Certain legal issues arising from a majority acquisition
Majority acquisitions, whereby foreign investors acquire majority equity interest in and, accordingly, management control of a local Vietnamese company (Local Co), become more and more common in Vietnam. The legal issues often arise from a majority acquisition including, among other things, the following:
- Investment Certificate: A Local Co is incorporated under a Business Registration Certificate or Enterprise Registration Certificate (BRC) under the enterprises regulations. Although there is no clear definition, a foreign-invested company is usually incorporated under an Investment Certificate under the investment regulations. Therefore, when a foreign investor acquires majority control of a Local Co, it is more likely than not that the foreign investor would require an Investment Certificate for the acquisition before closing.
- Business lines: A Local Co being a local Vietnamese company usually registers in its BRC more business lines than the business lines that it is actually conducting. While this practice is legally permitted for a Local Co, it may make a majority acquisition more difficult. This is because (1) some of the extra business lines may be subject to foreign ownership limit or additional licence or permit (e.g. business licence for import and trading business) or (2) the licensing authority may require additional clarifications or even new “projects” from the foreign investors. To avoid unnecessary licensing issues in obtaining the Investment Certificate, a Local Co may need to de-register all the irrelevant business lines when it is being acquired by a foreign investor.
- Branches/subsidiaries: A Local Co may have various subsidiaries and branches. If a foreign investor acquires control of a Local Co, the Local Co itself is also regarded as a foreign investor under the investment regulations. As such, the Local Co’s investments in its branches and subsidiaries may be regarded as investment by a foreign investor and be subject to separate Investment Certificates (Branches/Subs ICs). As such, in addition to the first Investment Certificate, a foreign investor would likely insisting on having all the Branches/Subs ICs in place before closing. Although not entirely correct, the local sellers may resist such a request by arguing that once the first Investment Certificate is issued, the local sellers are no longer in control of the Local Co. Therefore, the parties may need to develop a solution to satisfy both sides in case the Local Co has branches or subsidiaries.
- Land use rights: Land use rights may be allocated or leased to a Local Co for a fixed or indefinite term. However, a foreign-invested company may only acquire land use rights through leasing for a fixed term (usually up to 50 years). As a result of a majority acquisition by a foreign investor, the parties may have to adjust the nature of land use rights held by the Local Co. In addition, the term of the land use right held by the Local Co also determines the term of the Investment Certificate to be issued to the parties.
- Joint venture companies: A foreign investor who acquires control of a Local Co may still want the local sellers to remain as a minority shareholder/owner of the Local Co for some time. As such, under the Investment Law, the Local Co could be regarded as a joint venture company between foreign investors and Vietnamese investors. This would require a joint venture agreement to be signed between the parties.
- Public companies: Foreign ownership is capped at 49% in public companies in Vietnam. As such, a foreign investor may not acquire more than 49% shares in a Local Co if the Local Co or any of its subsidiaries is a public company. To acquire a Local Co being a public company, the parties would likely need to restructure the Local Co to avoid the 49% foreign ownership limit.
- Escrow Account: Majority acquisition
often involves the purchase of shares or capital contribution of existing local
controlling shareholders or owners (local sellers). Under the business
registration regulations, to register the transfer of shares or capital
contribution by founding shareholders of a joint stock company or members of a
limited liability company, the business registration authorities often require
evidence of the completion of the transfer which may include evidence of
payment of the purchase price. Based on this requirement, in a majority
acquisition, local sellers may require foreign buyers to pay the purchase price
before the Investment Certificate is issued. On the other hand, a foreign
investor would be reluctant to pay the purchase price before the Investment
Certificate is issued. The usual compromise is for the foreign investor to pay
the purchase price into an escrow account which will be released to the local
sellers when the Investment Certificate and other conditions precedent are
satisfied. Even if the parties adopt an escrow arrangement, the parties may
agree to use an US$ escrow account instead of an VND escrow account although
the purchase price is required to be paid in VND.
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.
Under Article 84.2 of the Civil Code 2015, a branch (chi nhánh) of a legal entity has the duties to perform all or parts of the legal entity’s functions. However, a branch is not allowed under the Civil Code 2015 to act as an authorized representative of a legal entity. Accordingly, it is not clear in what capacity a branch would perform the functions of a legal entity.
Logically, in order for a branch to perform all or parts of the legal entity’s functions, either
Option 1: a branch could be allowed to act as an authorized representative of a legal entity under another law; or
Option 2: a branch could perform the functions of a legal entity in its own name and capacity. In other words, a branch can perform the functions of a legal entity without needing an authorization from the parent entity and the action (or inaction) of a branch will be deemed an action or inaction of the parent entity.
