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.

UPSTREAM REGULATIONS IN VIETNAM – CONFLICT OF INTERESTS

In Vietnam, foreign and Vietnamese organizations and individuals carry out the petroleum operations based on a petroleum contract signed with Vietnam Oil and Gas Group (PVN) or other agreements signed with PVN or the Government of Vietnam in accordance with the Law on Petroleum 1993.

A petroleum contract can be a production sharing contract (PSC), joint venture agreement or other forms if approved by the Prime Minister. Unless otherwise approved by the Prime Minister, a PSC must comply with the model petroleum product sharing contract promulgated by the Government under Decree 33/2013.

PVN is entitled to participate in petroleum operations as an investor while concurrently has rights and power to manage contractors’ activities and, in some cases, is authorized to act on behalf of the Government in relationship with other investors under PSCs. This results in a material conflict of interests for PVN in acting as an investor under the PSC and as a regulator at the same time. Vietnamese law does not have a clear provision to control the conflict of interests where PVN participates in capital investment with other investors in petroleum operations and concurrently exercise rights and powers which should belongs to a State agency in relationship with such contractors under a PSC.

That said, in theory, the Competition Law 2015 may provide some restrictions on PVN’s authorities under the Law on Petroleum 1993. For example, when exercising the power conferred to it under the Law on Petroleum 1993,

·        if PVN is regarded as a State agency then the Law on Competition prohibits “State agency” to force enterprises, organizations, and individuals to purchase services or goods from enterprises as specified/selected by such State agency/State management agency; and

·        if PVN is regarded as an enterprise then PVN could be deemed to have significant market power (sức mạnh thị trường đáng kể) and is prohibited from abusing such power.

This post is contributed by Ha Thi Dung, a partner at Venture North Law.