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17 May 2013 Non-Compete Clauses in Joint Venture Agreements from the Perspective of the Myanmar Statute and Court Decisions on Restraint of Trade Edwin Vanderbruggen, Paul Nikitopoulos & Kyi Naing SUMMARY 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. The authors apply this statute to the non-compete clauses of joint venture agreements (JVAs) meant to be enforced in Myanmar. The authors review classic 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 authors, it is possible to interpret 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. ABOUT THE AUTHORS Edwin Vanderbruggen is VDB Loi’s partner responsible for Myanmar, and lives in Yangon. Formerly with Loyens & Loeff and a partner at DFDL, he has 21 years of legal and tax experience, 5 years of which in relation to Myanmar. Edwin lives full-time in Yangon, where he leads a team of approximately 20 lawyers and tax advisers. [email protected] Paul Nikitopoulos is a US attorney with 15 years of experience, and was formerly with Clifford Chance and O’Melveny & 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] Kyi Naing is a Myanmar-qualified lawyer with seven years of experience, most recently with DFDL in Myanmar. Experienced in cross-border legal issues, he has assisted international clients with their investment projects in Myanmar, and advised on a wide range of corporate and commercial issues. [email protected] ABOUT VDB LOI VDB Loi is a specialized 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. www.vdb-loi.com/vdb-loi-analysis

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17 May 2013

Non-Compete Clauses in Joint Venture Agreements from the Perspective of the Myanmar Statute and Court Decisions on Restraint of Trade Edwin Vanderbruggen, Paul Nikitopoulos & Kyi Naing

SUMMARY

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. The authors apply this statute to the non-compete clauses of joint venture agreements (JVAs) meant to be enforced in Myanmar. The authors review classic 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 authors, it is possible to interpret 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.

ABOUT THE AUTHORS

Edwin Vanderbruggen is VDB Loi’s partner

responsible for Myanmar, and lives in Yangon.

Formerly with Loyens & Loeff and a partner at

DFDL, he has 21 years of legal and tax

experience, 5 years of which in relation to

Myanmar. Edwin lives full-time in Yangon,

where he leads a team of approximately 20

lawyers and tax advisers.

[email protected]

Paul Nikitopoulos is a US attorney with 15 years

of experience, and was formerly with Clifford

Chance and O’Melveny & 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]

Kyi Naing is a Myanmar-qualified lawyer with

seven years of experience, most recently with

DFDL in Myanmar. Experienced in cross-border

legal issues, he has assisted international clients

with their investment projects in Myanmar, and

advised on a wide range of corporate and

commercial issues.

[email protected]

ABOUT VDB LOI

VDB Loi is a specialized 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.

www.vdb-loi.com/vdb-loi-analysis

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Finding and concluding a joint venture (JV) with a local partner in Myanmar is often a crucial element of a foreign investor’s strategy to secure a strategic position in this newly opened market. For a number of activities, a local partner is legally required.1 Even when it is not, foreign investors will often consider that the business might have a better chance of succeeding with a suitable local partner on board. Of course, a joint venture agreement (JVA) that directly or indirectly 2 relates to a Myanmar business might at some point need to be enforced in Myanmar, before Myanmar courts. Some typical points of potential tension between the JVA and Myanmar law relate to the governance of the joint venture company (JVCo), the reserved matters, the transfer of shares, the variation in shareholder rights, and arbitration. As part of the JVA negotiations, tricky legal angles often arise in practice in relation to funding and the financing of the capital contributed by the local partner. In this note we focus on one particular issue: exclusivity. How do non-compete clauses hold up under Myanmar law? Most JVAs will provide in one way or another that the JV partners are not to compete with the business of the JVCo. This would defeat the entire purpose of concluding a JV to carry out that particular business. What follows is a simple example of such a clause:

1

According to Notification 1/2013, which is one of the regulations that implemented the Foreign Investment Law of 2012 (FIL) a relatively limited number of activities require a local partner (so-called restricted activities) such as food production, beverage production, plastics and certain chemical industries, mining, and real estate development. In practice, the Government may still impose a requirement for a local partner in certain other sectors as well, such as oil and gas exploration (onshore and blocks on the shelf only) and banking. On the other hand, the Government may on occasion also allow 100% foreign ownership for sectors that are restricted according to Notification 1/2013. Even in the restricted sectors, the National Assembly has upheld that foreign investors may as a rule hold up to 80% of the shares (http://www.vdb-loi.com/vdb/analysis/myanmar-national-assembly-votes-to-keep-the-80-limitation-for-foreign-investment-in-restricted-business-sectors/). 2 In many cases, foreign partners sign JVAs governed by

foreign law with a company established overseas, which will in its turn set up a subsidiary in Myanmar to conduct the business there.

