Is amendment to an Investment Registration Certificate (IRC) necessary when a foreign investor acquires a company in Vietnam

When a foreign investor incorporates a company in Vietnam, the foreign investor needs to (1) apply for an IRC for an investment project (the Project), and (2) apply for an Enterprise Registration Certificate for the project company which implements the investment project (Project Co). In addition to the investment project, the IRC usually records details of the foreign investor (the original investor) and the Project Co.

When a new foreign investor acquires a Project Co by purchasing equity interest from the original investor, the new foreign investor does not need to obtain an IRC. Instead, the new foreign investor needs to register the proposed acquisition in accordance with a separate procedure under the Investment Law. To avoid duplicating licensing procedures, Article 46.4 of Decree 118/2015 provides that when a foreign investor acquires a Project Co, the Project Co is not required to amend the IRC issued to such Project Co before the time of acquisition. While Article 46.4 of Decree 118/2015 provides for a clear legal ground for not amending the IRC in this context, it does not sit well with other provisions of the Investment Law 2014. This is because being the owner of the Project Co is not necessarily equal to being the owner/investor of the Project. An IRC is defined as a document or a digital copy recording the registration information of the investor concerning an investment project. The content of an IRC includes, among others, name and address of the investor of the project. Accordingly, even if new foreign investor is the owner of the Project Co, if the IRC still records the information of the original investor as the investor of the Project, the original investor could theoretically claim to have the rights (and obligations) over the Project as provided by law.

This post is contributed by Le Thanh Nhat, a trainee at Venture North Law.

Conversion of preference shares into ordinary shares in a Vietnamese joint stock company

The Enterprise Law 2014 does not have specific provisions on alteration of rights attached to a class of shares other than ordinary shares. Since the Shareholder Meeting has the right to create a class of shares, logically, an amendment to class rights should also be approved by the Shareholder Meeting. Under Article 113.6 of the Enterprise Law 2014,

·        ordinary shares may not be “converted” (chuyển đổi) into preference shares; and

·        preference shares may be converted into ordinary shares pursuant to a resolution of the Shareholder Meeting.

There is no definition of “conversion” in the context of Article 113.6. However, a conversion from one class of shares into another class of shares would likely result in the change of rights attached to the shares being converted. Therefore, arguably conversion of shares could qualify as an alteration of class rights. Each share in the charter capital of a JSC has the same par value. Therefore, logically, one preference share should be converted into one ordinary share only. If one preference share is not converted into one ordinary share then the charter capital of a JSC will be increased or reduced which may not be clearly permitted by law.

Proposed changes to the treatment of deemed foreign investors under the Investment Law 2014

The Ministry of Planning and Investment (MPI) has just released various draft amendments to the Investment Law 2014 (https://tinyurl.com/y8tnwkkt). Regarding deemed foreign investors,

·        The MPI proposes that an economic organisation controlled by foreign investors (a Foreign Controlled Organisation) must comply with investment conditions applicable to foreign investors when the Foreign Controlled Organisation establishes a new company, or acquires equity interests in another company.

·        A Foreign Controlled Organisation is a company in Vietnam of which foreign investors (1) own more than 50% charter capital or ordinary shares of such company; or (2) directly or indirectly have the right to appoint members of the Board[,] the legal representative of such company; or (3) have the right to decide to amend the charter of such company.

This approach is broader and more logical than the approach under the current Investment Law 2014. Under the Investment Law 2014, the following foreign invested companies will be subject to the investment conditions applicable to foreign investors when setting up a new company or acquiring equity interests in another company:

(a)    Companies, 51% or more of its chapter capital is held by a foreign investor(s);

(b)    Companies, 51% or more of its chapter capital is held by an economic organization(s) prescribed in paragraph (a); and

(c)     Companies, 51% or more of its chapter capital is held by a foreign investor(s) and an economic organization(s) prescribed in paragraph (a).

The current approach may allow investors to use various structures to circumvent the restrictions (see https://tinyurl.com/ybyv49qf). If the new amendment is adopted then such structures may no longer work.