We are pleased to introduce to you our newest publication on M&A Legal Framework from The Vietnam M&A Research Report 2016 (Issue 6) published by StoxPlus on 8th January 2016. This section is written by Mr. Bui Ngoc Hong – Partner of LNT & Partners. We strongly believe that these updates will be valuable to institutional investors, investment company and foreign players to set a foothold or to expand your businesses in Vietnam.
New legal improvements are likely to simplify the M&A procedures for foreign investors into Vietnam
- Towards the end of 2015, Vietnam improved significantly its legal platform for M&A transactions, especially for foreign investors.
- For on-the–stock-market M&A, Decree 60/2015/ND-CP, effective as of 1 September 2015, revised a number of articles of Decree 58/2012/ND-CP (Decree 60) and replaced the previous foreign ownership cap of 49% charter capital, relaxing the thresholds for foreign ownership. Depending on the target company’s business lines and its shareholders’ approval, these changes could enable foreign investors’ acquisition of up to 100% of a local company’s charter capital.
- For not-on-the-stock-market M&A, effective as of 1 July 2015, the new Law on Enterprises (LOE) and the new Law on Investment (LOI) offer foreign investors relaxed ownership thresholds and simplify the investment procedures.
- These legal improvements coupled with Vietnam’s full market openings to foreign investments in 2015 and fueled by the local economy’s heightened productivity rates, all suggest that now is the right time for buyers and sellers to actively engage in M&A transactions.
Market openings ripen foreign investments
- Under the LOI, foreign investors are permitted to own charter capital of a Vietnamese enterprise without being subject to any limits, unless otherwise stipulated in the following situations:
- International treaties to which Vietnam is a party, i.e. the WTO Commitments on Services and other free trade agreements (FTA);
- Securities laws governing investment in public companies, securities business organizations or securities investment funds;
- Laws on specific industries applicable to particular business lines; or
- Laws on state-owned enterprises in case of investments in state-owned enterprises.
- Interestingly, the remaining restrictions under the WTO Commitments on Services (such as logistics services, foods and beverage supply, among others) are scheduled to be lifted this year 2015. This means, unless future free trade agreements offer better market openings, the scheduled openings under the WTO Commitments will provide the most preferential concessions to foreign investors.
M&A on the stock market –foreign ownership caps relaxed due to Decree 60
- On October 26th 2015, Vietnam Government issued Decree 60/2015/ND-CP amending several contents of Decree 58/2012/ND-CP. In total, there are 24 adjustments in this new Decree. Decree 60 is intended to add vitality to the Vietnam stock markets and an extra boost to the equitization of State enterprises, as part of the plan to upgrade Vietnam from “frontier” market classification to “emerging” market classification at MSCI, while racing up to finish the SOE equitisation goal set out in Decision 929 by the Government.
- Under Decree 60, there is no restriction on foreign ownership ratio of a public company, calculated by holdings of voting shares, unless:
- otherwise provided in relevant international treaties to which Vietnam is a party;
- the company operates in business line(s) for which the LOI and other relevant laws provide limits on the foreign ownership ratio;
- the target company operates in a business line with conditions applicable to foreign investors but there is not yet any specific provision on the foreign ownership ratio, then the maximum foreign ownership ratio is 49%;
- in case of equitization of Stated-owned enterprises, if the laws on equitization are silent on the foreign ownership ratio, the provisions of Decree 60 shall apply; or
- otherwise provided in the target company’s charter, which is subject to change by the shareholders at the annual general meeting.
- For companies operating in multi-business lines with different provisions on foreign ownership ratios, the foreign ownership ratio shall not exceed the lowest ratio permitted (unless an international treaty provides otherwise).
- Foreign investors may invest without limitation in government bonds, Government-backed bonds, local government bonds, and corporate bond unless prevented by Law or regulations.
- The duration for equitized SOEs to finish new business certificate registration and register on UpCom is tighten up to 90 days.
- The above rules of Decree 60 are expected to ease and increase foreign investment into Vietnam’s stock market. Once the list of business lines with conditions applicable to foreign investors are issued, the participation levels of foreign investors into companies on the stock market will depend only on the target companies’ shareholders’ decision at the general meeting.
For M&A into companies not on the stock market, the improvements introduced by the LOE and LOI are even more comprehensive and significant
New categorization of foreign invested companies, with different investment conditions and procedures depending on foreign ownership levels in the invested company
- Perhaps the most significant change to M&A foreign investment into Vietnam governed by the LOI and LOE is the categorization of economic organizations into 2 groups depending solely on the foreign owned capital factor, with respectively different investment procedures and investment conditions accorded to each group. The first group includes those economic organizations that are subject to investment procedures and business conditions applicable only to foreign investments and generally are more restrictive (Foreign Controlled Group -FCG).
