Sale of Shares to Strategic Investors During Equitisation

Below are some selected issues relating to the sale of shares to Strategic Investors during equitisation of a State-Owned Enterprise (Equitised SOE). These issues are discussed in more detail in my book on equitisation of Vietnamese SOEs.

Timing

Under Decree 59/2011, the proposed sale price for shares offered to Strategic Investors will be decided based on, among other things, the timing of the proposed sale (i.e. whether before or after the sale of shares to public investors in the equitisation (the Equitisation IPO)).

However, Decree 59/2011 also provides that for certain special Equitized SOE, if it is “absolutely necessary” to select Strategic Investors before the Equitisation IPO, the Prime Minister will decide the criteria for selecting Strategic Investors, the method of sale and the number of shares to be sold to Strategic Investors. This provision implies that the option to sell shares to Strategic Investors before the Equitisation IPO is only available to certain special Equitised SOE and is subject to approval by the Prime Minister.

Applicability of private placement rules

Decree 58/2012 implementing the Securities Law does not contain specific provisions stating that the sale of shares in the joint stock company established from the Equitised SOE (the Equitised JSC) to Strategic Investors by the Equitised SOEs is not subject to private placement regulations under Decree 58/2012. Instead, Decree 58/2012 states that a limited liability company privately issuing shares in order to convert to a joint stock company will be subject to private placement regulations. It is therefore not clear whether the private placement regulations under Decree 58/2012 will apply to a private placement of shares by an Equitised SOE to a Strategic Investor during the equitisation of such Equitised SOE. If the provisions of Decree 58/2012 applies then it would certainly make the situation much more complicated due to potential overlapping and conflicting requirements between two different sets of regulations.

Share sale price

For a sale of shares to Strategic Investors after the Equitisation IPO, the sale price must not be less than the lowest successful auction price in the Equitisation IPO (Minimum IPO Price). Decree 59/2011 provides that for the sale of shares to Strategic Investors “who have registered for purchase of shares” before the Equitisation IPO, the sale price to the Strategic Investor must not be lower than the Minimum Offer Price. The wording of this provision seems to suggest that a Strategic Investor needs only register to purchase shares before the Equitisation IPO in order to be entitled to the floor price, which is the Minimum Offer Price.

Previous equitisation regulations required that the sale price to Strategic Investors in an Equitised JSC must not be less than the average successful auction price of the Equitisation IPO. Compared to previous equitisation regulations, Decree 59/2011 provides more certainty and flexibility regarding the sale price to a Strategic Investor in the event that the sale occurs before the Equitisation IPO. This is because under Decree 59/2011, a potential Strategic Investor will be aware of the Minimum Offer Price before making a binding offer to the Equitised SOE. Under previous regulations, very few Strategic Investors could make a binding offer before the Equitisation IPO because the average successful auction price in the Equitisation IPO, and accordingly, the minimum purchase price, were still unknown and no sensible investors would write a blank check to the Equitised SOE.

Share lock-up

Decree 59/2011 provides that the shares in an Equitised JSC sold to a Strategic Investor are not transferrable for at least 5 years from the incorporation of the Equitised JSC, unless otherwise approved by the General Meeting of Shareholders of the Equitised JSC.

Auction sale vs. direct negotiation

Decree 59/2011 provides that “in case of direct negotiation with or auction among Strategic Investors”. As such, Decree 59/2011 appears to allow the sale of shares to Strategic Investors to be conducted either through an auction process or through direct negotiation.

Circular 196/2011 provides that if there are more than three Strategic Investors registering to purchase shares in the Equitised JSC, then the Equitised SOE must hold an auction among the interested Strategic Investors. In addition, if there are up to three Strategic Investors registering to purchase shares in the Equitised JSC and the number of shares registered for purchase exceeds the number of shares allocated to interested Strategic Investors, then the Equitised SOE must also hold an auction among the interested Strategic Investors.

If there are less than three Strategic Investors registering to purchase shares in the Equitised JSC and the number of shares registered for purchase do not exceed the number of shares allocated to interested Strategic Investors, then the Equitised SOE can directly negotiate with each Strategic Investor for sale of shares in the Equitised JSC.

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: