M&A in Vietnam from legal perspective, new background

The Covid-19 pandemic and recent geopolitical tensions will not obstruct the long-term growth of the Vietnamese M&A market, writes Duong Anh, Senior Partner of VILAF law firm.

With the acceleration of industrialization, the past decade witnessed the Vietnam mergers and acquisitions (M&A) market’s boom, with some of the largest M&A deals to date, including Central Group’s $1 billion acquisition of Big C Vietnam in 2016, ThaiBev’s 53% acquisition of Sabeco in 2017, and GIC’s $1.3 billion investment into Vinhomes in 2018.

Although issues surrounding the pandemic and recent global geopolitical tensions have had certain impacts on the overall environment, they would unlikely obstruct the long-term growth of the lucrative Vietnamese M&A market.

Legal framework

The term M&A refers to transactions in which the ownership of a business is transferred or consolidated with the aim to achieve synergy and growth. Mergers typically occur when one or multiple enterprises are merged into another company by way of transferring all assets, legitimate rights, obligations, and interests. As a result, those companies that are merged shall cease to exist, while the newly created entity survives the merger and assumes all rights, obligations and benefits from the dissolved entities.

Acquisitions, on the other hand, occur when one entity acquires another by the transfer of all of the acquired entity’s assets, rights, obligations and lawful interests to the acquirer, after which the acquired company ceases to exist.

Amongst others, the Civil Code provides general regulations on mergers and merger contracts. The Law on Enterprises provides the concepts and procedures for mergers and acquisitions of companies. The Law on Investment 2020 regulates the relevant projects implemented by companies subjected to an M&A transaction and conditions applied to foreign investors acquiring shares in local companies.

In relations to the Law on Competition 2018, competition law controls mergers and acquisitions in order to avoid concentrations that may detrimentally restrict competition in the market. Meanwhile, the Law on Securities cover several specific issues involving the M&A of publicly listed companies. In addition, the tax law, intellectual property law, labor law, and land law also govern many other important aspects of M&A transactions. Moreover, for a number of industries, like finance, banking, telecommunications, and inland transportation, parties to an M&A transaction must also conform to industry-specific regulations as they apply.

Notable remarks for investors

When investing into the Vietnamese M&A market, investors should be aware of several important remarks.

First, before initiating an M&A transaction, enterprises should examine the business conditions that may be imposed. An indispensable condition that foreign investors must consider is the foreign ownership limit that applies to certain businesses in accordance with Decree 31/2021 dated March 26, 2021, relevant industry-specific regulations, and relevant treaties to which Vietnam is a party.

For example, investors from Japan who intend to acquire shares in local companies in Vietnam should study the commitments from the Vietnamese Government to international treaties to which Japan is also a member, including the Schedule of Specific Commitments in Services annexed to the Protocol of Accession of the Socialist Republic of Vietnam to World Trade Organization (the “WTO Commitments”); Vietnam Japan Economic Partnership Agreement (the “VJEPA”); ASEAN-Japan Comprehensive Economic Partnership (the “AJCEP”); and the Regional Comprehensive Economic Partnership (the “RCEP”). If a business line is subject to a foreign ownership limit, the ownership of all foreign investors of an enterprise whose operation involves the business line must not exceed the foreign ownership limit.

Additionally, another important remark lies in the requirement that certain investment projects must be included in the relevant planning. These include, among others, power projects, which must be included in the national electricity development planning; and construction investment projects that must be consistent with national planning, regional planning, provincial planning, construction planning, land use planning and planning in the area where the project is executed.

In addition, the corporate type of the target also determines several factors in a transaction. For example, if a public company operates in an industry or profession with limited market access but the foreign ownership limit is not specified, the maximum foreign ownership ratio that applies to such a company is 50% of the charter capital.

Acquisition of land for the purpose of project implementation also often poses complex issues. In relation to land clearance, the investor may either choose the method of direct transfer from landowners or the method of land recovery through the State, each of which may cause different complications. Additionally, in relation to the leasing of land from the State, the investor may choose to pay the land rent in lump sum or on an annual basis. Each of these payment plans has different implications on the rights that investors are entitled to. Overall, acquisition of the land use right certificate may be a very lengthy and onerous process.