- FCG includes any company in which the following conditions exist:
- 51% or more of its charter capital is held by one or more foreign investors (i.e. foreign individual or offshore entity); or
- 51% or more of its charter capital is held by an enterprise in (1) above; or
- 51% or more of its charter capital is held by foreign investor(s) and enterprise(s) in (1) above.
- Of note, under the LOE the 51% threshold is calculated on the total charter capital of a company, rather than total voting shares.
- Those that do not belong to the FCG make up the second group (Locally Controlled Group -LCG), which is entitled to enjoy investment procedures and conditions equal to those applicable to domestic investments.
M&A procedures under the new Law of Investment and Law of Enterprises are simplified
Simplified M&A procedures under the LOI and LOE
- Now that M&A procedures have been simplified and shortened by the LOI and LOE, foreign investors’ share acquisitions into domestic companies shall follow one of the following two types of procedures:
- Type 1: If (a) any of the target company’s business lines falls under the business lines conditional to foreign investors , or (b) the foreign ownership resulted from the proposed M&A deal will lead the target company to become one belonging to the FCG, the M&A procedures shall comprise of 2 steps being (i) register and obtain an approval notice from the provincial Department of Planning and Investment and, (ii) upon approval, register the change of ownership as a result of the transaction.
- Type 2: For other cases, the sole step is to register the resulting change of ownership or the increase in charter capital of the target company. In case new shares have been issued privately to new investors, registration of the private placement may be required.
- At the time of this article, the implementing regulations guiding the LOI and LOE have not taken effect. Thus, it remains to be confirmed whether the simplified M&A procedures will prove realistic. Nevertheless, if implemented successfully, the new M&A procedures will reduce significantly the paperwork and shorten the registration time by at least two-thirds of the time it took under the former, repealed legislation.
- In any event, one virtual certainty is that foreign investors will not have to face the same time consuming procedures to obtain the so-called Investment Certificate, which was required under the former legislation when foreign investors acquired as little as 1% of the local target company’s charter capital.
Other improvements in the legal framework that support M&A deals
Registrability of M&A transactions involving foreign buyers becoming more transparent and predictable
- Under the former laws, registrability of M&A transactions involving foreign buyers could not be confirmed until the signed M&A transaction documents were submitted to the licensing authority for final registration, or sometimes even worse, until an Investment Certificate was issued to the target company.
- Now, if the proposed transaction leads the target company to become an enterprise falling under the FCG rubric or involves business lines conditional to foreign investors, it takes 15 days to obtain a notice from the authority to confirm whether or not the transaction is registrable or refused. When either the legal feasibility of the proposed transaction is confirmed or the approval notice is not required, parties to the proposed transaction may enter into contractual binding documents.
- Taking advantage of this new procedure, foreign investors can avoid practical risks which may arise from lengthy licensing procedures, especially in applying for an Investment Certificate for the target company as previously required under the former legal regime. Owing to the improved procedures, it can be expected that those tools for controlling payment such as escrow account instructions, bank guarantees or share pledges may no longer be as necessary as they were under the former legislation.
Industries and trades restrictive to foreign investment now specified
- Even with the market openings fully due under international trade treaties, there are a number of industries and trades into which foreign investments are still subject to restrictive conditions. On 30 December 2015, for the first time, the list of these industries and trades together with the respective investment conditions applicable to foreign investment (FCG Restricted Sectors) have been publicized on the Ministry of Planning and Investment’s website for foreign investment, at dautunuocngoai.gov.vn. The FCG Restricted Sectors consists of businesses which must adhere to conditions applicable solely to foreign investment, and those conditions can be one or more of the following:
- Conditions of investment forms, e.g. setting up new companies, M&A, or contractual forms;
- Requirements of the Vietnamese party’s participation in the investment; and
- Conditions in investment areas and scope;
- Other conditions stipulated in international investment treaties and laws, ordinances, and decrees.
Other improvements in the legal framework that support M&A deals (cont’d)
The new legal regime helps ease structuring for M&A into sectors restrictive to foreign investments
- Despite the restrictions placed on the FCG Restricted Sectors, special investment structures can be developed for FCG acquirers to commercially make the most of their investment. In particular, the new voting rules under the LOE and the new, higher allowance of foreign capital in categorizing FCG and LCG, along with other tools, help ease the deal structuring process.
- Along with the new 51% ownership threshold, voting thresholds to pass a resolution by the decision-making organs of a company have been lowered under the LOE. Specifically, in a joint stock company (JSC) the voting thresholds for passing shareholders’ ordinary resolutions have been lowered to 51% of qualified votes and 65% for certain important matters (previously 65% and 75% respectively) requiring extraordinary resolutions. If voted by way of circulation, shareholders’ resolution may also be passed with only 51% approving votes. Accordingly, a shareholder may generally control a joint stock company by controlling only 51% of the voting shares.
