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The new raft of laws will significantly improve the Vietnamese investment climate and boost inward investment
In November, the National Assembly passed 18 new laws that were to take effect from July this year. These new laws are supposed to represent a paradigm-shift in the business environment allowing foreign investors to conduct increasingly successful business practices in Vietnam. Noticeably, the laws on investment, enterprises, and real estate are expected to be lauded by foreign investors and foreign invested enterprises since they are bringing benefits to foreign investors while slashing red tape.
Concept of foreign investors redefined
In the past, an FIE with foreign ownership of less than 51 per cent would be treated as a foreign company even if the FIE was established in Vietnam. Under the new Law on Investment, foreign enterprises are only those that were established abroad or where foreigners own 51 per cent or more of a locally incorporated company. Article 23 of the Law on Investment presupposes that FIEs are treated as “foreign enterprises” only if foreign investors own directly and/or indirectly through an FIE [owned directly by foreign investors up to 51 per cent (F1 level)] at least 51 per cent of the equity (F2 level). This is an important principle because an FIE will be treated as a domestic investor so long as it satisfies these requirements and will receive the same treatment a domestic company would. This will also lead to various means to participate in various industries and projects that were previously reserved only for domestic companies by share restructuring to obtain shares of domestic companies involved in said projects and industries.
Abolition of investment certificates for M&As
When a foreign investor or an FIE (at least 51 per cent foreign ownership) conducts an M&A transaction into conditional investment projects or, as a consequence, holds more than 51 per cent equity of a target, then such M&A activity must be registered with the local department of planning and investment where the target is located. If these conditions are absent, the M&A deal may be conducted solely under the Law on Enterprises, thereby avoiding the requirement of obtaining an investment certificate to close the M&A deal, which was the most troublesome condition under the former law.
Even when registration is required, the registration process will be simple and straightforward and must be reviewed by the authorities within 15 days of submission. This change, together with the redefinition of foreign investors, will greatly streamline M&A investments.
Reduction in majority voting threshold for JSCs and LLCs
Unlike other countries, the concept of majority voting under Vietnam’s current Law on Enterprises required 65 per cent voting rights, not 51 per cent. The law brings Vietnam’s joint stock companies back in line with the rest of the world (where a majority vote means 51 per cent and super-majority voting means 65 per cent). Please also note that a shareholder holding less than 51 per cent equity could hold more than 51 per cent voting rights if he/she has shares with preferential voting rights. With respect to limited liability companies the default majority rule is still 65 per cent “unless otherwise provided by the charter”. That effectively means a simple majority voting in a limited liability company could be as low as 50.01 per cent if the charter so stipulates.
The quorum for a board meeting for limited liability companies or joint stock companies will be reduced from 75 per cent to 65 per cent. While this change may not affect existing companies with their current charters depending on how those charters were drafted, it opens up opportunities to renegotiate the charter for the benefit of some of the shareholders, as well as allows more investors to buy shares in a company.
Derivative actions - a boost for minority shareholders and private equity
Although the old Law on Enterprises introduced the concept of fiduciary duty, it did not provide for an implementation mechanism to protect minority shareholders if fiduciary duties were violated. For the first time, the new law introduces the concept of derivative actions, which allows shareholders holding at least 1 per cent of the total shares to launch derivative actions against board members, directors and controllers for violating their duty to put their own interests before the company’s interests and the duty not to abuse their powers. The cost of derivative actions will be borne by the company. This can be considered good news for private equity funds or minority investors who currently hesitate to participate in the equitisation programmes of state owned enterprises.
Easing of the Acting Ultra Vires doctrine and HS code requirements
While the Law on Investment reduces bureaucracy in the investment certificate registration process, the Law on Enterprises reduces delays in the Enterprise Registration Certificate (ERC) issuance process. The business lines are no longer recorded in the ERC. In doing so, an enterprise may have as many business activities as it wishes, provided that they are not prohibited or restricted by law. Trading and distribution companies will not need to supply thousands of Harmonised System (HS) Codes for traded products (and for products they anticipate in the future). This pre-empts the previously common complaint that licensing authorities frequently posed irrelevant questions delaying the incorporation process due to the HS Code requirements.
The relaxation of the HS Code system and the list of business activities during the ERC issuance process may lead the way to the loosening of the acting ultra vires doctrine – that is, an enterprise may only conduct business if such is allowed and stated in the ERC. This, again, will provide more certainty and relieve apprehensions over the legal capacity of companies who do business with each other.
Restriction of cross-shareholding
The Law on Enterprises does not allow a subsidiary to hold shares in a parent company, or a cross-shareholding in between two subsidiaries of the same parent company. While this general obligation still waits for explanation in the implementing the Decree of the Law on Enterprises, this may affect a holding structure to the extent as cross-shareholding is concerned. It is unclear whether an F1 company holds share in an F2 company (but not vice versa) would fall into this prohibition if both F1 and F2 are members of an F0 group (see the graph in section 1 above).
Easier property acquisition by foreigners
Property laws historically prohibited foreigners from acquiring property, the new law on residential housing will ease this measure to allow foreigners to purchase and own residential properties. Although this is not the first time the law has allowed foreigners to own residential properties, the previous law gravely limited the right to exercise ownership such as the ability to obtain a mortgage or use the property as collateral, or to pass on property as an inheritance. As a result, the new law that allows foreigners to exercise ownership is expected to lead to some more property sales.
Another change in the law is that FIEs are allowed to acquire property for whatever purpose they wish. The previous law limited FIEs to purchasing residential properties only for employees as a place of domicile. However, starting from July this year, FIEs can purchase residential properties to be leased out. Again, coupled with foreign individuals purchasing housing properties, this new law is expected to provide some momentum to the housing market. “This recently passed law makes the market more attractive to Vietnam-based expats seeking an investment in residential properties in Vietnam, and clears away the initial barriers to create a level playing field,”said CBRE Vietnam.
Looking ahead, 2015 is expected to see the signing of several free trade agreements. Together with the enforcement of many laws related to business and investment, 2015 is expected to bring new vitality to the economy.