Is “business transfer” a “share transfer”, “project transfer” or “assets transfer”?

A business transfer can generally understood as the transfer of, among other things, the assets, employees, contracts, clients and goodwill associated with a particular business. However, “business transfer” is not clear legal concept under Vietnamese law. In Vietnam, when one mentions "business transfer", it is not clear whether it refers to the transfer of (1) shares of the company that runs such business or (2) the assets and other components that constitute such business.

In case of (1), then a business transfer should probably better called as a share transfer transaction. In case of (2), commercially, a business transfer could be structured as the transfer of an “investment project” (see earlier post here) as provided under Article 66 of Decree 108/2006. However, there is no clear procedures under Decree 108 for a "project transfer" transaction which does not involve the transfer of shares of the project company. In particular,

• Article 66.2 of Decree 108 provides that in the case of assignment of a project of an economic organization not associated with the termination of operation of the assigning economic organization, the assignment of the project will comply with the conditions and procedures for assignment of capital;
• Article 66.3 of Decree 108 provides that in the case of assignment of a project of an economic organization associated with the termination of operation of the assigning economic organization, the assignment of the project shall comply with the conditions and procedures for merger with or acquisition of an enterprise;
• Article 66.4 of Decree 108 provides that in the case of assignment of an investment project associated with the termination of operation of the assigning organization and the assignee establishing an economic organization to continue implementation of the project, the investment procedures stipulated by this Decree must be carried out.

A “project transfer”, which is not a share transfer, is not associated with the termination of the assigning organization so Articles 66.3 and 66.4 of Decree 108 are not applicable. However, Article 66.2 of Decree 108 requires a transfer of project not associated with the termination of the assigning organization to follow procedures for assignment of capital. It is not clear how a project transfer by way of selling assets could comply with the procedures for assignment of capital.

As such, in case of (2), to avoid all the complications of a project transfer regulations, the parties can just structure a business transfer as a transfer of assets and other components of the transferred business.

Pre-emptive rights of existing shareholders over new shares issued by a joint stock company

It has never been clear whether an existing shareholder of a joint stock company (JSC) has pre-emptive rights over new shares issued by the JSC. However, in the past, under Decision 12/2007 of the Ministry of Finance on corporate governance rules applicable to public listed JSCs, “shareholders may refuse to exercise their priority right to purchase new shares. This right of refusal shall be clearly stated in the relevant resolution of the  general meeting of shareholders.” Many legal practitioners have relied on this provision of Decision 12/2007 to take the view that in case a public listed company issues new shares to a strategic investor by way of private placement,

• a collective waiver of pre-emptive rights recorded in the Shareholder resolutions of the target company approving the transaction is sufficient; and
• there is no need for the target company to collect individual waiver from each individual shareholder regarding their potential pre-emptive over the new shares to be issued to the strategic investor.

This view was particularly helpful to parties who want to expedite the deal process.

Decision 12/2007 has now been repealed by Decision 121/2012, which does not contain the provision on collective waiver of pre-emptive rights. On the contrary, Decision 121/2012 just basically repeats the provision in the Enterprise Law, which serves as the basis for pre-emptive rights of existing shareholders. While the model charter attached to Decision 121/2012 still contains a provision similar to the provision under Decision 12/2007, the legal arguments for not obtaining individual waiver from each individual shareholder regarding their potential pre-emptive over the new shares to be issued to the strategic investor have clearly become weaker.

Foreign investors purchasing assets of a Vietnamese company

Purchasing existing assets of a Vietnamese company may be an option for a foreign investor who wants to overcome the foreign ownership limit applicable to a public company or wants to avoid (or cheery pick) the liabilities associated with the target company. However, there are certain issues associated with an asset deal:

