-
14 July 2013
10 Things to Know about Private Equity
Investments in Myanmar Edwin Vanderbruggen, Paul Nikitopoulos
and Wint Wah Khin Mg Than
Although some argue it is actually still a bit early for private
equity investments, Yangon is these days awash with fund managers
looking to build a pipeline. Or, in rare occasions, to make actual
investments. Reason enough to present a hopefully useful round-up
of the key legal issues every fund manager or private equity
investor should know. We have tried to keep this list as
Myanmar-specific as possible, so we have left out the items of
information that are more or less valid for any emerging market
jurisdiction. You cant buy shares in a wholly Myanmar-owned company
Its by now a fairly well-known fact, we thought. Nevertheless, we
continue to be amazed by the number of deals that are conceived on
the faulty premise that the foreign investor will at some stage buy
shares in a wholly Myanmar-owned company. Such transfers are,
practically speaking, not implementable. Myanmar has different
licensing systems for wholly-Myanmar owned companies and all
others. As a result, when a Myanmar company is and has always been
owned by Myanmar nationals, a foreigner cannot simply purchase
those shares. Although the Myanmar Companies Act allows such
transfers, a combined and strict reading of the Foreign Investment
Law (FIL) and the Myanmar Citizens Investment Law (MCIL), plus the
prevailing practice of the authorities basically make this
unfeasible.
ABOUT THE AUTHORS
Edwin Vanderbruggen is VDB Lois partner
responsible for Myanmar. Formerly with Loyens
& Loeff and a partner at DFDL, he has 21 years
of legal and tax experience, five years of which
have been in relation to Myanmar. Edwin lives
full-time in Yangon, where he leads a team of
approximately 20 lawyers and tax advisors.
[email protected]
Paul Nikitopoulos is a US attorney with 15 years
of experience, and was formerly with Clifford
Chance and OMelveny & Myers. He holds an
MBA from Cambridge University and a J.D. from
Duke University. He has extensive experience in
providing integrated solutions for M&A and
private equity transactions. He lives full-time in
Yangon.
[email protected]
Wint Wah holds a Bachelors of Law and a
Masters of Law from the University of East
Yangon. She is a qualified member of the
Myanmar bar. Prior to joining VDB Loi, Wint
Wah researches and advises on commercial
corporate law issues, mostly related to foreign
investment. She is part of the legal team that
advised on Yangons new international airport,
and on the countrys first Western-owned power
plant.
ABOUT VDB LOI
VDB Loi is a leading law and tax advisory firm with more than 60
transactional lawyers and tax advisors across our offices in
Cambodia, Indonesia, Laos, Myanmar, Vietnam and our liaison office
in Singapore. We provide the highest quality solutions for
transactions and taxation.
With approximately 20 lawyers and tax advisers on the ground in
our offices in Yangon and Nay Pyi Taw, we are a leading advisory
firm in Myanmar. www.vdb-loi.com
-
Foreigners that wish to acquire a shareholding of less than 100%
in an existing Myanmar business need to establish a joint venture
company (JV Co) under the FIL. The local partner will in the
process of setting up that JV Co transfer the business to it, with
approval of the investment regulator (Myanmar Investment
Commission, or MIC). The end result is the same, of course. The
foreign investor owns shares in a Myanmar-registered company (the
JV Co) which also has Myanmar shareholders. Investors interested in
taking shortcuts by using a Myanmar citizen to acquire the shares
on their behalf end up on a slippery slope. Money flows in and out
are in such a scenario unsupported by a clear regulatory framework.