The term “economic organisation” (tổ chức kinh tế) was first introduced under the Investment Law 2014 and refers to, among other things, any company or organisation incorporated in Vietnam. Over time, the term “economic organisation” has been used consistently in other legislations and allows for a consistent application of the law. However, the Land Law 2024 has introduced significant confusion as to the meaning of the term “economic organisation”. In particular, it is not clear under the Land Law 2024, if the term “economic organisation” only refers to companies or organisations, which are not controlled by foreign investors and do not include companies or organisations which are controlled by foreign investors. The lack of clarity has important implication on how the Land Law 2024 is implemented. For example, if the term “economic organisations” under the Land Law 2024 includes organisations which are controlled by foreign investors then a foreign bank branch could have a clear legal basis to take mortgage over land use rights and assets attached to land.
The corporate bond crisis in Vietnam started in 2022 during which many corporate bonds issued before September 2022 under Decree 153/2020 were defaulted by the issuers (Pre-2022 Bonds). To facilitate the potential restructuring of Pre-2022 Bonds, in 2023, the Government issued Decree 8/2023 which allows for the bond issuers and the bondholders to agree to amend the terms of a Pre-2022 Bonds including the extension of the duration for the Pre-2022 Bonds to up to two years. However, the rights of a bondholder who disagrees with a restructuring proposal for a Pre-2022 Bond are not clear.
Under Decree 8/2023, the duration and the repayment schedule of a Pre-2022 Bond could be extended if the proposed extension is approved by bondholders representing 65% or more of the total number of outstanding bonds. Decree 8/2023 further provides that for bondholders who do not agree to changes in the conditions and terms of a Pre-2022 Bond (dissenting bondholders), the issuer is required to negotiate with the dissenting bondholders. If a dissenting bondholder does not accept the proposed negotiation plan, the issuer must fully fulfill its obligations to that dissenting bondholder in accordance with the original bond issuance plan. This requirement holds even if the proposed changes have been approved by the other bondholders who hold 65% of the outstanding bonds.
Under anti-money laundering (AML) regulations, reporting entities (e.g., credit institutions) are required to be aware of several key watchlists, maintained by relevant Vietnamese authorities, to ensure compliance with their AML obligations. This blog will introduce those watchlists and discuss specific requirements related to them.
Essential watchlists under AML regulations
Under AML regulations, the Vietnamese Government maintains the following watchlists:
(1) A Blacklist (danh sách đen in Vietnamese): including (a) list of organizations and individuals involved in terrorism and terrorism financing compiled by the Ministry of Public Security (MPS), and (b) a list of organizations and individuals designated as being involved in the proliferation and financing of the proliferation of weapons of mass destruction, compiled by the Ministry of National Defense (MND);
(2) A warning list/Grey list (danh sách cảnh báo in Vietnamese): A list of organizations and individuals compiled by the State Bank of Vietnam (SBV) to warn about those with a high risk of money laundering; and
(3) A list of Foreign politically exposed person (PEP List) (danh sách cá nhân nước ngoài có ảnh hưởng chính trị in Vietnamese): A list of foreigners who hold a senior position in foreign agencies, organizations, and international organizations, notified by the SBV.
There are no specific guidelines on how to access these watchlists or the procedure for screening data against them. However, except for the Grey List, which has not yet been published by the SBV, the Blacklist ((1)(a) and (1)(b)) and PEP List can be found via the national portals of the MPS, MND, and SBV (see embedded links).
Under the Housing Law 2023, a developer of a commercial housing project could raise financing from the following sources:
equity capital of the developer;
capital raised from joint venture, business cooperation, and contribution from other organizations or individuals (BCC Capital);
capital raised from issuance of corporate bonds, shares, and fund units;
pre-sale proceeds raised from sale and purchase agreements or hire and purchase agreements with regards to future houses signed with customers;
debt financing raised from credit institutions or finance organizations operating in Vietnam (bank loans).
In comparison with the Housing Law 2014, the Housing Law 2023 clearly includes capital raising from issuance of bonds and fund units but excludes pre-sale proceeds of leasing agreements for future houses. In this post, we will discuss each of the sources of financing for a commercial housing project. The Housing Law 2023 still does not allow a developer of a commercial housing project to raise debt financing from offshore lenders.
This post continues discussing some additional changes of the LCI 2024. For changes discussed in our Part 1, please see here.
1. Lowering the limit on total credit balance
The LCI 2024 lowers aggregate credit limit over the CI’s equity capital for a customer, a customer and its related persons over different periods. Specifically:
On 26 March 2024, the Supreme People’s Procuracy of Vietnam (the Supreme Procuracy) issued Official Letter no. 1083/VKSTC-V9 (the Official Letter) to respond to inquiries from local procuracies regarding supervision in legal proceedings regarding civil, marriage and family matters. Although these clarification and interpretation are non-binding, they constitute an important source of interpretation for the procuracy system to rely on. However, one should note that interpretation by a procurator is not binding on the court and therefore is not as important as a guidance issued by the superme court.
