Traversing the M&A regulatory highway in Vietnam

Author: | Published: 1 Jul 2012
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One of the significant features which strikes newcomers on their first journey from Tan Son Nhat Airport to the luxurious comfort of their five-star hotel in downtown Ho Chi Minh City is the ubiquitous, bustling traffic, and the talents of intrepid local pedestrians in navigating a pathway through the swarms of motorcycles when traversing the streets.

The skills and fortitude needed to cross the roads of Vietnam are primarily focused around the mindset of steering around obstacles which lie in the pedestrian's path, being prepared (with nerves of steel) to stop in the middle of a highway while the motorcycles (and other traffic) weave around them, and never stepping backwards.

Navigating your way through a merger and acquisition transaction in Vietnam has similar characteristics, and although the Vietnamese regulatory framework has developed considerably in the past 18 years, there are still significant obstacles and potholes which need to be circumvented in the pathway toward successfully completing an acquisition in the country. Together with the increasing inbound M&A activities (especially in the banking, finance, consumer products and real estate sectors), conflicting and inadequate provisions in legislation on investment, enterprises and securities have created certain obstacles and barriers for foreign investors. A roadmap is essential for newcomers to Vietnam.

Ownership restrictions

In order for a foreign investor intent on focusing on Vietnam's domestic economy to determine whether (or not) a particular product or service is appropriate for the Vietnam marketplace at this stage of the country's development, he or she will need to consider if the proposed activities would be subject to any regulatory restrictions.

In Vietnam, there are certain business activities which are not permitted to be undertaken by foreign-invested enterprises or which might otherwise be restricted (by way of a cap on foreign ownership or in the form of the investment vehicle to be used), as well as many other business activities which can be undertaken by a wholly (100%) foreign-owned enterprise.

Since January 11 2007, the date of accession of Vietnam into the World Trade Organisation, the Schedule of Specific Commitments in Services under the Protocol on the Accession of Vietnam to the WTO (WTO Commitments) has become the primary source document that a foreign investor should refer to in respect of any potential restrictions on ownership. It should also be noted that Vietnamese legislation will supplement the restrictions contained in the WTO Commitments.

An inconsistent definition

While it might be assumed that the definition of a foreign investor should be relatively straightforward, it is here where the structuring of a proposed investment in Vietnam can hit an early bump in the road.

In particular, and surprisingly to some newcomers to M&A transactions in Vietnam, there is an inconsistent interpretation in the legislation of the term "foreign investor".

According to Decision 121/2008/QD-BTC of the Ministry of Finance (December 24 2008) providing regulation on activities of foreign investors in Vietnamese securities market, a "foreign investor" includes: a foreign individual (being a non-Vietnamese passport holder) residing overseas or in Vietnam; a legal entity established and operating under foreign laws and its overseas and Vietnam-based branches; a legal entity established and operating in Vietnam with 100% foreign capital contribution, and its branches; and, an investment fund established and operating under foreign laws and investment funds established and operating in Vietnam with 100% foreign capital contribution.

Meanwhile, in the context of Decision 55/2009/QD-TTg of the Prime Minister (April 15 2009) on holding rates of foreign investors on the Vietnamese securities market, and Decision 88/2009/QD-TTg of the Prime Minister (June 18 2009) on foreign investors' contribution of capital to, and the purchase of shares from, Vietnamese enterprises, the foreign investor's definition seems to take a broader approach. This includes: a foreign individual (being a non-Vietnamese passport holder) residing overseas or in Vietnam; a legal entity established and operating under foreign laws and its overseas and Vietnam-based branches; a legal entity established and operating in Vietnam with foreign capital contributions accounting for more than 49%; and, an investment fund or securities investment company with foreign capital contributions accounting for more than 49%.

Accordingly, given such discrepancy, State authorities could hold a high level of discretion with respect to the determination of foreign investors over entities and hence to investment conditions and restrictions applied to them (see Ceilings on foreign ownership in specific business activities for further details).

Ceilings on foreign ownership in specific business activities
Commercial banks
According to Decree 69/2007/ND-CP of the Office of the Government (April 20 2007) on foreign investors' acquisitions of shares in Vietnamese commercial joint-stock banks, the total foreign holdings in a Vietnamese domiciled bank will continue to be capped at 30% of the charter capital of the bank, of which:

• a foreign strategic investor being a foreign credit institution and affiliated persons of such foreign strategic investor can acquire up to 15%;
• an investor being a foreign credit institution and affiliated persons of such foreign credit institution can acquire up to 10%; and,
• a foreign investor not being a foreign credit institution and affiliated persons of such foreign investor can acquire up to 5%.

