Introduction of Draft New Investment Law and Its Possible Implications on M&A in Vietnam

The Government of Vietnam is accelerating the drafting of two most important laws relating to foreign investment, i.e. the Investment Law (IL) and the Enterprise Law (EL). These new laws, especially the IL, scheduled to be adopted in October 2019, would significantly affect M&A activities in Vietnam.

Below are my notes on major changes proposed by the draft laws relating to M&A.

A – Major Proposed M&A-related Changes

The draft IL proposes changes relating to M&A as follows.

Change #1: The draft law introduces the concept of economic organizations dominantly owned (‘có sở hữu chi phối’ in Vietnamese language) by foreign investors (Foreign Dominated Company or FDC for short). A company is deemed to be an FDC if it falls inside any of the 03 following circumstances:

• 50% or more of its charter capital (paid-up equity) or common shares being held by a foreign investor(s);
• a majority or all of its board members or the legal representative being indirectly or directly appointed by the foreign investor; or
• amendment of its charter[1] being decided by the foreign investor

Change #2: It is expressly stated that M&A is not a project transfer.

Change #3: Registration with the relevant in-charge State body(ies) (often referred to as an M&A Approval) is compulsory if:

• the M&A results in the target being FDC; or
• the target in an M&A transaction consumes land at boundary or coastal areas or any other areas having security and national defense influences.[2]

B – Comments

Change #1: Foreign Dominated Companies

A key concern is what ultimately defines dominant ownership and who would decide that.

According to the draftsperson (i.e. – the Ministry of Planning and Investment (MPI)), dominant ownership is relatively similar to the ‘control’ concept in other jurisdictions which is often used to determine whether a company is considered a ‘subsidiary’. The MPI further adds that this approach has been long used in the ‘parent company – subsidiary’ chapter of the current EL.[3]

The MPI’s explanation is not quite persuasive because the EL’s ‘parent company – subsidiary’ chapter deals with different issues, i.e. cross investment. In M&A’s context, ‘control’ factor is used to determine whether a company is an affiliate of a contracting party for the purpose of, among others, assignment of contractual rights. None of them are employed to build market access threshold.

Hence, it remains to be seen if such proposed change would be ultimately incorporated in the new IL because of its ambiguity and non-compliance with other international treaties of which Vietnam is a member.[4]

Change #2: M&A vs. Project Transfer

Please be first noted that an [investment] project is generally defined as a business plan proposed by the investors to the Government of Vietnam for approval. Such approval is evidenced by either an investment registration certificate or a written in-principle approval. It is argued that until then can a project be transferred. In nature, a project transfer is very close to a typical assets transfer.

Actually, this proposed change is not new because an M&A (share transfer) per se differs sharply with a project transfer (or an asset transfer). Nevertheless, statement of this type is to avoid misinterpretation by licensing authorities. In practice, many of them improperly request an M&A go through very complicated and time-consuming licensing procedures applicable to project transfer.

Change #3: M&A Circumstances

The second M&A Circumstance, i.e. investment in sensitive areas, are highly questionable when it boils down to target using land. Land users are defined by the Land Law of Vietnam to cover entities directly obtaining land from the Government. In such sense, it is not clear as to whether it applies to projects that obtain land from sources other than that of the Government of Vietnam i.e. the target sub-leases land from existing land users. More critically, who will decide which areas are treated as ‘sensitive’ in terms of national defense and security and on what basis is also unclear.

In the past, a similar mechanism has blocked foreign ownership of residential houses due to a delayed issuance of a list of sensitive areas by the Ministry of National Defense and the Ministry of Public Affairs. The blockage has lasted several years despite the Law on Residential Housing expressly permits foreigners to own houses and apartments in Vietnam.

C – Other Important Notes

No screening of foreign investment in restrictive business sectors?

The draft law does not subject foreign investment in foreign-restricted business sectors to M&A approval (e.g. telecommunication or publishing sectors). In such case, it is unclear as to ultimate legal consequences if, for example, foreign investment exceeds the ownership thresholds set by local laws and related international treaties.

Another issue is the draft law is silent on whether a transfer or subscription of shares in the target not resulting in an increase of foreign ownership is still subject to the M&A Approval. For example, if a wholly owned foreign company increases its charter capital, is it still required to seek the M&A Approval. Theoretically, the answer should be No but quite a few of licensing authorities do the opposite in practice.

On a separate, but related, note, offshore investment i.e. investment outside Vietnam by Vietnamese companies), is still subject to a compulsory [and often time-consuming] registration with the Government. This means that in near future young Vietnamese startups still have to find their way to abroad, especially, Singapore, in an ‘illegal’ manner

D – Conclusion

While the above are just proposed changes for public discussion and from a law-making practice’s perspective, there is no guarantee that such changes are to be incorporated into the new laws. In our view, it is more likely that the first M&A circumstance i.e. the dominant ownership) would be limited to foreign majority ownership criteria only. In addition, the conditional business sector criteria will be put back for better State management on market access.

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[1] Analogous with articles of association in other jurisdictions.

[2] For the purpose of this note, circumstances that are subject to an M&A Approval in item (i) and (ii) will be referred to as M&A Circumstances

[3] Article 189 of the Investment Law.

[4] For example, under its commitments to WTO’s members, market access conditions mainly based on business sectors and the ‘pure’ (not dominant) foreign ownership ratio.