It is also important that primary approvals from the State are obtained for the acquisition or merger to be completed. These include the M&A approval as stipulated by the Law on Investment 2020, the amended Enterprise Registration Certificate as stipulated by the Law on Enterprises 2020 to reflect the changes in the business post-acquisition (if any), merger filing as required by the Law on Competition 2018, and registration with the State Securities Commission in relation to publicly listed companies (except for certain special cases).

An M&A transaction has certain technical issues. Firstly, in case the target is a foreign direct investment enterprise (e.g. having foreign investors owning 51% or more of charter capital), the target must open and use a direct investment capital account (DICA) for most of their capital transactions, in which case the share purchase price must be transmitted to the DICA before being wired to the selling shareholder.

Secondly, the law stipulates that individuals and organizations purchasing shares would officially become shareholders of the target when their information are duly recorded in the shareholder register. However, in practice, buyers in M&A transactions often insist on receiving not just the amended shareholder register, but also the Department of Planning and Investment’s confirmation on the target’s registration of the change of shareholders.

Finally, parties to an M&A transaction are often concerned about income taxes. Particularly, if the seller of the shares is an individual, the seller would only be taxed at the rate of 0.1 percent; meanwhile, the tax rate applied to such transactions where the seller is a corporate shareholder is 20 percent.

Impact of Covid-19, geopolitical tensions

Covid-19 has, to a certain extent, had an impact on the M&A market due to foreign investors’ inability to enter the country to survey the investment landscape of Vietnam and financial constraints caused by the pandemic. Such financial constraints are expected to be further exacerbated by the recent global geopolitical risks from the tensions between Russia and Ukraine, as well as other similar tensions in the political sphere.

Nevertheless, it is unlikely that these issues will detrimentally jeopardize the development of the M&A market in Vietnam. Statistically, in 2021, despite the pandemic, foreign investment into Vietnam, including investment in M&A activities, still grew by 9.2% compared to 2020, reaching $31.15 billion. This achievement is the result of many factors.

First, the changes in various new laws, such as the Law on Investment 2020, the Law on Enterprises 2020, the Law on Securities 2019, and the Labor Code 2019, have created a more transparent investment environment for foreign investors, effectively making the Vietnamese M&A market more attractive. For example, instead of the old “positive list” approach under which authorities enjoyed wide discretion in deciding market entry conditions, the new Law on Investment 2020 and Decree 31/2021 has adopted the new “negative list” approach. Under this new approach, except for a few business lines listed in Decree 31/2021, foreign investors are subject to the same business conditions as domestic investors, effectively simplifying the investment process for foreign entities.

Second, Vietnam has been active in entering into and implementing new free trade agreements. The EVFTA, which took effect in 2020, and the RCEP, which took effect in early 2022, along with the digitalization trend, can promote export activities and improve market accessibility.

Although these two measures are not originally aimed at curbing the impacts of Covid-19, they have, over time, proven to be effective in doing so. Beyond this, these new regulations are long-term strategic developments in the Vietnamese legal framework, that would help ease the impacts of not only Covid-19, but also any geopolitical risks that Vietnam may face, as well as any other issues which damage the Vietnamese investment market.

In addition to these long-term provisions, Vietnam has also produced certain short-term measures. These include the 30% corporate income tax applied to certain qualified companies and the reduction of contribution into the unemployment insurance fund from 1% to 0% until September 30, 2022. These evidence Vietnam’s flexibility in implementing ad-hoc measures to contain the impacts of adverse changes. Although similar measures have not been produced in relations to the recent geopolitical tensions, it is likely that such flexibility would translate into appropriate measures to restrain those impacts if they do arise.

All the above suggest that the pandemic and recent geopolitical tensions will not obstruct the long-term growth of the Vietnamese M&A market. Importantly, while foreign investors have, to a certain extent, become less active due to Covid-19, domestic enterprises have increasingly extended their presence over the period. Large value deals, unlike before, are now led by large domestic enterprises like Vingroup, Hoa Phat, Novaland, and Vinamilk. From this angle, Covid-19 has allowed opportunistic domestic investors to take the lead.