Competition law key factor in M&As

While investors’ interest in Vietnam has translated into healthy growth in mergers and acquisitions (M&As) and foreign direct investment (FDI), the potentially far reaching impact of the Competition Law is not understood by many players, writes Dr. Nguyen Anh Tuan from LNT & Partners.


Consumer goods is among sectors having the largest number of M&A deals, Photo: Le Toan

As Vietnam’s increasingly outward looking economy and Competition Law develop, the country’s merger control regulations should not be overlooked – not least because of the hefty penalties that they attract. A fine of up to 10 per cent of a company’s total revenue in a financial year may be imposed for a breach of merger controls, including requirements on notification. Other severe penalties include forced demerger or withdrawal of a company’s business certificate.

It is also worth remembering that investors who have just completed transactions are not out of the woods yet. Competition authorities can still penalise companies up to two years from the date of the breach and prospective or existing investors must be aware of how these merger controls affect them and how to deal with potential non-compliance risks.

The term, “economic concentrations”, under the Competition Law includes company mergers, consolidations and acquisitions, as well creations of joint ventures. The law imposes certain merger controls on these economic concentrations that investors should be aware of, especially when dealing with larger transactions.

These merger controls focus on the consideration of the economic concentration’s “combined market share”. The market share of a company is calculated by referencing its percentage of turnover from sales or inwards purchases against total turnover from sales or inwards purchases by all companies in the business of the same type of goods in the relevant market for a month, quarter or year. The combined market share is defined as the total market share in relevant markets of all companies participating in an economic concentration. The job of looking at the extent of the combined market share falls to the Vietnam Competition Authority (VCA) when assessing whether an economic concentration will be subject to notification or prohibition under the Competition Law.

This makes it crucial for investors, before entering into an economic concentration, to calculate the resulting combined market share to evaluate potential risks of offending Vietnam’s merger control regime. This prudence will allow investors to determine whether VCA notification of the transaction is required.

The data necessary to determine market share can be obtained from government agencies, such as the General Statistics Office, the ministries of Finance and Information and Communications or the State Bank, depending on the respective industry. Reputable market research can also be used.

To prevent an under or overstatement of this market share figure, investors also need to identify the “relevant market”, because market share will be calculated on an assessment of the relevant product market and geographical area. For example, the market share of a company may be more than 95 per cent for the Ho Chi Minh City area, but only 5 per cent for the whole country.

With respect to notification requirements, there are generally no restrictions against an economic concentration if the resulting combined market share in the relevant market will be below 30 per cent, or if the resulting economic concentration is considered a small or medium-sized enterprise (SME).

If the combined market share falls between 30-50 per cent, the VCA must be notified of the proposed transaction before the parties can execute it. The parties can only proceed with the transaction once the VCA approves it.

Economic concentrations that result in a combined market share of more than 50 per cent will be prohibited, unless the VCA grants an exemption. Such an exemption can be granted if one or more companies in the economic concentration will be at risk of dissolution or bankruptcy or if the economic concentration will contribute to the country’s socio-economic development or technical and technological progress. However, these exemptions are not guaranteed and will be at the authorities’ discretion.

An open door to VCA consultation

If investors harbour doubts or concerns over whether a proposed transaction will be prohibited or require VCA notification, they may actively consult the VCA for guidance.

This VCA consultation function has proved successful and resulted in VCA assistance in accurately calculating combined market shares in certain cases. PV Drilling and Mirae are two key recipients of VCA expertise. These companies were advised not to make a notification (with regards to respective deals or a combined  deal/merger) as the participants’ combined market share did not meet the threshold stipulated by law.

However, despite VCA being on hand to provide this free service, only a handful of companies have utilised it. In fact, it was called into action just nine times from 2008 to 2011.

The VCA offers two types of consultations - general and specific consultations. The former, which can be done through email or phone, is primarily used for clarifying general Competition Law concerns. The latter is used when considering whether the proposed transaction requires notification or is prohibited. Through the provision of salient details on a proposed transaction, the VCA can help ascertain the relevant market share and its potential market impact.

It must be remembered that this consultation service does not excuse companies from legally notifying the VCA of larger economic concentrations, however such consultations are an invaluable resource for investors in navigating through the country’s complex merger control regime. Moreover, they could potentially save millions of dollars in penalties and legal headaches, as well as save time and costs in ascertaining whether a breach has occurred.

Confronting early notification fears

There have also been growing investor concerns about the serving of notification letters to the VCA, a Competition Law requirement, on proposed transactions.

Particularly, fears over the possibility of the VCA preventing the transaction from going ahead and breach of confidentiality are still commonplace among prospective investors.

However, the VCA does not act as a roadblock to transactions upon receiving a notification. In fact, it has not objected to any of the notified economic concentrations. These include substantial economic concentrations that have resulted in considerable increases in local market share, such as the merger of Nippon Steel and Sumikin Bussan Corporation and the proposed merger of AIA and Prudential.

In regard to confidentiality concerns, the VCA is prohibited by law from disclosing or using confidential company information and the extent of information disclosed in notices and applications for exemption vary on a case-by-case basis. For example, future business plans are often needed if an application for exemption is made. Companies can rest assured though that sensitive information, such as prices and detailed post-transaction business plans, will almost never need disclosure.

With this in mind, it is unclear why prospective investors unnecessarily chance facing a substantial fine for a Competition Law breach. Failure to notify the VCA as required by law may result in a company getting hit with a substantial fine of 3 per cent of its total turnover for the preceding fiscal year.

For this reason, prospective investors must put irrational fears aside and notify the VCA to comply with the Competition Law. In addition, companies are not bound to proceed with transactions after receiving VCA approval. Notification should be provided as soon as the commercial terms of the transaction have been reached or even earlier during the deal negotiations.

Sound advice on offer

Vietnam’s Competition Law regime is challenging for new and seasoned investors, despite the sound VCA support on offer. For investors that strive to comply with the law, their combined lack of experience and knowledge in Vietnam’s business and legal environment have often resulted in drawn out VCA assessment or consultation processes, largely a result of improperly prepared notifications and explanations.

For this reason, seeking assistance from professional advisers is highly recommended. In dealing with the VCA, legal assistance will leave an invaluable footprint on the preparation of notifications and explanations – particularly when it comes to how much information should be disclosed on the proposed transaction.

While Vietnam’s Competition Law arguably lacks the sophistication of other developed jurisdictions, with substantial penalties and the potential to make or break a deal, they are often the overlooked elephant in the room for larger transactions.

Competition Law compliance should always be on the agenda when investors propose and negotiate an upcoming economic concentration. However, there is no need to be daunted.  For prospective transactions to proceed as smoothly as possible in agreement with the Competition Law, the VCA should be considered a friend, not a foe.

The VCA is ready to serve investors and the nation in promoting healthy competition and maximising foreign investment to the greatest extent permissible under the Competition Law.