As Vietnam is attracting ASEAN FDI flow, mergers and acquisitions are more and more popular. Thanks to mergers and acquisitions, investors can enjoy access to customers, locations, and distribution that benefit a lot of businesses in Vietnam nowadays. The Vietnamese government has currently streamlined the M&As process to encourage investment in new sectors and create a favorable investment climate. The article guides you to regulations of mergers and acquisitions and the procedure of doing mergers in Vietnam.
The regulation about mergers and acquisitions in Vietnam
Generally, the Vietnamese government does not issue specific legislation about M&As. Mergers and acquisitions are governed by two laws called the Law on Enterprises and the Law on Investment. Besides, the government also uses the Law on Competition and the Law on Securities but to a lesser extent.
In addition, the law on mergers and acquisitions is clarified in the Law on Enterprise No. 68-2014-QH13 and Law on Investment No. 67-2014-QH13:
- Article 18 explains the rights of companies and individuals to establish an enterprise, purchase shares, and supply capital. There are some restrictions on who can participate, such as state officials, minors, and those prosecuted for criminal acts.
- Article 195 dictates the process and limitations of a merger. In the case of a possible conflict with the Law on Competition, a legal representative of the company must settle the issue with the administrative agency for competition. Once the merge has been completed, the newly formed company must submit notice to the national enterprise registration database.
- Article 25 establishes foreign investor’s rights to contribute to capital and buy capital or shares.
- Article 26 spells out the procedure to contribute to capital and buy capital or shares. The application for registration must be submitted to the Service of Planning and Investment for approval.
Law on Securities
Regarding the Law on Securities, this law governs the acquisition of shares in a public company including public tender offers. Moreover, authorities responsible for enforcing the law are the State Securities Commission (SSC), Vietnam Securities Depository, and the MPI.
Law on Competition
The Law on Competition adopted by the National Assembly of Vietnam on 12 June 2018 took effect on 1 July 2019 (“LoC”). However, it took nearly 9 months for Decree No.35/2020/ND-CP, to be issued by the Government of Vietnam, on 24 March 2020 (“Decree 35”), guiding the implementation of the LoC. Decree 35 will take its full effect on 15 May 2020.
Decree 35 provides conditions in which an enterprise can control one enterprise or another one business line:
- The acquiring enterprise gains ownership of more than 50% of the charter capital of, or above 50% of voting shares of the acquired enterprise;
- The acquiring enterprise gains ownership of or the right to use more than 50% of the assets of the acquired enterprise during all or one business line of the acquired enterprise; and
- The acquiring enterprise has one of the following rights, including (1) directly or indirectly decide the appointment, removal or dismissal of a majority or all of the members of the board of directors, chairman of the members’ council, director or general director of the acquired enterprise; (2) decide the amendment of or addition to the charter of the acquired enterprise; and (3) decide important issues during business activities of the acquired enterprise comprising a selection of the form of organization of business, selection of business lines and the geographical area and forms of business; selection to adjust the scale and the business lines; selection of the form and method of raising, allocating and utilizing business capital of such enterprise.
Prohibited M&As Transaction
The threshold of 50% relevant market share provided by the former law is no longer in existence. In lieu of that, significant competition-restraining impact or ability to cause such impact is now used as the ground to decide whether an M&A transaction is approved or not. In brief, an M&As transaction shall be prohibited if it creates significant competition-restraining impact or ability to cause such an impact in Vietnamese market.
Anti-competitive agreement
The new law prohibits certain types of anti-competitive agreements if the firms are in the same market or if the agreements can impact market competitiveness. The agreement prohibits in case firms are in the same market including directly or indirectly fixing prices, sharing customers or markets or supply sources, and controlling the number of goods produced, sold, or bought as well as services provided.
The agreement also prohibits in case companies have a negative impact on market competitiveness such as restraining investments, technical, and technological capabilities; and forcing other companies to sign contracts related to the buying or selling of goods and services or bind them into commitments not related to the content of the contract.
Furthermore, a leniency program has also been introduced in the new law. Now, companies that are part of an anti-competitive agreement may be entitled to leniency if they voluntarily reach out to the government authorities before an investigation is formally opened.
This program will only be available to the first three applicants, with the first applicant being eligible for a penalty exemption of 100%, while the second and third will be eligible for an exemption of 60 percent and 40 percent respectively.
Besides, Decree 35 clarifies that an anti-competitive agreement would not be considered to cause or be likely to cause such “significant anti-competitive effect” in the following cases:
- For enterprises in the same relevant market, the combined market share of the enterprises intending to participate in the agreement is less than 5%.
- For enterprises intending to participate in the agreement from different stages in the same chain of production, distribution, and supply of specific goods/services, the market share of each participating enterprise is less than 15%.
Additionally, you can read further about M&As notification, preliminary appraisal, official appraisal, penalty to understand clearly about Vietnamese regulation of M&As process.
Steps in the mergers and acquisitions in Vietnam
Mergers in Vietnam
Actually, three types of mergers are a merger of two foreign-owned companies, the merger of two local companies, and a merger of a locally-owned company with a foreign-owned one.
When the merger happens, a merger contract is significant, which determines ownership after the merger. Once the merger contract is signed successfully, procedures for the merger take approximately 30 days.
1. Identify the feasibility and legality of the merger and consider the structure of the newly merged company.
2. Sign a non-disclosure agreement to gain further information about the company’s operations, finances, and so on. With these details, the investor must administer due diligence and identify whether the company is sound.
3. The two parties now have to negotiate terms and conditions of the merger, create the contract and a draft of the charter. The contract must detail the parties involved and the specifics and timeline of the merger. Depending on the nature of the plan, it is advisable to obtain preliminary permission from the appropriate authorities. The company is required to notify all employees of the merger and provide creditors with a copy of the contract within 15 days.
4. In certain conditions that trigger the M&A notification , a notification must be sent to the National Competition Committee (NCC) prior to a transaction. After submitting a notification to the NCC, within 30 days the NCC will issue the results of the preliminary appraisal notifying that the M&A transaction is permitted or is subject to an official appraisal. The preliminary appraisal will typically be done in 30 days, but an official appraisal may take an additional 90 days and be extended by another 60 days. As per Decree 35, if the NCC does not provide a response within 30 days, the M&A transaction will be allowed.
5. Submit the application to the licensing authority to receive an investment certificate or certificate of enterprise registration. The application will require a merger contract and a resolution and minutes of the merged company meeting and the merging companies’ meetings where the contract was approved.
6. Based on the type of merger, certain post-merger actions may be required, such as opening an escrow account. The government will update the status of the company in the national enterprise registration database.
7. Submit an application for registration to the Ministry of Planning and Investment (MPI), which must contain details of the investment and either the passport or ID card of an individual or certificate of establishment of an organization.
8. Within 15 days of receipt, the investor will receive either approval or denial of the contribution/purchase.
READ FURTHER: How To Set Up A Manufacturing Business In Vietnam.
In conclusion, the article covers two main parts. The first part explains the Vietnamese regulation about mergers and acquisitions. The process of doing mergers in Vietnam is introduced in the next part. The merger procedure in Vietnam goes through eight steps and it takes around one month for your companies to merge together. The second part of M&A in Vietnam will focus on steps of doing acquisition and some case studies of doing M&A in Vietnam. Let’s read the second part!
