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Structuring M&A Deals in Vietnam

NUMEROUS EFFORTS have been made by the Government of Vietnam over the past 10 years to improve the investment regime and the business climate of the country. The local legislation has been radically improved to make it more compatible with international rules and more business friendly. Vietnam has been admitted as an official member of the World Trade Organization (WTO) since 11 January 2007. It is also praised for its continued economic growth and stable political environment. All of these have positioned Vietnam as an attractive investment destination, including for both direct investment and portfolio investment.

 

Some major laws which should be named are the (Unified) Enterprise Law1 and (Common) Investment Law2 both issued in 2005, and the Securities Law3 issued in 2006. The new laws have actually opened a new era for foreign investors in mergers & acquisitions (M&A) activities and private equity investments in the country. This article is designed to provide an overview of the legal framework for M&A transactions and private equity investments in Vietnam, how to structure the deals and to share some practical experience in this area.

FORMS OF INVESTMENT AND TYPES OF ENTERPRISES
Pursuant to the Investment Law, all forms of investment in Vietnam are grouped under two broad categories, "direct investment" and "indirect investment".

"Direct investment" is a form of investment whereby the investor invests its capital and participates in the management of the investment activity. It includes the establishment of wholly foreign- or domesticowned companies, joint venture companies (JVC) between foreign and domestic investors; purchasing shares or contributing capital to become shareholders and participate in the management of investment activities; and investment in mergers and acquisitions.

"Indirect investment" is a form of investment by way of the purchase of shares, share certificates, bonds or other valuable papers through a securities investment fund or by way of intermediary financial institutions, and whereby the investor does not participate directly in the management of the investment activity.

The Enterprise Law provides for four (4) main types of enterprises in Vietnam as follows:

  • Limited Liability Companies (LLC): An enterprise with fifty (50) or less members. An LLC may consist of a single member LLC (SM-LLC) or multiple members LLC (MM-LLC) all contributing capital.
  • Joint Stock Companies (JSC): Also known as a shareholding company. It is an enterprise in which the charter capital is divided into shares, with a minimum number of three (3) shareholders and no maximum. Only JSCs may issue shares, offer securities and get listed on the stock exchange.
  • Incorporated Partnerships: An enterprise with at least two (2) members being co-owners of the company jointly conducting business under one common name (also known as unlimited liability partners).
  • Private Enterprises (i.e. sole proprietorships): An enterprise owned by one (1) individual who shall be liable for all activities of the enterprise to the extent of all his or her own assets (unlimited liability).

 

TYPES OF TRANSACTION
Acquisition of Shares or Equity

  • The new investor may acquire shares or capital contribution from an existing investor(s) in the target company, a LLC or a JSC; or
  • The new investor may purchase further shares to be newly issued by the target company (for a JSC), or contribute or inject further capital in the target company (for a LLC).

 

Asset Acquisition or Business
Acquisition
An investor may choose to make an asset acquisition in which the investor purchases key assets of the target enterprise, whereby incorporating new assets into an already licensed entity. In many cases, the investor acquires not only the assets of the target business but also others associated with the target business such as goodwill, client base, employees, etc. This is called business sale or business acquisition4.

Merger or Consolidation
Merger and consolidation are defined under the Enterprise Law and the Competition Law5 as follows:

  • Enterprise merger is a process whereby one or a number of enterprises transfers all of its assets, legal rights, liabilities and benefits for the purposes of merging with another enterprise.6
  • Enterprise consolidation is a process whereby two or more enterprises combine all their assets, legal rights, liabilities and benefits for the purposes of consolidating themselves into a new enterprise.7

 

Other Types of Enterprise Restructure
The Enterprise Law also provides for other types of business restructuring, which may be taken by the investors as a result of M&A, namely division or separation of an enterprise.

