Article 79.2(a) of the Enterprise Law provides that a shareholder (10% Major Shareholder) or a group of shareholders (10% Group Major Shareholder) holding more than 10% of the total ordinary shares for a consecutive period of six months or more, or holding a smaller percentage as stipulated in the charter of a joint stock company (JSC) will have the right to nominate candidates to the Board of Director of the JSC (the Board).
Both Decree 102/2010 and the Enterprise Law do not set out a clear mechanism for implementing the nomination right of a 10% Major Shareholder or a 10% Group Major Shareholder in the context of a JSC. In particular,
- Article 79.4 of the Enterprise Law provides that except where otherwise stipulated in the charter of the company, the shareholders forming a 10% Group Major Shareholder must notify other attending shareholders of the formation of the 10% Group Major Shareholder no later than the beginning of a meeting of the General Meeting of Shareholders (GMS). Article 29.2 of Decree 102/2010 allows the formation of a 10% Group Major Shareholder to occur before and during a meeting of the GMS. From the 10% Group Major Shareholders’ perspective, the provisions of the Enterprise Law and Decree 102/2010 could allow a group of shareholders to have maximum flexibility in exercising the rights of a 10% Group Major Shareholder. On the other hand, other shareholders or the JSC would likely want to know as early as possible if there is any 10% Group Major Shareholder who intends to exercise its nomination rights in the JSC to manage the operation of the company. A JSC (especially a public JSC) which wants to avoid a surprised proxy contest or hostile take-over may consider setting up a mechanism to require a 10% Group Major Shareholder to notify the JSC well in advance (even at the beginning of the six-month period) before exercising the rights of such 10% Group Major Shareholder.
- It is not clear if during a six-month holding period, internal transfers among the shareholders constituting a 10% Group Major Shareholder will affect such 10% Group Major Shareholder’s nomination rights. For example, at the beginning of the six-month shareholding period, a 10% Group Major Shareholder comprises of Shareholder A and Shareholder B holding 10% and 5% shares respectively. During the six-month shareholding period, A sells 2% shares to B. As such, at the time, the 10% Group Major Shareholder exercises its nomination rights, the 10% Group Major Shareholder still comprises of A and B but the shareholding ratios are different (being 8%/7% instead of 10%/5%). It is not clear if the 10% Group Major Shareholder at such time is still regarded as the same 10% Group Major Shareholder and is entitled to exercise the nomination right under Article 79.2 of the Enterprise Law.
- Similarly, it is not clear if any increase in the number of shares held by a 10% Group Major Shareholder during a six-month holding period would be entitled to the same nomination rights attached to the original number of shares. For example, at the beginning of the six-month shareholding period, a 10% Group Major Shareholder holds 11% shares in the JSC which empowers them to nominate one candidate for Board member if they were to continue to hold the same number of shares. Two month later during the six-month shareholding period the 10% Group Major Shareholder increases its shareholding to 31% which empowers them to nominate three candidates for Board members at the end of the six-month shareholding period. However, the question is whether the JSC can refuse the nomination rights attached to the 20% increased during the six-month shareholding period on the ground that the actual holding period for such increased shareholding is less than six month.
- The provisions of the Enterprise Law and Decree 102/2010 do not limit how many times during the term of the Board the nomination rights of a 10% Major Shareholder or a 10% Group Major Shareholder could be exercised. Therefore, to maintain control of the Board and to avoid the effect of cumulative voting requirement, a controlling shareholder may “divide” the election of Board members into smaller lots. In particular, under cumulative voting principle, whenever a JSC elects new Board members, each shareholder will have a number of votes equal to the number of new Board members to be elected times the number of voting shares held by such shareholder and such shareholder may cash all or some of his/her votes for any candidate. As such, the smaller the number of new Board members to be elected, the lesser the chance that a minority could win a Board seat.
- The provisions of the Enterprise Law and Decree 102/2010 do not contemplate the nomination procedures where the nomination and selection of Board Members is conducted through obtaining written opinions from shareholders rather than through physical meetings of the GMS.
provisions of the Enterprise Law and Decree 102/2010 do not have any
restriction for one shareholder to participate in the formation of more than
one group of 10% Major Shareholders.
- The Enterprise Law and Decree 102/2010 do not contemplate whether and how a 10% Major Shareholder or a 10% Group Major Shareholder needs to present evidence that it satisfies the holding period requirement under Article 79.2 of the Enterprise Law. Under the Enterprise Law, the shareholders register (Sổ đăng ký cổ đông) provides conclusive evidence of ownership over shares. For a public JSC, whose shareholders register is maintained by the Vietnam Securities Depository Centre (VSD), the public JSC may not be able to confirm whether a 10% Major Shareholder or a 10% Group Major Shareholder is holding a number of shares consecutively during a period of time without the VSD’s cooperation and confirmation.
