A closer look at the use of DICA account for M&A transactions in Vietnam – Part 2

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). 

It is too early to know what the intention of the State Bank of Vietnam (the SBV) is. The wording of Article 8.1 of Circular 6/2019 seems to suggest that a 51% FIE under Circular 6/2019 includes Future 51% FIEs. On the other hand, it is against common sense to consider a Future 51% FIE to be a 51% FIE which could result in additional difficulties and confusion in implementing Circular 6/2019 as discussed further below. In addition, treating Future 51% FIE like an Actual 51% FIE could arguably be considered as being contrary to Article 23.1 of the Investment Law 2014. Under Article 23.1 of the Investment Law 2014, only Actual 51% FIE needs to comply with investment procedures applicable to foreign investors (including the use if DICA).

Closure of DICA account

Circular 6/2019 requires a 51% FIE to close its DICA if, after the capital contribution or transfer by a foreign investor, foreign investors own less than 51% of the FIE. However, it is not clear if and when a Future 51% FIE will need to close its DICA if the proposed M&A transaction does go through and the Future 51% FIE remains to be controlled by local investors at all times. This is because in an M&A transaction, there is less certainty that the foreign investor will invest as in the case of Incorporated FIE.

Dealing with multiple M&A transactions

If a Future 51% FIE needs to open a DICA, and there are multiple M&A transactions involved (for example, there are three foreign investors, each buying 20% of the Future 51% FIE), it is not clear when the Future 51% FIE should open a DICA and whether all foreign investors (or only the last foreign investor who will trigger the 51% threshold) must use DICA for their investment.

Payment before DICA

In an M&A transaction involving a 51% FIE, a DICA is likely to be opened only after the relevant M&A approval is issued. However, in many cases, the parties may need to pay each other earlier than the issuance of the M&A approval. Article 8.1 of Circular 6/2019 allows payment relating direct investment to be made before issuance of an M&A approval provided that thereafter the payment is converted into equity capital of the FIE or shareholder loan. It is not clear how Article 8.1 should be applied if the early payment before opening of the DICA is made between sellers and buyers and does not relate to the FIE.

Foreign investors investing through indirect investment capital account (IICA)

A foreign investor who invests in an FIE which is not a 51% FIE will need to transfer its investment via an IICA. In case such an FIE becomes a 51% FIE later on, Circular 6/2019 does not make clear whether the early foreign investor should use DICA or IICA for repatriation and if DICA is used then what kinds of documents should be presented to the DICA bank.

This post is written by Nguyen Quang Vu