Rights of a Minority Shareholder under the New Myanmar Company ActAugust 30, 2017
After more than 100 years, Myanmar will soon enact a new Companies Act. The current one, Companies Act, 1914 (“1914 Act”), is a product of British colonization. In many regards it falls short of the requirements of companies, shares, stakeholders, and authorities in the economy of the 21st century. A draft for a new Companies Act is presently in debate in parliament (“Draft / Draft Companies Act”); it is expected to become law before the end of 2017.
VDB Loi will present aspects of the upcoming law in a series of notes. This note will discuss the rights of minority shareholders. In many cases, relations between the shareholders and their company are too complex for a simple rule of the majority. They require careful planning and structuring, and this requires a thorough understanding of the law.
This note is a first approach to understand the rights of a minority shareholder under the Draft Companies Act. It is based on our reading of the law; many aspects will depend how courts and authorities will apply the new provisions.
In general, the Draft maintains the rather restrictive outlook of the current law. Governance by the directors and majority decisions are the rule. However, the Draft seems to allow for more flexibility in the organization of the company, and introduces new instruments that minority shareholders may use to further their interests. It remains to be seen if the authorities will apply the new law according to its liberal language and let the shareholders organize their company and provide minority protection as they see fit.
Unless stated otherwise, this note only discusses provisions of the Draft Companies Act applicable to private companies limited by shares, which are by far the most common type in Myanmar.
2. RIGHTS IN RELATION TO SHAREHOLDING
2.1. Increase of Capital
The directors may decide to increase the share capital by issuing new shares at any time, unless the constitution provides otherwise (sec. 112.a.i, 63.c). This is a default rule that weakens the position of all shareholders in favor of the directors. The current law requires a shareholders’ resolution on the increase of capital.
In the event of an increase of capital, existing shareholders may have an interest in subscribing to new shares in order to avoid a dilution of their investment. The current law provides that a company must offer new shares to existing shareholders first unless the articles of association state otherwise. The Draft reverses this: By default, the company is free to issue fresh shares to new shareholders; only if the constitution explicitly states so, because the shareholders have a right of first subscription in proportion to their existing rights (sec. 63.c).
Shareholders, regardless of their participation, may want to consider if they are comfortable with granting the directors the power to dilute their investment and let new shareholders into the company unchecked.
2.2. No further commitment
No shareholder can be compelled to subscribe to more shares or to accept any increase in their liability (sec. 20), unless such an increase in liability or subscription to new shares has been agreed to by the shareholder in writing either prior to or after such event. This provision applies regardless of what the constitution may say. It ensures the predictability of the financial commitment and protects minority shareholders from the risks of expansion plans pursued by the majority.
3. MINORITY VOTING RIGHTS
3.1. Voting in the General Meeting
Shareholders exercise their voting rights in the shareholders’ meeting. The Draft provides for a general rule that, unless specifically provided for under the law or under the company’s constitution, a matter requiring a resolution shall be passed by an ordinary resolution i.e. with the “… simple majority of members present …” (sec. 155, 1.c.xx).
Sec. 152.b.iii. confirms this rule, stating that by default a resolutions must be decided by a show of hands, i.e. a procedure in which each shareholder has one vote regardless of their part in the equity. Taken literally, this rule would be a very powerful protection of minority shareholders’ interests. In practice, however, the rule is inadequate in a company limited by shares where shareholders reasonably expect to have a say in the company proportionate to their contribution to the equity. A similar provision in the 1914 Act is largely – and rightly so – ignored by DICA. It is surprising that it has found its way into the Draft.
The rules on voting in the shareholders’ meeting are explicitly subject to the company’s constitution (sec. 152.b.). This means that companies can and should opt for a vote by poll, where shares count rather than shareholders, as the default procedure. Failing that, the chair, at least five shareholders or shareholders holding 10% of the shares, can demand a vote by poll. This would have to be done before the vote.
3.2. Unanimous Resolutions
There is no requirement for unanimous decisions of the shareholders’ meeting in the Draft. The constitution of a company may provide such requirements (cf. 3.3. below).
Private companies may pass written resolutions instead of holding a shareholders’ meeting. Written resolutions require the consent of all shareholders (sec. 156.d), in other words, a unanimous decision. However, this does not confer a veto right to individual minority shareholders; they can merely block the written resolution. The board or shareholders holding 10% of the shares can work around such opposition simply by calling a shareholders’ meeting where decisions are taken by ordinary or special resolution (cf. 3.4. below).
3.3. Special Resolutions
Decisions must be taken by special resolution where the law or the constitution specifically require it (sec. 155).
A special resolution is passed with a majority of 75% of the members present (sec. 1.c.xxxix); in a vote by poll the shares should count. The constitution may expand the requirement of a special resolution to other matters or change the percentage of the qualified majority. The Draft is silent on the question whether that company may lower the percentage, and if so to what extent. Lowering the percentage to 50% the company could abolish the requirement for a special resolution, and so defeat the purpose of the law. At the same time companies may have legitimate interests to provide lower percentages the 75%, e.g. to avoid veto rights of individual shareholders.
The draft law requires a special resolution for decisions on the following matters:
- Maintaining the company’s business objects (sec. 12.f);
- Alteration of the constitution (sec. 17);
- Change of name (sec. 25.d);
- Change of type of company (sec. 57.a), e.g. from a private company to a public one, from a public to a private one, or from a company limited by guarantee to one limited by shares;
- Issuance of preference shares (sec. 73);
- Conversion of ordinary shares into preference shares, or the other way around (sec. 112.iv./v.);
- Assignment of office by a director (sec. 177);
- Including remuneration to officers (other than directors) in the profit and loss account (sec. 262.c);
- Winding up by the court (sec. 298.a);
- Voluntary winding up (sec. 345.b);
- Power of the liquidator to receive share, policies, or other interests in other companies as compensation for the sale of assets of the company in voluntary liquidation (sec. 354.a);
- Sanction the exercise of powers by the liquidator (sec. 375.a);
- Sanction arrangements between a winding up company and its creditors (sec. 378);
- Sanction the general scheme of liquidation (sec. 396);
- Disposal of documents after winding up (sec. 405).
The Draft provides for certain matters which require even more qualified majorities:
- A selective reduction of the capital [I.e. one that either i) relates not only to ordinary shares, or ii) does not apply to each shareholder in proportion to the number of their shares, or iii) is not made on the same terms for all ordinary shareholders.] requires a special resolution with no votes being cast in favor of the resolution by any person who would benefit from it or their associates, or a resolution agreed to, at a general meeting, by all ordinary shareholders (sec. 116.b). If the reduction involves the cancellation of shares, the reduction must also be approved by a special resolution passed at a meeting of the shareholders whose shares are to be cancelled (sec. 116.c).
- An agreement for a selective buy-back of shares [I.e. one that either i) relates not only to ordinary shares, or ii) does not apply to each shareholder in proportion to the number of their shares, or iii) does not give every shareholder have a reasonable opportunity to accept the offers, or iv) does not provide a specified time for acceptances, or v) is not made on the same terms for all ordinary shareholders.] requires a special resolution with no votes being cast in favor of the resolution by any person who would benefit from it or their associates, or a resolution agreed to, at a general meeting, by all ordinary shareholders (sec. 121.b).
- Changing or varying rights attached to shares in a class requires a special resolution by the company and a special resolution of the shareholders holding shares in that class. The constitution may provide a different procedure (sec. 126.b). If minority shareholders holding at least 10% of the shares that have been varied do not consent, they can apply to the court to have the variation cancelled; this right is not subject to the constitution (126.e).
- A company may provide financial assistance to a person acquiring shares in that company. This requires a special resolution with no votes being cast in favor of the resolution by the person acquiring the shares or their associates, or a resolution agreed to, at a general meeting, by all ordinary shareholders (sec. 133.b).
3.4. Other Rights in the General Meeting
10% of the shareholders or at least 100 shareholders may request the directors to call a special general meeting and propose the business of such meeting. The directors must call the meeting if the proposed business is of the kind that could properly be considered at a general meeting (sec. 151.b). The constitution may not restrict this right.
Every shareholder entitled to vote in a general meeting must be given notice at least 21 days prior to the meeting (152.a.1). This requirement can only be waived with the consent of all shareholders entitled to vote.
The chair must allow a reasonable opportunity for the shareholders to ask questions or make comments about the management of the company, and to ask the auditor questions about the audit, audit report or accounts of the company (sec. 146.a).
4. MEMBERS’ RIGHTS AND REMEDIES
Under the heading “members [sic!] rights and remedies” the Draft introduces a new set of tools for shareholders who are dissatisfied with how their company is run. They may act against the company to stop or remedy conduct they deem oppressive, and they can act on behalf of the company in judicial proceedings.
These rights can be powerful means to protect the interest of minority shareholders. Any shareholder, however small their part in the equity may be, is entitled to use them.
The new rights and remedies are judicial in nature. Their usefulness and effectiveness will depend to a great extent on the ability of the Myanmar judicial system to set reliable precedents and to conduct fair and expedient proceedings. In the best case the mere possibility of an action against the company may create enough leverage to discipline a run-away management; in the worst the new provisions open the door for frivolous actions and petty account settling that can paralyze a company.
4.2. Actions in Case of Oppression
Any shareholder can apply for a court order against oppressive conduct. If the court establishes that conduct is oppressive, it has broad and far reaching powers to make any order it considers appropriate; such orders may include (sec. 193.a):
- Winding up the company;
- Modifying or repealing the constitution;
- Regulating its conduct in the future;
- Purchase of shares by the company or another person;
- Judicial proceedings by or on behalf of the company;
- Restraining a person from doing, or requiring them to do a specific act;
The conduct of the company entitles shareholders to request such orders if it is:
- contrary to the interests of the shareholders as a whole, or
- oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a shareholder or shareholders whether in that capacity or in any other capacity (sec. 192.a).
The courts will have to develop the scope and limits of this definition. Precedents from other jurisdictions may provide guidance.