The total level of shareholding of all foreign investors (including existing foreign shareholders) and affiliated persons of such foreign investors remains capped at 30% of the charter capital of a Vietnamese domiciled bank, even if the bank is listed.

A foreign investor being a foreign credit institution purchasing shares in a Vietnamese bank must also satisfy certain criteria: for example, minimum total assets in the year before the year of registration of the acquisition must be equivalent to at least $20 billion.

Transportation services
Pursuant to Decree 140/2007/ND-CP of the Office of the Government (September 5 2007) providing detailed regulations on the commercial law regarding conditions for engaging in logistics services, and limitations on the liability of logistics services business entities, the total equity held by foreign investors in an enterprise undertaking rail and/or internal waterway transportation services may not exceed 49% of the enterprise's chartered capital.

With respect to an enterprise undertaking road transportation services, the total equity held by foreign investors may not exceed 51% of the enterprise's chartered capital.

Real estate
Under the Law on Real Estate Business, the permitted scope of real estate business activities applicable to foreign investors establishing an enterprise undertaking real estate business in Vietnam is more limited than to domestic investors: for example, foreign investors are not allowed to undertake the business activities of purchasing houses and buildings for sale, leasing out or granting of hire purchase or leasing houses and buildings for sub-letting out. Therefore, upon contributing capital or purchasing shares, foreign investors would also be subject to such limitations on the permitted scope of business activities.

Listed companies
According to Decision 55, foreign investors may hold a maximum of 49% of the total shares of a Vietnamese public company, unless otherwise expressly provided by specialised legislation: for example, the restrictions in Decree 69 for foreign investment into commercial joint stock banks. While the law is not entirely clear, this 49% cap appears to apply to both listed and unlisted public companies.

Competition law issues

According to the Law on Competition, an "economic concentration" means an enterprise entering into a merger, consolidation, acquisition, joint venture or other forms of economic concentration.

Enterprises participating in an act of economic concentration that has a combined market share of between 30% and 50% are obliged to notify the competition management authority before the act occurs (which is similar to the concept of antitrust filing).

Meanwhile, an act resulting in economic concentration, where the combined market share of a relevant market of the parties participating in that act represents 50% or more, is prohibited.

Difficulties which need to be overcome when considering competition law issues, include determining the size of the market (which is based upon, among other things, geographical location), and whether a foreign company's existing market share through non-foreign-owned distributors, would be included for the purposes of determining market share.

Preliminary due diligence

Preliminary legal due diligence of a target company by a foreign investor is recommended at an early stage to avoid spending too much time, effort and money on a potential target company which cannot satisfy basic criteria. Corporate governance is relatively new to Vietnam, especially since the first major company legislation for domestic enterprises was only enacted in the year 2000. Vietnamese enterprises are getting better in their development of good corporate governance practices, but still have considerable capacity to improve further. For these reasons, foreign investors should brace themselves for a level of internal record keeping by local companies which can be significantly lower than in mainstream jurisdictions within the region.

There are certain key cornerstone documents that should be included in a preliminary legal due diligence checklist when undertaking most legal due diligence review exercises. These are:

  • the business registration certificate/ enterprise registration certificate/ investment certificate;
  • the charter of the target company (being its constitution document);
  • the joint venture contract (if any);
  • any critical industry-specific licences; and,
  • land use right certificate(s)/land lease agreement(s).

(See Scope of permitted business activities for more details on why these documents can be so important.)

Scope of permitted business activities
In Vietnam, a company is only permitted to undertake those business activities which are expressly stated in its business registration certificate/investment certificate. A foreign investor contemplating an investment in a target company should obtain a copy of the target company's business registration certificate/investment certificate, and in its preliminary legal due diligence ask:

• Is the current scope of business activities being undertaken by the target company covered by the relevant business registration certificate/investment certificate of the target company?
• Are any of the business activities currently being undertaken prohibited or restricted from being undertaken by a company with the proposed level of foreign investment?
• If so, can such activities be divested to another entity owned (or to be owned) by the existing investors in the target company?
• Does the business registration certificate or investment certificate include activities which are not being undertaken by the target company, but which are restricted so far as foreign investment is concerned? (In which case the target company may wish to delete such activities from the business registration certificate/investment certificate by filing an amendment with the relevant licensing authority).

