Strategic investment in an equitised Vietnamese SOE – Transaction Documents

The steps to “equitise” (privatising) a Vietnamese State-owned enterprise (SOE) are not straightforward.  For example, a potential strategic investor in an equitised Vietnamese SOE may have to enter into more transaction documents than those required in a private company. Under the equitisation regulations, a strategic investor in a Vietnamese SOE should enter into the following transaction documents:

• In-principle Agreement specifying at least the number of shares and the share purchase price to be purchase by the strategic investor;

• A deposit agreement whereby the strategic investor registers to purchase shares and deposits 10% of the share purchase price; and

• A share sale and purchase agreement whereby the strategic investor purchases shares in the Vietnamese SOE.

The need for three agreements instead of one is due to the following requirements under the equitisation regulations:

• A strategic investor is required to pay the purchase price within five working days from the signing date. Therefore, if a strategic investor only signs a share sale and purchase agreement, it may have to pay the purchase price earlier than expected;

• The strategic investor and the SOE are required to “agree” on the number of shares and the share purchase price before the strategic investor is approved to be a strategic investor. Therefore, an In-principle Agreement should be entered into for the purpose of obtaining necessary approval for the strategic investment; and

• A strategic investor is required to make 10% deposit at the time of “registration” for purchasing shares. The SOE may return the deposit to the strategic investor if the parties fail to reach agreement. An SOE does not have clear right to return the deposit to the strategic investor after the agreement is signed. Therefore, a deposit agreement is necessary to handle the deposit unless the strategic investor is prepared to pay 100% of the purchase price immediately.

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.

Foreign invested enterprises in trading business

Under Decree 23/2007, a foreign invested enterprise (doanh nghiệp có vốn đầu tư nước ngoài) involved in import, wholesale, and retail of goods will need to obtain a trading licence (giấy phép kinh doanh) and, if applicable, a retail outlet licence . A foreign invested enterprise wishes to open more than two retail outlets will need to go through an Economic Need Test except in certain limited circumstances. So being a foreign invested enterprise in trading business would mean more restrictions and regulatory obstacles.

Decree 23/2007 does not define what is a “foreign invested enterprise”. However, it appears that in order to qualify as a foreign invested enterprise, one must have an Investment Certificate. This is because the procedures to issue a trading licence under Decree 23/2007 must be done in conjunction with the procedures to issue or amend an Investment Certificate.