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

Below is a list of key approvals and contracts required for a wind farm project in Vietnam (the Project):

  • Permission by provincial People’s Committee for the Project to carry out wind measurement;

  • Report on wind measurement result to the provincial People’s Committee;

  • Approval of the Pre-Feasibility Study of the Project;

  • Approval of the basic design part of the Feasibility Study of the Project;

  • In-principle Approval of the Project under the Investment Law 2014;

For a project financing or limited recourse financing in Vietnam, a mortgage over shares (or equity capital) of the project company usually forms part of the security package due to the ease of creating and perfecting a mortgage over shares. That said, when an enforcement event occurs and if the borrower or the project company does not cooperate, the lenders (usually foreign lenders), who wish to immediately taking over the mortgaged shares, may find it difficult to actually enforce the mortgage due to the need to complete various licensing procedures for the sale or transfer of the mortgaged shares.

Thanks to the flexibility offered by the Enterprises Law 2014 and the Investment Law 2014, lenders may now consider taking some extra measures to increase their ability to enforce the mortgaged over shares of a project company in Vietnam. In particular,

On 29 March 2019, the State Bank of Vietnam (SBV) issued Circular 3/2019 to amend and supplement some articles of Circular 32 of the SBV dated 26 December 2034 on restrictions in using foreign exchange within the territory of Vietnam (Circular 32/2013). Circular 3/2019 will take effect from 13 May 2019.

First, a bit of background, under the Foreign Exchange Ordinance, “in the territory of Vietnam” all transactions, payment, price denomination must not be made in foreign currencies except as permitted by the SBV. The SBV usually takes quite a restrictive (and, in our opinion, not reasonable) on what transactions are considered to occur “in the territory of Vietnam”.

The following is a non-exhaustive list of licenses, permits and requirements on environment which an industrial park in Vietnam need to comply with.

1. Environment impact assessment report (EIAR – Báo cáo đánh giá tác động môi trường) or environment protection plan (EPP – Kế hoạch bảo vệ môi trường).

2. Confirmation on completion of the environmental protection works (Xác nhận hoàn thành công trình bảo vệ môi trường).

The following is a non-exhaustive list of licenses, permits and requirements on firefighting and prevention applicable for an industrial park in Vietnam which are subject to the monitor of firefighting and prevention and may pose a risk of fire and explosion.

1)          Appraisal of firefighting and prevention design (Thẩm duyệt thiết kế về phòng cháy chữa cháy) by the competent authority before commencing the construction.

2)          Acceptance of firefighting and prevention (Nghiệm thu về phòng cháy và chữa cháy) by the competent authority before putting the construction works into operation.

3)          Compulsory fire and explosion insurance for the properties of the industrial park.

Foreign banks located outside of Vietnam extending cross-border loans to borrowers in Vietnam should be aware of the following:

  • Under WTO commitments, Vietnam gives an “unbound” commitment regarding cross-border lending services. The Comprehensive and Progressive Agreement for Trans-pacific Partnership (CPTPP) also does not open for cross-border lending services. This means that the Vietnamese Government has discretion to allow or disallow cross-border lending;

On 11 January 2019, the Supreme Court issued Resolution 1 guiding the application of several regulations on interest, interest rate and relevant penalty (Resolution 1/2019). Resolution 1/2019 will take effect from 15 March 2019. Below are some salient points of Resolution 1/2019

  • Resolution 1/2019 clearly states that the interest rate caps of the Civil Code 2005 and 2015 will not apply to credit contracts between banks and its customers. In the past, there has been long debate regarding whether the interest rate caps of the Civil Code 2005 and 2015 will apply to credit contracts.

  • If the interest rate, overdue interest on principal and overdue interest on interest are higher than the permitted cap, the exceeding interest which has been paid will be deducted from the principal of the loan.

Collective action mechanism among bondholders is one of the common features in terms and conditions of a corporate bond.  Two important features of collective action mechanism are:

·        the use of a bond trustee to act for the benefit of bondholders; and

·        the use of bondholders’ meeting to allow a decision of a majority (or super-majority) of bondholder regarding the bond (e.g. changing the terms of the bond) to bind minority bondholders who disagree with such decision.

Arguably, if the provisions of bondholders’ meeting are included in the terms of the bond and a bondholder agrees to such term then the provisions on a civil transaction under Civil Code 2015 may allow the use of bondholders’ meeting in Vietnam. However, the validity of a decision of a bondholders’ meeting which is not approved by all bondholders is still questionable under Vietnamese law. This is because:

Under the Law on E-Transactions, an e-signature (chữ ký điện tử) is defined as being created in the form of words, script, numerals, symbols, sounds or in other forms by electronic means, logically attached or associated with a data message, and being capable of identifying the person who has signed the data message, and being capable of identifying the consent of that signatory to the contents of the signed data message.

According to Article 24.1 of the Law on E-Transactions, an e-signature of an individual affixed to a data message will be legally equivalent to the signature of such individual affixed to a written document if:

·        the method of creating the e-signature permits to identify the signatory and to indicate his/her approval of the contents of the data message; and

·        such method is sufficiently reliable and appropriate to the purpose for which the data message was originated and sent.

Accordingly, if an user being an individual of an e-commerce website, who can be identified by his/her username, password, and other means of verification (e.g., OTP code), clicks on a confirmation button of an online order then such action can be regarded as creating and affixing an e-signature to the online order by the individual user. This is because:

On 28 December 2018, the State Bank of Vietnam (SBV) issued Circular 42 amending current foreign currency borrowing regulations (in Circular 24 of the SBV dated 8 December 2015, as amended from time to time (Circular 24/2015)) (Circular 42/2018). Circular 42/2018 will take effect from 1 January 2019.

Changes to permitted lending purpose

Vietnamese banks only lend in foreign currency for a few limited purposes. Circular 42/2018 has following changes to these purposes:

On 20 June 2018, the Ministry of Justice issued Circular 8 on the registration and provision of information on security interest and contracts (Circular 8/2018). Circular 8/2018 will replace Circular 5/2011 on the same subject from 4 August 2018.

Name of the object of the registration

The object of registration under Circular 5/2011 is secured transactions (giao dịch bảo đảm), which is in line with the Civil Code 2005. However, the term “secured transaction” is almost removed from the Civil Code 2015 and the registration is now the registration of security interest (biện pháp bảo đảm). Circular 8/2018 adopts such approach and determined the object of registration is security interest to be consistent with the new Civil Code 2015.

The Ministry of Finance has released a latest draft amendment to the Securities Law 2006 (https://tinyurl.com/ydc44zyd), which is scheduled to be passed in the second half of 2019. It looks like that any major law in Vietnam will need to undergo major changes in every 10 years whether or not the changes are necessary. The draft amendments include the following major changes regarding capital raising process: