Myanmar M&A bounces back

Swee Gim Cheah and Lyra Miragrace Flores of Kelvin Chia Yangon provide an update on the latest M&A trends in Myanmar

There was something of a wait-and-see sentiment on the part of the business community during the period leading up to Myanmar's historic elections on November 8 2015. The elections eventually culminated in the National League for Democracy, headed by Aung San Suu Kyi, securing almost 80% of the contested seats in the Myanmar parliament, and ending nearly 50 years of military dominance. M&A activities have been placed on hold during these past months, but will undoubtedly bounce back with renewed energy and force. Even in the months preceding the elections, the outgoing government had already embarked upon a series of game changing pieces of legislation, in readiness for post-election M&A activities in Myanmar.

Regulatory framework

The regulatory framework for foreign investment and carrying out M&A in Myanmar is found mainly in the 1914 Myanmar Companies Act (MCA 1914), the 1989 State Owned Economic Enterprises Law (SOEEL 1989), 2012 Foreign Investment Law (MFIL 2012), and 2013 Myanmar Citizen's Investment Law (MCIL 2013).

Historically, foreign investors could not directly purchase shares in wholly-citizen-owned Myanmar companies (in other words, those companies whose shares were 100% owned by Myanmar citizens) (Myanmar Citizen Companies) and M&A in Myanmar would hence typically be transacted as follows:

• The foreign investor purchases the shares held by an existing foreign shareholder.
• The foreign investor establishes a new joint venture company in Myanmar in partnership with a Myanmar Citizen Company, and the local partner contributes as its capital contribution, the assets which the foreign investor had intended to purchase.
• The foreign investor incorporates a company in Myanmar and purchases the assets from the target company.

To understand the historical limitations and the legal developments in M&A activities, it is useful to consider the mainframe laws, regulations and practices affecting foreign investment.

Foreign investment

In order to conduct business activities in Myanmar, a foreign investor must first establish a branch office or private limited company under the MCA 1914, with the Company Registration Office (CRO), which is a department under the Directorate of Investment and Company Administration (DICA) of the Ministry of National Planning and Economic Development.

Regardless of the entity established, the MCA 1914 provides that every foreign company (that is, a company where even one share is owned by a foreigner) must obtain a permit (Form of Permit), in addition to the certificate of incorporation (in the case of a private limited company) or the certificate of registration of branch office (in the case of a branch office), in order to carry on business in Myanmar.

Depending on the proposed business activities, it may also be necessary to obtain an investment permit (MFIL Permit) from the Myanmar Investment Commission (MIC) under the MFIL 2012. Generally, an MFIL Permit is required for a foreign investor who wishes to engage in manufacturing, industrial activities, real estate development activities, activities reserved for state-owned economic enterprises and other ministry-supervised activities. The foreign investor may further and of its own volition elect to seek an MFIL Permit in order to receive the incentives conferred by the MFIL 2012, which include the ability to secure a long-term lease of land, a five-year tax exemption from corporate income tax, and custom and commercial tax exemptions during the construction period and for the import of raw materials for a period of time after the construction period. However, there must be substantial investment, and the proposed business must create jobs, improve technology and generally benefit the country and raise the living standards of Myanmar people.

The difference is that an MFIL Permit will allow the foreign investor to enjoy certain benefits which are not otherwise extended to a company registered under the CRO and operating without an MFIL Permit (CRO Company).

Correspondingly, Myanmar Citizen Companies may also apply for an investment permit (MCIL Permit) from the MIC; but such an application is not made under the MFIL 2012 but under the MCIL 2013, the mainframe legislation for Myanmar citizens seeking domestic investment incentives.

Recent developments

A foreign investor has always been permitted to buy the shares of another foreigner in an MFIL Company. Laws and practices have also evolved such that it is now also possible for foreigners to purchase citizen-held shares of a Myanmar Citizen Company so long as that Myanmar Citizen Company holds an MCIL Permit (MCIL Company). This type of acquisition was made possible by the MCIL 2013, which was recently enacted to expressly allow foreigners to purchase citizen-held shares in an MCIL Company and subsequently to continue the business as an entity operating under the MFIL 2012, subject to the approval of the MIC. This is in direct contrast to the 1994 MCIL, which explicitly prohibited the acquisition by foreigners of citizen-held shares in an MCIL Company.

In contrast, there has not been any prevailing rule of law to prevent a foreigner from purchasing citizen-held shares in a CRO Company. However, in practice, the CRO would not register such transfers because it perceived a difference in the status of a Myanmar Citizen Company. Yet in recent times, the CRO has become open to considering such transfers for sectors where foreign-local joint ventures have been expressly endorsed by the relevant ministry.

Restrictions in sector-specific investment

As in many emerging jurisdictions, foreign investments are prohibited or restricted in certain 'negative list' sectors.

Firstly, under the SOEEL 1989, the government has the sole right to conduct certain economic activities. Those activities include the manufacture of security and defence-related products, and the exploration, extraction and export of pearl, jade and precious stones. The SOEEL 1989 has, however, concurrently recognised that reserved activities may be undertaken by the private sector, including foreign investors, where those activities have served the interests of the State. Hence, notwithstanding the SOEEL 1989, the government has allowed private sector participation in sectors which were supposedly reserved for state-owned enterprises under the SOEEL 1989, such as oil and gas, banking services and telecommunication services.

Notification 49/2014 (Foreign Investment Notification) dated August 14 2014 issued under the MFIL 2012 clarified to a certain extent the economic activities in which foreign participation may take place, by listing economic activities which were:

• prohibited for foreign investment;
• permitted only under a joint venture with a Myanmar citizen (Myanmar Citizen), the reference to which includes a Myanmar Citizen Company; or
• permitted only with specific conditions, such as with the recommendation of the relevant government ministry and under a joint venture with a particular ministry or a Myanmar citizen.

That said, and although 'trading' is not an activity listed in the Foreign Investment Notification, the rule which prevails today is that foreigners cannot engage in trading activities in Myanmar, that is to say, the import of goods into Myanmar, and/or purchase of goods domestically, for purposes of sale or supply to a third party.

Deal protections and break fees

M&A transactions in Myanmar are almost entirely private in nature as shares of target companies are not as of yet publicly traded. This may change with the Yangon Stock Exchange (YSX) having launched in December 2015, and companies already preparing to list and trade their shares in the very near future.

Since M&A activities in Myanmar are limited to private company transactions, deal protection and break fee provisions have to be negotiated and agreed at the letter of intent and memorandum of understanding stage. Generally, provisions providing for a contractual sum to be payable in certain contingencies are enforceable so long as the amount contracted for is reasonable.

Regulatory developments

Trading regulations

As previously mentioned, trading activities are generally reserved for Myanmar Citizens and Myanmar Citizen Companies. However recent exceptions were introduced and may result in an increase in M&A activities in the relevant business sectors.

Agricultural products and healthcare equipment Foreigners operating in joint ventures with Myanmar Citizens or Myanmar Citizen Companies recently have been permitted to engage in trading activities in respect of fertilizers, insemination seeds, pesticides and hospital equipment under MOC Notification number 96/2015 dated November 11 2015.

Showroom sales of new motor vehicles Foreigners operating in joint ventures with Myanmar Citizens or Myanmar Citizen Companies have also been allowed to import and distribute brand new motor vehicles in Myanmar under MOC Notification number 20/2015 dated March 18 2015, provided that they secure a showroom licence from the MOC, and are formally appointed by the manufacturer as a distributor of the motor vehicles.

Thilawa Special Economic Zone Instruction 02/2015 issued by the management committee of the Thilawa special economic zone (TSEZ) on May 27 2015 further permits foreign companies established in the TSEZ to engage in trading activities. This includes trading in the larger Myanmar market, subject to the fulfilment of certain prescribed conditions, including the investment of a minimum capital amount, the establishment of a warehouse in the TSEZ and the introduction of value-added manufacturing processes or services.

Condominium law

Under the 1987 Transfer of Immovable Property Restriction Act, the transfer of immovable property to a foreigner is prohibited. The Condominium Law, enacted on January 29 2016 creates an exception by allowing 40% of the housing units of a high-rise residential building registered as a condominium to be sold to foreigners. However, the source of funds for purchases made by foreigners must come from abroad, and foreign-invested entities established within Myanmar may not be able to make purchases from earnings generated in Myanmar.

Banking

In May 2014, the Central Bank of Myanmar (CBM) introduced a competitive licensing scheme whereby it invited interested foreign banks with representative offices in Myanmar, or which were in the process of establishing representative offices, to submit proposals to the CBM for a branch licence. Under the first round of the call for proposals, nine foreign banks were granted with licences to operate a branch for the provision of wholesale banking services to foreign-owned companies operating in Myanmar. A second call has since been made and awarded in favour of four additional banks.

The Financial Institutions Law (FIL 2016) was enacted on January 25 2016 replacing its 1990 predecessor, and now governs the conduct of banks and other financial institutions in Myanmar. The new FIL 2016 contemplates the setting up of subsidiary banks as opposed to branches only, by foreign banks.

Under the FIL 2016, it is also contemplated that foreign entities may now invest in existing local banks both by way of equity injection and by extending loans. Moreover, mergers between banks are also sanctioned under the FIL 2016. Foreign banks are permitted to acquire all or part of another bank established in Myanmar as well as sell their own businesses as conducted in Myanmar. Advance written approval from the CBM is necessary for each of these M&A activities.

Arbitration law

The Arbitration Law was enacted on January 5 2016, serving as the municipal legislation to give effect to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, to which Myanmar acceded on April 16 2013. This development is pertinent for disputes arising in M&A deals, since parties may now rest assured that awards given by a foreign arbitral tribunal will be given due recognition by the Myanmar courts.

Securities and exchange laws and rules

The Securities and Exchange Law enacted on July 31 2013, was followed by the issuance of the Securities and Exchange Rules on July 27 2015 by the Ministry of Finance. The YSX launched on December 9 2015, with six companies having formally indicated their intent to list in the very near future. It is expected that trading on the YSX will begin within the next few months. While there has not been any official notification that foreigners will be able to buy shares in Myanmar listed companies and therefore to trade on the YSX, government officials have recently indicated that foreign participation may be allowed when the new Myanmar Companies Act is passed and the distinction in status between Myanmar Citizen Companies and foreign-owned companies is removed.

Competition law

The Competition Law was enacted on February 24 2015, establishing a competition/antitrust policy in Myanmar. The President's office issued Notification 69/2015 on December 12 2015, stating that the Competition Law will only come into effect on February 24 2017.

The Competition Law generally classifies four types of violations relating to controlling competition, market monopolies, anti-competitive acts or what are basically unfair trade practices, and merger control. Violation of these acts merits organisational/corporate and/or individual liability, which results in fines that run up to Kyat 15 million ($12,400), and/or imprisonment (individuals) for up to three years.

Future M&A plans/transactions should not result in 'excessive market domination'. The thresholds for market domination have not as yet been prescribed. It is interesting to note that the Competition Commission to be formed under the law, may as an exemption allow certain agreements that constrain market competition, if among other things, they increase the competitive power of Myanmar businesses in the international market. It remains to be seen if this exemption will justify to any material extent, consolidation of local market strength and share, where this meets the larger purpose of competing in the international market.

Further reforms

The Myanmar Parliament has yet to pass the much anticipated new Myanmar Investment Law and Myanmar Companies Act. The new Myanmar Investment Law, which combines the existing MFIL 2012 and MCIL 2013 will improve investors' rights, even in cases where an investment permit is not obtained from the MIC. Amendments to the Myanmar Companies Act will update the century-old law and modernise the registration and governance of business entities in Myanmar. It is likely that discussion on the proposed laws will be postponed until the Myanmar Parliament, under the new government, reconvenes, but the business community anticipates only further improvements in investors' rights and business efficacy.

Undoubtedly, there are challenges to investing and doing business in an emerging market, particularly in a market such as Myanmar where laws and regulations and business institutions are highly underdeveloped because of an extended period of geopolitical isolation and economic sanctions. Myanmar has, however, taken on the challenge of rewriting and reenacting its laws and reforming its business and institutional infrastructure, and has achieved important milestones in an extremely short timeframe. Investors well versed in the reforms will therefore continue with confidence to seize upon the many valuable opportunities that Myanmar has to offer, thereby enjoying the advantage of being the early bird in the game.

  First published by our sister publication IFLR magazine. Take your free trial today.

Swee Gim Cheah
Kelvin Chia Yangon
Yangon

About the author
Cheah Swee Gim, director of Kelvin Chia Yangon and head of the corporate and commercial department of Kelvin Chia Partnership, has more than 25 years of corporate legal practice in South East Asia.

Her substantial portfolio of professional work includes mergers and acquisitions, de-mergers, joint ventures, corporate reorganisations and restructurings, private equity funds, equity and capital planning, debt restructuring, financing and banking transactions, and myriad commercial contract and corporate issues. Her experience in commercial transactions includes complex agreements where intellectual property rights and information technology played critical roles. In Myanmar, she has extensive experience in advising investments in the real estate, aviation, oil and gas, mining, and agriculture sectors and the special economic zones.

She received her law degree from National University of Singapore and an LLM in intellectual property studies from New York University.

Lyra Miragrace Flores
Kelvin Chia Yangon
Yangon

About the author
Lyra is a foreign consulting attorney at Kelvin Chia Yangon. She provides structuring and legal advice to both local and foreign clients in various business industries in Myanmar, including energy, infrastructure and real estate development, distribution and retail, manufacturing, agriculture, and logistics. She regularly assists clients throughout the investment process in Myanmar, including advising on preliminary limitations/issues, establishing the appropriate investment structure, and supporting the project by drafting the relevant commercial agreements.

Lyra obtained her Bachelor of Arts and Juris Doctor degrees from the Ateneo de Manila University in the Philippines. She also holds a Master of Corporate Law degree from the University of Cambridge (Sidney Sussex College) in the UK. Lyra is a member of the Philippine bar.