Wednesday 15 January 2014

The Fine Print: Legal & tax insight

In sectors where government policy prohibits 100-percent foreign-owned companies, a joint venture may be the only way for outside businesses to invest in Myanmar. But even where this isn’t the case, joint ventures are often sound decisions, as they allow access to a local partner’s market know-how, decision-maker contacts, and established supply and distribution channels.

Conversely, local partners may wish to team up with a foreign investor in order to gain access to technology, know-how, an expanded distribution network and capital. As in all developing countries, however, it is vital to conduct thorough due diligence of the local partner. This is true not only where the joint-venture company takes over an existing business but also where the object is to start a new business together.

Due diligence is crucial because, given how underdeveloped the legal framework is, it is often difficult to predict the extent to which contracts can be enforced. An in-depth background check of the partner therefore provides more protection against unpleasant surprises later – even more so than the most carefully drafted joint-venture agreement ever could. And of course, the foreign partner should not be surprised if the local partner wants to conduct due diligence on them as well – indeed, it’s probably a good sign.

Legal due diligence covers things like shareholder structure, company administration and contractual relationships. While it is possible to run a company check with the Companies Registration Office, the information obtained may not always be complete and up to date. Often, the local partner is the only source of information.

Documents that a foreign investor may wish to ask to see include the company registration certificate, the current lists of shareholders and directors, the certificate of registration as importer and exporter, land documents, audited financial statements and tax returns, labour contracts of key employees, trademark registration certificates, and important contracts with customers and suppliers.

Of course, the information that can be unearthed by checking documents is only as reliable as the degree to which the documents accurately and completely describe the facts. A document check can be backed up by interviews with the company owner and key employees, but in a country where transparency has lots of room for improvement, information will often remain sketchy. Ultimately, the main object of legal due diligence is often to find out whether the local partner adheres to acceptable standards of record-keeping.

Often, the emphasis of due diligence is not on the legal but the commercial or ethical side. Foreign investors want to know whether teaming up with a certain partner will bring reputational risks.

Sebastian and Zin Myo are consultants with Polastri Wint & Partners Legal & Tax Advisors.

source: The Myanmar Times

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