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.

Vietnam Business Law Blog

A new Law on Cybersecurity (Luật an ninh mạng) (the CSL 2018) will come into effect from 1 January 2019 in Vietnam. Not only providing measures to secure the cyber-environment which to some extent has been regulated by the Law on Cyber-information Safety dated 19 November 2015, the CSL 2018 also includes various provisions to control the contents posted or published on the cyber-network. Below are some salient issues of the CSL 2018.

Scope of the CSL 2018

The CSL 2018 applies to all agencies, organizations and individuals involving in the protection of cybersecurity, which is broadly defined as the assurance that activities in cyberspace not causing harm to the national security, social order and safety, lawful rights and interests of agencies, organizations and individuals. In particular, the CSL 2018 will apply to overseas organisations, which have users residing in Vietnam such as Google or Facebook.

The CSL 2018 covers all networks of IT infrastructure, telecommunication, Internet, computer systems, databases, information processing, storage and controlling systems, and regulates activities of every enterprise providing services in cyberspace and Internet users including e-commerce, websites, online forums, social networking and blogs.

Operators of information system (Chủ quản hệ thống thông tin)

The CSL 2018 imposes various obligations on an operator of an information system. Under the  Law on Cyber-information Safety according to which, an operators of information systems means any agencies, organizations or individuals having directly managing authority to an information system.

A new Law on Competition (Competition Law 2018) will take effect from 1 July 2019 in Vietnam. Some key changes in the Competition Law 2018 are as follows:

  • Broader scope of application: The Competition Law 2018 now governs any activities whether by Vietnamese or foreign entity or individual which have or may have the “competition restraining impact” to Vietnam market. Competition restraining impact means impact which excludes, reduces, distorts or hinders competition in the market. Under the Competition Law 2018, the competition authority of Vietnam now has clear authority to deal with offshore activities and transactions which has impact on Vietnam market. In addition, the Competition Law 2018 now also apply to public service units such as hospitals, or schools which are technically not enterprises.

  • Besides the principle of honesty, companies are required to compete with each other in accordance with the principles of justice and fairness.

  • Relationship with other laws: Contrary to the old competition law, the new Competition Law 2018 will not prevail other laws in case such other laws have regulations on action in restraints of competition, form of economic concentration, activities of and dealing with unfair competition.

  • Under the new Competition Law 2018, a State agency is prohibited not only from forcing but also from “requesting or recommending” enterprises or individuals or organisations to perform or not to produce and sell specific goods, provide and use specific service, or produce and sell goods to or provide and use services of specific enterprises.

Decree 71/2017 replaced Circular 121/2012 on corporate governance of public join-stock company (Public JSC) since 1 August 2017. Decree 71/2017 does not have its own criteria for being an independent director but refers to the criteria under the Enterprise Law 2014. The table below compares the old criteria of an independent director in a Public JSC with the new criteria under the Enterprise Law 2014. Although in some areas, the Enterprise Law 2014 provides stricter criteria, the Enterprise Law 2014 contains certain major omission (e.g., including omission to exclude managers of an affiliate or representatives or related persons of a major shareholder in a Public JSC from acting as an independent director of a Public JSC).

Under a recent announcement in Official Letter No. 4486/UBCK-GSDC dated 20 July 2018, the State Securities Commission of Vietnam (SSC) requires public companies, securities companies, asset management companies, and securities investment funds (quỹ đầu tư chứng khoán) (i) not to conduct any illegal offering, transaction or transaction brokerage relating to virtual money (tiền ảo) which should include cryptocurrencies like Bitcoin and to (ii) adhere to the legal regulations on anti-money laundering.

The above official letter was based on Directive 10/CT-TTg of the Prime Minister dated 11 April 2018. Both of them once again confirm the view of Vietnamese government on virtual money that was stated by the State Bank of Vietnam in its press release dated 27 February 2014 about Bitcoin in Vietnam:

(a)        virtual money is not currency; and

(b)        virtual money is not a legal tender.

1.    Where a member (the Conflicted Member) in a limited liability company with two or more members (the LLC) has an interest in a related-party transaction or contract (an RPT) with the Multi-Member LLC, the Enterprise Law 2014 requires the RPT to be approved by the Members’ Council (MC) of the LLC excluding the votes of the Conflicted Member. However, relating to the approval process, the Enterprise Law 2014 is not clear on the following issues:

1.1.    whether the charter capital of the Conflicted Member should be excluded from the calculation of quorum of the MC’s meeting to approve the RPT? and 

1.2.    if the Conflicted Member is the chairman of the MC, whether the Conflicted Member can still preside over the MC’s meeting?

Vietnamese banking regulations do not have clear mechanics for transfer of loan commitments between banks or credit institutions in Vietnam. In particular:

  • Under Circular 9/2015 of the State Bank of Vietnam (SBV) on loan transfer, loan transfer is defined to mean the transfer of “the right to collect loan” arising from the lending operation by a bank (the Original Bank) to a loan purchaser, which may or may not be a bank. The definition of loan under Circular 9/2015 does not include loan commitment where a bank only commits to lend to a borrower but has not actually disbursed the loan. Accordingly, all the loan transfer mechanics under Circular 9/2015 do not directly apply to transfer of loan commitment.

  • One way for banks to overcome the lack of regulations on transfer of loan commitment is for the Original Bank to actually disburse the loan and then transfer such loan to another bank (New Bank) in accordance with Circular 9/2015. However, under Circular 9/2015, if the loan purchaser is a bank, then the SBV requires the New Bank to have a loan purchase license. Not all banks in Vietnam are granted a loan trading licence by the SBV.

  • Under the lending regulations (Circular 39/2016), a loan commitment could be understood to be an undertaking by a bank to handover to the client an amount of money to use. Therefore, it appears that a loan commitment is regarded as an obligation to lend by a bank (which, of course, is usually conditional on the borrower’s satisfying certain conditions precedent). Therefore, transfer of a loan commitment is regarded as a transfer of obligation and will require the consent of the borrower. Borrower’s consent is usually not a problem since any proper loan agreement will include a transfer clause which allows the bank to transfer any of its rights and obligations under the loan agreement to a third party.


On 15 May 2018, the Supreme Court issued Resolution 3 on expedited proceedings for disputes arising from handling of non-performing loans (NPL) and security assets of NPL (Resolution 3). Resolution 3 is an implementing legislation of Resolution 42 of the National Assembly on NPLs (Resolution 42). Resolution 3 takes effect from 1 July 2018 and will expire when Resolution 42 expires in August 2022. Resolution 3 will apply to claims (1) accepted for hearing by the courts before 1 July 2018 but have not been brought to trial; and (2) accepted during its term but still in process when it expires. Resolution 3 cannot be based on to protest against effective judgment under retrial and cassation.

Resolution 42 allows disputes relating to security asset of an NPL to be conducted under expedited proceedings. Resolution 3 further clarifies that:

  • Disputes on obligations to hand-over security assets of an NPL is clarified to be dispute relating to the case where the securing party or the party holding the security asset (1) does not hand-over the security asset, or (2) does not hand-over correctly according to the request of the secured party or the party having right to enforce the security asset; and

  • Dispute on right to enforce security asset of NPL is clarified to be dispute on the determination of person having right to enforce the security asset of an NPL.

In Vietnam, if a real estate investor (Investor) cannot Acquire A Land Area Through Common Options to implement its investment projects, it may consider entering into a business cooperation contract (BCC) with a local land user. Under a BCC structure, the parties do not establish an entity but usually cooperate to use their available resources (including land use rights) to do business. In this case, the party having land use rights (Landlord) retains the title over the land without transferring them to the Investor, but the Investor may obtain certificate(s) which evidence its title over assets attached to the relevant land area (generally, ownership certificate). There is a risk that a BCC contract may be regarded as a land sub-lease contract between the local land user and the Investor.  However, a BCC structure is quite common in practice and there are certain legal basis for such a structure.

In March 2018, the Government issued a new Decree (Decree 40/2018) on multiple level marketing (MLM) activities. Decree 40/2018 takes effect from 2 May 2018 replacing Decree 42/2014. In general, Decree 40 inherits many regulations of Decree 42/2014 and its implementing Circular (Circular 24/2014). That said, Decree 40/2018 introduces various new and stricter requirement on MLM activities. In particular,

  • A MLM enterprise must now register its activities with provincial competent authorities, where there are MLM activities conducted by its consultants. A MLM enterprise must appoint an individual representative in each province where it does not have branch or representative office. Under Decree 42, a MLM enterprise only needs to notify provincial competent authorities where there are MLM activities conducted by its consultants.

  • A MLM company must now make an escrow deposit of VND 10 billion or 5% of the charter capital, whichever is higher instead of VND 5 billion with a local bank or a foreign bank branch in Vietnam. The deposit is to secure for the MLM company’s obligations with respect to the members of the MLM network.

A shareholder (especially a foreign shareholder) in a Vietnamese joint stock bank (VN Bank) must know how much its shareholding in the VN Bank is. This is because (1) there are ownership caps applicable to a single shareholder or a group of related persons, and (2) a “major shareholder” is required to obtain an approval from the State Bank of Vietnam (SBV). Since the Law on Credit Institutions 2010 (LCI 2010) and Decree 1/2014 introduces the concept of “indirect ownership”, it may be difficult to determine the exact shareholding ownership of a shareholder in a VN Bank for the purpose of (1) and (2) above. Indirect ownership is defined as an organization or individual owning the charter capital or shareholding capital of a credit institution via a related person or trust investment.

Given the lack of clarity on tender offer rules and the difficulty in enforcing such rules in practice, it is not so difficult for an investor to accumulate significant stake in a public joint stock company (target company) in Vietnam. However, if such investor is not supported by the Board of the target company, then the unwelcomed investor may find a hard time to participate in the management of the target company even if the investor can acquire control of the target company at shareholder level. This is because:

In March 2018, the Government issued Decree 32/2018 containing major amendments to the regulations on sale of State capital in State-affiliated enterprises. The amendments will take effect from 1 May 2018. State-affiliated enterprises are joint stock companies (State-owned JSC) or limited liability companies with two members or more (State-owned LLC) a part of which is owned by the State or by a wholly State-owned enterprises (Wholly SOE). New amendments under Decree 32/2018 include:

Stricter pricing control

·        Decree 32/2018 requires the State-seller to retain licensed valuer to value the State’s capital and to determine an asking price before commencement of the sale process even if the State-affiliated enterprises are listed companies. Under Decree 91/2015, it appears that if a State-affiliated enterprise is a listed company, then there is no need to retain a licensed valuer. Decree 32/2018 also provides that the asking price is only valid for a period of six months from the date of the valuation report. This suggests that a re-valuation is required if a sale is not completed within six months of the date of the valuation report.

·        For a listed State-affiliated company, if the asking price determined by the valuer is lower than the average share price of the company during the period of 30 consecutive trading days before public announcement of the sale, then such average share price will be used as the asking price. It is not clear if the average share price is a arithmetic average or weighed average (which takes into account the trading volume each trading day).

·        The licensed valuer when valuing the State’s capital must take into account the value of land leased by the State-affiliated enterprise and “history” of such State-affiliated enterprise. Decree 91/2015 only requires the value of land granted (not leased) to the State-affiliated enterprise to be taken into account. However, Decree 32/2018 does not specifically require the valuer to take into account whether the sale stake is a minority stake or a control stake.