Non-Competition

The Foreign Partner and the Local Partner hereby agree that, for the term of this JVA, neither they nor any of their affiliates, directly or indirectly, shall carry out a business within Myanmar, whether alone or in association with any third party, which is similar to that of the JVCo as defined in this JVA (a Competing Business) except with the express written permission of the other Partner. The Partners also agree that they will not act as a consultant, adviser, promoter or service provider to a Competing Business in Myanmar, nor will they solicit, canvas, accept orders or otherwise deal with any such Competing Business.

The question is how clauses such as these will hold up when confronted with Myanmar law. Whether or not the JVA has Myanmar law as its governing law, when it comes to enforcing a non-compete clause on the ground in Myanmar, Myanmar law and the practice of the Myanmar courts is, in the final instance, the determinative. Even if one of the parties would, based on an arbitration clause, be able to obtain a foreign arbitral award on an alleged violation of the non-compete clause, the Myanmar court would not enforce it, if such an award is contrary to public policy in Myanmar.3 The Myanmar Contract Act on restraint of trade

3 A violation of the ordre public of the enforcing state is a

longstanding bar to enforcement of a foreign arbitral award, recognized in s.7 of the (India) Arbitration Protocol and Convention Act of 1937 (the Arbitration Convention Act), which is in force at present in Myanmar. The Arbitration Convention Act is basically Myanmar’s implementing law of the Convention on the Execution of Foreign Arbitral Awards, concluded in Geneva on 26 September 1927. It includes signatories such as Belgium, Denmark, Estonia, Finland, France, Germany, Greece, India, Ireland, Italy, Luxembourg, Malta, Mauritius, the Netherlands, New Zealand, Portugal, Romania, Spain, Sweden, Switzerland, Thailand and the United Kingdom. Like many of these signatories before it, Myanmar is on track to accede to and implement the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (the New York Convention). In that respect, it is noteworthy that the exception for the ordre public is also enshrined in Article V.2 of the New York Convention and Article 36 of the UNCITRAL Model Law.

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The Myanmar Contract Act of 1872, which essentially came into existence as the India Contract Act4, provides in Section 27(s.27) for a wide-reaching restriction on the restraint of trade in contracts:

“27. Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.”

This provision was reproduced from the Hon. David D. Field’s draft Code for New York, which was based upon the old English doctrine of restraint of trade.5 S.27 appears in the chapter of the Myanmar Contract Act entitled “void agreements”. The provision can be broken down into the following conditions:

1. There must be an agreement or a part of an agreement;

2. The agreement provides for a certain obligation consisting of a restraint;

3. The restraint relates to exercising a profession, a trade or a business; and

4. The exception (below) does not apply. If all of the above conditions are met, the agreement, or the relevant part thereof, is void. Situations where the restraint is not void under the Myanmar Contract Act The Myanmar Contract Act features one exception to the s.27 provision, which relates to the sale of a business. It reads as follows:

“Exception 1 - One who sells the good-will of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the

4 The India Contract Act came into force 1 September 1872 in

the “entire British-India” (original s. 1 Indian Contract Act). In 1935, Burma was separated from British India without gaining independent sovereignty. The “Government of Burma Act” specifically provided that the Indian Statutes would continue in force until altered, repealed or amended by the Legislature (Eggar, E., Digest of the Government of Burma Act 15, Government Printers 1962). 5 Pollock, S. and Mulla, D.F., Indian Contract Act and Specific

Relief Act, 9th

Edition (1909), 164; the provision was, however, never actually enacted in New York.

buyer, or any person deriving title to the good-will from him, carries on a like business therein: Provided that such limits appear to the Court reasonable, regard being had to the nature of the business.”

On its face, the exception is rather limited. Only the sale of a business is envisaged, not the start of a new business by two or more persons who promise not to compete separately with the business they carry on together. We will revisit the interpretation of Exception 1 in relation to JVAs below. Does the law refer to a partial or to an absolute restriction? According to a classic interpretation by Sir Richard Couch in one of the earliest judicial interpretations of the statute, s.27 Myanmar Contract Act covers both complete and partial restraints.

