Under Competition Law 2018, in general, any economic concentration transaction (i.e., any M&A transaction) triggering the filing thresholds prescribed in Decree 35/2020 must be notified to National Competition Committee (NCC). Accordingly, enforcement of security over shares or capital contribution by a lender, which result in a change of control of the borrower, may be considered as an economic concentration and subject to merger filing requirements under Competition Law 2018. This could pose a serious timing problem for the lender (e.g., a Vietnamese bank or a foreign lender) (the secured creditors) in enforcing mortgaged/pledged shares or capital contribution in practice.

According to Decree 163/2006, in case of mortgage/pledge of shares or capital contribution, the creditor and the debtor may agree on the following enforcement methods: (i) sale of the mortgaged/pledged shares (by way of auction or private sale); (ii) take-over of the mortgaged/pledged shares in lieu of the secured obligations or (iii) other enforcement methods.

Regarding the aforementioned methods, enforcement by way of method (ii) will require the secured creditors to notify NCC, if the take-over of mortgaged/pledged shares (a) results in the control of the secured creditors over the target and (b) triggers any of the thresholds under Decree 35/2020. This is because:

The possession of mortgaged/pledged shares leading to the control of the secured creditors in the target through enforcement process is likely to be treated as an economic concentration; and
At present, Competition Law 2018 and Decree 35/2020 have no exception for merger filing requirements in case of economic concentration as a result of enforcement of security over shares.

The strict approach of Competition Law 2018 and Decree 35/2020 on merger filing regulations does not consider the rights of the secured creditors in a secured transaction over shares or capital contribution. A merger filing could prolong the security enforcement procedure as a merger filing process could take substantial time in practice, which adversely affects the secured creditors’ rights. In the worse (but not unlikely) case, if the borrower refuses to cooperate in the merger filing process, then the lender may not be able to obtain clearance at all from the NCC.

Unlike Vietnam, the United States and EU merger filling regulations have certain exceptions in case of enforcement of security over shares. The United States merger filing regulations clearly provides that creditors and insurers are exempt from premerger notification in case of the acquisition of collateral in foreclosure or upon default of the debtor in a bona fide credit transaction. Similarly, under EU’s merger filing regulations, credit institutions or insurance companies could also be exempt from merger filing obligation if they only hold the shares on a temporary basic with a view to reselling them and satisfy other conditions regarding voting rights and management of the target. These exceptions could protect the secured creditors’ right to enforce mortgaged/pledged shares in a more effective manner.

This post is written by Trinh Phuong Thao and edited by Nguyen Quang Vu.

Vietnam Business Law