To avoid confusion and potential disputes, the Charter of a JSC should address the various uncertainties regarding the right of a 10% Major Shareholder or a 10% Group Major Shareholder to nominate Board Members candidate under the Enterprise Law and Decree 102/2010.
The new Anti-Corruption Law 2018 expands to regulate anti-corruption practices in private sectors and includes a new mechanism on controlling conflict of interests. For private sectors, the provisions on controlling of conflict of interest under Anti-Corruption Law 2018 apply to, among other things, public joint stock companies, and credit institutions. It appears that other private companies are not subject to the provisions on controlling of conflict of interest under Anti-Corruption Law 2018.
Under the Anti-Corruption Law 2018, conflict of interest means a situation where the interest of a company official or his/her relative have or likely to have an influence on performance of such official’s duties. Company officials who may be subject to the rules on conflict of interest under the Anti-Corruption Law 2019 include:
Article 14 of the Law on Real Estate Business 2014 has the title “Entities which can purchase, receive assignment, lease, hire-purchase (thuê mua) real esates from real estate companies”. Article 14.2 of the Law on Real Estate Business 2014 provides that a foreign-invested enterprise (FIE), as a customer of a real estate company, is allowed to “purchase, hire-purchase houses, construction works to use for offices or business facilities in accordance with use function of such houses, construction works”. Article 14.2 does not include “leasing from real estate companies” from the permitted scope of purchase by an FIE. Technically, this could mean that an FIE is not allowed to lease office from real estate developers in Vietnam.
After years of existence, it is still arguable whether e-cigarette (thuốc lá điện tử) should be regarded as actual tobacco (thuốc lá). Accordingly, it is not clear how e-cigarette business should be regulated under Vietnamese law.
Under the Law on Tobacco Prevention 2012, tobacco is defined to be “a product wholly or partly manufactured from tobacco ingredients, processed in the form of cigarettes, cigars, tobacco shreds, pipe tobacco and other forms”. The word “other forms” could broadly cover many forms of product. However, from the definition, the key when identifying whether a product is a tobacco product is not its form, but its ingredients.
In most cases, e-cigarettes are battery-operated devices that work by heating a liquid solution (e-liquid), from which vapor is then produced. This e-liquid usually contains nicotine – a stimulant typically made from tobacco plants. Meanwhile, the definition of tobacco ingredients under the Law on Tobacco Prevention 2012 includes multiple forms of tobacco leaves, tobacco shreds, tobacco stalks and other substitute ingredients used for tobacco production.
A notable change of the new Anti-Corruption Law 2018, among other things, is that the Anti-Corruption Law 2018 applies to not only State agencies, organizations, units and public officials, but also to non-state enterprises, organizations, and officials. However, a closer reading of Article 22 on the giving and receipt of gifts under Anti-Corruption Law 2018 may indicate otherwise. In particular,
(a) Article 22.2 provides: “Agencies, organizations, units, and public officials are not allowed to directly or indirectly receive gifts in any form from agencies, organizations, units, individuals which are relating to the affair which they are handling or fall under their management”; and
(b) Article 3.9 of the Anti-corruption Law 2018 defines “agencies, organizations, units” under the Anti-corruption Law 2018 as agencies, organizations, units of the State.
Based on the definition in Article 3.9 and the wording of Article 22.2, it is arguable that the regulations and restrictions regarding gifts-giving under the Anti-corruption Law 2018 only apply to State-owned enterprises, state agencies, organizations, units, and public officials but not to non-state enterprises, organizations, and officials.
Decree 40/2019 amending four separate decrees on environment protection takes effect from 1 July 2019. Below are some of the key amendments introduced by Decree 40/2019:
· The term “Industrial zones” is expanded to include all kinds of zones, such as export processing zones, high-tech zones, or industrial areas.
· “Main works or items of a project” is the main project component specified in the feasibility study of the project.
· List of projects subject to environmental impact assessment (EIA) is adjusted. For example, investment in a golf course is now subject to EIA. Certain projects which do not have wastewater treatment work or waste treatment work are exempted from post-construction examination. Only residential projects with capacity of 2000 (instead of 500) or more inhabitants are subject to EIA. Only hotel projects with capacity of 200 rooms (instead of 50) are subject to EIA.
· Industrial manufacturing is classified in various sectors with different level of risks to the environment. Development of manufacturing projects with very high risks to the environment is subject to consultancy with environmental experts and scientists, and appraisal of EIA reports of these projects must be conducted by an appraisal panel.
Various provisions of the Enterprise Law 2014 can now allow parties to an M&A deal in Vietnam to have more flexibility in designing a closing mechanics. In particular,
· Multiple legal representatives – In a M&A deal involving a change of control, the buyer would want to control the legal representative position on the closing date. But this involves registration with the Business Registration Authority. Many sellers are reluctant to change the legal representative position before closing without receiving payment of the purchase price.