You might not have a right to repatriate funds or profit. The
structure cannot or hardly be secured. To say nothing of the fact
that, depending on how the structure is implemented, the whole
arrangement might not be in accordance with Myanmar law and thus
unenforceable in case of trouble. You cant easily reflect the
provisions of the JVA in the articles of a Myanmar JV Co The
Myanmar Companies Act (MCA) entered into force in 1914 as the
Indian Company Act and has only been amended slightly since. The
MCA includes Table A, the name of a template of articles of a
company. The MCA clearly states that Table A is not binding, except
for a handful of provisions that are provided in a helpful list and
relate to several issues such as dividend calculation, voting,
directors and proxies. Shareholders are theoretically free to
choose other articles, as long as these articles are in accordance
with the MCA, and there should be no problem enforcing them. Well,
in theory. In practice, it is an issue. The DICA has prepared, and
normally uses, its own articles template, which is largely (not
entirely) based on Table A. Standardizing the process is entirely
understandable. Practically speaking, it is far more efficient for
DICA to promote the use of one template. If every company used
different articles, DICA would need to muster enormous resources to
analyze each and every set of proposed articles for legality. It is
difficult to imagine where those resources would come from. The MCA
does not state explicitly which of its provisions you may deviate
from in your particular
articles. There is no helpful list of articles as there is for
Table A. Nevertheless if one takes a closer look, it becomes clear.
A number of provisions of the MCA contain language such as
notwithstanding any other mention in the articles. Of course, this
means what it means. Furthermore, we believe that the provisions of
the MCA that connect to matters which are compulsory in Table A
should, logically, also be seen as MCA provisions you cannot
deviate from. Finally, we think it is reasonable to argue that any
provision of the MCA with a criminal penalty or fine should be seen
as public law and is thus not susceptible of being changed by two
or more shareholders. There are a number of measures you can take
to mitigate this problem, including passing special shareholder
resolutions and patiently convince DICA, vetting whether all
deviations are really necessary, and using an offshore JV Co.
Non-compete clauses might not always be enforceable Section 27 of
the Myanmar Contract Act renders every agreement by which any one
is restrained from exercising a lawful profession, trade or
business of any kind void. This statute throws a shadow on any
non-compete clause of joint venture agreements (JVAs) meant to be
enforced in Myanmar. There are a number of classic court decisions
of what are now Myanmar courts interpreting the statute,
authoritative scholarly writings on the Myanmar Contract Act and
more recent Indian case law on the identical statute. According to
the us, it is possible to interpret the statutory Exception 1 to
the statute in such a manner that it allows for non-compete clauses
in JVAs, subject to a reasonableness test. Furthermore, the authors
argue that, based on a number of arguments found in the Myanmar
Contract Act and other Myanmar statutes, the rule has not been and
should not be interpreted or applied in an unnecessarily literal
manner by Myanmar courts. Nevertheless, investors are cautioned not
to assume that all non-compete clauses will be upheld by Myanmar
courts. The (well placed) local partners have many options Today,
even with a very large section of the foreign community still
believing it is too early, the ones that do proceed far outnumber
those larger local
-
players who would make good prospective partners in any given
industry sector. If you seek a local partner for a telecom
consortium, for example, there are just a handful of experienced
local companies. This was well demonstrated when the list of
prequalified bidders was published on 11 April 2013. On top of
that, as OFACs list of Specially Designated Nationals (SDN) still
lingers (for the moment), the pool of potential JV partners becomes
even smaller. Not every foreign company actually falls within the
purview of the remaining US sanctions, of course, but in our
experience, there are few large investors willing to ignore the
potential or perceived reputational risk anyway. So, there is a
funnel effect. The prettiest girls at the prom get more attention
than they can handle. The completion time and the completion risk
of a PE deal increases. For some local partners with small
management teams and a single decision maker which certainly does
not apply to everyone just finding the time to attend meetings and
prepare documents is a challenge. More importantly, perhaps, local
partners are more likely to keep playing the field, always keeping
options open, reluctant to go hard. The more or less only clear
legal path to international secured loans is through an MIC Permit
There is very little experience in Myanmar with private
international secured lending. A new regulatory framework has been
created by means of the regulations implementing the FIL. These
regulations provide that financing and security of a foreign
invested project needs to be approved by the MIC, not the Ministry
of Finance (MoF) or the Central Bank of Myanmar (CBM). There are a
number of conditions for the approval, and the interpretation of
these conditions is still in flux. Without the FIL, or rather
without the MIC, the applicable laws and regulations for approving
an international loan become much murkier. Though not impossible,
the completion time and risk is difficult to estimate, making this
a most likely unfeasible option at this time. Most cases of
commercial lending to date have been done offshore, i.e. with the
borrower having some type of offshore presence which actually
borrows and sometimes provides security on offshore assets or
shares. From the matters our firm is presently
working on, however, we think that this will change rapidly. You
cant be actually certain you will get an MIC Permit until you try
In the present stage of Myanmars regulatory framework there will be
issues that will have to be resolved as you go along. Needless to
say, such uncertainty puts pressure on a deal, particularly for a
PE investor that has not gone through it yet. Some of the
legislation is a bit outdated and the Government may put a
different spin on old rules. As far as new rules go, it is too soon
to find an established interpretation or practice. On top of that,
some transactions such as franchising, e-commerce or convertible
loans, are new here. By the same token, there are a lot of matters
where the policy of the MIC, which has changed chairman and
composition several times in the past 18 months, is difficult to
predict. There are often novel aspects to a proposed project.
