M&A Activity in Vietnam

Recently, M&A activities in Vietnam have become more active than ever.  Main factors that have boosted Vietnam M&A activities include, among others, development of the legal framework after Vietnam’s accession to WTO in 2007, financial distress (difficulty in obtaining capital from loans and stock exchange), and increased in the number of distressed companies and assetsbesides the Government opening its doors to several businesses.  2016 witnessed several big M&A deals in many industries, such as real estate, consumer goods and retail.  Notwithstanding, Vietnam is still in the process of developing its legal framework for M&A and still requires reforms in order to create a more attractive investment environment in Vietnam.  This article discusses certain key legal issues in conducting acquisition of private domestic-owned companies (“DOC”) in Vietnam.  

1. Deal structure:

Deal structure should be conducted simultaneous with a legal due diligence exercise over a target company.
In the acquisition of a DOC, examination of the target company’s business scope is needed to determine whether the core business lines of the target company are subject to certain restrictions, including foreign ownership limits, form of investment and requirement related to Vietnamese partners, operational contents and other conditions as stipulated in the international treaties to which Vietnam is a party.  This exercise helps to identify whether the transaction is feasible, not feasible at all, or feasible with certain deal structuring.
For example, a foreign investor cannot acquire 49% of the equity interest in a target company having registered to carry out passenger transport services.[1]  The acquisition is not permitted if the foreign investor wishes to own more than 49% equity interest in such target company.  If the business is not a core business of the target company, the parties may consider carving out such conditional business.  Otherwise, alternative holding structures should be considered. 

Multiple-level holding structure is one of the options worth further considering when the business line subject to foreign ownership cap is a core business line of the target company.  The new Law on Investment, which became effective on 1 July 2015, introduces for the first time the concept of “enterprises having foreign investment who are treated as foreign investors” (referred to as “foreign-investor-equivalent” in this article).  Other “enterprises having foreign investment” will be treated as local investors and the above-mentioned conditions will not apply to them. A foreign-investor-equivalent is an enterprise [incorporated in Vietnam] in which:

a. Foreign investors (being individuals having foreign citizenship or companies incorporated outside Vietnam) hold at least 51% of its charter capital;
b. Companies described in limb a) above hold at least 51% of its charter capital; or
c. Foreign investor(s) and companies described in limb a) above together hold at least 51% of its charter capital.

To increase the de facto ownership over the target company, the vendors would consider setting up a multi-level corporate structure to allow the foreign investor to acquire the maximum permitted equity interest directly in the target company, and increase the ownership indirectly, by acquiring less than 51% of the equity interest in the entities holding the remaining equity interest in the target company.   There is also a structure that helps to increase the voting rights or dividend rights of foreign investors in the target company. Such structuring would involve establishing the companies in multi-level corporate structure to set up as a joint stock company and issue preference shares to shareholders.  There are risks associated with this structure and the foreign investors should be well advised before making decisions.

Choosing between the structure of acquisition of assets of the target company or equity interest in the target company is also a popular deal structuring exercise. The legal and financial due diligence exercises may identify significant contingent liabilities that cannot be efficiently covered by retention of the sale proceeds, or other alternative security.  In such case, acquiring assets appear to be an optimal option. Acquiring assets is viewed as less risky than acquiring interests in a target company as foreign investors may avoid succeeding legacy and hidden liabilities of the target company.  If the asset is associated with a business that requires an operation license, the investors will need to consider whether the cumbersome process in obtaining an operation license outweighs the issues associated with company acquisition.  In addition, asset acquisition may not also work in certain cases (e.g., acquisition of commercial real estate for lease or sale is not possible for foreign investors in Vietnam, etc.).  The acquisition of equity interest in the company owning real estate seems to be an option.  Foreign investors may request the vendors to establish a new company in Vietnam to acquire the property and sell the equity interest in such new company to foreign investors. This two-step process may not be the most efficient route for a first-time investor in Vietnam.

2. Transfer restriction 

Due diligence exercises may help foreign investors to determine whether the proposed transfer is subject to regulatory or contractual restrictions.  Subject to the type of restrictions, certain approval/consents may need to be secured before the proposed transaction.  By way of example, the following are some of the regulatory and contractual restrictions.

a. Equity interest in multi-member limited liability companies must first be offered to other member(s) in limited liability companies.  Only if the other member(s) refuse or waive their right to acquire such equity interest, may the equity interest be sold to a third party on terms equal to, or less favorable than, terms offered to the other member(s).   In this case, refusal or waiver of the other member(s) should be secured before the acquisition.
b.   Founding shareholders in joint stock companies may only transfer among themselves during the first three years after the establishment of the company, unless transfer is approved by the general meeting of shareholders with a note that transferring founding shareholder is not allowed to vote on approving the transfer.  In this case, approval of the general meeting of shareholders of the target company should be secured before the acquisition.
c.   Shares of strategic shareholders in state-owned companies will be subject to a five-year lock-up period unless otherwise approved by the general meeting of shareholders of the target company.  In this case, approval of the general meeting of shareholders of the target company should be secured before the acquisition.
d.   Shareholders/members may contractually agree to subject their shares to certain transfer restrictions by way of a shareholders’ agreement.  Subject to type of restriction provided in the agreement, waiver of other shareholders/members of the agreement may need to be secured.

