or duties?
Under section 83 of the MCL, a transfer of shares in a company is effective upon the company entering it in its register of shareholders. A company is required to enter such transfers in its register of shareholders subject to its constitution and the receipt of a duly stamped and executed instrument of transfer in the prescribed form, together with share certificates evidencing the interests proposed to be transferred and a declaration by the transferor or transferee (or both) regarding whether the proposed transfer would result in the target company changing its classification from a Myanmar company to a foreign company or vice versa.
Under the Myanmar Stamp Act 1899 stamp duty is payable on share transfers in the amount of 0.1 per cent of the value of the transfer price.
Within 21 days of a transfer of shares in a Myanmar-registered company, a notice must be filed with Dica in the prescribed form notifying it of the transfer. Other associated filings with Dica may also be required, for example, for a change in its business name, or directors.
Under the MIL a notice must be filed with MIC for any transfers of shares in, or the business of, a company with an MIC permit or endorsement. As noted in question 1, the prior approval of the MIC will be required for any direct or indirect transfers of shares in a company which has an MIC permit or endorsement (or to transfer the business itself), if it will result in an entity that is not an affiliate of the transferor acquiring majority ownership or control of the shares, or more than 50 per cent of the assets, of the business.
Are hostile acquisitions a common feature?
As noted in question 5, hostile acquisitions are not possible in practice in Myanmar.
What protections do directors of a target company have against a hostile approach?
As noted in question 5, hostile acquisitions are not possible in practice in Myanmar.
Are there circumstances where a buyer may have to make a mandatory or compulsory offer for a target company?
If an acquirer does not obtain full control of a target company, what rights do minority shareholders enjoy?
Minority shareholders have rights under sections 192 and 193 of the MCL against conduct that is oppressive.
Is a mechanism available to compulsorily acquire minority stakes?
Schemes approved by 75 per cent of shareholders (or creditors) are binding on all shareholders (or creditors) and either by the order sanctioning such scheme or a subsequent order, a court can make provision for the transfer of a company’s undertaking or its shares, pursuant to such scheme.
In addition, the approval of an offer to buy the shares of a public company by 75 per cent of shareholders within four months of such offer will give rise to a right on the part of the acquirer to compulsorily acquire the shares of dissenting shareholders upon notice within two months, subject to any objection proceedings.