There are, of course, many other documents which will need to be reviewed during a full legal due diligence exercise, but a review of the above documents is normally very helpful in determining, at an early stage of discussions with a potential vendor, whether or not the target company will stand up to more scrutiny during a full legal due diligence review.

Minority shareholder rights

Statutory minority shareholder rights should also be considered when a foreign investor is contemplating the acquisition of a stake in a Vietnamese enterprise.

According to the Law on Enterprises, a member or group of members holding more than 25% of the charter capital of a limited liability company, or a smaller percentage as stipulated in the charter, has the right to request a meeting of the Members' Council to be convened.

With respect to a joint stock company (which is akin to a shareholding company in certain other jurisdictions), a shareholder or group of shareholders holding more than 10% of the total ordinary shares for at least six months will be entitled to:

  • review the minutes book and resolutions of the Board of Management (BOM);
  • nominate candidates to the BOM and the Control Panel;
  • request the Control Panel to review the company's operations as well as specific issues of concern; and,
  • exercise any other rights that may be specified in the company's charter.

A shareholder or group of shareholders with more than 10% of ordinary shares may also request a General Shareholders Meeting be convened in the event that the BOM seriously violates the rights of the shareholders or issues decisions beyond its powers; the term of the BOM has ceased to exist for more than six months (and no new BOM has been enacted); or in such other circumstances as may be provided for in the company's charter.

Accordingly, the Charter of each joint-stock company can provide a more extensive scope for protecting the rights of minority shareholders.

Procedural burdens

Under current foreign exchange control regulations, to effect the contribution of capital to or purchase of shares from Vietnamese-domiciled enterprises, a foreign investor must open a capital contribution account at a commercial bank operating in Vietnam. All money transfer transactions for effecting the capital contribution, share purchase and sale, transfer of contributed capital, collection and use of dividends, divided profits, purchase of foreign currencies at the licensed banks for transferring them abroad and other transactions related to the foreign investor's activities of contributing capital to or purchasing shares from the Vietnamese domiciled enterprises, must be effected through such account.

With respect to an M&A transaction, an investor will need to undertake various registration procedures with governmental authorities for the amendment of certain documents.

First of all, a change in a shareholding structure of an enterprise will only be legally recognised following the issuance of a new or amended business registration certificate or investment certificate recording such change. Although the prescribed timelines for issuance of such documents are five business days with respect to a business registration certificate and 30-45 business days with respect to an investment certificate from the filing date, in practice licensing authorities exercise a significant degree of discretion regarding this matter and the process may take much longer. Concurrently, the amended charter of the enterprise reflecting the change in the corporate information following the transaction will also be registered during this business/investment registration procedure.

As part of the post-completion processes, different procedures might also need to be undertaken, such as the amendment of the tax registration certificate, land use right certificate, and registration of the new seal of the enterprise.

When a foreign investor acquires 100% of the charter capital of a domestic enterprise, the foreign investor has to undertake investment procedures to be granted an investment certificate.

With respect to an acquisition of less than 100% of the charter capital of a domestic enterprise, although there are debates arising from unclear existing regulations and guidelines, many licensing authorities require a foreign investor, regardless of the ownership ratio, to conduct procedures to obtain firstly, an amended business registration certificate of the acquired company and then secondly, an investment certificate for the investment project undertaken by the acquired company.

Under Vietnamese laws, a public company is a listed company or an unlisted company which has made a public offer of shares, or has at least 100 shareholders excluding professional securities investors and has paid-up charter capital of at least VND10 billion ($480,000).

Pursuant to the Law on Securities, subject to certain exception, any offer to purchase 25% or more of the voting shares in a public company must be made by way of a mandatory public offer.

The public offer must initially be registered with the State Securities Commission, and may only proceed upon receipt of prior written approval from the Commission. The public offer must also be announced in the mass media.

The public offer period may not be less than 30 days, but not more than 60 days from the date of its announcement and the investor must appoint a securities company as its agent to carry out the offer. For a target company being a listed company, the offer price must not be less than the average reference price of the shares in the target company.

During a mandatory public offer, an investor is not permitted to: directly or indirectly purchase or undertake to purchase shares in the target company outside the offer; sell or undertake to sell shares which it offers to purchase; or provide separate information to certain shareholders or investors at different levels or at different points of time.