In the past, a company can only have one legal representative. However, under the Enterprise Law 2014, a company can have two or more legal representatives. As such, the parties can agree that the target company will have two legal representatives appointed by the seller and the buyer. The legal representative appointed by the seller will continue to run the target company up until closing and will resign on closing. The legal representative of the buyer will assume control on closing. And after closing, the target company will deregister the legal representative appointed by the seller.
Unclear definition of 51% FIE
Under Circular 6/2019, enterprises with foreign direct investment (FIEs), which must open DICA include (1) enterprises which are established by foreign investors (with or without local partners) (Incorporated FIEs); and (2) enterprises which do not fall under (1) but 51% of which are owned by foreign investors (51% FIEs). Normally, one would expect that a 51% FIE must be a FIE, 51% of which is actually owned by foreign investors (Actual 51% FIEs). However, Circular 6/2019 provides that a 51% FIE include enterprises which have foreign investors making capital contribution or purchasing shares resulting in foreign investors’ owning 51% of the FIE. The use of the words “resulting in” suggests that a 51% FIE could be a 100% locally-owned company, which has potential foreign investors who may acquire 51% or more of its charter capital (Future 51% FIEs).
A closer look at Circular 6/2019 of the State Bank of Vietnam (SBV) reveals that it could create more problems than it solves. The key issue under Circular 6/2019 is the broader use of the “direct investment capital account” (normally referred to as DICA).
To understand the issue, one would need to know how DICA works. Under the foreign exchange regulations, DICA must be opened by a company in Vietnam, which has “foreign direct investment” (the FIE). Foreign investor/shareholders of an FIE will contribute capital to the FIE by transferring monies to DICA. Foreign investors/shareholders will get their monies back from Vietnam also by transferring monies from DICA to their own bank accounts (even in case the foreign investor/shareholder sells its investment to another investor). This simple arrangement works well for simple foreign direct investment activities in the 1990s where there is limited M&A activities and foreign investors are mostly foreign manufacturers who do not plan to sell their investment down the road.
On 8 July 2019, the State Bank of Vietnam (SBV) expresses its view and recommendation to credit institutions in Vietnam (CIs) on peer-to-peer lending activities (P2P Lending). The SBV’s view is as follows:
· P2P Lending is built on a digital platform which connects borrowers and lenders without having to go through financial intermediaries (such as CIs). All lending activities will be recorded on the platform.
· The SBV acknowledges that P2P Lending is not specifically regulated by current regulations.
· Besides its potential to create additional way to mobilize capital, P2P Lending can give rise to the following risks: (1) misleading information provided by P2P Lenders about the product’s safety, (2) the lack of oversight on P2P Lending’s platform in terms of cybersecurity, (3) P2P Lenders’ using customer information for predatory lending activities, and (4) P2P Lending being considered as activities of CI.
Since the end of 2018, the Commission for the Management of State Capital at Enterprises (CMSC) will become the new Owner Representative Agency (Cơ quan đại diện chủ sở hữu) of 19 large SOEs including State Capital Investment Corporation (SCIC), Petro Vietnam (PVN), Vietnam Electricity (EVN), Vietnam National Petroleum Group (Petrolimex). This change causes some SOEs to have CMSC as the common Owner Representative Agency, which may cause these SOEs to become related persons according to the Enterprise Law 2014, because:
The Ministry of Finance has recently released draft amendment to the current regulations on duty-free goods under Decree 167/2016. We discussed below some proposed amendments:
· The definition of “goods temporarily imported to Vietnam” is amended to include goods temporarily imported from “non-tariff zones and bonded warehouses”. Under existing regulations, it is not clear whether or not goods from non-tariff zones and bonded warehouses can be sold in duty-free stores.
· Bags, packaging for the purpose of carrying duty-free goods are now also considered duty-free goods.
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.
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.
In the latest draft amendment to the Securities Law 2006, compared with the earlier draft, the following new points , among others, are introduced :
· “Indirect ownership” of securities is defined to mean holding securities through a “related person” or an entrustment arrangement.
· The criteria of a professional investor is reduced. A company with a paid-up charter capital of VND 100 billion (about US$ 4.5 million) instead of VND 1,000 billion can now qualify as a professional investor. An individual with a portfolio of VND 2 billion (instead of a trading volume of VND 2 billion per month) or annual taxable income of VND 1 billion can now qualify as a professional investor. Qualifying as a professional investor is important since only a professional investor or a strategic investor could participate in a private placement of shares by a public company.
· Major customers or counterparties are no longer considered as a related person of a public company.
· The latest draft amendment seems to allow for issuance of shares at a price below par value if the current trading price of the issuer is lower than par value.
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,