New regulations in law on investment and law on enterprises affecting M&A deals in Vietnam

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New regulations in law on investment and law on enterprises affecting M&A deals in Vietnam

The domestic COVID-19 pandemic in Vietnam has been well controlled so far; in addition, the Government of Vietnam continues to issue many investment attraction policies and legal provisions on investment activities in Vietnam, specifically:

  • Law on Investment 2020;
  • Law on Enterprises 2020;
  • Law on Competition 2018 and Decree No. 35/2020/ND-CP elaborating on several Articles of the Competition Law;
  • Law on Securities 2019.

This shows that Vietnam’s economy is expected to show positive signs in the near future. In particular, the M&A activities in Vietnam after a quiet period are also expected to recover and boom strongly.

In this article, we will share new points of the Law on Investment 2020 and the Enterprise Law 2020 coming into effect on January 1, 2021, that will affect M&A activities in Vietnam in the near future.

1. New regulations of the Law on Investment 2020 impact Vietnam’s M&A activities 

(i) Regulations on market approach conditions for foreign investors

According to Article 9 of the Law on Investment 2020 stipulates market approach conditions of foreign investors. Specifically, the regulations are as follows:

  • Foreign investors will not be restricted from approaching the Vietnam market if they have not yet been market approach or conditional market approach.
  • The Government is responsible for clearly regulating the List of industries and trades that have not yet been market approach, or that market approach is conditional.
  • There are 05 types of market approach conditions for foreign investors. 

These shifts have created more clarity and transparency in determining investment conditions for foreign investors. With this regulation, we think it will generate more advantages in the M&A activities of foreign investors.

(ii) Provisions on the implementation of investment activities by foreign-invested economic organizations

In Article 23 of Law on Investment 2020, a reduction of the rate is adjusted to determine whether an economic organization must satisfy the conditions and carry out the prescribed investment procedures for foreign investors when implementing investment forms in Vietnam from 51% of charter capital under the Law on Investment 2014 to 50% charter capital, specifically:

Economic organizations must satisfy the conditions and carry out investment procedures as prescribed for foreign investors when investing in establishing other economic organizations; capital contribution investment, share purchase, capital contribution purchase from other economic organizations; investing in the form of a BCC if the economic organization falls into one of the following cases: 

a) Having foreign investors holding more than 50% of the charter capital or having the majority of the general partners are foreign individuals, if the business organization is a partnership;

b) Having an economic organization specified at point a of this Clause holding more than 50% of the charter capital;

c) Having foreign investors and business organizations specified at point a of this Clause holding more than 50% of charter capital. 

(iii) Provisions on investment in the form of capital contribution or purchase of shares or acquisition of capital contribution portions 

According to Article 26 of the Law on Investment 2020 provides the procedures for registration of capital contribution and purchase of share, contributed capital of foreign investors in economic organizations in Vietnam. The following cases are required for foreign investors to carry out this procedure:

  • There is a change that increases the foreign ownership ratio of foreign investors in economic organizations engaged in conditional market approach for foreign investors;
  • There is a change in the increase in the foreign investor’s ownership rate to more than 50% of the charter capital and the case of a change in the foreign investor’s ownership ratio when they have already owned over 50% of charter capital;
  • Contribute capital, purchase shares, purchase capital contributions of economic organizations having land use right certificates in islands and border and coastal communes, wards and towns, other areas affecting national defense and security.

This provision has some notable points as follows:

  • In case a foreign investor contributes capital, purchases shares, or purchases a capital contribution portions but does not increase the foreign investor’s ownership ratio, the procedure is not required;
  • Additional provisions on the case that foreign investors are required to carry out registration procedures when implementing capital contribution by economic organizations having land use right certificates in islands and border and coastal communes, wards and towns, other areas are affecting national defense and security. This regulations are new, and in our opinion, they aim to control and restrict investment cases being detrimental to or which could be harmful to national defense and security.

(iv) Stipulate the legal basis for merger, division, separation project

In Article 41 of Law on Investment 2020, there are explicit provisions on the legal basis for the merger, division and separation of projects compared to the Law on Investment 2014, specifically:

During the implementation of an investment project, an investor has the right to adjust the objectives, transfer part or the whole of an investment project, merge projects or divide or split a project into multiple projects, use of land use rights, assets on land belonging to an investment project to contribute capital to the establishment of an enterprise, to business cooperation or other matters and in accordance with the provisions of law. 

This is a new point that needs to be concerned by Investors because the Law on Investment 2014 does not specify the cases of adjusting investment projects and the licensing agency must consider and consult relevant agencies. This leads to prolonging the processing time and affecting the merger and splitting of projects, as well as using land use rights and assets on land belonging to investment projects to contribute capital to establish enterprises. 

(v) Add provisions on the case in which the investment registration agency terminates an investment project

At Point e, Clause 2, Article 48 of the Law on Investment 2020 additionally provides for the case that the investment registration agency terminates part or the whole of an investment project if the investors conduct investment activities based on counterfeit civil transaction according to the provisions of Law on Civil.

In our opinion, this provision is intended to control and limit “investment in shadow hiding.” Still, to apply this provision, it is necessary to clarify or note the following:

  • Criteria for determining what is a counterfeit civil transaction;
  • Authorities identifying counterfeit civil transactions;
  • Risks that investors and licensing authority may face;

Difficulties in the process of investment procedures since the licensing authority may request the investor to explain property, land, capital …

2. New provisions of the Enterprise Law 2020 affect M&A activities in Vietnam

(i) Provisions on change of rights of a group of shareholders in a joint-stock company

In Clause 2, Article 115 of the Law on Enterprises 2020, the condition for the ratio of ownership of ordinary shares is reduced from 10% to 5% and removed the requirement for a continuous request of at least six months of a group of shareholders to exercise the rights specified in Clause 2 Article 115 of the Law on Enterprises.

In our opinion, this revision point is consistent with international practice and helps investors to be more proactive and convenient in managing and controlling their investments in Vietnam.

(ii) Complete and supplement regulations related to the organization of the joint-stock company

Regulations on the organizational structure of joint-stock companies are adjusted to conform to general practices and more transparent rules on the position and role of agencies such as the Audit Committee, Company Secretary…

In Article 166 of the Law on Enterprises 2020, shareholders’ right to sue for specific managers is to remove the requirement that shareholders shall own ordinary shares for six consecutive months.

Article 165 of the Law on Enterprises 2020 stipulates and increases the responsibility of the company manager.

In our opinion, the above changes are intended to increase measures to protect investors and to make the Law on Enterprises more consistent with general practices.

(iii) Additional provisions on non-voting depository certificates

In Clause 6, Article 114 of the Enterprise Law 2020, for the first time, the type of non-voting depository certificates is provided, thereby helping to create and diversify investment instruments of investors.

(iv) Supplement regulations on voting rights of voting preference shareholders

In Clause 6, Article 148 of the Law on Enterprises 2020 also provides for voting rights of voting preference shareholders regarding contents that adversely change the interests and obligations of voting preference shareholders.

This provision also aims to protect better investors who own preference shares.

The Law on Enterprise 2020 and the Law on Investment 2020 will take effect from January 1, 2021, so it is hoped that with the content of this article, investors will grasp the new points of the law from there prepare more suitable for business investment activities in general and M&A activities in Vietnam in particular.

 

If you have any questions or require any additional information, please contact Apolat Legal – An International Law Firm in Viet Nam.

This article is for general information only and is not a substitute for legal advice.