New guidance of the State Bank of Vietnam (SBV) on foreign direct investment

M&A lawyers in Vietnam usually spend a great deal of time (and client’s monies) to figure out how and when payment for an M&A transaction should be made. This is partly due to the fact that the SBV has not issued any guidance on foreign exchange control for investment activities under the Investment Law 2014 since 2015. From September 2019, hopefully, the situation will be significantly improved thanks to the new Circular 6/2019 of the SBV. Under Circular 6/2019,

· Foreign-invested enterprises, which must open a Direct Investment Capital Account (DICA), include, among others, (1) enterprises which are incorporated by, among others, foreign investors and are issued an Investment Registration Certificate (IRC), and (2) enterprises which are first incorporated by Vietnamese investors but are later acquired by foreign investors who own 51% or more of the charter capital of such enterprises. Previously, enterprises under (2) are not required to open a DICA if they do not have an Investment Registration Certificate. However, it appears that an enterprise, which is a subsidiary of a DICA enterprise, is not required to open a DICA.

· The DICA is used by a DICA enterprise to handle fund transfers for capital transactions such as capital contributions by shareholders/members of the DICA enterprise or loans from foreign lenders. For M&A transactions including secondary transfer of shares/capital contribution, the DICA plays an important role because the SBV requires payment for secondary transfer of capital in a DICA enterprise to be made via DICA. The bank which operates DICA could require various supporting documents in order to allow monies can be transferred in or out of the DICA.

Latest proposed amendments to the Investment Law 2014

The latest proposed amendments to the Investment Law 2014 submitted to the National Assembly in June 2019 include the following points, among others:

· The Investment Law will not apply to PPP projects which will be subject to a separate law.

· Investment conditions are not separated into two groups (1) operational conditions which apply to the operation of an investment project and (2) market access conditions which apply to foreign investors who wish to invest in sectors/industry which have market access restrictions.

· The proposed definition of foreign-controlled enterprises is removed (http://tinyurl.com/y2nl4ork). Accordingly, the regime regarding deemed foreign-invested enterprises under the Investment Law2014 remains unchanged. This should be a major relief for transactions which have relied on existing definitions of deemed foreign-invested enterprises.

· A foreign investor which incorporates a “start-up innovative” enterprise will not need to obtain an Investment Registration Certificate.

· Foreign investors investing in public companies or securities companies under the Securities Law are not subject to the investment conditions and investment procedures under the Investment Law 2014.

· Outbound investments by Vietnamese investors are now subject to more restrictions. The draft amendments include sectors where outbound investments are prohibited or subject to conditions (including financial services, securities, real estates and technologies).

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Voting rights at the Member’s Council of a single-member limited liability company (Single LLC) in Vietnam

It is not clear whether voting rights of members of the Member’s Council of a Single LLC is based on (1) the amount of charter capital that such member represents, or (2) principle one person-one vote. Article 75.5 of the Enterprises 2014 provides that unless otherwise provided in the charter, each member of the Members’ Council of a Single LLC has one vote. This provision suggests that in the charter of the Single LLC, the owner of a Single LLC can allocate different voting rights to members of the Members’ Council who are usually the representatives of the owner in the Single LLC. The most common criteria is based on the amount of charter capital of the Single LLC represented by each member. The ability to allocate different voting rights to different members of a Single LLC is important since the owner of a Single LLC may have different shareholders who want to directly manage the Single LLC.

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.

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Vietnam Business Law