Making Market Noise: M&A in Vietnam

Vietnam has seen an increase in M&A activity in recent years as investors view an emerging investment channel for companies both within and outside of Vietnam.   In accordance with the Government’s restructuring plan for strengthening the banking sector, Vietnam’s domestic banks are anticipated to carry out voluntary M&As to help some of the ailing lenders and, at the same time, improve the competitiveness of credit institutions. In the past, Vietnam received FDI mainly through greenfield investments, but there has been an uptick in foreign companies investing in Vietnam by acquiring a stake in existing companies. Despite some macroeconomic instability, Vietnam has seen some significant M&A deals in 2012, which include:

Overview of Legislation

Currently, subject to certain limitations, foreign investors in Vietnam are allowed to freely acquire stakes in Vietnamese companies. Specific restrictions on such acquisitions are provided in both the Schedule of Commitments of Vietnam to the World Trade Organization and domestic legislation. However, until now, Vietnam has no separate comprehensive law on M&A. M&A laws and regulations are found scattered in various pieces of legislation, including the Law on Enterprises No. 60/2005/QH11 and the Law on Investment No. 59/2005/QH11 and their implementing regulations; in particular, Government Decree No. 102/2010/ND-CP, Decree No. 43/2010/ND-CP and the Prime Minister’s Decision No. 88/2009/QD-TTg, which are the main laws governing business combination and which are applicable to all companies incorporated in Vietnam.  If the acquisition involves shares of a public and listed company, the Law on Securities No. 70/2006/QH11, as amended by Law No. 62/2010/QH12 and Government Decree No. 58/2012/ND-CP on private placement plans and its implementing regulations will apply. Cross-border transactions will also be additionally subject to the Ordinance on Foreign Exchange No. 28/2005/PL-UBTVQH11, amended by Ordinance No. 06/2013/UBTVQH13 which will come into effect on January 1, 2014, and the WTO Commitments. In the instance, where M&A triggers an anti-trust issue, the Law on Competition must also be considered.

M&A Rules

In general, all M&A transactions are subject to the same rules set out in the Law of Enterprises and its implementing and guiding regulations, although sector-specific regulations may apply to different companies.  Some of the specific rules include:

• A capital contribution in a limited liability company (a company not limited by shares and with no more than 50 owners) may only be sold once each of the capital owner’s share of capital has been fully paid; an offer given to other members of the company who have the right of first refusal for 30 days before the capital owner may be able to transfer his shares; and the company has issued a certificate of capital contribution.
• Sales of shares of the initial founding shareholders of a joint-stock company (i.e. a company limited by shares) are restricted for 3 years, unless the General Meeting of Shareholders consents to their sale.
• An M&A transaction involving a public company, whether listed or unlisted, will also be subject to the Law on Securities and its implementing and guiding regulations.

Under the Law on Securities, joint-stock companies (otherwise known as shareholding companies or companies limited by shares) that belong to any one of the following three categories are included in the definition of a “public company”:

• Companies which have made a public offer of shares;
• Companies with shares listed on the Stock Exchange or a Securities Trade Center; or
• Shareholding companies with at least 100 investors (excluding professional securities investors), and paid-up charter capital of VND 100 Billion or more (approximately USD 500,000).

All public companies must lodge a public company file with the State Securities Commission (“SSC”) within 90 days from the date of becoming a public company, following which, they remain regulated by the SSC.

Sector-specific Rules

M&A transactions which involve companies in specific industries are subject to additional set regulations. In principle, approval is usually required before a business combination may go ahead. In certain industries, foreign equity is capped (for example, 30% for banking and 51% for the movie industry) and are, in some cases, subject to industry-specific approvals.

Transactions which are entered into between credit institutions established and operating in Vietnam are governed by the Law on Credit Institutions No. 47/2010/QH12, Government Decree No. 69/2007/ND-CP and several State Bank of Vietnam (“SBV”) guidelines, which allow various forms of credit institutions to merge or consolidate with one bank. One form of acquisition is defined as the purchase of the entire legal assets, rights, obligations and interests of the target credit institution. Post-acquisition, the target credit institution becomes a subsidiary company of the acquiror. The acquisition requires the consent of the SBV. An acquisition by a foreign investor of a finance company in Vietnam might be unacceptable.

Means of Acquisition

Under Vietnamese law, control of a public company may be acquired through (i) an acquisition of shares or (ii) a merger.

Acquisition of shares

The purchaser may acquire newly-issued shares of a public company by way of subscription or, alternatively, purchase the shares or share options of existing shareholders or stakeholders of a company.

The offer to purchase shares of existing shareholders in a public or listed company will trigger tender offer requirements in the following cases:

• a purchase of circulating shares which results in a purchaser with no shareholding, or less than 25% shareholding (and affiliated persons of the purchaser) passing the threshold of 25%;
• a purchase of circulating shares which results in a purchaser with 25% of more shareholding (and affiliated persons of the purchaser) purchasing a further 10% or more of the current circulating shares of the company; or
• a purchase of the circulating shares which results in a purchaser with 25% shareholding or more (and affiliated persons of the purchaser) purchasing a further 5% up to 10% of currently circulating shares of the company within less than 1 year from the date of completion of the previous offer tranche.

However, a purchaser shall not be required to make a tender offer in any of the following cases:

• subscription of newly-issued shares resulting in ownership of 25% or more of the voting shares in a public company pursuant to an issuance plan, approved by the company’s General Meeting of Shareholders;
• acquisition of shares by way of transfer from an existing shareholder resulting in ownership of 25% or more of the voting shares in a public company, where such transfer has been approved by the company’s General meeting of Shareholders;
• transfer of shares between companies within a group of parent-subsidiary companies;
• donation of bequeathing shares;
• assignment of capital pursuant to a decision of a court; and
• other cases as decided by the Ministry of Finance.

Merger

The Law on Enterprises sets out general procedures for company mergers by way of transfer of all lawful assets, rights, obligations and interests to the merged company and the simultaneous termination of the existence of the merging companies.  Such procedures apply to “companies of the same type”, but there is no specific official guidance on this term, and no implementing detailed regulations on the merger provisions of the Law on Enterprises of general application to public companies.

Outlook

Along with macroeconomic stability, the lack of market transparency, legal barriers and governance hurdles still seem to be the greatest concerns for foreign investors, M&A in Vietnam continues to be one of the key, effective channels for market entry. Amidst a market downturn in real estate, the growing M&A trend is expected to surge in the areas of banking, consumer goods, entertainment, IT and e-commerce, property and real estate, as a range of opportunities present themselves.

However, foreign investors looking to invest in a company in Vietnam should carefully research the country’s legal framework. In addition, foreign investors must take into account that the laws and regulations governing M&A transactions are scattered and subject to registration, approval and supervision by various Vietnamese authorities, with oftentimes complicated, unclear provisions and procedures.

This article was originally published in CorporateLiveWire.