“The words ‘restraint from exercising a lawful profession, trade or business’ do not mean an absolute restriction, and are intended to apply to a partial restriction, a restriction limited to some particular place, otherwise the first exception would have been unnecessary. Moreover, in the following s. (s.28) the legislative authority when it intends to speak of an absolute restraint and not a partial one, has introduced the word ‘absolutely’.... The use of this word in s.28 supports the view that in s.27 it was intended to prevent not merely a total restraint from carrying on trade or business, but a partial one. We have nothing to do with the policy of such a law. All we have to do is to take the words of the Contract Act, and put upon them the meaning which they appear plainly to bear.”6

How do Myanmar courts interpret the provision on restraint of trade? There have been a handful of cases in Myanmar with respect to the Contract Act’s restraint of trade. Most cases date from before World War II,

6 Sir Richard Couch, C.J., in Madhub Chunder v. Raj Coomar

Doss; 14 BLR 76 (1874).

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but they remain interesting to review. It is impossible to give a complete analysis of the available body of case law on this topic within the framework of a short briefing note, but we touch upon a few interesting cases below. The case of the two butchers One noteworthy case involved two enterprises carried on by butchers.7 Their enterprises were competing with each other and presumably they were in each other’s vicinity. In order to reduce the effect of this competition, they concluded an agreement which was to be in force for four to five years. The agreement stipulated that they would open on alternate days. In other words, on any given day only one of the two butchers would be open for business. That way, the competition between them would be much reduced. There would be no need to reduce prices to compete, for instance. A third party was also mentioned in the agreement. The two butchers would compete together against the third party. If any losses resulted from this, such losses would be shared between the two of them. The first court decided that the agreement was indeed void, as it was an agreement for the restraint of trade. The appellate court confirmed the decision of the first court. It held that the obligation not to sell products, except on the agreed days, constituted a restraint of trade. Such restraint of trade falls within the purview of s.27 Myanmar Contract Act.8 The case of the two rice millers In a certain area, two rice milling enterprises dominated the market. Instead of competing with each other head on, at a certain point in time the enterprises came to an agreement. They agreed to only operate their mills on alternate weeks. A similar arrangement as we have seen in the case of the two butchers (above), as it were. In addition, they set a minimum price for rice milling services in the agreement. A penalty was also agreed to in case either party agreed to mill rice for a fee that

7 Mohamed v. Ona Mohamed Ebrahim, Civil Second Appeal No.

197 of 1920, dated 4 January 1922; 6 UBR 186. 8 Mohamed v. Ona Mohamed Ebrahim, Civil Second Appeal No.

197 of 1920, dated 4 January 1922; 6 UBR 186.

was below the set minimum, or at a time it had agreed not to operate. One of the two millers could not resist the temptation to operate, and his enterprise started providing services at times the mill was actually supposed to be closed. The other miller, the claimant, took action and filed a suit to recover the agreed damages. The defendant argued that the penalty was not enforceable, because the entire agreement was, in his view, void anyway. The appeal court did not agree. 9 The court considered that the purpose of the agreement was not to raise the price of rice milling for the public, but to ration the use of production facilities in the area. Thus, the court argued, the clause to open only on alternate weeks was not a restraint of trade. The court also considered that “[i]n the present case, the agreement was for the mutual benefit of the parties, and so far as it imposed restraint on the exercise of their business, both were equally subject to it”.10 The court held that the contract was valid, and that the defendant did owe the agreed penalties. Paying someone for not competing with you The Myanmar courts also had an opportunity to pronounce themselves on contracts that take exclusivity to an extreme: the agreement to pay someone in exchange for not competing. In one classic case 11 , an enterprise concluded an agreement with a person whereby this person was paid a certain sum every month for not starting or carrying on a stevedoring business. The payer was obviously worried that if the person would in fact start such a business, this would lead to an economic loss for the payer. The enterprise that promised to pay the fee was owned by the former general manager of a stevedoring business. It was in fact the business of the husband of the person that the fee was supposed to be paid to. Before his death, the husband had carried on a successful stevedoring business with four places of business. After his passing, his widow was basically offered money by

9 Justice L. M. Parlett in Tan Khwan Hong v. Maung Kyaw,

Chief Court of Lower Burma, 13 June 1912, 5 (BLT) 236. 10

Justice L. M. Parlett in Tan Khwan Hong v. Maung Kyaw, 5 (BLT) 238. 11

G. Hurry Krishna Pillay v. M. Anthilatchmy, 8 L.B.R. 389.

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the general manager of that business not to start a stevedoring business, seemingly so that the general manager himself could do so more easily. The money was paid for a number of months, but the general manager apparently changed his mind and stopped the payments. In this case, the widow thus became the claimant. She sued for payment of the amounts that were promised in exchange for not competing. The court decided that the contract was actually void, based on s.27 of the Myanmar Contract Act. Accordingly, the defendant did not owe the claimant anything. The claimant was not allowed to recover compensation on a contract that was void, the court ruled. Persuasive Indian case law on the identical statute The problem of the absolute character of s.27 has been noted as far back as 1909 by Pollock and Mulla in their classic treatise on Indian contract law.12 The interpretation of s.27 has evolved in India, where the identical provision is still in force and where we might ordinarily expect to find persuasive precedents13:

