Further guidance on divestment of State capital in Vietnamese State-owned enterprises

The Vietnamese Government has been pushing hard for divestment of State capital in Vietnamese State-owned enterprises whether by way of equitisation or sale of existing State capital. One of the key issues that hinder this process is the actual areas that the Government should be pushing. To address this issue, finally, in June 2014, the Prime Minister issued Decision 37/2014 setting out the State-ownership limit in various sectors or industries. This replaces Decision 14/2011 of the Prime Minister. In particular,

• Comparing older regulations, Decision 37/2014 has  opened for private ownership regarding a number of business sectors including (i) managing and exploiting important seaports, airports (exclusive of airports having important decision on national defense); (ii) producing cigarette; (iii) Radio broadcasting and television, and (iv) controlling and maintaining dykes, flood division and disaster prevention. Previously, companies in these sectors must be wholly owned by the State;

• Decision 37/2014 also removes the restriction on state ownership on enterprises operating in (i) producing pig-iron, steel with capacity up to 500,000 tons/year; (ii) producing rotary kiln cement with capacity up to 1.5 million tons/year; (iii) producing newspaper printing paper, writing paper of high quality; (iv) Building and repair of air transport facilities; and (v) producing large-scale power from 500 MW upwards. Previously, the State must own a majority of the capital in companies in these sectors;

• The State shall remain to hold 100% of charter capital for enterprises operating in, among other things, (i) business of lottery, publishing, (ii) business relating to national defence and security, and (iii) enterprises play a key role in the activity of production and business, development strategy, holding business keys and technology that the groups and state corporations need to hold 100% of the capital in order to carry out the tasks and main business line assigned;

• The State shall hold from 75% of charter capital for enterprises operating in, among others things, (i) providing telecommunication infrastructure, (ii) exploiting the mineral with large scale and (iii) exploiting oil and natural gas;

• The State shall hold between 65% and under 75 % of charter capital for enterprises operating in, among others things, (i) processing oil and natural gas, (ii) producing cigarette, (iii) wholesaling foodstuffs, medicine and gas and oil, (iv) banking finance (exclusive of insurance, security, fund management company, finance company and finance leasing company) (v) air transportation, and (vi) power distribution; and

• The State shall hold between 50% and under 65 % of charter capital for the enterprises operating in, among others things, international maritime transport and railway transportation.

The classification based on the voting thresholds of 65% and 75% under Decision 37/2014 may become obsolete if the voting thresholds under Enterprise Law are reduced to 51% and 65% under the proposed amendments to the Enterprise Law. 

Licensing procedures for purchasing shares in Vietnamese local companies - IC or BRC or Both

A major difficulty for a lawyer advising a foreign buyer purchasing equity interest in a local Vietnamese company (Local Co) is to determine whether an Investment Certificate (IC) should be obtained for the investment and if so, how the IC should be issued (e.g. to the foreign buyer or to the Local Co and for which project?). By way of background, the key incorporation document recording key corporate details such as name, address, business lines, owners, and capital structure of a Local Co is the Enterprise Registration (Đăng Ký Doanh Nghiệp) or Business Registration Certificate (Đăng Ký Kinh Doanh). Both terms are commonly abbreviated as BRC. On the other hand, a foreign investor setting up a new company in Vietnam will be issued an IC as the key incorporation document.

The Hanoi Department of Planning and Investment (Hanoi DPI) seemed to share the lawyers’ frustration when in May 2013, it sent a request to the Ministry of Planning and Investment (MPI) seeking clarification on the rules. We do not know whether and how the MPI responded to the Hanoi DPI’s request. However, the Hanoi DPI’s letter to the MPI provides many useful information about the licensing practice in this regards. In particular, according to Hanoi DPI,

• Before May 2013, when a foreign investor purchases equity interests in a Local Co, Hanoi DPI would issue a new IC to the Local Co to replace its existing BRC. After acquisition, the Local Co will have the new IC as its incorporation document and will be treated as a foreign-invested enterprise (doanh nghiệp có vốn đầu tư nước ngoài) for all purposes;

• After May 2013, the Hanoi DPI will not continue the current practice and will not accept new IC applications submitted by foreign buyers purchasing equity interests in a Local Co in Hanoi until there is further guidance by the MPI;

• There has been inconsistent guidance by different departments of the MPI. The Business Registration Department of the MPI took the view that there is no procedure for “replacing” a BRC with an IC if a foreign buyer purchases equity interests in a Local Co. The Foreign Investment Department on the other hand has advised a Local Co to (1) amend the existing BRC to record the new foreign buyer as an owner and (2) thereafter, apply for a separate new IC recording the project that the Local Co is implementing;

• MPI were asked to provide guidance on (1) timing, sequence, and procedures to amend an existing BRC of a Local Co to record a new foreign buyer and, if applicable, to obtain a new IC, (2) in what circumstances a new IC is required (depending on the business lines of the Local Co or the level of foreign ownership in the Local Co?), (3) can the foreign buyer voluntarily apply for a new IC even if one is not required, (4) if a new IC is issued in subsequent to a BRC, what happen if a new IC is not issued after the BRC has been amended, (5) which tax department will be in charge of a Local Co after a foreign buyer’s purchase (the tax department in charge of foreign-invested companies or the tax department in charge of domestic companies), (6) licensing procedures and management regime for branches of Local Co after a foreign buyer’s purchase, especially in case the Local Co is involved in conditional businesses for foreign investors such as retail, restaurant), (7) exact definition of foreign-invested enterprises in light of a very broad definition provided in the Investment Law for the purpose of land regulations, tax regulations and reporting obligations; and (8) procedures to record foreign buyers being non-founding shareholders in the BRC of a Local Co being joint stock company;