Although the restriction on the level of ownership held by foreign investors in Vietnamese enterprises conducting trading business activities in Vietnam (including import, export and distribution activities) was removed on and from January 1 2009, the trading business sector is a so-called conditional investment sector in Vietnam and, accordingly, foreign investors are subject to certain investment restrictions.

There are additional issues when acquiring an enterprise which conducts trading activities. According to Decree 23/2007/ND-CP of the Government (February 12 2007) detailing the commercial law regarding the sale and purchase of goods, or activities related to the sale and purchase of goods, of foreign-invested enterprises in Vietnam, a foreign-invested enterprise has to be granted a business licence for conducting trading activities in Vietnam.

An acquisition of shares by a foreign investor in a company that is registered to engage in trading activities is deemed to be a foreign investor investing in Vietnam for the first time. Accordingly, the investor will need to submit a combined dossier for the issuance of an investment certificate (given that it is a first time investor in Vietnam) and a business licence (with respect to the trading activities) and the licensing authorities are permitted to issue an investment certificate to which the contents of the business licence are incorporated (a combined IC).

The right granted to a foreign-invested Vietnamese company to import and distribute finished products is not general. It is, in fact, limited to specific products categorised according to the Vietnamese Harmonised System Codes, which are listed in the combined IC. Accordingly, a list of products and their relative Harmonised System Codes must also be submitted to the licensing authority as part of the application dossier for the issuance of the combined IC.

The appraisal procedures undertaken by the investment authorities must be conducted within 45 business days from the date of receipt of a complete and valid dossier. Pursuant to Decree 23, the granting of the right to conduct the trading activities is, however, ultimately dependent upon the receipt of approval from the Ministry of Industry and Trade. From a practical standpoint, given the significant discretion of such authorities, it would be prudent for a foreign investor to expect this period to be much longer.

With respect to retailing activities, Decree 23 provides that a foreign-invested company which has already been entitled to engage in trading activities is permitted to establish only one retail sales outlet. To establish additional retail sales outlets, the foreign-invested Vietnamese company must apply for the issuance of a licence with respect to each additional outlet. The application will be considered and approved by the local people's committee and the Ministry of Industry and Trade on the basis of satisfying an economic needs test, which entails an assessment of the pertinent economic issues (such as the current number of service providers, the inherent market stability and the population density of the area concerned). However, no official guidance has been issued regarding the economic needs test. This has afforded licensing authorities a high degree of discretion to interpret these regulations, albeit with a certain level of strictness, due to the sensitivities associated with foreign investment in retail activities in Vietnam.

Don't forget the road map

Immediately before and subsequent to Vietnam's WTO accession, many foreign investors were chasing too few opportunities. The frothiness which was created has long since evaporated, and astute investors are seizing upon opportunities which exist to acquire stakes in leading Vietnamese enterprises.

Those investors who are well prepared, and have a roadmap around the legal obstacles, will hopefully achieve the commercial success they deserve.

Vo Van Toan, legal assistant, Frasers Law Company, assisted in the preparation of this article.

Mark Fraser
  Frasers Law Company

Mark Fraser, managing partner of Frasers Law Company, has garnered 25 years' experience in leading international firms in Asia, the United Kingdom and New Zealand. He has been advising clients on transactions in Vietnam since 1994 when he established the Ho Chi Minh City office of a UK magic circle firm he had joined in London. Under his direction, Frasers Law Company was the first legal firm to be granted a foreign law company licence to operate in Vietnam, and has experienced consistent and phenomenal growth ever since.

Since being based in Southeast Asia, Fraser's practice has focused on corporate matters (especially mergers and acquisitions), commercial real estate transactions, and infrastructure projects. This involves debt and equity structuring of investment projects and the preparation and negotiation of documents. His international legal expertise and in-depth knowledge of Vietnam as a result of having been based in Vietnam for most of the past 18 years, have earned the firm a reputation, from clients as well as both global and local law firms, as one of the premier commercial law firms operating in this jurisdiction. With an extensive range of local and international networks and relationships, Fraser is often regarded by clients as Vietnam's go-to lawyer on headline deals and in particular complex international transactions.

Fraser is recognised as one of Vietnam's top-tier lawyers by two leading legal directories, and as a leading lawyer by IFLR1000.