Insider Trading – Selective Disclosure

The Securities Law prohibits the use of inside information to purchase or trade in shares of public companies. Failure to comply with the insider trading rules may result in administrative penalty and the transaction may be held invalid. The broad definition of inside information, in theory, may include certain information obtained by a potential strategic investor in the course of due diligence into a Public Joint Stock Company (Public JSC) in advance of a potential private acquisition. Therefore, theoretically, if a proposed strategic investment is predicated on the use of inside information relating to a Public JSC in the course of due diligence, the proposed investment might be subject to insider trading restrictions under the Securities Law. This may also give rise to insider trading liabilities for the relevant potential investor, who relies on non-public due diligence information to make an investment in a Public JSC.

The issue of selective disclosure in the context of a private acquisition in a Public JSC appears to have not been considered when the Securities Law was drafted. Thus, the restriction appears to be one of omission rather than a specific intention to prohibit or regulate. Unfortunately, a resolution of this issue, which will create an environment of greater regulatory certainty for potential strategic and institutional investors, will likely take many years in Vietnam.

That being said, the securities regulations allow certain “inside shareholders” in a Public JSC who have or are deemed to have inside information to trade shares in Public JSC provided that certain public disclosures are made before and after the proposed trade. It is not clear if potential investors in a Public JSC may make public disclosures in the same manner as an inside shareholders do to avoid potential insider trading liabilities.

 
Vietnam Business Law Blog

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.