“The legal position that appears to be fairly crystalized in India is that while construing the provisions of s.27 of the Contract Act, neither the test of reasonableness nor the principle of restraint being partial is applicable unless it falls within the Exception appended to s.27. The reasonableness of the restraint is not envisaged by s.27. Under s.27 of the Contract Act, [a] restrictive covenant

12

Pollock, S. and Mulla, D.F., Indian Contract Act and Specific Relief Act, 9

th Edition (1909), 271: “the law of India is tied down

by the language of the section to the principle, now exploded in England, of a hard and fast rule qualified by strictly limited exceptions”; and “This section, like the last, unfortunately follows the New York draft Code, which has been the evil genius of this Act” (on page 164); See also Meena, R. L., Textbook On Contract Law Including Specific Relief, p. 148. 13

Christie, A., “The rule of law and commercial litigation in Myanmar”, 10 Pac. Rim. L. Poly. J., 47.

extending beyond the terms of the contract is void and not enforceable.”14

However, it is nevertheless true that in India, the courts seem much less reluctant to uphold a non-compete clause between two business partners than a similar clause between an employer and an employee. In a 1967 Indian case on s.27, for example, the learned judge noted that:

“[t]he Court takes a far stricter view of covenants between master and servant than it does of similar covenants between vendor and purchaser or in partnership agreements.”15

Non-compete clauses that fit within Exception 1 Even if s.27 Myanmar Contract Act would be interpreted in an absolute manner by Myanmar courts, the Exception will, in our view, often provide protection for a non-compete clause in a JVA. Notably, in many cases, the local partner has some type of an existing business in Myanmar which is more or less integrated into the expanded JV business. The local partner may in practice contribute land rights, an operating license, and local market know-how, for example. Although the continuation of an existing business by means of a JV is not specifically mentioned in the Exception, one could, in our view, argue that when the local partner transfers its existing business into a new entity in which both the local partner and the foreign partner hold a share, thus creating a JV under Myanmar law16, in actual fact the JVCo has bought the local partner’s business in exchange for shares in that JVCo. In other words, a situation of “sale of the goodwill of a business” in the sense of Exception 1 does exist, notably from the local partner to the JVCo, and which is remunerated with shares in the JVCo. The essence

14

R Lodha in Zaheer Khan v. Percept D' Mark (India) Private ... on 19 December 2003; AIR 2004 Bom 362, IV (2004) BC 181; see also Superintendence Co. of India (P) Ltd. v. Krishan Murgai, AIR 1980 SC 1717. 15

J. Shelat in Niranjan Shankar Golikari v. The Century Spinning & Mfg. Co. Ltd.,; 1967 AIR 1098, 1967 SCR (2) 378 (on page 384). 16

The FIL and the Myanmar Companies Act do not provide in a definition of a JV for the purposes of Myanmar law, but it can be derived from Art. 9 and 17 FIL that any company is meant which was formed for an investment in Myanmar the capital of which is not owned 100% by a foreign investor.

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is that the local partner has transferred a business to the JV and the Contract Act explicitly allows restraints of trade in this situation, subject to the conditions laid out in the Exception to s.27. Non-compete clauses that do not fit within Exception 1 However, what if there is no business transferred at all and the Exception does not operate? Is in such cases the correct interpretation of s.27 Myanmar Contract Act that any non-compete clause is void, or does it depend on the circumstances, the contract, the reasonableness of the restraint that the JV partners agreed to? Myanmar is of course not alone when it comes to evaluating the enforceability of non-compete clauses. In the European Union (EU)17 and the United States18, to name just a few examples, non-compete clauses in JVAs at times raise issues in connection with competition laws. In EU competition law, non-compete clauses between the parents of JVAs may potentially fall within the purview of the EU’s anti-competition rules comprised in art. 81(1) EC Treaty.19 Interestingly, however, such non-compete clauses are not regarded as a violation of art. 81(1) EC Treaty if they are “ancillary restrictions without which the

17

S.101 Treaty on the Functioning of the European Union (TFEU). 18

In January 2013, for example, citing anti-trust laws, the Federal Trade Commission required two sellers of bulk bleach to terminate an agreement not to supply products to a certain region for a certain period of time. 19

