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. 

Further guidance on “fundamental” principles of Vietnamese law

“Fundamental” (or basic) principles of Vietnamese law are an important concept. For example, while certain contracts with Vietnamese counterparties could be governed by foreign law, the choice of foreign law must not be contrary to fundamental principles of Vietnamese law. Vietnamese courts may refuse recognition of foreign arbitration awards if such awards are contrary to fundamental principles of Vietnamese law. Until recently, there is no clear guidance about what fundamental principles of Vietnamese law are. In March 2014, under Resolution 1/2014 implementing the Law on Commercial Arbitration, the Supreme Court seems to be for the first time has given some limited guidance on fundamental principles of Vietnamese law. In particular,

• The court considers a fundamental principle of Vietnamese law to be a fundamental principle of conduct which applies broadly (hiệu lực bao trùm) to the drafting and implementing of Vietnamese law; and

•  The courts refer to certain principles contained in the Civil Code, the Commercial Law and the Law on Commercial Arbitration as example of fundamental principles of Vietnamese 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. 

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.