Onshore vs. Offshore Structure
The new investor may acquire some or all of the shares from the offshore company that holds the interests in a target company in Vietnam. This is called "offshore transaction" which is quite commonly used for acquiring interests in foreign invested enterprises in Vietnam. It is not subject to any approval or registration, except for the case where the target company wishes to effect some changes such as corporate name or business lines as a result of the acquisition.

DOMESTIC COMPANIES VS. FOREIGN INVESTED ENTERPRISES
Domestic companies and foreign invested enterprises (FIEs) were formerly governed by different laws, the 1999 Enterprise Law and 1998 Domestic Investment Promotion Law for domestic companies, and the 1996 Foreign Investment Law ("FIL") for FIEs. As of 1 July 2006, both types are covered by a single system, namely the Investment Law and Enterprise Law.

The Investment Law defines that "foreign invested enterprises" comprise any enterprise established by a foreign investor to conduct investment activities in Vietnam or any Vietnamese enterprise (domestic company) in which a foreign investor purchases shares, merges or acquires. 8 As such, a company in Vietnam, which has any element of foreign ownership, may be treated as an FIE, irrespective of the ratio of the foreign ownership.

Recently, the FIE definition has been made clear under Decree 1399, which provides10 that if more than 49% of the charter capital (stake) of the enterprise to be established will be owned by a foreign investor, the investor will be issued an Investment Certificate11 ("IC"). And the enterprise to be established in this case will be treated as an FIE. If the foreign investor holds just 49% or less stake, then the enterprise will be treated as a domestic enterprise, and the investor will be issued a simple Business Registration Certificate12 ("BRC").

SECURITIES MARKET
The securities market in Vietnam is regulated under the Securities Law, and regulation of securities and the securities market is charged with the State Securities Commission ("SSC") attached to the Ministry of Finance ("MOF").

Vietnam has two listed stock exchanges: Ho Chi Minh Stock Exchange ("HoSE") and the Hanoi Securities Trading Centre ("HaSTC"). HaSTC was established to focus on the listing of small and medium-sized enterprises. Combining the two markets, the Vietnamese listed market has more than 250 stocks with a market capitalization of approximately US$22 billion.

The over-the-counter (OTC) market is an active equity market in Vietnam. It is comprised of only public companies that have not yet been listed on the HoSE or HaSTC. There are approximately 2,500 companies on the OTC market, with a total market capitalization of about three to four times that of the listed market. The Vietnamese government is currently in the process of reorganizing the OTC market to operate under the supervision of the HaSTC.

LIMITS OF FOREIGN OWNERSHIP IN DOMESTIC COMPANIES
The Investment Law and the Enterprise Law do not explicitly cap the level of foreign ownership in Vietnamese or domestic companies. A foreign investor is entitled to contribute capital to and/or purchase shares of a company in Vietnam, and that the proportion of capital contribution/share purchase with respect to certain sectors and industries is prescribed by the government. Degree 139 affirms a general principle that business entities and individuals, irrespective of nationality, are entitled to make capital contributions and purchase shares without any limitation of level in all enterprises in Vietnam, except for:

  • Listed companies;
  • Businesses operating under the relevant industry specialized laws;
  • Equitized former State-owned enterprises ("SOEs"); or
  • Service companies as set out in Vietnam?s commitments to WTO for commercial services.

 

Under Decision 23813, foreign investors are able to buy up to 49% of listed shares of a company listed on the Vietnam stock exchange, except for some sectors in which foreign ownership may be limited, such as banking (now 30% cap).

Generally, for unlisted companies, the percentage of ownership by foreign investors will be in accordance with the regulations of the government, specialized laws and commitments of Vietnam in international treaties of which Vietnam is a member. As a member of WTO, Vietnam has committed to remove the caps for foreign ownership in certain sectors over the next few years on a set schedule.