In this post, we will discuss some statements of the Supreme Procuracy under the Official Letter that we find interesting or noteworthy:
1) Q&A no. 34: If (i) a civil transaction is not in the required form for it to be legally effective, (ii) the obligation therein cannot be quantified, and (iii) the court cannot determine how many parts of the obligation has been performed by the obligor then (a) Articles 129.1 and 129.2 of the Civil Code 2015, which allow an otherwise invalid transaction to remain valid if two thirds of the relevant obligations have been performed, would not be applicable to recognize the validity of such transaction and (b) such civil transaction would be consider invalid.
Our comments: The Supreme Procuracy seems to have taken the view that a party (i.e., the obligor who has performed a certain amount of work under such transaction) may only seek for recognition of the validity of a civil transaction if their situation is captured under Articles 129.1 and 129.2 of the Civil Code 2015.
Although this might be an understandable deduction from the straightforward reading of Article 129’s wordings, we believe that the aforementioned party should be able to request the court to consider their claim according to Article 14.2 of the Civil Code 2015 (i.e., the court should seek to apply customary practice, analogous law, basic principles of civil law, case law, and equity law to the case if Article 129 is not applicable) instead of being rejected immediately.
There have been numerous discussions about the new direct power purchase mechanisms (DPPA) introduced under Decree 80/2024 our own briefing note. In this post, we focus on issues which are unclear under Decree 80/2024 and require more clarification. Terms defined in our briefing note will have the same meaning when used herein. These issues are:
Decree 80/2024 introduces the concept of “Authorised Electricity Retailer in Zones” (Đơn vị bán lẻ điện tại các mô hình khu, cụm được ủy quyền). However, it is not clear who will verify and determine whether an electricity retailer will qualify as an Authorised Electricity Retailer in Zones. Decree 80/2024 does not make clear if the parties to the DPPA mechanism can verify the qualification of an Authorised Electricity Retailer in Zones or will require a third party (even the authority) to do so.
To purchase power via a DPPA mechanism, a customer is required to consume an average 200,000 kWh per month. If a Consumer consumes less than 200,000 kWh per month then the DPPA relating to such Consumer may have to be terminated. However, it is not clear if the 200,000 kWh threshold includes the amount of power purchased from (1) both EVN and the RE Generator or (2) EVN only. In other words, it is not clear Decree 80/2024 requires a Consumer to purchase at least 200,000 kWh from EVN. This interpretation seems not logical but not impossible.
On 16 May 2024, the Government of Vietnam promulgated Decree 55/2024 to elaborate some articles of the Law on Protection of Consumers’ Rights (Decree 55/2024) which replaced the Decree 99/2011 from 1 July 2024. Decree 55/2024 introduces some noteworthy amendments on requirements applied to standard form contracts (Standard Contracts) and general trading conditions (T&Cs) as follows:
Multilingual Standard Contracts and T&Cs:
Decree 55/2024 allows additional languages to be used in the Standard Contracts and T&Cs as agreed by the parties alongside Vietnamese. Previously, Decree 99/2011 only allowed the use of Vietnamese. This change accommodates international trade practices and facilitates clearer communication between parties.
Please download the pdf version here.
Decree 80/2024 outlining mechanisms for direct power purchase agreement (DPPA) between renewable energy generators and large electricity consumers (Decree 80/2024) was issued by Vietnamese Government and became effective 3 July 2024. This Decree is considered as a significant policy that aims to promote the development of renewable energy in Vietnam and enhance the competitiveness of Vietnam’s retail electricity market.
This briefing note discusses the significant highlights of DPPA mechanism to be applicable to renewable power developers, including rooftop solar power developers in Vietnam as introduced by Decree 80/2024. This post is written by Nguyen Thi Kim Anh and Ha Thanh Phuc and edited by Nguyen Quang Vu.
Under Article 27 of Decree 80/2024 on mechanism for direct sale and purchase of renewable energy with large electricity customers, the Ministry of Industry and Trade (MOIT) will be entitled to suspend or terminate a Direct Power Purchase Agreement (DPPA) if there is an “act of taking advantage of the mechanism, policy for making profit”. For termination, the consequences of such act needs to be irremediable and the MOIT will need to obtain opinion from related authorities (presumably from the Ministry of Public Security).
Any large customer or any renewable energy producer enters into a DPPA will need to comply with (or “use”) the DPPA mechanism. In addition, obviously, the parties to a DPPA enter into the DPPA for the purpose of making profit (or saving costs). But Decree 80/2024 is not clear when the use of the DPPA mechanism would be considered as “taking advantage” (lợi dụng) of the mechanism or when an entity is deemed to make so much profit that the relevant DPPA may need to be suspended or terminated.
