The New Investment Law – Changes on M&A

Please ONLY read this post if you have gone through that post (and then that post) so that you will have initial ideas of what the New Investment Law (NIL) seeks to change the investment world.

1 – Reduction of the Change of Control Threshold

Pursuant to the NIL, a foreign owned (albeit Vietnam-based) company can be treated as a foreign investor if its ultimate foreign ownership is more than 50% (currently less than 51%).  In such case, that foreign invested company is automatically subject to strict market access conditions or abbreviated as MACs which per se apply to non-Vietnamese investors only.

The new change aims to unify various corporate voting thresholds among different legal instruments, particularly the Enterprise Law.

For your information, the ‘51% – 1 share’ foreign owned’’ vehicle is not uncommon in Vietnam. Under this structure, the vehicle is, on one hand entitled to ‘domestic’ company status and therefore may avoid many strict market access conditions applicable to foreign investment. On the other hand, the foreign investor is still able to effectively control the vehicle via its ‘simple majority’ shareholding.

It remains to be seen if the current ‘51% – 1 share’ foreign owned’’ vehicles must reduce their foreign ownership to the new ratio set out by the NIL to keep the ‘domestic’ company status.

2 – Mandatory M&A Approval

An M&A approval* is always mandatorily required if any of 03 events occurs:

*M&A approval literally refers to a licensing process where a foreign investor must register its proposed acquisition of a local target with the relevant licensing authorities. In practice, the M&A approval is quite a headache for foreign investors because the licensing authority may turn down an M&A transaction for ambiguous reasons.

(i) – the M&A increases foreign ownership in target that conducts condition foreign investment

Example would be a local distributor of goods which issues new shares to a foreign investor. Because goods distribution is  a business line conditional for foreign investment, the share subscription, which ends up increased foreign ownership in that distributor, must be subject to an M&A approval. 

 (ii) – the targets have land use right certificates for land lots at:

• • • islands;
    • borders areas;
    • coastal areas; or
    • other areas that may have national defense or security effects.

collectively the ‘Sensitive Areas’.

You do not need to care much about this new change unless you come from China or are China-linked.

(iii) – results in change of control threshold, namely where the M&A:

• • • increases the foreign ownership in a target that conducts business activities conditional on foreign investment;
    • results in foreign ownership’s being increased from less than 50% to more than 50% charter capital; or
    • increases foreign ownership where the target is already 50% or more owned by foreign investors.

In a nutshell, no needs for M&A approval if (i) the relevant transaction does not change the current ownership status and (ii) it takes place outside a Sensitive Area.