This country-specific Q&A gives an overview of mergers and acquisition law, the transaction environment and process as well as any special situations that may occur in Myanmar.
It also covers market sectors, regulatory authorities, due diligence, deal protection, public disclosure, governing law, director duties and key influencing factors influencing M&A activity over the next two years.
This Q&A is part of the global guide to Mergers & Acquisitions. For a full list of jurisdictional Mergers & Acquisitions Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/mergers-acquisitions/
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 Myanmar Companies Act 1914 (MCA), the 2016 Myanmar Investment Law (MIL) and the 2015 Competition Law.
The MCA is expected to be replaced in 2018 by the Myanmar Companies Law, which was passed on 6 December 2017 (MCL). While enacted, the MCL will not enter into force until the issue of an implementing notification by the President of Myanmar, expected to be after the implementation of a computerised companies’ registry. Other matters required to fully implement the MCL include development of regulations and similar instruments, such as the model constitution to be used by companies to develop their company constitution. The MCL will modernise the MCA once it enters into force (for example, improving companies’ ability to manage their capital structure) and remove some barriers to foreign investment.
Importantly, companies incorporated under the MCA (and in future, the MCL) 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, in relation to mergers and acquisitions in sectors involving significant land use (such as agriculture or construction) the 1987 Transfer of Immoveable Property Restriction Law (TIPRL) prohibits the transfer of immoveable property to, or its acquisition or lease for more than one year by, a foreign company. 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 will be permitted in such a company.
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.
The companies’ registrar, the Directorate of Investment and Company Administration (Dica), has committed to implement the MCL by 1 August 2018, which appears optimistic as we understand that work on the new computerised registry only began after the MCL was enacted on 6 December 2017. However, for the purposes of this guide, we have assumed the MCL will be implemented in line with Dica’s timeline and focused on the applicable requirements of the MCL rather than the MCA.
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 (discussed 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, which was intended to be a streamlined approval, together with a land rights authorisation. In practice, MIC endorsements have not proved to be a streamlined approval process and 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 (Law No. 9/2015) 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. As a new law, it is not yet clear how its requirements will be applied in practice. As of 15 January 2018, no regulations had been issued under the Competition Law and the competition law regulator had not yet been formed.
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 as of 15 January 2018, there were only four listed companies in Myanmar, with a fifth company, TMH Telecom Public Co. Ltd., approved to list on 26 January 2018. Under Instruction 1/2016 of the Securities and Exchange Commission of Myanmar (SECM), foreign companies cannot trade on the YSX. Many issues will need to be resolved before foreign investment is permitted in companies listed on the YSX.
As summarised above, the key regulatory authorities applicable to mergers and acquisitions are Dica, MIC, YSX and SECM.
What is the current state of the market?
The market has to an extent slowed over the past few months, in particular in anticipation of the implementation of the MCL.
For the reasons noted in question 1 above, the due diligence requirements for acquisitions of shares in Myanmar companies by foreign investors are complicated where such investment would result in the conversion of a Myanmar company to a foreign company. Investors need to assess the implications of restrictions on foreign companies doing business in Myanmar such as under the TIPRL to their investment. An MIC permit or endorsement may be required for such investments.
In addition, Dica’s practice was to require companies whose classification changed following a share transfer (e.g. from a Myanmar company to a foreign company or vice versa) to apply to amend its registration number. Its previous practice was to not permit a Myanmar company to change its registration to become a foreign company, effectively prohibiting the acquisition of Myanmar companies by foreign investors. Dica’s practice however started to change in early 2017 and the change in classification of a company is now possible.
Share acquisitions are likely to become more common once the MCL comes into force.
Which market sectors have been particularly active recently?
Dica statistics show that foreign investment has been particularly strong recently in manufacturing, real estate development and transport and communications, and historically it has been strong in oil and gas.
The government is in the process of developing tenders for the upgrade of its aged infrastructure, including road, rail and port infrastructure, and this is likely to drive further investment.
MIC for example, issued an announcement on 22 December 2017 calling for applications under the MIL to invest in the manufacture of certain products to substitute imports, such as vehicles and vehicle parts, tractors and trailers, telecommunications equipment, and machinery and inputs such as iron and steel. It announced on 26 December 2017 that it was seeking applications under the MIL to invest in certain logistics services in major cities and logistics hubs, such as dry port services, bonded warehouse services and highway bus and freight terminals.
The banking and insurance sectors are also generating interest from foreign investors. No foreign insurer has been awarded a licence to date 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). However, on 24 August 2017, the Ministry of Planning and Finance (MOPF) issued Notification No 87/2017 establishing a board to review and select foreign insurance companies for licensing.
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). No approval has been provided to date for such acquisitions.
Instead, foreign banks are currently permitted to offer corporate and wholesale banking services to foreign-owned companies and Myanmar banks after establishing a branch in Myanmar with a licence from CBM. Thirteen foreign banks have established branches in Myanmar to date. CBM officials have in the past indicated that it is considering options to liberalise restrictions on foreign banks, and on 8 December 2017, it issued Directive No. 9/2017 permitting foreign banks to provide export financing to local export businesses with its prior approval.
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, in particular the timely implementation of the MCL, 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. A key concern in this respect is the extent of re-imposition of any sanctions. On 20 December 2017, US President Donald Trump issued Executive Order 13818 providing for the listing of persons involved in human rights abuses and corruption in the US Treasury’s Office of Foreign Assets Control’s list of Specially Designated Nationals and Blocked Persons. Currently, only one person, Major General Maung Maung Soe who formerly oversaw the Myanmar military’s operations in Rakhine State, has been listed as a Specially Designated National under this order, and western nations have been cautious of the effect of sanctions on Myanmar’s transition to democracy. However, the broader re-imposition of sanctions could affect the ease of investing in Myanmar and raise reputational risks for foreign 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. However, following the implementation of the MCL, it is anticipated that up to 35 per cent foreign investment in listed companies will be possible. 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 in publicly listed companies, 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. While schemes of arrangement may theoretically also be possible under the MCA, they 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. The MCL provides for Dica’s registers to be maintained electronically, and once this is implemented, it will give Dica greater capacity to ensure transparency of company information, and to itself make information publicly available. Any person may inspect Dica’s registers and records on payment of the prescribed fee.
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 fiduciary duties to the company, as well as 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. Although not specifically referred to, this would apply in the context of business combinations.
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 acquirer 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 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 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 (under Notification No 146/2016).
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 business name.
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.