Art. 81 (1) EC Treaty (formerly art. 85(1)): “The following shall be prohibited as incompatible with the common market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market, and in particular those which: (a) directly or indirectly fix purchase or selling prices or any other trading conditions; (b) limit or control production, markets, technical development, or investment; (c) share markets or sources of supply; (d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; (e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts”; Myanmar is preparing competition legislation: http://mmtimes.com/2010/business/538/buiz001.html.

existence of the JV would be undermined”.20 For example, in a landmark case the Commission decided that a non-compete clause in a JVA is not a violation of EU competition law because:

“[N]either party could reasonably have been expected in the circumstances of this case, in which each of them commits all its existing and future applicable facilities and expertise to the joint work, to give to the other party unreserved rights to exploit the results independently or in association with third parties.”21

It is clear to us that, paraphrasing Lord Reid in Esso Petroleum22, to some extent every contract by which a company agrees to do something with the other party for any future period might arguably be seen as a ‘contract in restraint of trade’, because it restricts the company’s liberty to do as it pleases. In other words, applying s.27 strictly, literally, without taking into account the reasonableness of the restriction might lead to commercially absurd and legally inequitable results. We also think that the non-compete obligation provided in s.87H of the Myanmar Companies Act, which prohibits managing agents of companies to compete with the business they manage, supports our argument that s.27 Myanmar Contract Act should not be seen as an absolute prohibition.23 What clauses will Myanmar courts likely uphold? Above, we have cited classic but relevant decisions of Myanmar courts as well as more recent Indian cases on the identical statute where the alleged restraint of trade has been upheld in a commercial agreement. Thus, two situations appear to be possible: a certain number of non-compete clauses will be deemed enforceable while others will not. That is important. As we know that a distinction is possible, all that remains is to work out how the

20

Green, N, and Robertson, A., Commercial Agreements and Competition Law, second edition, p. 744-745. 21

77/781/EEC: Commission Decision of 23 November 1977 relating to proceedings under Article 85 of the EEC Treaty (IV/29.428: GEC-Weir Sodium Circulators), Official Journal L 327, 20/12/1977 P. 0026 – 0037, 3 e). 22

Esso Petroleum Co. Ltd. (1967) 1 All ER 699). 23

S.87H Myanmar Companies Act provides that “a managing agent shall not on his own account engage in any business which is of the same nature as and directly competes with the business carried on by a company under his management or by a subsidiary company of such company”.

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distinction is made. What criteria make a non-compete clause acceptable despite s.27 Myanmar Contract Act? Keeping in mind the reference to “reasonableness” in Exception 1 of the statute, the arguments followed in a number of classic decisions of the Myanmar courts, including Tan Khwan Hong v. Maung Kyaw (decisions that may or may not withstand the test of time), other relevant Myanmar statutes such as s.87H of the Myanmar Companies Act (which orders managing agents of companies not to compete with the company they manage), and relevant Indian decisions on the same statute (which are more permissive of non-compete clauses between business partners), it seems to us likely that principles such as equity, the objective and purpose of the clause, and reasonableness will play a significant role in any evaluation by a Myanmar court.24

24

U Sein v. Daw Mya Aung [1984] BLR 224 (in general on judicial interpretation).

Whether the Exception applies or not, when drafting non-compete clauses, investors in Myanmar should be mindful that there is at least a measure of judicial discretion that may have an effect on the enforcement of their commercial agreements, including JVAs.

***

For more information on this subject matter, contact: Edwin Vanderbruggen, Partner VDB Loi [email protected]

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Kyi Naing is a Myanmar-qualified lawyer with seven years of experience, most recently with DFDL in Myanmar. Experienced in cross-border legal issues, he has assisted international clients with their investment projects in Myanmar, and advised on a wide range of corporate and commercial issues.

Kyi Naing Chaw Nandar Aung

Chaw has built up a comprehensive knowledge of taxation, including calculation of tax liabilities, preparation of tax returns, and in particular, the tax clearance and audit process. She holds a Bachelor’s degree and has a diploma in Accounting. She also has an extensive knowledge of company establishment and investment licensing.

Lin holds a Bachelor’s in Commerce from the University of Newcastle, Australia. She formerly worked with a global audit and advisory firm, where she was based overseas for a number of years. At VDB Loi, Lin advises clients on tax structuring, licensing, general regulatory and customs duty issues. She has worked on major projects in the FMCG sector, oil and gas, power and health/life sciences.

Ngwe Lin Myat Chit