• The Business Registration Department of the MPI considers an “acquisition” (mua lại) of a Local Co being the purchase of 100% charter capital of such Local Co which must be a sole-owner company (doanh nghiệp tư nhân). In January 2010, the Foreign Investment Department of the MPI agreed to the Ho Chi Minh DPI that a new IC will be issued to replace the existing BRC of a Local Co if the foreign buyer acquires 100% equity interest of such Local Co. In February 2013, the Business Registration Department of the MPI took a different view that there is no procedures for replacing an existing BRC with a new IC;

• In Ho Chi Minh City, when a foreign investor purchases equity interests in a Local Co, HCMC DPI would (1) amend the current BRC of the Local Co to record the foreign buyer and (2) thereafter,  issue a new IC to the Local Co for an investment project. Hanoi DPI disagrees with HCMC DPI’s approach due to the uncertainties (see above);

• In Vinh Phuc province, the Vinh Phuc DPI applies Hanoi DPI’s approach;

• In Can Tho province, the Can Tho DPI applies Hanoi DPI’s approach for Local Co being manufacturing entities. Can Tho DPI does not accept purchase of equity interest by foreign buyers in Local Co being trading or services entities;

• In Da Nang, if a foreign buyer acquires no more than 49% equity interest in a Local Co, Da Nang DPI will only amend the existing BRC and will not issue an IC. If a foreign buyer acquires from 51% to less than 100% equity interest in a Local Co, Da Nang DPI adopts HCMC DPI’s approach. If a foreign buyer acquires 100% equity interest in a Local Co, Da Nang DPI will issue a new IC to replace the existing BRC; and

• In Binh Duong, if a Local Co is a manufacturing entity then Binh Duong DPI adopts Hanoi DPI’s approach in case the foreign buyer acquires 51% or more of the Local Co. If foreign buyer only acquires no more than 49% of a Local Co being a manufacturing entity then Binh Duong DPI only amends the existing BRC and does not issue an IC. If a Local Co being trading or services entity then Binh Duong will issue a new IC to replace the existing BRC even the foreign buyer only acquire 1% of the charter capital. 

Licences and Permits for running business in Vietnam

Navigating among numerous licences and permits required by law for running a business in Vietnam has never been easy. There many reasons including:

• There is no comprehensive list of valid licences and permits available. Therefore, businesses run the risks of missing certain licences and permits. This is particular true as many authorities in Vietnam have the power to issue licences and permits;
• The time and efforts required for obtaining a licence or permit may be substantial. In practice, the authorities may not always check or enforce the required licence or permit. Therefore, the risk in practice of missing a particular licence and permit varies; and
• That being said, in theory, missing a required licence or permit may be subject to administrative penalty and, in extreme case, criminal penalty (e.g. see the case against Mr Nguyen Duc Kien).

Regarding the first point, I just come across of report on business licences and permits prepared by the Ministry of Planning and Investment (MPI) in December 2013 (MPI List). The MPI seems to have spent substantial time and efforts verifying with all other ministries about the licences and permits issued by such other ministries. As such, the MPI List is quite comprehensive. The MPI List provides for the list of 334 licences and permits requires for various conditional business lines in Vietnam.

Therefore, a business owner may use the information in the MPI List to check if it has obtained all the licences and permits mentioned in the MPI List for its operation, if necessary.

A copy of the MPI List in Vietnamese can be downloaded here.

An unofficial translation of the MPI List by VILAF can be downloaded here.

The case against Mr Nguyen Duc Kien and its potential implication

The first hearings of the criminal cases against Mr Nguyen Duc Kien, former Board member of Asia Commercial Bank (ACB) and Ms Huynh Thi Huyen Nhu, former staff of Vietinbank, a large State-owned bank have raised many fundamental issues about the business law framework in Vietnam. Unfortunately, without a full transcript of the hearings, one cannot comment on the legal interpretation adopted by the courts.

That being said, newspaper reports about Mr Kien’s conviction of illegally doing business (tội kinh doanh trái phép) have shed some light about the court’s interpretation of “doing business” under Article 4.2 of the Enterprise Law. The background of the case is as follows:

• Mr Kien set up two companies which do not register for the business lines of sale and purchase of shares but for other business lines;
  

• These two companies acquire and/or sell shares in other companies;
  

• The procurator takes the view that the two companies have illegally done business which are not recorded in their business registration certificates. Under Article 9.1 of the Enterprise Law, a company is required to do business within the scope of its business registration certificates;
  

• Mr Kien takes the view that under Article 13 of the Enterprise Law, a company is entitled to acquire shares in another company. Therefore, there is no need for Mr Kien’s companies to register for the business lines of sale and purchase of shares. In practice, the approach taken by Mr Kien’s companies is widely common. Some business registration authorities even refuse to register the business line of sale and purchase of shares on the basis that this activity is permitted by the Enterprise Law already; and
  

• The first instance court hold that because Mr Kien’s companies do not do any business other than sale and purchase of shares, these companies are considered as engaging in the business of sale and purchase of shares.
  

 Article 4.2 of the Enterprise Law provides that “doing business” (kinh doanh) means the continuous conduct of one, several or all of the stages of the investment process, from production to sale of products or provision of services in the market for profits. There is no further interpretation of the term “continuous conduct”. Now, it seems that the court will consider a business conduct by a company to be a continuous conduct if such business conduct is the only business conduct of the company. In light of this interpretation, owners of companies in Vietnam will likely pay more attention to ensure that their companies will at least actually engage in some business lines as provided in their business registration certificates.