Foreign investment in manufacturing sectors in Vietnam faces stricter requirements

During the last few months, foreign investors have faced new challenges in applying for the authorities’ approval (M&A Approval) for acquiring share capital in Vietnamese companies operating in the manufacturing sector (Target).

In particular, to obtain an M&A Approval in the manufacturing sector, a foreign investor must now also submit an extensive explanation on the followings for the authorities’ assessment:

(a) Technologies;

(b) Machinery;

(c) Labor uses;

(d) Sources of input materials;

(e) Market(s) for products; and

(f) Environmental protection.

This is a new requirement arising from Vietnam’s new policies which are aimed at making the country more selective in attracting foreign investment. However, in practice, this new requirement is time-consuming and costly, thus likely to become a burden to foreign investors who wish to invest in Vietnam’s manufacturing sector.

Ground for the requirements

The new requirement is rooted in Resolution No. 50/NQ-TW on foreign investment policy towards 2030 issued by the Politburo on 20 August 2019 (Resolution 50). Implementation of Resolution 50 is guided by Plan No. 379-KH/TU, issued on 1 July 2020 by the Standing Committee of the Party Committee (Plan 379).

Under Resolution 50 and Plan 379, provincial licensing authorities (mainly the Department of Planning and Investment – DPI) are instructed not to approve scale-up and extension of any manufacturing projects that are using obsolete technology, potentially causing environmental pollution or natural-resource intensive.

The above policy under Resolution 50 and Plan 379 is subsequently manifested in the new Law on Investment dated 17 June 2020 (LOI 2020). Particularly, Article 44.4(a) of LOI 2020 stipulates that upon expiry of the operational duration of an investment project, generally the investor may ask for a duration extension, except for investment projects which are “using obsolete technology, potentially causing environmental pollution or natural-resource intensive”.

Although legally LOI 2020 is not effective until 1 January 2021, over the last few months DPI has surprisingly taken the new policy into consideration when assessing M&A Approval applications. While the provision only restricts project term extension, in practice the requirements (and possible restrictions) therein have been surprisingly applied to existing projects for the purpose of approving or disapproving foreign investment.

M&A deals in manufacturing sector may face heavy delay or even deal breaker

Previously under Article 46.3(b) of Decree No. 118/2015/ND-CP, obtaining an M&A Approval for a manufacturing project would take 15 days. This timeline would likely be prolonged by the new policy as the DPI would now also conduct a thorough review of, and may even seek consultation from other relevant provincial departments (e.g. Department of Science and Technology, Department of Natural Resources and Environment, etc.) on, the foreign investor’s detailed submission on the abovelisted (a)-(f) criteria in deciding whether or not to approve the investor’s proposed acquisition.

The new policy and LOI 2020 are understood to help screen out or reduce investments, especially foreign investments, into manufacturing projects using outdated technologies, polluting the environment, and resource-intensive projects. There is nothing wrong with the new policy in that it helps the country to be more selective and attract better quality investments. However, when the new policy is implemented in practice, it has somehow become a serious obstacle to foreign investment. In particular, as a result of the new policy, a foreign investor whose proposed acquisition in the manufacturing sector is subject to the M&A Approval requirement shall now also submit an extensive explanation on the above listed (a) to (f) criteria for the licensing authority’s review and approval. Meanwhile, there appears to be a lack of detailed regulations and criteria to assess whether or not a technology is outdated or may pollute the environment, or whether a project is resource-intensive. Given the lack of transparency and predictability, the authorities’ assessment could be very time consuming and, worse, discretionary.

Specific requirements on preparing the explanation to the DPI

To prepare the newly required explanation, reference can be made to Article 16.2 of the Law on Technology Transfer 2017 as the provision stipulates the types of information which arguably can be used to prove that the Target is not “using obsolete technology, potentially causing environmental pollution or natural-resource intensive”. Such information includes:

(a) Name, origin and chart of the technological process; list, status and technical parameters of the machinery and equipment used in the technological line;

(b) Products, standards and product quality;

(c) Ability to supply raw materials, fuel and supplies for the technological line;

(d) Program on training and technical support to operate the technological line; and

(e) Expenses of investment in the technology, machinery and equipment, training and technical assistance.

It would take the relevant departments much time to review the investor’s submitted explanation in order to arrive at a conclusion on these points. It is even more time consuming given that there are not sufficient and clear regulations on these points, especially on the criteria to judge whether a technology is “obsolete”.

Moreover, if environmental protection is of concern, which is quite common for manufacturing projects, Article 18 and Article 29 of the Law on Environmental Protection can be applied to consider whether or not the Target is a project that must:

(a) conduct an environmental impact assessment; or

(b) devise an environmental protection plan.

If the Target’s manufacturing operation is deemed to be one such project, the investor will also be required to submit the environmental protection authority’s approval of the environmental impact assessment or, depending the case, the environmental protection authority’s confirmation on the environmental protection plan. And this takes times and is uncertain as well.

Consequences to be noted for parties to an M&A transaction

With the new policy and the new practice, parties to an M&A deal in the manufacturing sector may have to spend a lot more time and money on preparing the required documents to  obtain the M&A Approval. The closing date could be driven far away from the signing date of transactional documents, increasing the risks for the investor with respect to liabilities arising between the two dates. In the worst case scenario where the authority refuses to issue an M&A Approval due to the new requirement, the refusal becomes a deal breaker beyond the expectation of the transaction parties.

When Vietnam joined the WTO in 2007, market openings and market restrictions became a prerequisite for foreign investment transaction, for which M&A Approvals have been emphasized as a first-thing-first condition precedent in most M&A transactions. With the new policy, this condition precedent attracts the parties’ attention again and needs to be managed with special care.

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 legal advice, please contact our Partners.

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