Foreign equity limits relaxed under new Investment Law

Foreign investors will likely be jubilant at the news that restrictive definitions of what constitutes a foreign invested enterprise are finally being recast in Vietnamese law

In 2012, the Mekophar case received much public attention as well as scrutiny from lawmakers due to its definition as a “foreign invested enterprise”.

In this case, the listed pharmaceutical company was refused licensing for new distribution establishments because, as it was 4.7 per cent owned by foreign investors, Mekophar was technically defined as a foreign invested enterprise (FIE). Under Vietnam’s WTO Schedule, FIEs are not permitted to distribute pharmaceutical products.

Following this contentious case, questions were raised as to how Vietnamese laws should define an FIE and foreign ownership limits, and how to prevent any such restrictions from interfering in the free trade of listed shares on the stock market.

In an effort to define FIEs and foreign investors, lawmakers have addressed these issues in the new Law on Investment 2014 (LOI 2014), which comes into force on 1 July 2015. As discussed below, foreign investors will be able to enjoy two exceptions to the normal foreign ownership limits: indirect ownership via FIEs that are not “semi-foreign-investors”, and direct ownership of up to 49 per cent in listed and non-listed public companies.

FIEs, foreign investors and semi-foreign-investor concepts

An FIE is defined under LOI 2014 similarly to that under the Law on Investment 2005 (LOI 2005): it is a business entity of which a member or shareholder is a foreign investor. Generally, this means that an FIE cannot engage in a business which is not permitted of foreign investment under Vietnam’s WTO Schedule (subject to discussion in the Section on Foreign Ownership Limits below).

Nevertheless, LOI 2014 brings about lots of clarity in the regulation of the concept “investor.” In principle, a business entity is considered an “investor” when it makes an investment in another company (e.g., acquiring equity or shares or establishing a new company). In this regard, an interesting development under LOI 2014 is that an FIE can be treated as a “domestic investor” in certain circumstances, and, in such cases, the conditions and procedures that apply to domestic investors for investment in other companies will apply to such an FIE.

One important implication is that, if an FIE qualifies as a domestic investor, the FIE itself is not permitted to engage in certain foreign investment restrictive business. However, it is allowed to form a new subsidiary or acquire shares in another company that engages in such foreign investment restrictive business.

An FIE is treated as a foreign investor when investing in other companies if it is owned at least 51 per cent by:

- foreign investors; and/or

- any other FIE which is owned at least 51 per cent by foreign investors.

This article refers to the above foreign investor FIE as “semi-foreign-investor”. If an FIE does not fall under the above category, it is treated as a “domestic investor”.

Foreign ownership limits

LOI 2014 provides three categories of foreign ownership limits:

- Foreign ownership limits in listed companies, non-listed public companies, securities companies, and securities investment funds as provided under securities laws;

- Foreign ownership limits in “equitised companies” pursuant to regulations on equitisation;

- Foreign ownership limits in other companies pursuant to other laws and regulations and international treaties to which Vietnam is a member. These foreign ownership limits currently range from 0 per cent to 100 per cent depending on the business sectors of the relevant companies.

Although this may be subject to further interpretative guidance from the relevant ministries, it seems that the specific regulations on listed companies, public companies, and equitised companies may provide exceptional foreign ownership limits that differ from the standard foreign ownership limits under Vietnam’s WTO Schedule. If this interpretation is confirmed in sub-law regulations, foreign investors can own up to 49 per cent of the shares in a public company (pursuant to current regulations on public companies) even if it engages in a sector which is not opened for foreign investment under Vietnam’s WTO Schedule. This would resolve the Mekophar case in favour of the investor.

Areas requiring clarifications

Under LOI 2014, the test if an FIE is a “semi-foreign-investor” appears to be conducted only when this FIE establishes new companies, makes capital contribution into, acquires shares or capital interests of companies in Vietnam, or invests in the form of a Business Co-operation Contract. LOI 2014 and the recent draft Decree guiding the implementation of LOI 2014 (Draft LOI Decree) seem not to deal with the circumstances where an FIE changes its status from “domestic investor” to “semi-foreign-investor” after the FIE establishes a new company or acquires shares in another company. Will the company in which the FIE has invested continue to be treated as a local company after the FIE changes its status to a semi-foreign-investor?

In addition, LOI 2014 and the Draft LOI Decree have not addressed the circumstances where a public FIE engaging in a foreign investment restrictive sector is converted to a non-public company. Will the foreign investors be permitted to continue to hold their shares? If not, how will the situation be resolved such that the foreign investors’ rights are protected?

Although there are areas requiring clarifications, LOI 2014 has provided a great leap forward in clarifying what foreign investors and FIEs can do in Vietnam, as well as adding a boost to the stock markets by resolving cases similar to Mekophar. It will be interesting and encouraging to see how foreign investors will react to the added room opened for them.