- In a multi-member limited liability company (MLLC), statutory voting threshold for members’ ordinary resolutions remains unchanged at 65% and 75% for special resolutions. However, the LOE allows the MLLC’s charter to provide a lower voting threshold, e.g. 51% or even less, subject to its members’ agreement.
- Compared to the voting rules under the former, repealed LOE, majority shareholders will find that these new voting thresholds will make it cheaper to control the target company’s corporate management, as they now need to control only as little as 51% of the company’s voting shares. In contrast, for minority shareholders, it will cost more to buy enough shares (i.e. votes) to block a decision from being passed by the other shareholders.
- Of note, different from the laws on securities, under the LOE the 51% threshold is calculated on the total charter capital of a company, rather than total voting shares. Accordingly, an acquirer investing via the LOE, i.e. not on the stock market, may find it cheaper to structure their investment so that they can hold and control in their invested company even if their operating company is engaged in the FCG Restricted Sectors. In any event, structures can be devised to achieve the commercial purposes of an investment.
Despite many improvements, some shortcomings still remain
Payment regulations applicable to M&A transaction not compatible with the LOI and LOE
- Payment in M&A transactions is also an issue to be dealt with urgently. The current payment rules applicable to foreign related M&A transaction are provided by Circular 05/2014/TT-NHNN dated 12 March 2014 (Circular 5) and Circular 19/2014/TT-NHNN dated 11 August 2014 (Circular 19). These rules did not accommodate the relevant changes in the LOI and LOE in which such fundamental concepts as direct investment and indirect investment are no longer been used. In short, both Circular 5 and Circular 19 must be amended. The most expedient payment mechanism is to allow each offshore acquirer to open its own sole investment capital account at a commercial bank in Vietnam, and have the payment from their M&A deals into Vietnam-based companies transferred from that sole investment capital account to the seller’s account.
Existing shareholders may keep foreign acquirers locked out of a public company
- Compared with former legislation, both the LOE and Decree 60 seem to allow parties of M&A transactions to decide the terms of their deal, i.e. corporate matters are becoming more democratic.
- With respect to M&A transactions on the stock market, under Decree 60, the existing shareholders in a public company can effectively decide whether or not to open their doors to foreign investors, by setting maximum foreign ownership thresholds in their company’s charter. This should trigger plenty of negotiations not only among the existing shareholders in a public company, but also between a potential acquirer and the existing shareholders, so that a foreign acquirer may purchase shares.
Despite many improvements, some shortcomings still remain (cont’d)
Documents evidencing completion of M&A transactions –the tricky law interpretation may come back
- With respect to registering M&A transactions which are not on the stock market, i.e. to abide by the LOE, Decree 78/2015/ND-CP (Decree 78, effective as of 1 November 2015) provides a change which may be very consequential especially to the acquirer. This change reads, “share purchase agreements or documents proving completion of the share purchase transaction” must be submitted for licensing registration. Positively interpreted, it could mean that instead of submitting documents evidencing the completion of the share transfer (in previous practice, evidence that the entire purchase price has been made), the parties to an M&A can choose to submit their share purchase agreement.
- On the other hand, negatively interpreted, the “share purchase agreement” could be deemed as a tool to prove that the share purchase transaction has been completed. If so interpreted, payment terms in the share purchase agreement should require that the purchase price must be fully made at the time the share purchase agreement is submitted for licensing registration. If the positive interpretation applies, payment terms of share purchase agreements can be freely negotiated, and this change should revolutionize the payment terms in an M&A transaction, where lots of trade-offs are expected to be made between the parties. In that sense, the legal environment for M&A in Vietnam under the new legislation empowers parties to make more of their own decisions.
For the first time, Vietnamese law makers introduced new, more reasonable classification of foreign invested companies –FCG and LCG -together with different investment conditions and M&A procedures respectively applicable to each of the two groups. With the new voting thresholds, the new M&A legislation makes it more cost effective, dramatically reducing the time it takes to conduct M&A transactions. The new voting rules tend to support financially stronger shareholders, i.e. those who wish to become a majority shareholder, as they can pass decisions in a company with a smaller percentage of approving votes. In this regard, the new legislation encourages acquirers to buy more into the target company. With the new, improved legal platform, M&A transactions in Vietnam should run faster and more smoothly. With respect to implementation, as usual, there remain issues to be addressed and resolved. However, with the macro-economic factors getting more and more encouraging, the market should soon experience a noticeable increase in M&A traffic.
By Vietnam Law Insight (LNT & Partners)
Disclaimer: This Briefing is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For more information, please contact the author Hong Bui at (hong.bui@LNTpartners.com) or visit the website: Http://LNTpartners.com