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Focus: Cambodia Legal Update – April 2009

In this issue: We look at the legal regime for mergers, recent regulatory developments in the banking industry, key issues under the current mining regime and the National Social Security Fund scheme.

• Mergers in Cambodia
• Banking regulations in Cambodia
• Mining regime in Cambodia
• National Social Security Fund in Cambodia

Mergers in Cambodia

In brief: Under Cambodian law, a merger of two or more commercial entities is possible, with the underlying principle that all assets and liabilities of the two or more merged entities automatically pass to the new entity recognised by law. However, the relevant legislation is unclear in a number of areas and only one merger has occurred to date. Partner Marae Ciantar and Senior Associate Andrew Emslie consider the legal regime for mergers in Cambodia and the uncertainties under the relevant law.

Summary of the law

The Law on Commercial Enterprises (2005) (LCE) sets out a mandatory procedure to be followed for two or more companies to merge into one company or consolidate to form a new company. The key provisions are as follows.

• A merger agreement must be prepared which includes certain prescribed matters, including:
  • the terms and conditions of the merger;
  • the articles of incorporation of the surviving company;
  • the method of converting shares of each constituent company into shares or other securities of the surviving company; and
  • details of any arrangements necessary to finalise the merger and provide for the subsequent management and operation of the surviving company.
• The merger must be authorised by a board resolution of each company and at least two thirds of the shareholders of each company;
• Adequate written notice must be given to all known creditors of the constituent companies, and it must be established to the satisfaction of the Director of Companies (DOC) that no creditor made valid and credible objections to the merger;
• Following approval of the merger by the shareholders, certain prescribed documents must be filed with the MOC, including:
  • the merger agreement;
  • the board/shareholder resolutions approving the merger;
  • the articles of incorporation of the surviving company; and
  • statements issued by a director or officer of each constituent company establishing certain solvency and creditor protection matters to the satisfaction of the DOC.
• The MOC will then issue a Certificate of Merger (COM). The effect of the COM will include that:
  • the property of each constituent company will be the property of the surviving company;
  • the surviving company will continue to be liable for the obligations of each constituent company; and
  • all civil, criminal or administrative matters involving any constituent company will be inherited by the surviving company.

Practical implementation

Some important observations for the implementation of the merger provisions in practice are as follows.

• The MOC has advised that there has only been one company in Cambodia that has attempted to merge under the LCE. In accordance with the general procured for winding up companies, the non-surviving entity had to be audited and its tax liabilities ascertained, before the company could be wound up. The respective rights, responsibilities and obligations of the MOC, the National Auditor and the Tax Department under this process were unclear, and hence it was a difficult process for all parties concerned. Consequently, currently the MOC is reluctant to allow mergers of Cambodian companies.
• The MOC is of the view that the effective implementation of the merger provisions requires a regulation or other agreement between the MOC, the National Auditor and the Tax Department in relation to the procedure to be followed. It acknowledged that this could take some time.

Conclusion

Cambodian law in relation to mergers is currently unclear in a number of areas, particularly in respect of procedure and administration, and the provisions are not well tested in practice. It is likely that further implementing regulations will be required before mergers can be implemented effectively in practice. This is a common experience in Cambodia – often laws are enacted but remain effectively inoperative because subsidiary legislation or other government action required to give practical effect to the law is not undertaken. Until such regulation or other clarification of procedure has been issued, investors looking to invest in or restructure Cambodian companies should consider using alternative structures to a merger.

Banking regulations in Cambodia

In brief: Partner Marae Ciantar and Lawyer Daniel Allender provide an overview of recent regulatory developments in the banking industry in Cambodia, including minimum capital requirements for new banks, adjustments to mandatory prudential ratios and increased regulation of the governance of banks and financial institutions.

Background

There have been a number of recent regulatory developments in Cambodia, initially aimed at slowing a rapidly growing economy (including an overheating domestic property market) and increasing prudential requirements in response to a rapid increase in the number of banks in Cambodia, but more recently aimed at stimulating economic activity and lending as the effects of the global financial crisis have become more pronounced.

An International Monetary Fund report published on 10 February 2009 noted that Cambodia's banking system will come under increased strain as real GDP growth is projected to drop significantly this year amidst the current global financial uncertainty, and stressed the need for comprehensive measures to improve banking soundness, notably in the areas of supervision, enforcement of regulations and bank licensing procedures.

Establishment and regulation of banks

The National Bank of Cambodia (NBC) is Cambodia's central bank. In addition to its role regarding the formulation and implementation of monetary and exchange policies, the NBC is also responsible for the licensing, regulation and supervision of banks, financial institutions and other relevant establishments such as auditors and liquidators.

Pursuant to the Law on Banking and Financial Institutions (the Banking Law), a licence must be obtained from the NBC to conduct banking operations in Cambodia, including:

• credit operations for valuable consideration, including leasing, guarantees and commitments under signature;
• the collection of non-earmarked deposits from the public; or
• the provision of means of payment to customers and the processing of those means of payment in national currency or foreign exchange.