STATUTORY CONSENTS AND APPROVALS
Licensing Procedures
Foreign investors investing in Vietnam for the first time must have an investment project and shall conduct investment procedures in order to be issued with an IC from the Investment Certificate Issuing Authority14 ("ICIA"). They are subject to one of two procedures to obtain an IC, "investment registration" or "investment evaluation". Investment registration is much simpler than investment evaluation. Investment projects whose investment capital is less than VND300 billion and that do not fall within conditional investment sectors will only be subject to investment registration. For projects with a capital investment of VND300 billion or more, or projects in a conditional sector, the investors are required to undergo investment evaluation for the IC.

For most domestic investment projects, only simple BRC is required from the Business Registration Authority15 ("BRA"), except for some projects which are subject to the investment evaluation.

Registration for Transfer of Interests in LLCs
For LLCs, it is required that any transfer of interests must be registered with the BRA which issued the BRC (for domestic companies) or the ICIA which issued the IC (for FIEs) so as to reflect the changes of the investors/members of the company.

Corporate Governance Requirements for Listed Companies
For public companies and those companies listed on the stock exchange, they are also subject to the disclosure and reporting requirements under the Securities Law for transfer of stocks and M&A transactions in particular.

The Enterprise Law also requires that if an investor acquires 5% of the total shares or more of a company, this must be reported and registered with the BRA16.

Transfer of Interests in FIEs not Re-registered under the new Laws
For those FIEs which have not been re-registered under the new laws (see below), it is required that any transfer of legal capital or interests shall be subject to the approval by the investment licensing authority which has issued the investment license. Such FIEs remain LLCs which was the single legal form for FIEs under the old law.

RE-REGISTRATION OF FOREIGN INVESTED ENTERPRISES
Under the Investment Law and Enterprise Law, those FIEs that were established under the old FIL may consider re-registration under the new laws by 1 July 200817. Otherwise, they will operate under the investment licenses issued under the old law, and the terms of the issued investment licenses will apply until expiry of the term of the project.

Conversion of the legal form of an FIE may be carried out at the same time as the re-registration process. FIEs can be converted and re-registered as an SMLLC, MM-LLC or JSC operating under the new laws. By re-registration and/or conversion, the former investment license will be replaced by an IC which will also serve as the BRC. Re-registered FIEs shall take over all rights and liabilities of the former enterprises, including investment or tax incentives formerly granted.

DOCUMENTATION AND DUE DILIGENCE
In practice, many Vietnamese companies are not familiar with due diligence and may be hesitant to provide full disclosure. Therefore, the investor and its advisers should be particularly cautious of any unwillingness to make full disclosure. Professional advisers should know how to work with the target companies to get the maximized disclosure, and in some cases, a cross-check must be conducted to verify the information disclosed. Also, many older enterprises, established under a developing legal regime without the assistance of international- standard professional services, suffer from poor documentation and record keeping.

Therefore, the importance of comprehensive legal and financial due diligence before acquiring an enterprise cannot be understated. It is also a good practice to draft a preliminary agreement, such as a memorandum of understanding or a letter of intent, in order to arrive at a "meeting of the minds" for the essential terms and conditions of a transaction and towards a final agreement later on.

FOREIGN EXCHANGE CONTROL
Purchase and sale of securities in Vietnam by foreign investors must be implemented in Vietnamese Dong ("VND"), and foreign investors are permitted to open VND accounts and foreign currency accounts with credit institutions in Vietnam.

Investors transferring foreign currency into an authorized bank in Vietnam in order to invest in securities must transfer the capital into a "specialized on-call foreign currency deposit account" of a securities company opened at an authorized bank in Vietnam. Foreign currency must then be sold to an authorized bank, as needed, to obtain VND in order to purchase securities.