Based on the language of the law it should be clear that only shareholders’ interests justify an order, not the (alleged) interests of the company. The interests of the shareholders as a whole are essentially financial: maintaining the value of their investment and receiving a dividend. Other interests shareholders may claim to have (e.g. in relation to certain projects, assets, people or the business culture) should not allow them to interfere with the running of the company.
In providing the means to act against oppressive, prejudicial or discriminatory behavior the Draft makes it clear that it expects a certain degree of loyalty of the company towards its shareholders. This loyalty extends beyond the corporate relationship to include any dealings between the company and the shareholder “… in any other capacity”, e.g. as a contracting partner or an employee.
4.3. Derivative Actions
Derivative actions are taken in the interest of the company, not the shareholders.
Any shareholder, former shareholder or person entitled to be registered as a shareholder can bring proceedings on behalf of a company, or intervene in any proceedings to which the company is a party, or take a particular step in them (sec. 196.a.). Directors and officers of the company have the same right.
A person wishing to use this right must first give at least 14 days’ notice to the company (unless this requirement would be inappropriate in the case). They must then apply for leave to the court. The court will grant leave if (sec. 197.b):
- It is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them;
- the applicant is acting in good faith;
- it is in the best interest of the company that the applicant be granted leave;
- there is a serious question to be tried (only if new proceedings are in question).
An informed decision of the company taken in good faith and without conflicts of interest to engage or not to engage in a certain proceeding against a third party creates a rebuttable presumption that the derivative action is not in the interest of the company. This is a confirmation of the principle of governance by the directors; they are competent to decide what is in the interest of the company. Only if they abuse their power, e.g. by acting in bad faith or in their own interest, may shareholders take matters in their own hands.
The ratification by the majority of shareholders of a decision to engage or not to engage in certain proceedings does not prevent one of them or any other shareholder to apply for leave for derivative action; but the court must take such ratification in consideration (sec. 199). This provision ensures on the one hand that minority shareholders may defend the company against abuses by the majority; on the other hand it protects the majority in the fair exercise of its rights. As a general rule the majority decides; only abuses justify exceptions.
5. INFORMATION RIGHTS
Minority shareholders without representation in the board of directors often lack the information they require to protect their interests.
The Draft identifies a set of documents and information that must be made available to all shareholders. It also institutes a procedure for shareholders who suspect foul play.
5.2. Inspection by Shareholders
Any shareholder, regardless of their share in the equity, may inspect the following documents at the registered office of the company or at the premises of a third party maintaining them. They may also request copies:
- Registers and indexes of shareholders and other interests (sec. 99);
- Minutes of general meetings and written resolutions (sec. 157.d/e.);
- Register of directors (sec. 189.d.);
- Instruments creating mortgages (sec. 249);
- Register of debenture holders (sec. 251).
Inspection is free of cost; copies must be paid for.
5.3. Financial statements in particular
Companies (other than small companies) must present their financial statements and the auditor’s report in a general meeting once per year (sec. 260.a). The financial statements include the balance-sheet, profit and loss account, the amount of the dividend, and a director’s report. This director’s report must present a fair review of the company’s business, including a description of the company’s primary business, an analysis of the company’s performance during the year, a description of risks and uncertainties facing the company and any other matters which may be prescribed.
The financial statements and the auditor’s report must be kept open for inspection for at least 21 days before the meeting (sec. 260.c).
Shareholders may require copies of the audited financial statements (sec. 268).
The financial statements only give a general view on the affairs of the company; they are created by the directors and reflect their perspective. Shareholders wishing to confirm the statements would have to consult the financial records consisting of monies received and expended, sales and purchases, assets and liabilities, and other financial matters. The company must maintain these, but only open them for inspection to directors (sec. 258.b); shareholders are not entitled to inspect them.
5.4. Administrative Inspection
Shareholders holding 10% of the issued shares may apply to the competent union minister (currently the Ministry of planning and finance) to appoint inspectors to investigate the affairs of the company (sec. 271 ss).
The minister will do so if he believes on reasonable grounds, that a) company or one of its directors or officers may have committed an offence under the Draft or another applicable law, and b) the application was made in good faith and on reasonable grounds. He can require the applicants to provide evidence for their allegations and for their good faith; he may also require security for the cost of the inspection.
If the minister appoints inspectors they may require former and present directors and officers to produce all books and documents in their custody or power relating to the company, and they may examine any such person in relation to the company’s business.
The inspectors will draft and submit a report to the minister. The minister in turn will distribute copies of the report to the company and, upon request, to the shareholders having applied for the inspection. The report of the inspectors may be used as a base for prosecution. Moreover, it can be used as evidence “… in any legal proceeding …” (sec. 278).
The right to apply for inspection may be a powerful tool in the hands of minority shareholders. If they succeed they will obtain a comprehensive report on the dealings of the company, which they may use in further proceedings. The efficiency of the new instrument will depend on its application in practice. The ministry will have to determine what kind of conduct constitutes an offence and what level of certainty is required to justify an inspection.