• Usually, the foreign investor cannot directly own assets especially land use rights and buildings in Vietnam. Accordingly, the foreign investor would need to set up its own subsidiary in Vietnam (Buyer Sub) to acquire the target assets from the Vietnamese seller. And the asset transfer agreement needs to be entered into between the Vietnamese seller and the Buyer Sub. However, from the seller’s perspective, the Buyer Sub is not a company of substance at least until the Buyer Sub’s capital is fully paid up and as such the foreign investor may need to act as a party to the asset purchase agreement and to be liable for the Buyer Sub’s performance;
• There is a risk that the foreign investor cannot set up the Buyer Sub as this may involve a discretionary investment evaluation process by the licensing authority. So even if the foreign buyer and the Vietnamese seller have agreed to a definitive agreement, the agreement cannot be completed until the Buyer Sub is set up. This is a risk that both the Buyer Sub and a target company have to consider when negotiating an asset deal;
• An asset purchase agreement between the Buyer Sub and a target company being a contract between two companies in Vietnam is likely to be subject to Vietnamese governing law. In addition, it is more likely than not that land use right and buildings are part of the target assets. In such case, the asset purchase agreement (or at least the part relating to land use right and buildings) may be subject to jurisdiction of the Vietnamese courts;
• An asset purchase agreement between the Buyer Sub and a Vietnamese seller being a contract between two companies in Vietnam will need to be settled in Vietnamese Dong under the foreign exchange regulations. As such, it may be difficult for the Vietnamese seller to fix the transfer price in US$;
• If the transferred assets include assets the ownership of which is subject to registration such as trademarks, buildings and land use rights then the parties may need to enter into separate transfer instruments for the purpose of filing with the relevant authorities. Transfer instruments relating to real estate in Vietnam must usually be notarized. As such there is a risk that there is inconsistency between the notarized transfer instrument and the asset transfer agreement which are not notarised;
• The transferred assets might involve numerous contracts and require third party’s consents. The Civil Code requires the transfer of rights to demand to be notified to the obligors. In addition, transfer of receivables will need to be registered with the National Department of Registration of Security Interests. The Civil Code requires the transfer of obligations to be consented by the obligee. Therefore, if the target company has substantial external debts and has granted security interest over its assets, it may be difficult to obtain consents from the target company’s lenders for the transfer of assets unless simultaneous or escrowed closing can be arranged to ensure that the lenders will be repaid.

Vietnamese bankruptcy regulations

In 2012, many Vietnamese companies are facing difficulties and have to cease operation. In other developed countries, the bankruptcy law plays an important role in the restructuring of a company having financial difficulties. The same cannot be said for Vietnam. However, to some extent, bankruptcy is still a credible option in theory for corporate restructuring in Vietnam. Therefore, a good understanding of Vietnamese bankruptcy law is still necessary.

Basic knowledge

Under Vietnamese legislation, there is no concept of personal insolvency but only concept of bankruptcy for enterprises.

In Vietnam, the regulations on bankruptcy of companies and reorganization and restructuring of companies in bankruptcy process are mainly provided in:

• The Law on Bankruptcy; and
• Resolution 3 of the Supreme Court dated 28 April 2005.

The average timing from the petition filing until the deletion off the registry book of a bankrupt company is about 150 days assuming that no recovery plan is adopted and implemented.  If there is an appeal against the court’s decision to commence the liquidation procedures, a period of at least 90 days will be added for the court of higher level to consider the appeal.

Bankrupt status

An enterprise is considered bankrupt if it is “unable to pay the due debts upon request by the creditors”. Resolution 3 further clarifies that “due debts” are the unsecured debts or partly secured debts, which is expressly recognized by the relevant parties, supported by adequate evidencing documents and free of dispute.

Filing and acceptance of a petition for bankruptcy proceedings

Petition: An unsecured or partly secured creditor of a company by noticing that the company is in bankrupt status will have the right to file a petition for bankruptcy proceedings against such company together with evidence of the bankrupt status

Court’s fee: The petitioner must make an advance of the bankruptcy fees, determined the court

Court: The competent court in charge of bankruptcy cases is the provincial court of the locality where the company in bankruptcy registered for its business registration.

Acceptance of bankruptcy hearing: The Court will issue a decision whether to commence the bankruptcy proceedings within 30 days from the date of acceptance of the petition for bankruptcy proceedings. Creditors and debtors of the company are also entitled for being noticed of such decision.

