On March 24, the Vietnamese government issued Decree 35/2020/ND-CP (Decree 35), which took effect on May 15 and contains detailed guidelines on the implementation of the Law on Competition No. 23/2018/QH14 (2018 Law on Competition). This article gives a brief overview of some key features of merger filings addressed in Decree 35, as well as some practical observations.
New notification thresholds
Decree 35 establishes new thresholds for transactions – primarily in the form of mergers, consolidations, acquisitions and joint ventures – that, if met, must be notified to the soon-to-be-established National Competition Commission (NCC), which will be tasked with overseeing economic concentration in Vietnam, prior to implementation. Notably, a distinction is made between financial thresholds for credit institutions, insurers and securities companies on one hand, and all other enterprises on the other. For parties participating in the transaction that are not credit institutions, insurers or securities companies, notification is required if:
- the party's total assets in the Vietnamese market – or that of its affiliated group – was VND 3 trillion (US$130 million) or more in the financial year preceding the year in which the transaction is proposed to take place;
- the party's total turnover of sales or purchases in the Vietnamese market – or that of its affiliated group – was VND 3 trillion (US$130 million) or more in the financial year preceding the year in which the transaction is proposed to take place; or
- the value of the transaction is VND 1 trillion (US$43 million) or more.
For insurers and securities companies, however, the relevant financial thresholds for total assets, total turnover, and transaction value are higher.
For credit institutions, these thresholds are expressed as a percentage of the relevant figure for the entire credit institution system in Vietnam, rather than as a standalone absolute value as described above. Accordingly, the asset and turnover thresholds applicable to credit institutions are 20% or more of the total asset or turnover of the credit institution system in the Vietnamese market for the financial year preceding the year of the transaction; and the transaction value threshold applicable to credit institutions is 20% or more of the total charter capital of the credit institution system in the Vietnamese market for the financial year preceding the year of the transaction.
For all parties, whether credit institutions, insurers, securities companies or others, notifications to the NCC are also required if the combined market share of the participating parties was 20% or more of the relevant market for the financial year immediately preceding the year of the transaction.
Other than transaction value, the foregoing notification thresholds are also applicable to transactions conducted outside Vietnam. For example, a transaction between two non-Vietnamese entities that have no physical presence in Vietnam may still be required to make a merger filing in Vietnam if one of the involved entities (or its affiliated group) has a nexus to Vietnam. This could be in the form of sales conducted in Vietnam that generate a turnover exceeding the applicable threshold for merger filing under Decree 35. However, the decree does not provide any guidance on the type of nexuses that would require a merger filing.
Unlike in other jurisdictions, in Vietnam, notification thresholds reflect multiple metrics. As such, parties are required to examine sales amounts, asset values, transaction value, and market share information, which may be burdensome.
Two-phase review process
Transactions requiring notification to the NCC must now go through a review process, which begins with a preliminary 30-day review. The NCC has seven working days upon receiving the merger filing dossier to make a request for information (RFI) in case it is incomplete. The parties then have another 30 days to amend or supplement it. If they fail to do so, the NCC will reject the merger filing. The preliminary 30-day review period can only begin once the NCC is satisfied that the dossier is valid and complete.
If no decision is issued by the NCC within the 30-day period, the transaction may proceed. However, if the NCC issues a notice of non-approval, this will trigger an official 90-day review period. This occurs when the proposed transaction does not meet at least one of the following four criteria:
- the combined market share of the participating parties is less than 20% in the relevant market;
- the combined market share of the participating parties is 20% or more in the relevant market but the Herfindahl–Hirschman index (i.e., the total market share squares of the parties) in the relevant market following the transaction is less than 1,800;
- the combined market share of the participating parties is 20% or more in the relevant market, the Herfindahl–Hirschman as a result is higher than 1,800, but the increase in the Herfindahl–Hirschman index is less than 100; or
- the market share of the participating parties that have a vertical relationship with each other in the chain of production, distribution and supply of a specified type of good or service, or whose business lines provide mutual inputs or provide ancillary support to each other, is less than 20% in each relevant market.
The NCC has the power to stop the clock during the official 90-day review process by requesting additional information and materials. Unlike in some other jurisdictions, such as the US, the NCC is able to make such a request twice.
Decree 35 does not state for how long the 90-day period may be tolled or give any indication as to how burdensome the requests might be. Since the enactment of the 2018 Law on Competition (July 1 2019), only a small number of merger filing dossiers have been submitted, but it is unclear whether any of these submissions have undergone an official review.
Decree 35 also fails to indicate what sources of statistics are approved by the NCC for the identification of market share in the review process.
Although the 2018 Law on Competition and Decree 35 do not provide for preliminary consultations and draft checks, it is common practice in Vietnam to unofficially consult with the competition authority before submitting a merger filing dossier. Officials from the Vietnam Competition Authority, the predecessor to the NCC, have been helpful during the unofficial consultation process.
Definition of controlling or governing
Prior to Decree 35, it was unclear to what extent the acquisition of capital contributions or assets of a target company could be deemed to give the acquirer the ability to 'control or govern' the target for the purposes of determining economic concentration. Decree 35 now defines "controlling or governing" as the acquisition of:
(i) more than 50% of the charter capital or voting shares of the target;
(ii) more than 50% of the assets of the target in all or one of its business lines;
(iii) the right to directly or indirectly appoint, remove, or dismiss the majority of the board of management, the chairperson of the members' council, or the director or general director of the target; or
(vi) the right to decide any amendment to the charter of the target or certain enumerated matters in the course of business activities of the target.
This new definition of "controlling or governing" is now clearer but broader. For instance, the decision-making rights mentioned in items (iii) and (iv) do not hinge on any particular equity threshold as defined in Decree 35. A literal reading of the decree suggests that a person could be deemed to control or govern a target company with a minority investment if such person has any of such decision-making rights.
In addition, while Decree 35 does not specify whether veto rights fall within the legal definition of 'controlling or governing', anecdotal evidence strongly suggests that they will. Parties contemplating a minority investment in a target company that involves veto rights should therefore officially consult with the competition authority to get confirmation as to whether the contemplated minority acquisition will be deemed to be an acquisition that triggers a merger filing.
Decree 35 is now effective and applicable to transactions conducted both in Vietnam and abroad. While numerous points require further clarification, it provides welcome guidance on the 2018 Law on Competition. Further guidance is expected to be issued as it begins to be implemented.
Kazuhide Ohya, Michael Douglas and Cao Bao Tran