3. Anti-trust/competition issue:

Under Vietnam’s Competition Law, a transaction will be prohibited if an “economic concentration” is formed in which companies involved in such transaction would have a combined “market share” of more than 50% in the relevant market. An M&A deal is considered an “economic concentration”.  There are exceptions to the prohibited economic concentrations, if the economic concentration:

a. will result in creating only a small or medium-size company;
b. is necessary due to insolvency/bankruptcy concerns;
c. will promote export; or
d. will facilitate socio-economic development and technological progress.

Any exemption requires an application to Vietnam Competition Administration Department (“VCAD”) for its approval.

If parties to an “economic concentration” have a combined “market share” of between 30% to 50% of the “relevant market”, they will be required to notify VCAD 30 days before the transaction resulting in the “economic concentration”. Such proposed transaction can only be carried out after written confirmation has been received from VCAD stating that the economic concentration is not prohibited.  Concepts such as “relevant market” and “market share” are defined in the Competition Law.  However, the basis for calculating the “market share” of a potential target company involving in an “economic concentration” is not clear under the Competition Law. Questions thus remain regarding the basis of the calculation.

4. Payment:

Vietnam maintains a stringent foreign exchange control system.  Foreign exchange regulations are relatively dynamic and scattered in several different legislative instruments, which may cause some inconsistency in interpretation and implementation. 

Under Vietnamese laws, the payment of the purchase price in an M&A would need to be made through “capital accounts,” meaning bank accounts for the exclusive use of “capital transactions.”  A capital transaction is any remittance between a resident and a non-resident relating to investment equity and loan financing. Companies incorporated in Vietnam fall under the “residents” category. Offshore-incorporated companies usually fall under the “non-residents” category.  Failure to comply with the perceived requirements on inward investment remittances subjects the investor to possible difficulties in its future repatriation of dividends and divestment funds.

In this regard, the regulations of the State Bank of Vietnam are not yet updated after the issuance of the new Law on Investment, causing confusion to many investors.

While the concepts of “direct investment” and “indirect investment” have been eliminated in the new Law on Investment, the concepts of “direct investment capital account” (“DICA”) and “indirect investment capital account” (“IICA”) still exist in the State Bank of Vietnam’s regulations.  In practice, the rules of thumb that the foreign investors may need to know include:

a. for acquisition into a DOC, foreign investor may need to open an IICA, a VND-account in a bank licensed to operate in Vietnam; and
b. for acquisition in a company with foreign investment having investment certificate, investment registration certificate or equivalent, the payment must be made through a DICA of the target company as an intermediate account.

The above are some key issues that foreign investors should know when conducting a M&A transaction in Vietnam.  Since the laws are changing fast and so is the practice among the authorities, foreign investors should also get advice on the most recent updates on laws and practice.
 
NGUYEN TRUC HIEN

Vietnam International Law Firm (VILAF)

Nguyen Truc Hien is the managing partner of VILAF’s Ho Chi Minh City office. She is recommended by several well-knowninternational legal guides as offering broad expertise in commercial and construction-related work, and for having particular skills in high-value real estate projects.  She advises companies inmany multimillion-dollar real estate projects, M&A, equity and debt financing deals in Vietnam, including CapitaLand, VinaCapital, Prudential, Aseana, Nam Long, Novaland and Hoa Lam.  She advises both employers and contractors in construction-related contracts, including design/consultancy, construction and turnkey contracts.  She has served as an adviser for turnkey contract and credit agreements in hundred-million dollar transactions, including the Tay Ninh Cement Project and Dakr’tih Hydropower Project. She advises both Vietnamese and foreign investors in direct investment and M&A transactionsabout operational issues in many fields of operation, including retail, e-commerce, consumer goods, automobiles, opticals, information technology, insurance, telecommunications, feeds and livestock, brewery and beverages, hotel management, catering, construction and construction materials. She is also an excellent tax lawyer, and her tax planning helps clients find the best tax-efficient structures for their transactions and business models.

NGUYEN ANH HAO

Vietnam International Law Firm (VILAF)

Nguyen Anh Hao is Counsel of VILAF’s Ho Chi Minh City office.  He has more than 11 years of working experience, including more than 1 year with Willkie Farr & Gallagher LLP and Thompson Hine LLP, the U.S law firms.  Headvises clientsinmultimillion-dollar M&A, real estate, capital market, and energy deals, including Mondelez International, Dragon Capital, Jen Capital, Shell, Mitra Energy (Holdings) Ltd, KrisEnergy Limited, Nameson Holdings Limited and Regina Miracle International (Holdings) Limited.