Investing in Vietnam is a perfect choice in the wave of shifting production activities by many multinational corporations to diversify their supply. Particularly, mergers and acquisitions (M&A) become the priority channel for foreign investors when building operations in Vietnam.
In brief of the M&A market
Foreign investors recorded nearly USD 5.45 billion in newly registered capital, adjusted and contributed capital for purchasing shares, and capital contributions from foreign investors in Vietnam from January 1 to March 20, according to the latest figures reported by the Foreign Investment Agency for 2023. The estimates indicate that foreign investment projects will surpass USD 4.3 billion in realized capital.
These figures demonstrate Vietnam’s increasing appeal as an investment destination and indicate its robust economic growth. Businesses anticipate that the rapid digitalization will drive an uptick in deal-making within sectors such as technology, media, and telecommunications. Divestments related to sustainability are likely to occur in the automotive and industrial manufacturing sectors.
Vietnam has implemented various measures since 2015 to strengthen its legal framework and improve the efficiency of market governance. As a result, the government has strengthened its management in taxation, investment, competition, and e-commerce. The closure of tax loopholes on indirect transfers, the establishment of clear frameworks for e-commerce, and the implementation of stronger rules on investment and competition have all contributed to a more level playing field. Supply chain disruption is still a concern for multinational corporations. Corporations are actively seeking new solutions to diversify supply and relocate production to other countries, with Vietnam being regarded as an ideal choice. Therefore, in the face of the risk of global economic recession, Vietnam continues to be a bright spot in terms of economic development potential and a potential destination for investors in the region.
Key legal issues
Business activities in Vietnam are classified based on the Vietnam Standard Industrial Classification. These classifications determine the licenses, permits, and regulations required for operating businesses, as well as guidelines for foreign investors interested in specific sectors. Different business activities impose restrictions on foreign investment, including limitations on foreign ownership and specific requirements that foreign investors must fulfill. Vietnam agrees upon and enforces these restrictions through international treaties and domestic laws.
Examples of foreign investment restrictions include limitations on foreign ownership in advertising businesses, restrictions on subleasing of purchased buildings by foreign-invested enterprises, minimum financial capacity for foreign-owned banks, and minimum investment capital for foreign investors in hospital projects. Due to these restrictions, M&A transactions for foreign investors require more effort as they face difficulties in acquiring target companies and assets compared to local investors. The purpose of this is to protect local businesses that may not be able to compete with global players and give them an opportunity to grow and develop.
Vietnamese regulatory bodies, such as the Departments of Planning and Investment, the Ministry of Planning and Investment, the National Competition Commission, and other authorities, act as gatekeepers by assessing the financial capacity of foreign investors and the market effects of M&A transactions. They also issue approvals for the movement of bank funds and the transfer of legal ownership.
Timeline for Vietnamese regulators learn and adapt of M&A in Vietnam:
Vietnamese regulators learn and adapt as a result of foreign investors dedicating significant time and resources to devising innovative strategies for investing in targets that do not have foreign investment restrictions.
Law on Investment 2020
Vietnam introduced the Law on Investment in 2020, which came into effect in 2021 and brought about significant changes. Under this law, the Vietnamese investment registration authority can challenge “sham” transactions and potentially shut down the operations of target companies. This poses a risk for deals that try to bypass foreign investment restrictions.
Alternatively, foreign investors can directly consult Vietnamese regulators and seek exceptions to foreign investment restrictions through pilot programs or special waivers. Larger and more influential investors with connections at higher levels of the government typically pursue this safer option. Some investors may find this option impractical.
One important change introduced in the 2020 Law on Investment is that foreign investors who acquire shares in Vietnamese companies with land use rights in specific areas require approval from the investment authority. This requirement presents practical issues, as the target company needs to declare its land use rights and provide supporting documents for evaluation. Additionally, the M&A approval process may face rejections or delays as the investment authority consults with the Ministry of National Defense and the Ministry of Public Security regarding security and national defense conditions.
Before 2015, Vietnam did not have specific laws regarding corporate income tax for indirect transfers, such as transactions involving offshore holding companies instead of direct targets in Vietnam. To address this, Vietnam implemented Decree 12/2015/ND-CP, establishing a legal framework for taxing capital transfers and investment projects involving Vietnamese companies.
Competition Law 2018
Vietnam enacted a new Competition Law in 2018, which became effective from July 2019. The law requires companies to notify economic concentration resulting from mergers, consolidations, acquisitions, joint ventures, and other prescribed activities if certain thresholds are reached. The thresholds include total asset value, total revenue, combined market share, and the total value of the transaction. Different thresholds apply to M&A transactions involving credit institutions and insurance and securities companies. The scope of this law covers both onshore and offshore transactions.
Since 2022, foreign investment resulting in control over one or more of the top-five e-commerce companies in Vietnam requires approval from the Ministry of Public Security. However, the specific list of these top companies has not been published by the Ministry of Industry and Trade.
If the owners of project companies, land, or project development rights undergo a thorough examination, M&A transactions involving projects can restrict the transfer of ownership if these assets hold significant value. Once a project investor receives tentative approval, it becomes difficult for another investor to join without undergoing the same scrutiny. These regulations result in increased scrutiny and numerous approvals and requirements for foreign investors. Only serious investors seeking attractive opportunities in Vietnam can meet these conditions, which in turn enhances the quality of investors and the sophistication of targets.
In terms of global rankings, Vietnam climbed 10 places to 67th in the Global Competitiveness Index of the World Economic Forum in 2019. It was also the only ASEAN country to improve its position in the Global Soft Power Index 2021, rising three places to 47th out of 60 nations.
Dispute resolution of M&A
Many investors in M&A transaction disputes prefer arbitration over Vietnamese court litigation due to its lower cost and quicker resolution, which surpasses Vietnamese court litigation. Vietnamese court litigation can become complicated and challenging, particularly when concerns of local bias arise. In many M&A transactions, the forum for dispute resolution commonly chosen is the Singapore International Arbitration Centre. However, Vietnamese courts hold exclusive jurisdiction over civil cases involving a foreign element, especially when they entail rights to real property in Vietnam, based on Vietnam’s Civil Code.
In M&A disputes, the participation of arbitration presents a number of advantages because there are a number of procedures and characteristics as follows:
First, the procedure of third party addition and consolidation of arbitration proceedings
Cross-border M&A transactions can involve not only the seller and the buyer but also other parties such as financial advisors, transaction insurance, etc., resulting in multiple contracts in the M&A transaction. Therefore, arbitration in this multi-party or multi-contract cross-border M&A can lead to concerns about affecting the quality of the arbitration process because they can give rise to parallel proceedings. In international arbitration, there are at least three commonly occurring consolidation situations: (i) two arbitration proceedings between parties to the same contract and arbitration agreement; (ii) two arbitration proceedings between the parties under different contracts and arbitration agreements; and (iii) two arbitration proceedings between different parties and based on different contracts and arbitration agreements
Second, the involvement of experts in dispute resolution
In many cross-border M&A transactions, the designated experts are accountants or people with high technical, environmental, financial or construction knowledge, etc., depending on the area of dispute. Problems are usually identified by the expert in relation to the valuation issues, such as determining the target company’s net equity as the basis for calculating the company’s future purchase price or earnings.
The expert resolution process usually includes following steps:
(i) The parties agree on experts to resolve the dispute;
(ii) The parties agree on a timetable for settling the case;
(iii) The parties provide the first submission to the expert to argue on the issues in dispute;
(iv) The parties provide arguments rebutting and opposing the views in the other’s arguments;
(v) Experts send inquiries or documents to the parties regarding the issues in dispute or the submissions of the parties;
(vi) The parties respond to experts;
(vii) The expert makes a written decision for the parties.
Depending on the nature and extent of the issues in dispute, the expert resolution process may include more or less steps, the above process may be modified in any way that the parties agree.
Third, the confidentiality of the referee is high
Confidentiality is important for M&A disputes. The seller will not want to disclose any price sensitive information or any confidential information related to the business and operations of the target company. After spending a great deal of time and money evaluating a deal, a buyer will want to keep his or her investment secret from other potential buyers. Therefore, choosing to resolve cross-border M&A disputes by arbitration with confidential procedures will help parties keep business secrets and disputes.
Fourth, resolve disputes faster and more friendly
The less time it takes to resolve disputes arising from an M&A transaction, the faster the transaction is completed, thus allowing investors to continue to take the next business step. Therefore, by choosing an arbitrator, businesses can take advantage of a faster dispute resolution process and experience a smoother M&A transaction instead of using litigation that is slow, time-consuming, and potentially damaging to goodwill and public image of the enterprise.
Trends and challenges
Similar to China, Vietnam has implemented stricter regulations on bonds and foreign loans, leading to liquidity issues for many Vietnamese companies. These difficulties have been further compounded by high interest rates, resulting in the need for businesses to sell off assets and properties, and in some cases, even entire businesses. This trend has contributed to a decline in M&A deal values, particularly in Southeast Asia. These transactions are often driven by the seller’s liquidity needs, such as debt sales in the real estate and banking sectors.
There has been a growing trend of businesses shifting from China to Vietnam. In certain situations, foreign investors view M&A as a quicker method of entering the Vietnamese market compared to the traditional process of establishing a new business. This approach helps them avoid the challenges associated with obtaining operational licenses and permits.
Moreover, Vietnam is placing a greater emphasis on environmental, social, and governance reporting and compliance. The Law on Investment contains provisions to reject project extensions that employ outdated and environmentally harmful technologies. Furthermore, a decree scheduled for release in 2022 will establish requirements to reduce greenhouse gas emissions and pilot a domestic carbon credit market. This will generate revenue opportunities and add value for companies that prioritize sustainability.
Conclusion
In conclusion, the M&A laws in Vietnam reflect the country’s efforts to attract foreign investment and promote economic growth. The trends in M&A activity have been on the rise in recent years, driven by sectors such as real estate, manufacturing, and services. However, there are challenges that need to be addressed, including the need for clearer regulations, transparency, and a more efficient approval process. As Vietnam continues to open up its economy and reforms its legal framework, it is crucial for policymakers to continually evaluate and update the M&A laws to ensure a conducive environment for both domestic and foreign investors.
HMLF is always available to offer assistance in understanding the procedures with authorities.
Harley Miller Law Firm “HMLF”
Head office: 14th floor, HM Town building, 412 Nguyen Thi Minh Khai, Ward 05, District 3, Ho Chi Minh City.
Phone number: +84 937215585
Website: hmlf.vn Email: miller@hmlf.vn