Since 2019, Hanoi Stock Exchange (HNX) has operated a website to publish information on private corporate bonds (Private Bond Information Website). Currently, on the Private Bond Information Website, several outstanding private bonds issued under Decree 153/2020, which have reached maturity but have not been repaid by the relevant issuers, are marked as “cancelled” (bị hủy) by HNX (the Cancelled Bonds). This classification by HNX raises several issues as discussed below.
Legal status of the Cancelled Bonds
One may argue that HNX’s announcement of the Cancelled Bonds implies that the Cancelled Bonds are invalid and that bondholders can no longer claim outstanding payment from the issuer. However, Vietnamese law also contains several provisions suggesting that the Cancelled Bonds remain valid and the issuer must fulfill outstanding payments to the bondholders:
Under Decree 153/2020, the bondholder is entitled to “be paid on time by the issuer the full amount of principal and interest when they become due […] under the terms and conditions of the bond and the agreements with the issuer”. This suggests that even when the Cancelled Bonds have matured, the issuer must still fully pay the outstanding amount to the bondholders under the Bond terms & conditions (Bond T&C) and bond subscription agreement;
Under Decree 153/2020, as a condition for the new issuance of private bonds, the issuer must “have fully paid the principal and interest on the issued bonds (if any) or having fully paid out debts on maturity within three (3) years immediately preceding the issue tranche […]”. This provision suggests that the issuer must pay in full all of the debts, including outstanding bonds that have matured (e.g., Cancelled Bonds), to be eligible to issue new private bonds; and
Under Decree 65/2022, if the Cancelled Bonds have matured but the issuer has not paid the principal and interest of the Cancelled Bonds in full, the issuer is only allowed to negotiate with bondholders regarding changes of plan to pay the principal and interest of the Cancelled Bonds. If bondholders disagree with the proposed plan by the issuer, the issuer must fully comply with the Bond T&C and bond subscription agreement. At law, there is no provision allowing the issuer to terminate the validity of the Cancelled Bonds purely because they have matured.
In the modern day, signing of contracts is increasingly done through the creation and exchange of pdf copies of the agreed contract by the relevant parties instead of physically signing and exchanging hard copy documents. Previously, the Law on Electronic Transactions 2005 allows the parties to have substantial flexibility in agreeing on how contracts can be signed by way of creating and exchanging pdf copies. However, from 1 July 2024, several new provisions under the Law on Electronic Transaction 2023 (LET 2023) could affect how the parties could sign a contract via the creation and exchange of pdf copies of the agreed contract. In particular,
The LET 2023 appears not to allow an individual to have an e-signature which can be created from a scanned signature of such individual. Accordingly, the practice of having the signature page printed, signed, scanned and attached to the body of the contract may not be considered as signing the contract by the relevant individual.
The LET 2023 requires an electronic record (thông điệp dữ liệu) converted from a hard copy document to have a specific indication that it has been converted from a printed copy and the details of the person/entity conducting the conversion. Accordingly, a simple scanned pdf copy of a contract without the required information may not qualify as an electronic record of such contract.
On 15 May 2024, a new Decree on non-cash payments has been passed by the Government (Decree 52/2024) to replace the old Decree 101/ND-CP of the Government on non-cash payment dated 22 November 2012 (Decree 101/2012) from 1 July 2024. In this post, we will introduce certain key changes of Decree 52/2024.
Supplementing e-wallets as one of the permitted non-cash payment instruments
Decree 52/2024 provides a specific definition of non-cash payment instruments which are instruments issued by organizations providing payment services, finance companies authorized to issue credit cards, intermediary payment service providers offering electronic wallet services, and used by customers to conduct payment transactions. Furthermore, e-wallets are supplemented as one of the non-cash payment instruments.
Banks, foreign bank branches or intermediary payment service providers may provide E-wallets service. Due to the increase in illegal payments via e-wallets (such as online gambling, or scamming), Decree 52/2024 only allows customers to use e-wallets linked to his or her own payment account or debit card. This regulation may prevent people from renting or lending their identities and documents to alleged violators for opening bank accounts or e-wallets.
On 27 May 2024, the Ministry of Industry and Trade (MOIT) issued Decision 1260 approving the electricity generation price (EGP) range for the year 2024 applicable to LNG combined-cycle gas turbine (CCGT) thermal power plant (nhà máy nhiệt điện tua bin khí chu trình hỗn hợp sử dụng LNG in Vietnamese).
The ceiling price of such EGP range is VND 2,590.85 per kWh (about 10.67 UScents at the exchange rate of 1 USD = 24,262 VND), exclusive of VAT. Such ceiling price was calculated based on the following factors: