Can a foreign bank acquire 100% shares in a Vietnamese joint stock bank?

There has been an argument that under the new Decree 1/2014 a foreign bank may acquire 100% of the shares in a Vietnamese joint stock bank (Local Bank) if (1) the Local Bank is, among other things, a “weak credit institution”, and (2) the Prime Minister approves to increase the foreign ownership limit in the relevant Local Bank to 100%. However, in order for a foreign bank to acquire 100% of the shares in a Local Bank, various legal issues still need to be clarified. In particular,

  •  It is not clear if Decree 1/2014 is applicable to the scenario where a foreign bank acquires shares in Local Bank and becomes a single-member LLC bank owned by the foreign bank. Decree 1/2014 allows the Prime Minister to increase the foreign ownership limit in a Local Bank. However, Decree 1/2014 appears to be drafted on the assumption that the Local Bank will remain to be a joint stock bank even after the acquisition by a foreign bank. For example, all of the provisions in Decree 1/2014 regarding rights and obligations of a foreign investor after acquiring a Local Bank refer to “share” and “shareholders”.
  • A Local Bank is required to have at least 100 shareholders under the Law on Credit Institutions. If a foreign investor acquires 100% of the shares in a Local Bank, the Local Bank will become a 100% foreign-invested bank existing in the form of a single member limited liability company (LLC). The Law on Credit Institutions and Decree 59/2009 currently do not have any specific procedures for converting a local joint stock bank into a single-member LLC bank owned by a foreign bank. Instead, the Law on Credit Institutions and Decree 59/2009 only generally provide that conversion (chuyển đổi) of legal corporate form of a joint stock bank requires State Bank’s approval. As such presumably, the conversion of a local joint stock bank into a single-member LLC bank will need to follow the procedures under the Enterprise Law and Decree 102/2010. This means that, among other things, the conversion would require (1) super majority approval by the General Meeting of Shareholder of the Local Bank and (2) the share purchase price by the foreign bank to be determined according to market price or price determined by certain valuation methods.
  • After a 100% acquisition, the Local Bank will become a 100% foreign-invested bank. Therefore, presumably, the foreign investor will need to satisfy the conditions of setting up a 100% foreign-invested bank in Vietnam in addition to the conditions of acquiring shares in Local Bank in Vietnam.
  • A Local Bank is also a public joint stock company in Vietnam. Therefore, acquiring 100% shares in a Local Bank will be subject to the tender offer rules under the securities law unless an exemption is granted by the General Meeting of Shareholders.
  • A conversion of a Local Bank into a single-member LLC bank owned by a foreign bank would require (1) consent by all of the shareholders of the Local Bank for selling their shares to the foreign bank and (2) super majority approval by the Local Bank’s shareholders. If a shareholder in the Local Bank objects to the 100% acquisition, it may be difficult to complete the acquisition voluntarily. Under the Law on Credit Institutions, only when a Local Bank is put under “special control” (kiểm soát đặc biệt) by the State Bank, the State Bank may compel the Local Bank to be acquired by another bank or by the State Bank itself. Even in case of special control, the legal ground and procedures for a compulsory transfer of shares is still unclear and untested.
Vietnam Business Law Blog

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.

Under the Law on Credit Institution 2010,

  • a major shareholder of a joint stock commercial bank in Vietnam (VN Bank) is a shareholder, who owns directly or indirectly at least 5% of the total voting shares of the VN Bank. 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; and
  • a SBV’s approval is required for “transfer of shares by a major shareholder” or “transfer of shares resulting in a major shareholder becoming a non-major shareholder and vice versa”.

Under the definition of a “major shareholder”, a holding company (Parent Co), which indirectly owns shares in a VN Bank through one of its subsidiaries (Sub Co) could be considered as a major shareholder of the VN Bank if the aggregate shareholding is 5% or more. However, in that case, it is not clear:

  • whether Sub Co or Parent Co or both are considered as major shareholders of the VN Bank. And if the Parent Co only owns a part of Sub Co, then whether the indirect shareholding of the Parent Co in the VN Bank should be calculated with reference to the shareholding of the Parent Co in Sub Co; and
  • whether a transfer of shares in Sub Co by a Parent Co is considered as a transfer of shares in VN Bank and is subject to SBV’s approval.

According to Social Insurance Law 2014, from 1 January 2018, any employee working under a labor contract with a term of from one month to three months must participate in the compulsory social insurance scheme (SI Requirement). The social insurance contributions are paid by both employer and employee subject to the contribution rate, of which the employer usually pays larger part. However, it is not clear whether an employee working under a “probation labour contract” (hợp đồng thử việc) with a term of from one to two months (Probationary Contract) must comply with the SI Requirement. There are various views on this issue.

Under the Law on Credit Institutions 2010 (as recently amended), a bank is subject to several limitations when extending a loan and other forms of credit to a borrower including the following:

(a)    the aggregate outstanding credit extended to (1) a single client and (2) a single client and its related persons must not exceed 15% and 25% of the equity capital of the bank respectively. The outstanding credit includes, among other things, (1) bonds issued by the client and its related persons, (2) loans to clients being other credit institutions or loans secured by guarantees by other credit institutions, (3) loans secured by individual saving deposits, and (4) loans financed by funds entrusted by the Government, organizations or individuals. The Prime Minister may decide to waive this limitation subject to a limitation of 400% of the equity capital of the bank;

(b)    a commercial bank must not extend credit to (1) board member, member of member council, member of board of controllers, general director, director, deputy director, deputy general director and equivalent positions in the commercial bank, legal entities being a shareholder whose representative of the capital contribution portion is a board member or member of board of controllers; and (2) a parent, spouse or child of a board member or member of board of controllers or of general director, director or deputy general director, deputy director and equivalent positions.

A bank must not extend credit to a borrower on the basis of security provided by any of the persons specified at (b);

(c)    a bank must not extend credit without security or under preferred conditions to following  persons: (1) auditing organization and auditor currently conducting an audit at such bank or inspector currently conducting an inspection at such bank; (2) chief account of such commercial bank; (3) major shareholders and founding shareholders of such bank; (4) companies of which more than 10% of charter capital is owned by one of the persons specified in (b); (5) people conducting appraisal and approval of loans; and (6) subsidiaries or affiliates of such bank or of an enterprise controlled by such bank.

The total outstanding credit balance extended by a bank to all borrowers specified at (1) to (5) must not exceed 5% of equity capital of such bank. Such outstanding credit balance includes the total of the investment and purchase of bond issued by the borrowers (if applicable).

The total outstanding credit balance extended by a bank to a single borrower specified at (6) must not exceed 10% of equity capital of such bank and to all borrowers specified at (6) must not exceed 20% of equity capital of such bank. Such outstanding credit balance includes the total of the investment and purchase of bond issued by the borrowers.