M&A in real estate (P1)

Section 1– Real estate M&A transactions using the capital contribution/share transactions 

Mergers and acquisitions (M&A) in general and M&A in the real estate sector are becoming more and more prevalent. With the active participation of many parties, including the buyers, sellers and participating units whose role is to support and promote the success of M&A deals. M&A in general and M&A in the real estate sector, in particular, are happening here and there. M&A is currently one of the preferable options that many businesses and investors who are interested in real estate see as a more efficient and faster method to enter the real estate market in Vietnam for the first time. It is also an option that can help businesses in the real estate sector seize opportunities to expand their business or to invest in other potential real estate projects whose investors are unable to continue implementing and developing, completing and operating such projects. M&A transactions in the real estate sector take place in many different types of real estate from residential real estate, commercial real estate, industrial real estate… 

A real estate M&A transaction might involve different parties from the beginning to the completion of a real estate M&A transaction. Although the buyer and seller play the main role in real estate M&A deals, we can also see the participation of other parties which shall be listed below: 

• Competent State agencies: The units responsible for licensing and issuing approvals during the implementation of M&A transactions as well as the ongoing implementation of real estate projects.  
• Parties involved in capital provision/financing for M&A transactions: Banks, other organizations, bond investors participating as capital/financial providers for the M&A deals. 
• Contractors: construction and operation contractors of projects.
• Other parties: Consumers, buyers/renters of products from real estate projects.

Therefore, depending on the specific characteristics of each type of real estate, each type of project, the intentions of the parties when participating in the transaction, the transaction option/structure to perform a real estate M&A transaction shall be varied. Accordingly, the following transaction options/structures might be used to perform an M&A transaction in the real estate sector: 

• The transaction option whose object is the capital contribution/share of the enterprise.
• The transaction option whose object is a real estate asset or a real estate project. 
• The transaction option whose object is debts (usually applied in debt settlement transactions of real estate enterprises with a bank).
• The transaction option conducted through the implementation of financing transactions: convertible loans/convertible bonds of real estate enterprises. 

Real estate M&A transactions using the option of transacting the enterprise’s capital contribution/share

This method shall be understood as the parties to the transaction would perform transactions to transfer/handover the ownership of capital/shares of the enterprise which is owning the target real estate from the transferor to the transferee in a way that basically has no direct impact on the real estate or real estate project. 

Depending on each specific case, the transaction under this option shall be done with the object being the contributed capital/shares of existing members/shareholders or the capital/shares additionally contributed/issued.  

For such transaction option, there shall be a number of outstanding features compared to other real estate M&A transaction plans, specifically as follows: 

• Implementation procedures: the procedures are usually simpler than those of the option which directly merges and acquires the real estate assets. Because the capital contribution/share transfer transactions shall be done mainly among the members, shareholders of the buyer and the seller in the transaction and do not require too much permission/approval/certificate from competent state agencies.  

• Tax liability: in the transaction of transferring capital contribution/shares, the tax liability shall be related to the transfer of contributed capital/shares while the project/asset transfer transactions shall be subject to tax on transfer of assets. 

• Potential risks: this transaction option may have potential risks with regards to the financial and legal obligations of the target company which may be hidden that the transferee sometimes perceives during the implementation and completion of the transaction. 

• Objects of transaction: contributed capital/shares of the target company. 

• Transfer of ownership: transfer the ownership of contributed capital/shares instead of transferring the ownership of real estate assets. 

• Transfer requirements: for this type of transaction, the requirements for transfer shall mainly focus on compliance with regulations on the conditions for capital contribution/share transaction, capital increase, additional issuance of shares, offering of shares in accordance with the Law on Enterprises and the Law on Investment. As for the asset transfer transactions, depending on the type of assets that the parties to the transaction may have to meet, there shall be different types of specific conditions.  

• Responsibility and rights for enterprises: with this transaction option, the parties shall have to pay much attention to their scope of responsibility and authority for the target enterprises. 

Therefore, in M&A transactions related to the contributed capital/shares, the legal issues are related to the contract of transfer of contributed capital/shares, rights and obligations of members and shareholders, membership/shareholders agreements, rights and obligations of the parties when participating as members and contributing capital/shareholders of the enterprise shall also be considered along with the legality of the real estate assets or real estate projects. 

