Features

The legal framework for mergers and acquisitions (M&A) in Vietnam has been gradually enhanced in the context of the tremendous increase in both value and volume of M&A deals for recent years.

The currency story in M&A deals, however, will be discussed in this paper to highlight a critical gap in the M&A legal framework in Vietnam.

Foreign exchange control regulations

It goes without saying that under the Ordinance on Foreign Exchange Control, any indirect investment by non-resident investors shall be made via an indirect investment capital account in Vietnamese dong (“capital contribution account”). The capital, if in foreign currency, shall be transferred into Vietnamese dong for the investment purpose.

Following the above regulations, the prime minister and the Ministry of Finance have promulgated Decision 88/2009/QD-TTg and Circular 131/2010/TT-BTC, respectively for the capital contribution and share acquisition of foreign investors in Vietnamese enterprises. Under the two vehicles, the same message has been delivered. In the case where the capital contribution or share acquisition is made in foreign currency, the investor is obliged to sell the foreign currency amount to a commercial bank operating in Vietnam via his capital contribution account.

Offshore transactions

A question on the appropriateness of this requirement is raised when all the parties in an M&A deal are foreign investors.

Assuming that a foreign shareholder in a Vietnamese enterprise would like to transfer his share to another foreigner, the latter shall open a capital contribution account and exchange dollar capital for Vietnamese dong amounts. The seller then receives the amount in Vietnamese dong and exchanges it into dollars for overseas remittance. Unfortunately, at least one party in this deal will suffer from the foreign exchange difference. In addition, the seller will probably face up with a refusal of the commercial bank for his dollar request due to dollar supply shortage.

To sell or not to sell

This is not the matter of whether the seller should sell these shares, but the matter of whether the buyer should sell his dollar amount to the commercial bank.

It is compulsory that any payment for capital contributions or share acquisitions in Vietnam shall be made in Vietnamese dong via a capital contribution account opened in a commercial bank operating in Vietnam. It is, however, quite obvious that there is no sanction or remedy available to those who fail to perform the above requirement. A recent official letter from the State Bank of Vietnam (Official Letter No. 9374 dated December 1, 2010) has confirmed this situation. Given this legal gap in the regulations of Vietnam, investors are still confident to make the payment in foreign currency outside Vietnam.

In conclusion, lawmakers should have looked at its efficiency with regards applying to merely offshore transactions like the above example. In addition, any regulation shall be deemed incomplete in the absence of a remedy for its enforcement.