VIETNAM: An Introduction to Corporate/M&A
M&A IN VIETNAM: CHANGES AND NEW PRACTICES FOR 2021
By Hong Bui - Partner and Thien Ly Huynh - Associate
Introduction
Battling COVID-19 while rising in the new normal, the M&A market in Vietnam is expected to bounce back in 2021 thanks to the four cutting-edge topics below, which bring tremendous changes in legal practices to foreign investors.
New Law on Investment (LOI)
Overall, the LOI 2020, which takes effect from 1 January 2021, provides for less conditional and more preferential business lines, and clearer market access conditions for foreign investors, but tightens controls on M&A involving sensitive locations or outdated technology.
Foreign investors, especially investment funds, may have a wider selection of business segments to invest in in Vietnam, as around 23 business lines have been removed from Appendix IV - List of conditional business lines of the LOI 2020. These notably include production and repair of liquefied petroleum gas (LPG) tanks, franchising, logistic services and shipping agencies. On the other hand, some business lines with investment incentives have been added, including university education or manufacturing products in supporting industries, such as garment, footwear, electronics and automobile.
Market access conditions for foreign investors become more transparent as the conditions are now defined under Article 9.3 of the LOI 2020. Moreover, the Government will, hopefully within early 2021, issue a list of business lines that are limited to foreign investors’ market access, including (i) those not yet accessible to foreign investors and (ii) those accessible on conditions. Accordingly, if a business line is opted out of the aforementioned list, foreign investors are, in principle, allowed to apply market access conditions of such business line similarly to those applied for local investors.
Regardless of the above, M&A involving target companies located on islands, coastal or frontier areas of Vietnam will become more stringent, as foreign investors in this case must obtain an M&A approval from the licensing authority due to national security and defence reasons. Moreover, near-expired manufacturing projects in Vietnam that are using obsolete technology, contain underlying risks of environmental pollution or are natural-resource intensive will not be approved for project extension under the LOI 2020, or even expansion during the investment term in practice.
New Law on Enterprises (LOE)
Also taking effect from 1 January 2021, the LOE 2020 provides for progressive corporate governance standards to protect shareholders, less procedural private placement and the newly introduced non-voting depository receipts (NVDR) to encourage more M&A activities.
Under the new law, a shareholder or a group of shareholders only needs to hold from 5% of the total ordinary shares at any current time, or a lower ratio specified in the company’s constitutional document, to perform significant shareholders’ rights. These include the rights to call for an extraordinary general meeting of shareholders (GMS), nominate candidates for the board of management (BOM), access and make an extract of the BOM’s meeting minutes and resolutions, etc. The ratio was generously cut down from 10% under the LOE 2014, which also required such shares to be held by the shareholder(s) at least 6 consecutive months before exercising the aforementioned shareholders’ rights.
Preference shareholders are better protected, because a GMS resolution on matters adversely affecting their rights and obligations is only passed if approved by shareholders representing at least 75% of the total of such preference shares, whether by attendance at the GMS meeting or in case of passing a GMS resolution by collecting written opinion.
Moreover, the role, organisational structure and operation of an audit committee in a joint stock company is now clarified under the LOE 2020, the concept of which was only introduced yet lacked detailed regulations under the LOE 2014.
The LOE 2020 also brings good news to M&A foreign investors by way of private placement of a non-public joint stock company, in that it no longer requires a company’s notification of the intended private placement to the licensing authority prior to implementation. As such, an enterprise is only required to register for capital increase after the private placement is completed.
Finally, NVDR, a special tool for capital mobilisation and investment, is newly introduced in the LOE 2020. By owning NVDR, an investor is entitled to economic benefits, such as dividends, and bears obligations similarly to those of the ordinary shares used as based assets for the NVDR’s issuance, except for voting right. NVDR is believed to be especially beneficial to foreign investors who wish to invest in a listed company in which its room for foreign ownership has been reached. However, implementation of this tool in reality will be pending on the Government’s guiding decree and the licensing practice of the time to come.
New Law on Securities (LOS)
Although having been promulgated since November 2019, the LOS 2019 also takes effect from 1 January 2021 together with the LOI and the LOE above.
Under the LOS 2019, only strategic investors and professional stock investors are allowed to acquire shares of a public company via private placement. Furthermore, a buyer contemplating the acquisition of voting shares of a public company must conduct a public offer, if such acquisition leads the buyer to directly or, as supplemented by the LOS 2019, indirectly own 25% or above of the total voting shares of the public company.
The above changes aim to increase transparency, fairness and quality of M&A transactions of public companies, yet may limit participants of a public company’s private placement and confuse investors about what is regarded as “indirect” ownership for public offering. A detailed guidance of this new regulation should be issued soon for better application in practice.
The LOS 2019 also pays more attention to corporate governance of public companies. It resembles the global practices and sets forth main contents surrounding the rights and obligations of shareholders, organisation of annual GMS meeting, the BOM, avoidance of conflict of interests and ensuring information transparency. Remarkably, major shareholders, that is, those who own from 5% of voting shares of a public company, are required not to take advantage of their positions to interfere with the rights and benefits of the company and other shareholders, whose shares may be more minor and dispersed.
New economic integration with the European and the Asia-Pacific region
Vietnam’s recent preferential treatment on a wide range of trade and investment aspects with the European and the Asia-Pacific region will become a magnet for more cross-border M&A transactions into Vietnam.
With respect to goods, immediately after the EU - Vietnam Free Trade Agreement (EVFTA) came into effect for Vietnam, i.e. 1 August 2020, the EU has eliminated import tariffs on 85.6% of tariff lines, equivalent to 70.3% of Vietnam's exports to the EU, while it is 48.5% and 64.5% respectively for Vietnam’s side. These ratios will all increase to over 90% within the next 7 to 10 years.
In service sectors, the majority of Vietnam and the EU’s commitments to each other are beyond those of the WTO, such as for banking, insurance, telecommunication, transportation and distribution services. Notably, Vietnam’s requirement of the economic needs test (ENT) for establishment of retail outlets (beyond the first one) will be abolished after 5 years from the EVFTA’s date of entry into force.
On the other hand, the EU - Vietnam Investment Protection Agreement (EVIPA) will bring more certainty to the EU investors by setting out core principles in relation to fair and equitable treatment, compensation for losses and expropriation.
Moreover, with the Regional Comprehensive Economic Partnership (RCEP) signed among the ASEAN countries and Australia, China, Japan, South Korea and New Zealand in November 2020, Vietnam’s exports will be more facilitated, while e-commerce services and small and medium enterprises will be more emphasised within the Asia-Pacific region.
Last but not least, the UK - Vietnam Free Trade Agreement (UKVFTA) concluded in December 2020 ensures benefits of Vietnam and the UK’s existing trading relationship after the UK officially leaves the EU by the end of 2020, with equivalently deep commitments to those agreed under the EVFTA.
Conclusion
The triple LOI 2020, LOE 2020 and LOS 2019, together with the EVFTA, EVIPA, RCEP and UKVFTA, are indeed promising to foreign investment into Vietnam by way of M&A from 2021 onwards. From offering more investment incentives to enhancing corporate governance of enterprises in Vietnam, these new legislations have shown Vietnam’s great effort and commitment to becoming more accessible to foreign investors and to ensure their interests are better safeguarded.