Factors affecting an acquisition of companies in Vietnam
Any acquisition
will have its own details and structures. That being said, a foreign investor
intending to do deal in Vietnam should take into account the following factors,
among other things:
Corporate form of the target company
A target company in Vietnam may be:
- a limited liability company (LLC) (công ty trách nhiệm hữu hạn) incorporated under the Enterprise Law. A LLC may be a single-member LLC (One Member LLC), which is owned by a single member, or a two or more members LLC (Multiple Member LLC), which is owned by two or more members; or
- a joint stock company (JSC) (công ty cổ phần) incorporated under the Enterprise Law. A JSC can be a public JSC (which usually has 100 or more shareholders) or a private JSC. A public JSC may also be a “listed company” (công ty niêm yết) if the shares of the relevant company is listed on a stock exchange.
The corporate form of the target company may affect a transaction significantly. For example, a foreign investor may not be able to acquire more than 49% of a public JSC while it can acquire 100% of a LLC doing the same business. The selling shareholders in a public JSC can be subject to substantially lower capital gain tax than the selling shareholders in a private JSC.
Nature of the existing owner(s) of the target company:
A target company in Vietnam may be owned and controlled by:
- local private investors, in which case the target company is considered as a domestic company. Investing in a domestic company may or may not require an Investment Certificate;
- foreign investor, in which case the target company is considered as a foreign invested enterprise. A foreign invested company incorporated on or after 1 July 2006 should operate either as a LLC or JSC under the Enterprise Law. However, a foreign invested company which was incorporated before 1 July 2006 and has not re-registered as a LLC under the Enterprise Law will operate in a legal vacuum and be subject to many uncertainties. Investing in a foreign invested company is usually subject to an Investment Certificate; or
- Vietnamese Government, in which case the target company is considered as a State-owned enterprise. Investing in a State-owned enterprise may be subject to separate rules on equitisation (or privatisation) of State-owned enterprises.
Nature of the business of the target company
Depending on the business of the target company, there may be specific restrictions on foreign investment or other special requirements applicable to the proposed acquisition or the target company.
One can assume that where possible (i.e., not prohibited by international treaties) Vietnamese law will likely provide better treatment to Vietnamese investors over foreign investor. However, in the examples discussed below, foreign investors do get better treatment over Vietnamese investors:
Investor protection - The biggest advantage that many foreign investors have over Vietnamese investors is the ability of the foreign investor to make a claim against Vietnamese Government before international arbitration under various investment treaties that Vietnam has signed with several countries. Vietnamese investors have no ability to do so. The Government of Vietnam has indeed been subject to several investor-State disputes and is well aware of the risk that it can be sued if it mistreats foreign investors.
The Official Gazette (Công Báo) publishes legal instruments (văn bản quy phạm pháp luật) issued in accordance with the Law on Law. However, the Official Gazette also has a section which publishes “other legal documents” (Văn bản pháp luật khác). It is not clear if these “other legal documents”, which are not legal instruments, will have the force of law.
The Law on Legal Instruments (or Law on Laws) defines a legal provision (quy phạm pháp luật) to mean a general rule of conduct, with universal binding force, applied repeatedly to agencies, organizations, and individuals within the entire country or a specific administrative unit, as prescribed by a competent state agency in this Law and ensured by the State. A legal instrument (văn bản quy phạm pháp luật) is a document containing legal provisions issued in accordance with the Law on Legal Instruments and must be published on the Official Gazette. The Law on Legal Instrument prohibits the issuance of documents which are not a legal instrument but which contain legal provisions. Since the “other legal documents” published on Official Gazette are not issued in accordance with the Law on Legal Instruments, they should not contain a legal provision and should not have the force of law.
It is unclear whether indirect ownership or control is taken into account when determining a company is the parent company of another company. Under Article 195.1 of the Enterprise Law 2020, a company will be deemed to be a parent company of another company in one of the following circumstances:
the former owns more than 50% of the charter capital or the total number of ordinary shares of the latter;
the former has the right to directly or indirectly appoint “the majority or all directors of the Board, Director or the General Director” of the latter; or
the former has the right to amend the charter of the latter.
The above definition makes it unclear because indirect control is only clearly mentioned in the case of appointing Board directors and Director (General Director) (i.e. the second limb).
The most common form of security which is created over houses and buildings is mortgage (thế chấp). However, the Civil Code 2015 also provides for other forms of securities. In this blog, we will discuss whether other forms of securities could be created over houses and buildings.
Pledge (Cầm cố) – Unlikely
Pledge of property means the delivery by one party of “property” under its ownership to another party as security for the performance of an obligation. Since the term “property” includes both moveable properties and immovable properties, it is arguable that a pledge could be created over houses and buildings being immovable properties. However, Article 310.2 of the Civil Code 2015 provides that “Where an immoveable property is the subject matter of a pledge in accordance with law, the pledge of the immoveable property shall be enforceable against a third person as from the time of registration.”
Reference to “in accordance with law” suggests that pledge could only be created over an immovable property if a law specifically allows it. However, currently the Land Law 2024 and the Residentially Housing Law 2023 only specifically allow mortgages to be created over residential houses or assets attached to land.
Article 23.1 of Vietnam's 2023 Law on Real Estate Business explicitly allows real estate developers to sell future properties, such as houses, buildings, or floor areas within a building. However, the law is silent on the leasing of future properties (except for hire purchase transactions). This omission has led to uncertainty regarding the legality of such transactions.
On the one hand, leasing of future properties was clearly permitted in a similar Article of the Law on Real Estate Business 2014. Accordingly, one could argue that the omission of leasing from Article 23.1 of the Law on Real Estate Business 2023 indicates that a real estate developer cannot lease future properties.