M&A advisors confront myriad of legal discrepancies

Nevertheless, the dynamics of the laws have also caused inconsistency in interpretation and application. Issues of confusion are most often faced in merger and acquisition (M&A) transactions regarding which procedures apply to the deal and at what point in time a foreign buyer acquires the legal title to purchased shares.

There has been much confusion and some inconsistency in the answers to these questions. The new laws on Investment and Enterprises are aimed to resolve some of the issues faced in the past. However, investors are anxiously waiting to see how far the decrees will go in implementing the laws.

Below are some examples of current concerns:

What business categories will be included on the list of “conditional business categories for foreign investors” being developed by the government?

The laws have recently lifted the 49 per cent foreign equity restriction for public companies and simplified M&A procedures. However, what will be included on the list of “conditional business categories for foreign investors,” which is currently being developed by the government, could either confirm or nullify the stated intent of the laws. Under the list of such conditional business categories and other sub-law regulations being developed, how many listed companies would actually enjoy the lifting of the 49 per cent foreign equity restriction, and how many other companies would be free from regulatory approval requirements when a foreign investor buys 1 per cent or 10 per cent of their shares? These are current questions of concern.

How should the capital account be used?

There has been official interpretation by some state authorities that the transfer of share purchase price between a foreign buyer and a foreign seller in certain cases must be made via the direct investment capital account of the target company. Investors are concerned because the target company is neither the buyer nor the seller, and does not have a sensible reason to hold the purchase price.

Would two different capital accounts be required for investment in one single target company?

The current requirement to maintain both a direct investment capital account and indirect investment capital account can increase the burden of costs and efforts of investors while it does not provide a concrete benefit for the state administration. It would be best that each foreign investor is subject to only one consolidated capital account held in their name. The capital account should be held in VND, or, in the case that the foreign investor invests in a company initially formed as a foreign owned company, should be permitted to be in a foreign currency.

How do investors see the process of equitisation of state-owned enterprises in Vietnam, and what factors in the equitisation plan have not satisfied investors’ expectations?

New equitisation regulations during the last two years have helped solve some important issues, such as the conversion of land use rights into new land leases without accounting for the location value in the evaluation of an equitised enterprise. Prices, however, remain a major concern to investors. There are two major types of investors, including financial investors and strategic (operating) investors. A financial investor is willing to buy a minority stake but looks for good prices and profit potentials in the medium term. On the other hand, a strategic investor may be relatively less demanding on prices than financial investors, but requires participation in the management or even control of the target enterprise. A strategic investor typically wants to have an equity stake of more than 35 per cent. Additionally, a financial investor may be more likely interested in an enterprise when the enterprise has secured participation of a strong operating investor.

In this regard, both types of investors have been hesitant to Vietnam’s equitisation opportunities because financial investors have found the offered stock prices higher than what they see in the profit history and overall financial status of the enterprise, while strategic investors have found the 10-20 per cent stake typically offered to foreign investors inadequate to appeal to them.

The government recently made an encouraging move by initiating the idea of selling lots of shares in equitisation or divestment of state equity. It is, however, also important to investors how much equity stake the state will retain in a specific enterprise.

By Vo Ha Duyen-VILAF chairperson