Normally, the option of transacting contributed capital/share shall have the following advantages compared to the transaction option whose object are assets: 

• Transactions are usually fast, procedures are simple;
• Can transact multiple target assets at once instead of transacting each asset one by one;
• Basically does not affect the target company’s operations;
• Avoid restrictions in regulations on ownership of assets and licenses related to real estate assets/projects.

Special notes for this transaction option: 

• In M&A transactions through the method of owning capital contribution/shares of the target company, in which the transaction involves the participation of a foreign investor or falls under the circumstances applicable similarly as to foreign investors in accordance with law regulations. According to the Law on Investment, the parties involved in such transaction shall need to consider the following issues: 
  • Ownership rate and market entry conditions of foreign investors in the target enterprise for each specific business line. Accordingly, to decide whether to maintain or remove one or several business lines they might need to either take some steps or conduct the restructuring in order to satisfy the requirements of the parties involved in the transaction. 
  • It is necessary to carry out an additional procedure of “Registration for capital contribution, purchase of shares, purchase of contributed capital of economic organizations” before carrying out the transfer transaction or contributing more capital to the enterprise in Vietnam. However, not all cases involving foreign investors shall be required to carry out such procedure, but such procedure shall only be applicable to cases specified in Clause 2, Article 26 of the Law on Investment. 

• Transactions related to the shares of public enterprises shall need to comply with the provisions of the law on securities trading. Accordingly, a number of important issues shall need to be noted for transactions in which one and/or the parties to the transaction are public companies, specifically as follows: 
• • The percentage of foreign investors’ ownership in public companies; 
  • Regulations on offer to buy/sell shares; 
  • Requirements on buying/selling prices within a fluctuation range or compliance with regulations of the transactions of shares/securities of public companies; 
  • Regulations on public company governance; 
  • The existence and characteristics of Treasury shares; 
  • Procedures for transferring ownership and paying for share purchase and sale transactions. 

• Although the M&A transaction is carried out using the method of capital contribution/share transaction of the target enterprise, the object of the M&A transactions in the real estate sector shall be the real estate assets, real estate projects. Therefore, one difference between that and M&A transactions in other fields is that in addition to assessing the legal risks of the target company, the parties to the transaction also need to pay attention to the legal issues of real estate assets, real estate projects which are being owned/entitled by the target company. Important legal issues that need to consider shall include: 

• • Planning issues, such as planning criteria approved in detailed planning 1/2000 and 1/500; 
  • The project’s implementation progress compared to investment permissions/approvals; 
  • Attached are the obligations of the projects (construction of social housing, project infrastructure, etc.);
  • Status of compensation for ground clearance;
  • Origin of land.

• The regulations on control and restriction of economic concentration are prescribed in the Law on Competition is also a matter of concern when conducting transactions using the option of transacting the contributed capital/share. Accordingly, the determination of whether an M&A transaction is in the case of a prohibited economic concentration or whether it is obliged to conduct mandatory procedures before conducting the M&A transaction must comply with law provisions on competition restriction. If the M&A transactions fall into the cases specified in Clause 1, Article 29 of the Law on Competition and the cases specified in the economic concentration threshold in accordance with Article 33 of the Law on Competition and Article 13 of Decree No. 35/2020/ND-CP detailing a number of articles of the Law on Competition, a number of procedures must be carried out in order to be allowed to conduct the economic concentration. And this provision of the Law on Competition shall also apply to economic concentration transactions performed outside the territory of Vietnam. To be specific: 

Case 1: Enterprises participating in economic concentration are not credit institutions, insurance enterprises or securities companies 

• The total asset value on the Vietnamese market of an enterprise or group of affiliated enterprises of which such enterprise is a member reaches VND 3,000 billion or more in the fiscal year immediately preceding the year in which the economic concentration is planned; 

• The total sales or purchases on the Vietnamese market of an enterprise or group of affiliated enterprises of which such enterprise is a member reaches VND 3,000 billion or more in the fiscal year immediately preceding the year planned to implement economic concentration; 

• The transaction value of economic concentration is from 1,000 billion VND or more; 

• The combined market share of enterprises intending to participate in the economic concentration is 20% or more in the relevant market in the fiscal year immediately preceding the year planned to implement economic concentration. 

