New amendments with high impacts

10:12 | 26/10/2019
The Ministry of Planning and Investment last week published the latest draft laws on amendments to both the Law on Investment and the Law on Enterprises, which feature significant changes. Vaibhav Saxena, lawyer at Vietnam International Law Firm, delves into how the new amendments will make an impacts on investors.  
new amendments with high impacts
The planned changes for both laws will bring about significant changes for businesses (Photo: Le Toan)

The latest draft Law on Enterprises has removed unsuitable administrative procedures, such as notification on changes of managers, hard-copy submission of enterprise registration dossiers, and enterprise seals. It also includes amendments to the administration of joint-stock companies (JSCs) and limited liability companies. In terms of capital contribution and/or payment of subscribed shares upon incorporation, as per the 2014 version of the law, one must contribute shares of capital contribution to the company and/or pay the subscribed shares in full and in the type of assets as undertaken and/or subscribe within 90 days from the date of issuance of the enterprise registration certificate (ERC). Taking advantage of the ambiguity in the laws, many companies have increased their capital in the ERC but do not make the contribution in time. It also increases the burden on authorities to ensure timely capital contribution as stated in the ERC of the company. In the case that the member or shareholder is incapacitated to contribute towards the increased charter capital, the authorities are required to deal with the default or entertain charter capital reduction in the ERC.

Encouraging companies

For supplement of regulations on non-voting depositary receipt (NVDR) in JSCs, the draft enterprise law provides that when ordinary shares are deposited to issue NVDR, owners of such receipts shall have full rights and obligations with respect to such ordinary shares, except for voting rights. In other words, when investors fund NVDR, investors would receive the same financial benefits including dividends, right issues, and warrants as ordinary shareholders, except for voting rights. Besides that, voting for ordinary shares that are deposited to issue NVDR shall comply with the company’s charter and the provision under the Law on Securities. The new provision on NVRD shall encourage companies in Vietnam to raise capital from foreign investors. Under the Law on Securities, if a public company operates in a conditional business line with conditions applicable to foreign investors but there is not yet any specific provision on international ownership ratio, the maximum foreign ownership ratio is capped to 49 per cent. If the overseas investors own NVRD, it will not amount to an increase in the foreign ownership ratio of a particular public company, so these investors have an option to pour further money into a public company.

In regard to expansion of rights of shareholders and group of shareholders owning at least 1 per cent of ordinary shares in a JSC, the draft Law on Enterprises removes the condition of “holding shares for six consecutive months” regarding their right to lodge a claim against members of the board, director, or general director under Article 161 of the 2014 law. The latest draft amendments to the Law on Investment, meanwhile, supplements definitions on investment conditions and “capital investment”. Accordingly, conditions are separated into two groups: “business investment conditions” which apply to the operation of a project, and “market access conditions for foreign investors” which apply to such investors who wish to fund sectors or industries that attract market access restrictions. Thus, these investors will no longer be required to obtain merger and acquisition (M&A) approval when they acquire shares in a local company, which is subject to the “business investment conditions” but does not attract the “market access conditions for foreign investors.”

For capital investment, a new definition is introduced in the draft investment law. This definition is clearer than the previous one stipulated under the 2014 incarnation by listing types of assets as capital investment e.g. proprietary rights, future assets, IP rights, and more.

In addition, the draft clears out the threshold of application of itself with the Law on Management and use of state capital invested in enterprises, the Law on Public Investment, and the Law on Construction.

Also, the draft supplements and amends the list of conditional and prohibited business lines. It eliminates 12 business lines from the list of conditional business sectors, amends 19 business lines, and adds six new business lines into the existing list under the Law on Investment 2014 as amended, particularly in three areas.

The first is eliminated business lines such as logistics services, franchise and massage services, debt trading, and more. The second area is the vast area of amended business lines like trading in industrial explosives (except for demolition); power generation, wholesale, retail, specialised electricity consultancy; services of testing biological preparations, micro-organisms, chemicals, film production and distribution services, supply of intermediary payment services, and much more. The third area is newly-introduced business lines. These include registering of fishing vessels; services of import press releases; business architectural services, and more. The draft also has additional conditional market access business lines for foreign investors. Specifically, as to implement the policy on the attraction of overseas investment under Resolution No.50-NQ/TW on orientations to perfect mechanisms, policies, raise quality and efficiency of foreign investment by 2030, the draft investment law introduces a list of conditional market access business lines for such financiers in a positive approach by writing up lists of business lines in which foreign investors are not facilitated the market access, and lines with conditional market access for them. With respect to unlisted business lines, foreign funders apply conditions as for domestic investors.

The other important additional regulations are investment incentives. Accordingly, it includes new preferential investment business lines: manufacturing and trading of products formed from science research; college education; manufacturing of goods or services provision creating and participating in a chain of values, cluster of sectors; and innovation startups.

New investment incentives

New preferential investment areas include centralised IT zones, while new conditions are to receive investment incentives. The draft amendments to the Law on Investment provides for additional projects to receive incentives for projects with specially preferential business lines with investment capital of at least VND6 trillion (about $258 million) disbursed within the first three years under Article 15.2(c) of the Law on Investment, meaning with the minimum revenue of VND10 trillion ($430 million) per year within three years after the revenue generated year or employing over 3,000 employees. The draft investment law is silent on the nationality of employees. However, the stated investment incentives under Article 15.2(c) is not applicable to mining, commercial residential houses, or production or trading in products or services subject to special sales tax (except for production of automobiles, cruises, and airplanes), as per Article 15.5. There are supplements and amendments of provisions on foreign investors. One is a new incentive for innovative startups, along with those in investment funds. Under the draft, foreign investors are not required to have an investment project when establishing these. There are also specialised cases applicable for international investors. Those wishing to engage in public companies, securities companies, or investment funds shall comply with the Law on Securities, which means that they will be subject to the law’s funding conditions and ownership restrictions. Should the Law on Securities have no regulation on these matters, the related conditions and ownership restrictions under the Law on Investment shall be applied.

Articles 31.2, 32.2, and 32.3 of the Law on Enterprises regulate the performance of enterprise registration procedures. It is pertinent that according to the provisions of the law, enterprises shall carry out business registration procedures within 10 days from the date on which such changes are made to the business registration contents of the enterprise.

In the transactions of purchase, sale, and transfer of shares, and capital contribution, the registration agency interprets this provision in a way that the seller and the purchaser must complete the transfer of payment of shares/capital contribution before the relevant company is allowed to carry out the procedures to record the name of the new shareholders/members into the content of the enterprise registration.

This mechanism seems to deflect with the actual practice and the international standards with respect to M&A transactions. The reason being that it does not guarantee the purchaser's benefits when it is required to pay 100 per cent of the transfer value, while its name has not been recorded in the content of the enterprise registration.

A more specific and clear provision on implementation of procedures for changing business registration for M&A transactions is required.

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