An entity carrying out only one of these activities, or only one component of each of these activities, is referred to as a 'specialized bank'.

Under the Banking Law, banks may be locally incorporated in Cambodia (as a public company) or may be a branch of a foreign bank. Foreign banks may alternatively apply to open a representative office in Cambodia, although such representative offices are not entitled to carry out banking operations or financial intermediation. The process for obtaining a licence from the NBC is set out in the Banking Law and various implementing regulations.

Recent regulatory developments

Changes to minimum capital requirements

Banks must maintain a minimum capital amount, which is set by the NBC. Pursuant to regulations which came into effect on 19 September 2008, the required minimum capital was increased from 50 billion Riel to 150 billion Riel (approximately US$37.5 million) for commercial banks, and set at 30 billion Riel (approximately US$7.5 million) for specialised banks. However, where the commercial bank or specialized bank has at least one 'influential shareholder' which is a bank or financial institution with an investment grade rating, extended by a reputable rating agency, the relevant minimum capital requirement is currently reduced to 50 billion Riel and 10 billion Riel (approximately US$12.5 million and US$2.5 million) respectively. Under the Banking Law, an 'influential shareholder' is a shareholder that directly or indirectly holds at least 20 per cent of the share capital or voting rights of the bank or holds de facto decision-making power (eg as a consequence of widely dispersed shareholding).

Changes to prudential ratios

All licensed banks in Cambodia are required to maintain reserve requirements (deposited with the NBC) against deposits and borrowings, and maintain a solvency ratio, each at a level set by regulations issued by the NBC. In April 2008, the foreign currency reserve rate was raised from 8 per cent to 16 per cent, in an attempt by the NBC to rein in lending and reverse the increasing inflation rate at the time. However, amid the global financial crisis and predictions of significantly reduced growth in Cambodia's GDP in the present financial year, the NBC released new regulations on 26 January 2009 revising the foreign currency reserve rate to 12 per cent.

Changes to corporate governance requirements

A regulation introduced by the NBC on 25 November 2008 sets out a range of requirements with regard to the governance of banks and financial institutions in Cambodia. These requirements cover areas such as the qualifications and active involvement of directors, the establishment of an audit committee and risk committee, and the implementation of corporate values, including procedures for avoiding and addressing conflicts of interest, and clear lines of responsibility in order to achieve greater transparency across banks and financial institutions operating in Cambodia.

Conclusion

The recent regulations issued by the NBC with regard to capital requirements for the establishment of banks and the governance requirements applicable to banks and financial institutions appear to be clearly aimed at enhancing the financial and corporate governance foundations of the financial sector in Cambodia. The IMF's recently expressed concerns are worth noting in this regard.

The recent adjustments by the NBC to the mandatory foreign currency reserve requirements of banks, however, appear to be intended as a mechanism to either restrain or stimulate economic activity.

Mining regime in Cambodia

In brief: Partner Marae Ciantar and Lawyer Shaun Yeo provide a brief summary of the current Cambodian mining regime and highlight some key issues that mining companies and investors should be aware of.

Cambodia's mining laws

The key laws and regulations relevant to the exploration, exploitation and processing of mineral resources in Cambodia are the Law on Mineral Resources Management and Exploitation 2001 (the Minerals Law) and its implementing regulations (together, the Mining Laws).

The Minerals Law provides the regulatory framework for the mining industry in Cambodia. However, it does not contain the level of detail that may be expected in a more developed jurisdiction, particularly with respect to the rights and obligations of the holder of a mineral resource licence (Contractor). Some of the uncertainty reflects the current stage of development of Cambodia's mineral sector – as there is currently no large-scale mining operations in Cambodia, the regulatory and fiscal regime for such operations has yet to be fully developed.

Key Issues

Right to exploit

There is no automatic right for a Contractor who holds an exploration licence to be granted a licence to exploit mineral resources (an industrial mining licence) if a commercially viable deposit is discovered in the exploration contract area.

Investors should therefore seek to negotiate with the Government, prior to commencing exploration, contractual rights that will guarantee the right to exploit any commercial discovery of minerals in the event that a discovery of minerals is made. Such agreement should ideally be sought as part of a project agreement with the Government valid for the life of the mining project.

Tax and fiscal regimes

There is currently no clear tax and fiscal regime with respect to the exploitation of minerals in Cambodia. The Law on Taxation imposes a corporate income tax rate of 30 per cent on profit realised from the exploitation of natural resources, but the Minerals Law contemplates that a special tax regime will be established and regulations issued to provide for a royalty rate and methods of royalty payment. However, these regulations have not yet been issued and, accordingly, the key fiscal parameters that will apply in the event of exploitation of resources is unclear (including the royalty rate on the value of the extracted minerals).

