Some notable issues for enterprises when becoming an enterprise with foreign investment capital

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Some notable issues for enterprises when becoming an enterprise with foreign investment capital

Post-COVID 19 and the context of increasingly stressful trade warfare between the US and China, as well as the signing of the EVFTA agreement between Vietnam and the European Union “EU,” Vietnam promises to be “The Promised Land” absorbing foreign investment. According to the Foreign Investment Agency report, up to May 20th, 2020, the total newly registered capital, adjusted and contributing capital, buying shares of foreign investors reached $13.89 billion – an optimistic statistic in the problematic situation of the current world economy. To promptly access the Vietnamese market, foreign investors usually carry out M&A transactions over Vietnamese enterprises (“Target Company“). By this way, foreign investors may own the total or a part of share/equity capital to gain the right to manage all operations of the Target Company. Thereby, the Target Company becomes the foreign-invested enterprise (FIE). Hence, this article provides material legal issues that foreign investors need to consider when making M&A transactions.

First, referring to the business lines of the Target Company. When the Target Company remains by Vietnamese organizations and/or individuals as owners, the business lines are not restricted except for those that are conditional or prohibited. However, in the event a foreign investor performs M&A transaction to possess of a share/equity capital in the Target Company, it should be aware of the business lines of the Target Company which have not been committed by the Government of Vietnam to open market for foreign investors or there is a commitment in international treaties to which Vietnam is a membership but limiting the charter capital ownership ratio of foreign investors.

  • If the Target Company has any business line that has not yet been committed to market opening in international treaties to which Vietnam is a member when foreign investors and the Target Company register the procedure in contributing capital, purchasing shares/equity capital; the Department of Planning and Investment where the Target Company is located will consult with specialized management ministries leading to the prolonged execution time of administrative procedures and foreign investors will not be able to make transactions if specialized management departments refuse. For example, for the current Vietnam container repair service has not committed in market opening for foreign investors; therefore, it is necessary to get the opinion of the specialized management ministries such as Ministry of Planning and Investment, Ministry of Transport, Ministry of Industry and Trade.
  • In case the Target Company has any business line that Vietnam has committed to open the market for foreign investors; still, there is a restriction on the capital ownership rate, the proportion of foreign investor’s contribution in the Target Company is not allowed to exceed the maximum committed. For example, for goods transport of inland waterway transport services, the Schedule of Specific Commitments in Services of Vietnam in WTO has demonstrated that the capital ownership ratio of foreign investors must not exceed 49%. Hence, foreign investors may only hold a maximum of 49% of the equity in the Target Company in this case.

Second, if the M&A transaction leads to the event that foreign investors own 51% or more the Target Company’s charter capital, companies that the Target Company holding charter capital will compulsory to meet requirements and procedures applied for foreign investors in case (i) the Target Company owns 51% of the charter capital or more; or (ii) there are foreign investors and the Target Company hold 51% or more of charter capital. For example, for the retail distribution of goods, companies by the Target Company holding the charter capital under the mentioned cases shall have to carry out procedures in obtaining the business registration certificate and setting up retail outlet which is similar to conditions in which foreign-invested enterprises have to fulfill.

If the proportion of ownership of foreign investors’ equity/shares in the Target Company is less than 51%, the companies that the Target Company holding charter capital are treated with investment conditions and procedures prescribed for domestic investors.

The third, in regard to the Target Company’s land use rights after completing the M&A transaction. According to Law on Land, in case the Target Company is converted into an FIE following the acquisition, the Target Company must register for the amendment of land or land- attached assets due to land-user change. Besides, it should be noted that land use term must not exceed 50 years for FIE. In fact, the Target Company faces in a lot of troubles in implementing procedures for amendment registration of land or land- attached assets due to incomplete framework for this issue and different requirements of various local authorities.

The fourth, in compliance with foreign exchange legislation, when making payments in the M&A transaction. We have encountered cases where non-resident foreign investors make payments in the M&A transaction to the Target Company’s current bank account. As a result, the Target Company having been sanctioned administratively due to violations of the law, and foreign investors could not transfer profits abroad due to unproven cash flows in legally transferable transactions. In order to avoid the stated risks, payments in M&A deals by non-resident foreign investors must be made via (i) the Target Company’s direct investment capital account, if the Target Company has a foreign capital ratio of 51% or more; or (ii) indirect investment capital account of foreign investors is opened at a licensed commercial bank in Vietnam.

Finally, regards to the Target Company’s financial statements after becoming a FIE. When the Target Company is not foreign-invested organization, an annual financial report is not required to be audited. However, for foreign-invested enterprises, following Independent Audit Law, FIE is one of the subjects that annual financial statements must be audited.

The above are some common issues that foreign investors usually face in the M&A transactions over Vietnamese companies. We hope that through this article, investors can have a glance in investing in Vietnam to avoid legal risks during the process of business investment.

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.