Options in Vietnam

Option arrangements are used quite frequently in M&A transactions in Vietnam. Many foreign investors have used options or convertible securities as a mechanism to, among other things, acquire additional shares once the regulatory restriction is removed or to allocate commercial risks between the parties.

Generally speaking, an option arrangement should be valid for the following reasons:

  • Under Article 122 of the Civil Code, a civil transaction will be valid when it satisfies all of the following conditions: (a) persons participating in the transaction have capacity for civil acts; (b) the objective and contents of the transaction are not contrary to the law or social morals; and (c) persons participating in the transaction act entirely voluntarily. An option arrangement generally satisfies all these requirements and should be valid.
  •  Articles 6.1 and 6.7 of the Law on Securities recognize options as a form of securities. In particular, option to sell or option to buy is defined as a right stipulated in a contract which entitles a purchaser to choose the right to purchase or to sell a pre-determined volume of securities at a pre-determined price during a specified period.
  • Under Article 64 of the Commercial Law, options to purchase goods or options to buy goods are allowed to traded on a commodity exchange organized under the Commercial Law. In particular, call option or put option contract means an agreement whereby the option purchaser has the right to purchase or to be sold a certain type of goods at a pre-determined price (referred to as the contracted price) and must pay a certain amount of money for the purchase of this right (referred to as the option price). The option purchaser has the right to opt to carry out or not to carry out such purchase and sale of such goods. 

However, the major difficulty relating to option arrangement is that exercising an option is not an automatic process. In Vietnam, after an option is exercised, the parties usually have to obtain necessary regulatory or corporate approvals so that shares can be issued or transferred to the relevant option holder. Therefore, cooperation of the counterparties is essential for successfully exercising an option arrangement. Certain option arrangements appear to have been successfully implemented with the cooperation of the parties involved.

Another difficulty is that although there is law which generally recognizes options arrangements, there are few detail implementation rules and regulations or court precedents. Therefore, it is difficult to anticipate how the authorities including the courts and other authorities view and enforce an option arrangement in practice.

Vietnam Business Law Blog

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:

In December 2018, the Government issues Decree 163/2018 to replace Decree 90/2011 on private issuance of corporate by Vietnamese companies from February 2019. Decree 163/2018 introduces certain new important points as follows:

·        To be able issue bonds, a company is no longer required to be profitable in year before the proposed issuance. Instead, the company only needs to operate for at least one year and its financial statement is audited by a qualified auditor. Issuer who has undergone certain restructuring (e.g., merger, conversion or division) may rely on the historical operation of other related companies to meet the one year operating test;

·        Secondary trading of privately-issued bonds is limited within up to 100 investors excluding “professional investors” within one year from the issuance date. The new limitation seems to aim at the practice of issuing bonds privately at the first place and reselling the same to public investors in secondary market;

Vietnamese banking regulations do not provide for a clear definition of a financial lease (cho thuê tài chính). The lack of a clear definition may result in unnecessary legal risks for parties to a cross-border lease transaction (e.g., an aircraft lease). For example, if a cross-border lease is regarded as a financial lease, then the lease may need to be registered with the State Bank of Vietnam as a foreign loan.

Under the Law on Credit Institution 2010, the act of finance leasing is defined to be (1) the extension of medium and long-term credit; (2) on the basis of a finance leasing contract; and(3) satisfying one of the following conditions:

  • upon expiry of the lease under the contract, the lessee may take over ownership of leased assets or may continue to lease them under the agreement of the parties; or

  • upon expiry of the lease under the contract, the lessee shall have the priority right to purchase the leased assets at a nominal value less than the actual value of the leased assets as at the date of purchase; or

  • the minimum term of the lease of any single asset must equal at least 60% of the period necessary for depreciation of such leased asset; or

  • the total rent for any single asset stipulated in the finance lease contract must be equal at least to the value of such asset at the signing date of the contract.