TAXATION
Corporate Income Tax
The Law on Corporate Income (CIT) Tax18, effective from 1 January 2004, is currently the primary tax on corporate income and capital gains. For straight purchases of the charter capital of a foreign party in a JVC, a CIT of 28% is payable on any premium over the original investor?s actual contribution to capital. When investing in shares of JSCs, the investor is typically classified as a foreign investor investing in Vietnamese securities through a bank account (with no permanent establishment in Vietnam), and as such a deemed CIT of 0.1% is imposed on the gross value of securities sold on each transaction, instead of a CIT 28%.

As of 1 January 2009, a new CIT Law19 will take effect. Major changes in the new law include a reduction in the CIT rate from 28% down to 25%, and comprehensive reforms on tax preferences.

Personal Income Tax
A new Personal Income Tax (PIT) Law was passed on 21 November 2007 and will take effect on 1 January 200920. The new law now unifies locals and foreigners into a single progressive tax scale, where previously, both types were subject to different tax regimes. Under the new PIT, an individual?s income from capital investment, capital assignment (inclusive of income derived from stocks/securities transactions)21, and real estate transfers shall be taxed at the flat tax rates.

EMPLOYMENT ISSUES
Under the Labor Code, where an enterprise divides, separates, merges or transfers the ownership, management or right to use the assets of the enterprise, the new employer shall continue to be bound by the labor contract with the employee. This serves to bind enterprises to their labour contracts regardless of any change in ownership of the enterprise.

INTELLECTUAL PROPERTY RIGHTS
The 2005 Civil Code and the 2005 Intellectual Property Law are the main regulations on intellectual property. Vietnam is also a signatory to the major international agreements on IPR. Vietnam separates intellectual property rights ("IPR") into two categories, copyrights and industrial property rights. Registration is generally required except for copyrights. For industrial property, rights are protected upon registration on a first-to-file basis, except for some objects as trade secrets, geographic indications and trade names. The duration for protection of IPRs is in line with international conventions.

The buyers in M&A transactions should be aware that, in many cases, recording of changes (e.g. change of owner or address, etc.) in titles or certificates of protection for IP assets, including licensing agreements, should be made with the Patent & Trademark Office22, as required by the Vietnamese laws.

COMPETITION LAW
The first Vietnam?s Competition Law was adopted by the National Assembly on 9 November 2004. The Ministry of Industry and Trade ("MOIT") is the regulator for the competition laws and policies in the country. Two agencies have been established to oversee competitive practices and enforcement of the Competition Law, namely the Vietnam Competition Administration Department ("VCAD") and the Vietnam Competition Council ("VCC").

Mergers, consolidations, acquisitions, joint ventures and other (undefined) forms of economic concentration are regulated under the Competition Law. When participating parties in an M&A transaction have a combined market share of 30-50%, they must notify the VCAD in order to determine whether the proposed economic concentration can proceed.

DISPUTE RESOLUTION
Any dispute involving at least one foreign party, except disputes between a foreign investor and a government authority, shall be resolved by one of the following tribunals and organizations: A Vietnamese court; a Vietnamese arbitration body; a foreign arbitration body; an international arbitration body; or an arbitration tribunal established in accordance with the agreement of the disputing parties.

Court System
Vietnam has three (3) tiers of courts: the Supreme Court, Provincial Courts and District Courts. Foreign judgments are generally not enforceable in Vietnam. Under the current Code of Civil Procedure, Vietnamese courts will only consider the recognition of judgments issued by courts in countries that have entered into an agreement with Vietnam to do so. In the absence of a judicial agreement with a country, the recognition of the verdicts issued by the court in that country would be considered on a reciprocal basis.

Arbitration
Arbitration is becoming a more common practice in Vietnam since the passage of the Ordinance on Commercial Arbitration in 2003. The ordinance gives a broader definition of commercial activities covered by arbitration, outlines court support of domestic arbitration proceedings and provides for enforcement of domestic arbitration awards.

Since 1995, Vietnam has acceded to the United Nations Convention on Recognition and Enforcement of Foreign Arbitral Awards of 1958 (New York Convention), whereby foreign arbitral awards may be recognized and enforced in Vietnam. The Code of Civil Procedure sets guidelines on the recognition and enforcement of foreign arbitral awards in Vietnam.

COMMITMENTS TO THE WTO
As a member of WTO, Vietnam is committed to liberalizing the service and financial markets in addition to reducing and cutting down the tariff for imported goods. Accordingly, the financial service market will be opened to attract overseas investment capital. The roadmap to open the market for securities under WTO commitments is as follows:

  • Upon accession, foreign securities service suppliers will be permitted to establish representative offices and joint ventures with Vietnamese partners, subject to foreign ownership limit of 49%.
  • Five years from the date of accession, securities service suppliers with 100% foreign-invested capital will be permitted.
  • Five years from the date of accession, the following services and branches of foreign securities services suppliers will be permitted: (a) Asset management; (b) settlement and clearing services for securities, derivative products, and other securities-related instruments; (c) provision and transfer of financial information, and related software by suppliers of securities services; and (d) advisory, intermediation and other auxiliary securities-related services.

 

CONCLUSION
As a member of WTO, Vietnam has to adhere to WTO commitments and adopt international rules. It is no doubt that further reforms will continue to take place, especially in the legal framework, to make the country more integrated to the world economy. It is therefore anticipated that M&A activities will grow rapidly in the years ahead. M&A transactions will be also a good choice for foreign investors as Vietnam has started to open various sectors for foreigners. To keep pace with this, the regulatory framework for M&A activities in Vietnam needs to be further improved, especially with regard to clear rules on foreign ownership in Vietnamese companies. In this respect, the National Assembly has recently circulated a Draft Resolution on Implementation of Vietnam?s WTO Commitments for public comments. It is expected that if the Resolution is approved by the National Assembly, various issues will be made clear, particularly for foreign investors to invest in and acquire interests in companies in Vietnam in different sectors and industries.

 

NOTES
1 Law No. 60/2005/QH11 on Enterprises dated 29
November 2005, effective as of 1 July 2006
("Enterprise Law")
2 Law No. 59/2005/QH11 on Investment dated 29
November 2005, effective as of 1 July 2006
("Investment Law").
3 Law No. 70/2006/QH11 on Securities dated 29
June 2006, effective as of 1 January 2007
("Securities Law")
4 Article 17, Competition Law.
5 Law No. 27/2004/QH11 on Competition dated 3
December 2004 ("Competition Law").
6 Article 153, Enterprise Law
7 Article 152, Enterprise Law.
8 Article 3.6, Investment Law.
9 Decree No. 139/2007/ND-CP dated 05
September 2007 guiding for the
implementation of the Enterprise Law
("Decree 139").
10 Article 9, Decree 139.
11 Which serves both as certificate of
incorporation of the enterprise and approval or
registration of the investment project.
12 Same as certificate of incorporation in other
countries.
13 Decision No. 238/2005/QD-TTg of the Prime
Minister dated 29 September 2005 on Foreign
Participation in Vietnamese Securities Market.
14 Depending on scale and areas of investment,
the ICIA may be the Provincial People?s
Committee or the Management Board of
Industrial Zones (for those projects located in
industrial zones).
15 An agency attached to the Provincial
Department of Planning and Investment (DPI).
16 Article 86.4, Enterprise Law.
17 Two (2) years from the effective date of the
Investment Law and Enterprise Law.
18 Law No. 09/2003/QH11 dated 31 July 2003 on
Corporate Income tax ("CIT Law").
19 Law No. 14/2008/QH12 dated 3 June 2008 on
Corporate Income Tax
20 Law No. 04/2007/QH12 on Personal Income Tax
dated 21 November 2007, effective as of 1
January 2009 ("PIT Law").
21 Under the current tax rules, the individuals?
income from capital investment, capital
assignment are not subject to PIT.
22 National Office of Intellectual Property (NOIP)
in Hanoi.

Source: Law.com

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