Except for the slam-dunks, we as legal advisers cannot be actually
certain that the project will receive approval in its proposed form
until we try. Nevertheless, a great deal of the uncertainty
dissolves if you know the practices of the Ministries and the
details of previous deals that have recently been approved. Deals
at a break-neck pace? There are a number of factors that make
Myanmar a fast place to do business, strangely. The Government
wants to see investment projects implemented sooner rather than
later. As a result, one constant that we see over a wide range of
sectors is the emphasis the Government puts on speed of
implementation. When applying for a license to generate power, the
Government will set strict deadlines for the start of operations.
Even the Foreign Investment Rules provide tough consequences if the
development phase of a project falls behind schedule for more than
50% of the planned time. You may get the same push from local asset
owners. We need to sign the JVA within a few days or we lose the
deal is something we often hear as legal advisers. Sometimes the
hurry stems from commitments that expire really fast, such as when
a local partner has only a few months to come up with the hefty fee
for acquiring Government land rights.
-
There are a few different ways to get land rights into the
project company According to the FIL, a foreign owned company can
only obtain land rights for a real estate development in two ways:
either the company concludes a lease (or a BOT) direct with the
land owner (often the Government) or a sublease is put in place.
Both require approval from the MIC and from the landowner. Other
means may be possible, but the lease/BOT and sublease are the legal
instruments that are explicitly recognized by the FIL and the MIC.
In any real estate development deal, the MIC will monitor whether
the land rights are proper, if need be with the help of the
Attorney Generals Office. The terms of the master lease and
sublease, the details of the proposal, and the Environmental and
Social Impact Assessments will play a key role in the MIC
appraisal. For a holding company, Singapore is by far the most
effective solution Its by now quite well known that Singapore is
the most attractive jurisdiction for structuring investments into
Myanmar. The reason is almost entirely based on the mitigation of
Myanmars capital gains tax. Foreign investors that sell their
participation in a Myanmar company are taxed at a hefty 40%. Under
the tax treaty with Singapore, that rate is reduced to 0% or
maximum 10%, a very significant reduction. Even though Myanmar has
more tax treaties, Singapore is the only country with such an
advantageous arrangement. In the
case of investors that do not plan to divest their holdings,
this option has less importance. But PE investors almost certainly
need to plan for exits in the mid-term. Foreign exchange
remittances have much improved, but there are still traps to avoid
The combined effect of the 2012 Foreign Exchange Management Act,
the Foreign Investment Law and the de-sanctioning of a number of
Myanmar banks by the US Treasury has already resulted in
significant improvement of the cross border movement of money. On
the ground, we now have a somewhat clear and relatively
straightforward pathway to bringing in and extracting most types of
payment such as dividend, loan reimbursement, interest payment and
payment of service fees. There remains, understandably, much room
for improvement. There are still many situations where you can get
tangled up. For example, advance inward remittances of capital. Say
a local partner needs a cash advance from the foreign investor to
secure an asset, but the money needs to be brought in well before
the local company with an MIC Permit (and the therewith connected
capital account) can be setup. This is difficult to organize
properly and even harder to secure on the ground.
*** For more information on this subject matter, contact: Edwin
Vanderbruggen, Partner, VDB Loi [email protected]