Case 2: Enterprises participating in economic concentration are credit institutions, insurance enterprises or securities companies 

• The total asset value on the Vietnamese market of an enterprise or group of affiliated insurance enterprises of which such enterprise is a member, of the company or group of affiliated securities companies of which such company is a member reaches VND 15,000 billion or more in the fiscal year immediately preceding the year planned to implement economic concentration; the total assets on the Vietnamese market of a credit institution or group of affiliated credit institutions of which such credit institution is a member reaches 20% or more of the total assets of the system of credit institutions in the market Vietnam in the fiscal year immediately preceding the year planned to implement economic concentration;

• The total sales or purchases on the Vietnamese market of an enterprise or a group of affiliated insurers of which such enterprise is a member reaches VND 10,000 billion or more in the fiscal year immediately preceding the year planned to implement economic concentration; the total sales or purchases on the Vietnamese market of a company or group of affiliated securities companies of which that company is a member reaches VND 3,000 billion or more in the fiscal year immediately preceding the year planned to implement economic concentration; the total turnovers on the Vietnamese market of a credit institution or group of affiliated credit institutions of which such credit institution is a member reaches 20% or more of the total turnover of the system of credit institutions in the fiscal year immediately preceding the year planned to implement economic concentration; 

• Transaction value of economic concentration of insurance enterprises, securities companies is from 3,000 billion VND or more; the transaction value of an economic concentration of a credit institution reaches 20% or more of the total charter capital of the system of credit institutions in the fiscal year immediately preceding the year planned to implement economic concentration; 

• The combined market share of enterprises planning to participate in the economic concentration reaches 20% or more in the relevant market in the fiscal year immediately preceding the year planned to implement economic concentration; 

• The capital contribution/share transfer contract shall be the basis and focus of a transaction under this option. In terms of the form, this contract can be drafted in many different ways and options depending on each transaction and the requirements of the parties to the transaction. Accordingly, there shall not be a mandatory standard for this type of contract, but in a common way, if there is the participation of foreign investors, these transactions shall have a drafted contract with the following main contents and characteristics:  

• • Contract object (information about transferred capital contribution/shares);
  • Transfer price and payment method; 
  • Prerequisites (as required by law or as agreed upon by the parties for each specific transaction); 
  • Commitments pending completion of the transaction; 
  • Representations and warranties; 
  • Commitment after completing the transaction; 
  • Contract validity and cases of contract termination; 
  • Compensation for damage; 
  • Force majeure events; 
  • Other terms (Confidentiality, stipulating laws; contract amendment, contract language; contract validity…).

• After assessing the elements of the target real estate assets, the request of the parties involved in the transaction to choose the transaction option in the form of capital contribution/share transaction, depending on a case-by-case basis, a real estate M&A transaction may have to perform a number of intermediary steps which is commonly known as transaction structuring in order to bring the target assets/target enterprises back to the right expectations and intentions of the parties and sometimes also make it feasible to perform the transaction. Accordingly, whether the transaction structure will be simple or complex shall also depend on the characteristics of each transaction, some options of transaction structuring are as follows:  

• • Divide/separate a business that owns real estate to form a target enterprise; 
  • Conduct the consolidation/merger of enterprises to form a target enterprise; 
  • Change the structure/value/shareholder/capital contribution/convert the type of enterprise to form a target enterprise suitable for the transaction; 
  • Conduct the dissolution/termination of operation of some member enterprises/dependent units (branches/representative offices/business locations) to meet the requirements of the transaction; 

• … 

The capital contribution/shares transaction option shall be the preferred one but it is not the only option. Based on the above characteristics and legal issues, the parties to the transaction shall consider choosing this or other transaction options presented in the below part of this article.  

Disclaimer: This article is for general information only and is not a substitute for legal advice. Apolat Legal is a Vietnamese law firm with experience and capacity to advise on matters related to Real estate. Please click here to learn more about our services and contact our lawyers in Vietnam for advice via email info@apolatlegal.com.

Share: