The code of M&A
The main areas of legislation that affect mergers and acquisitions (M&A) in Vietnam are the 2014 Law on Enterprises (the company law), the 2014 Investment Law, and the 2006 Securities Law (amended). Together with the contract law principles set out in the 2015 Civil Code and 2005 Commercial Law, these form the legal framework for M&A in Vietnam.
In addition, the 2010 Law on Credit Institutions and the 2004 Competition Law regulate M&A transactions involving mergers of certain types of companies – commercial banks for example.
One common method for foreign companies to seek a business presence in Vietnam is through the acquisition of a local target company. The target may be either a joint stock company (JSC) or a limited liability company (LLC). A JSC must have at least three members owning shares issued by the JSC. Unlike a JSC, an LLC may have a single member (but not more than 50 members) and each member owns an equity interest (similar to the concept of partnership interest) in the LLC.
As a general rule, foreign investors may acquire an entire equity position in a target company, except when the target operates in certain service sectors. For example, a foreign ownership cap of 49 per cent is applicable to shipping companies, and a 30 per cent cap is placed on commercial banks.
Three options exist for structuring an acquisition transaction: a share purchase, an asset purchase, and a merger.
A share purchase involves the acquirer purchasing shares or equity interest in the target company – be they existing shares from the shareholders or newly-issued shares from the target company. Thus, with a share purchase, the acquirer would take over the target company along with all of its assets, liabilities, and obligations. With an asset purchase, only the assets (and liabilities) specified in the sale and purchase agreement are transferred to the acquirer.
In a merger, the acquirer will take on all of the target company’s assets and liabilities, and as a result, the target company will cease to exist. By contrast, in a share purchase or asset purchase, the target company continues to operate.
From a foreign investor’s perspective, both asset purchases and mergers share a common characteristic: the foreign acquirer needs to take on the entire target company or specific assets and liabilities of the target company through an existing company in Vietnam.
In case of incorporation of a new company used to accommodate the proposed acquisition, the foreign acquirer would need to apply for an investment registration certificate under the 2014 Investment Law.
Licensing and forex issues
In order to acquire shares in any target company, a foreign acquirer needs to obtain a security trading code from the Vietnam Security Depository. If the foreign acquirer intends to acquire 51 per cent or more of any target company’s share capital (or acquiring shares or equity interest in a target company operating in a sector where foreign investment is subject to conditions) – then the proposed acquisition must be registered with the relevant local investment authority.
With regards to foreign exchange control requirements, the foreign acquirer is required to open a VND-denominated “capital account” with a commercial bank or foreign bank branch operating in Vietnam. All payments relating to any acquisition or divestment must be channelled through this account. Purchase prices are required to be expressed and made in VND as well.
As a general rule, any merger or acquisition leading to a “prohibited economic concentration” (i.e. both acquirer and target company having a combined market share of more than 50 per cent within the relevant market) is strictly forbidden. However, the parties may proceed with the proposed acquisition if the combined market share stands at 50 per cent or less. This is subject to prior written notification to the competition authority if such combined market share remains between 30 and 50 per cent.
Acquisitions of 25 per cent or more of existing shares in a public company (i.e. a JSC having 100 or more shareholders or a listed JSC) is subject to tender offer processes, as set out in the securities regulations. The acquirer must register a tender offer filing with the State Securities Commission, and then make a mandatory public offer to all shareholders of the target company.
The acquirer is required to comply with certain disclosure obligations, as imposed by the securities regulations.