Commencement of bankruptcy proceedings

Company’s operation: After the issuance of the court’s decision to commence bankruptcy proceedings, the business activities of the company in bankruptcy will be subject to the supervision and inspection of the judge in charge of the case and the Board for Asset Management and Liquidation (Liquidation Board).

Standstill: After the issuance of the court’s decision to commence bankruptcy proceedings, the disposal of the company’s secured assets for secured creditors will be temporarily suspended.

List of company’s assets: Within 30 days from the date of receiving the court’s decision to commence bankruptcy proceedings, the company will have to list out an inventory of its assets in accordance with the detailed list submitted to the court and determine the value of such assets.

Preparation of the list of creditors: Within 60 days from the last day of publication of the court's decision to commence bankruptcy proceedings, creditors of the company must submit to the court their detailed request for debt payment. Within 15 days from the expiration of the above 60 days, the Liquidation Board must prepare a list of creditors with details of the debts thereof.

Convention of the Creditors Meeting: Within 30 days from the completion of the list of creditors or the list of company’s assets, depending on which date comes first, the competent court will convene the first meeting of the company’s creditors to discuss the company’s situation and approve a resolution to recover the company’s business, if the creditors consider that the company is recoverable. If the creditors consider that the company is not recoverable then the court will decide to commence the liquidation procedures.

Recovery of business activities

The plan will then be subjected to the approval of the second meeting of the company’s creditors. The maximum term for the company to implement the business recovery plan is 3 years from the last day of publication of the Court’s adoption of the creditor’s resolution approving the company’s recovery plan

Within 30 days from the approval of the resolution to recover the company’s business, the company is required to prepare and submit the plan to recover its business activities to the Court, specifying the necessary measures to recover the operations as well as the conditions, term and schedule for repayment of debts.

Assets liquidation

Commence the liquidation procedures: The court will decide to commence the liquidation procedures for the company’s assets in the following cases: (1) the failure of the first creditor’s meeting, (2) the company fails to propose a recovery plan, (3) the company implements improperly the approved recovery plan or (4) the creditors do not approve the company’s recovery plan.

Settlement of undue debts: Where the court decides to commence the liquidation procedures, any undue debts of the company existing at that time will be treated as due debts, without any interest for the undue period.

Settlement of secured debts: Where the court issues decision on commencing the liquidation procedures, debts secured by the company’s assets before the courts’ acceptance of bankruptcy hearing will be given priority in payment by such assets.

Priority of assets distribution: Where the court decides to commence the liquidation procedures, the assets of such liquidated company will be distributed in the priority order of (1) bankruptcy fees, (2) unpaid salary, severance allowances, social insurance and other benefits of its employees, and (3) unsecured debts.

Termination of the liquidation procedures: The court will decide to terminate the assets liquidation procedures when the company has no more assets to carry out the assets distribution or the assets distribution has been fully completed.

Declaration of bankruptcy

The court will make the decision to declare the bankruptcy of the company along with the decision to terminate the liquidation procedures thereof. Within 10 days from the date of such decision, the court will forward the decision to the business registration office for deleting the bankrupt company’s name from the business registry.

Voidable transactions

Under the Law on Bankruptcy, inter alia, the following transactions may be held by the court to be invalid if conducted within three months prior to the date of acceptance of the bankruptcy application (the suspect period):

the payment of debts which are not yet due.

• settlement of any bilateral contract under which the obligations of the Counterparty are apparently greater than those of the other party; and

Vietnam Business Law Blog

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Summary of the Case

The dispute originated from a service contract between Company M (the Service Provider) and Company A (the Client). After the Service Provider performed its services, the parties mutually agreed to terminate the contract. Subsequently, the Client explicitly confirmed in writing the specific amount of the service fee it owed to the Service Provider and the late payment interest but ultimately failed to make the payment. When the Service Provider filed a lawsuit to recover the unpaid amount, the Client requested the court to dismiss the case, arguing that the 3-year statute of limitations for a contractual dispute had already expired.