Authorisation for export

A regulation issued by the Government in 2005 provides that mineral resources may not be exported but shall be used to supply the demand of local companies for making it into final products. Only 'final products' will be authorised for export. However, the regulation does not clearly articulate what constitutes a final product and, as such, there is considerable uncertainty as to the ability to export mineral resources from Cambodia. There are currently no processing or refining facilities in Cambodia with the capacity to process certain raw minerals, hence it is also unclear how that requirement to supply local companies will be interpreted and applied by the Government in practice.

Land owner consent

A Contractor must obtain the written agreement of any owner of the private land on which the Contractor is intending to conduct exploration or mining. A Contractor must also seek written permission from the competent government institution to conduct any mining operations on state-owned lands designated as protected, reserved or restricted areas.

Such agreement must in each case be obtained prior to the commencement of any exploration or mining operations.

The fact that a Contractor has obtained a mineral resource licence is therefore not, of itself, sufficient to permit the conduct of exploration or mining operations.

Overlapping rights

The Minerals Law provides that no other mineral resource licence will be issued over an area which is already covered by an existing licence. However, the Minister of Industry, Mines and Energy may issue overlapping licences under certain conditions.

Economic land concessions may also be granted over a mining contract area. An economic land concession allows the concessionaire to clear the land for industrial exploitation or agricultural developments. Economic concessions may be granted over areas of up to 10,000 hectares and for a duration of up to 99 years. In practice, it is not uncommon for economic concessions and mining contract areas to overlap, which in practice will require the Contractor and concessionaire to negotiate in relation to use of land for exploration or mining operations.

Mineral investment agreement

Under the Minerals Law, if the Ministry of Industry Mines and Energy (MIME) considers that an application for an exploration or mining licence indicates a large-scale project of special national significance, MIME and the applicant must negotiate a supplementary mineral investment agreement to be appended to the mineral licence. The scope and terms of such agreement are not clearly specified in the Law. The requirement to negotiate such an agreement may complicate an application for an industrial mining licence.

Conclusion

Cambodia's minerals sector is growing and it is expected that as more mining companies move from exploration to exploitation, there will be an increasing need for communication with MIME with respect to the issues that have been raised in this article.

National Social Security Fund in Cambodia

In brief: Partner Marae Ciantar and Lawyer Shaun Yeo provide an update on the National Social Security Fund scheme.

Background

In September 2002, the Royal Government of Cambodia introduced the NSSF scheme through the Law on Social Security Regime (the Social Security Law). The NSSF scheme is applicable to all employees to whom the Labour Law applies, and will comprise the following.

• A pension benefit scheme – It is contemplated that such benefits will include pensions for old age, disability and dependants; and
• An occupational risk benefits scheme for work-related accidents and illness – It is contemplated that such benefits will include medical treatment of injuries or illnesses, compensation and disability allowance and, in the case of the death of an NSSF member, allowances for funeral costs and an annuity for the beneficiaries of the victim.

Registration requirements

Initial registration

Every company subject to the NSSF scheme must register with the NSSE. Such registration is effected through prescribed forms provided by the NSSF.

Currently, only companies with eight or more employees have to register for the NSSF. Upon registration, companies will be provided with a CD of software to assist it to comply with its ongoing NSSF obligations.

Monthly reporting

Every company subject to the NSSF scheme must send a report of the number of its employees to the NSSF before the 15th of each month. Such report must also be in the prescribed form, in soft copy, as provided for in the software.

Contribution rates

Occupational risks

Every company which is registered with the NSSF and has eight or more employees must pay contributions for occupational risks to the NSSF. The contribution rate for occupational risks is currently 0.8 per cent of each employee's monthly total wage in the company. The contribution rate may be amended in future in accordance with the Cambodian economy.

The initial contribution payment should be made within 30 days after the issue of the NSSF registration certificate. Thereafter, the company must pay the required monthly contribution by the 15th of the following month with the prescribed contribution form. For example, a company that registers in April 2009 must pay its contribution of occupational risk for May 2009 by 15 June 2009 at the latest.

All payments are to be made at ACLEDA Bank Plc or its other branches.

Upon payment, companies will be issued with a Contribution Payment Receipt by the bank. This Contribution Payment Receipt must be brought to the NSSF who will then issue a separate payment receipt to the company. These payment receipts should be kept by the company to ensure that it has records of its compliance.

NSSF is unable to provide Occupational Risk Insurance cards as yet. As such, companies registered with the NSSF must inform their employees of their individual identification numbers within a day of receiving the software CD containing the information from the NSSF.

Pension

The contribution rate for the pension component of the NSSF has not yet been finalised.

Conclusion

Implementing regulations issued under the Social Security Law provide significant further details on the pension benefits scheme and the occupational risk benefits scheme. Please contact one of our lawyers if you would like to receive additional information in this regard.

Published 7 April 2009

For further information, please contact:

• Marae CiantarPartner, Singapore
  Ph: 65 6535 6622
  Marae.Ciantar@aar.com.au
• Gavin MacLarenPartner, Melbourne
  Ph: +61 3 9613 8941
  Gavin.MacLaren@aar.com.au

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