In July 2011, the Vietnamese government promulgated Decree 59/2011/ND-CP on the conversion of state owned enterprises (SOEs) into joint-stock companies. Decree 59 seeks to eliminate many of the legal obstacles formerly associated with the equitisation process in Vietnam.
Pursuant to Decree 59, a SOE is eligible to be equitised if it is not in the list of the enterprises in which the State must hold 100% of the charter capital, and it retains State capital after the revaluation of its assets and the auditing of its financial statements in preparation for the proposed equitisation.
Under the legislation there are three forms of equitisation, each of which may be combined with the issuance of new capital:
(i) maintaining existing State capital;
(ii) selling part of the existing State capital; and
(iii) selling all of the existing State capital.
Eligibility to purchase shares
Under Decree 59, both domestic and foreign investors are eligible to purchase shares in the SOE as a strategic investor. While a domestic investor may purchase an unlimited number of shares on offer to the public, a foreign investor (being a foreign organisation, foreign individual or foreign invested enterprise in Vietnam in which the foreign investor(s) own more than 49% of the charter capital) may only purchase a limited number of shares in accordance with the approved equitisation plan and the provisions of relevant industry-specific laws in Vietnam.
A "strategic investor" is defined as a domestic or foreign investor with sufficient financial capability and a long term interest in supporting the applicable SOE by: the transfer of new technology; the training and development of human resources; the improvement of financial and management capabilities; the supply of raw materials; and/or the development of product consumption markets.
Decree 59 enables the SOE to select a strategic investor before or after an IPO. Whether the strategic investor subscribes before or after an IPO, Decree 59 legislates for a minimum subscription value by the strategic investor, to be not lower than the lowest price of any shares issued in connection with the IPO or the tender floor price determined by the SOE before the IPO.
Strategic investors are also locked in for longer under the new legislation and must hold their shares for a minimum of five years, up from three. During this period, the strategic investor may only transfer shares in limited circumstances, subject to approval of a general meeting of shareholders. Furthermore, Decree 59 provides that only a maximum of three strategic investors are permitted to purchase shares in each equitised enterprise; previously there was no limit.
In addition, a strategic investor must pay a non-refundable deposit of 10% of the shares to be acquired or subscribed, which it must relinquish if it fails to subscribe for or acquire the shares. The deposit would usually be structured in the form of a bank guarantee, escrow account or cash deposit subject to negotiation between the equitising SOE and the strategic investor.
While Decree 59 should certainly assist in reducing certain legal obstacles associated with past equitisations, challenges will still remain, but with many more equitisations in the pipeline this will be a dynamic area.
Juniper Cheng and Mark Fraser