Vietnam seeks to attract more foreign investment with two new laws
December 2015 | EXPERT BRIEFING | MERGERS & ACQUISITIONS
This article summarises the most important changes brought about by the new Law on Investment and the new Law on Enterprise which became effective on 1 July 2015 and their immediate impact. The Vietnamese authorities have confirmed the principle of free enterprise in Vietnamese law, have done away with most foreign ownership restrictions in Vietnamese companies, reduced red tape in the foreign investment approval process and brought corporate governance rules a step closer to international standards.
Nine years ago, when the then newly-appointed and still-current prime minister Nguyen Tan Dung took office, two fundamental laws for the country’s economic activity – the 2005 Law on Investment and Law on Enterprise – also came into effect. The two laws contributed to the improvement of the business climate in Vietnam which in turn resulted in a long period of high economic growth. Vietnam became an Asian tiger and an attractive investment destination. Now, at the end of his second term in office, the country is facing new challenges presented by the ASEAN Economic Community (AEC) and a series of new free trade agreements, including the Trans-Pacific Partnership (TPP), and the upcoming trade agreement with the European Union. The government is searching for new measures to give the economy fresh momentum for more long-term sustainable development.
Against this background, significant legislative and regulatory efforts were made to eliminate remaining obstacles to foreign investment, a key factor behind the country’s growth. These included limitations in respect of the sectors in which foreign investors could do business in Vietnam, the ownership limits in Vietnamese companies, lengthy and complicated investment registration/approval procedures and inadequate corporate governance rules. These efforts led to the passing by the National Assembly of Vietnam on 26 November 2014 of the new Law on Enterprises and the new Law on Investment, as well as the adoption by the government of Decree 60 on foreign ownership in public companies.
Freedom of enterprise affirmed
Until very recently, Vietnamese law did not recognise the principle of freedom of enterprise as it is known in many developed jurisdictions. Individuals and companies were authorised to legally engage only in businesses specifically listed in their enterprise registration certificates (ERC) or, in the case of foreign invested companies, investment certificates (IC).
This started to change with the adoption of the new Constitution in 2013 which set, as a fundamental principle of Vietnamese law, the right to freely conduct any business activity not prohibited or restricted by the law. This principle was carried into the two new laws mentioned above.
On the one hand, the number of prohibited or restricted sectors was significantly reduced. In the past, the implementation of investment and M&A transactions in Vietnam crucially required an in-depth investigation on market access rules before the parties could discuss other aspects of the deal. This was to ensure that the application for issuance of an Investment Certificate registering the equity transfer would not be rejected by the licensing authority on the ground of prohibitions or restrictions on foreign investment. In some cases, year-long efforts by sellers and buyers were frustrated at the last moment.
Starting from 1 July 2015, out of the 51 previously prohibited businesses, the new Law on Investment retained only six. The number of conditional businesses was also reduced from the previous 386 to 267 listed in annex four to the law.
On the other hand, the requirement to list all the permitted lines of business activities in the incorporation documents was abolished. Companies will no longer run the risk of breaching the law for conducting business activities which are not expressly registered with the authorities, as was frequently the case in the past. A company’s chosen business lines are still required to be notified to the enterprise registration authorities and are published on a centralised online database, but this is no longer a registration/approval process (unless they fall into conditional business activities).
In the Vietnamese context, this is a huge change. Indeed, it was a very common practice for a company incorporated in Vietnam to register a long list of business lines it might potentially engage in, even if it did not actually need all of them. Apart from the enormous amount of paperwork this generated, it also created difficulties for cross-border M&A transactions because whenever any of the unused business lines was a conditional business for foreign investors, the acquisition automatically had to go through more complex approval procedures and could also result in the application of a lower foreign ownership limit.
Substantial reduction of the remaining foreign ownership limits
Although wholly foreign-owned private businesses were already permitted in Vietnam except for certain restricted sectors, the total foreign ownership in a Vietnamese public company (i.e., a joint-stock company which: (i) has made a public offering of shares, or (ii) has their shares listed on a stock exchange, or (iii) has shares owned by at least 100 investors (excluding professional investors) and have paid-up charter capital of approximately $393,000 or more) remained limited to 49 percent of all issued shares.
Continuing in the direction of greater openness for foreign investment initiated by the adoption of the two new laws, the government issued Decree 60 to broadly open the doors to foreign investment in Vietnamese securities. With effect from 1 September 2015 the new regulation allows foreign investors to acquire up to 100 percent of shares in public companies unless these companies fall into one of the following categories where foreign ownership restrictions will be maintained: (i) limits provided for by international treaties (e.g., Vietnam’s WTO commitments); (ii) limits under sector-specific laws (e.g., the Law on Credit Institutions regulating banking activities); (iii) limits applicable to conditional businesses as specified in the laws applicable to these conditional businesses or in the absence of specific limits – 49 percent; (iv) limits applicable to state-owned enterprises undergoing equitisation; and (v) voluntary limits imposed by the shareholders of a public company as specified in the company’s charter.
In the event more than one of the above ownership limits apply, the lowest limit applies. It is also important to note that all the remaining restrictions apply only to shares with voting rights. There are no restrictions on foreign holdings of shares without voting rights.
Decree 60 also allows foreign investors to make unlimited investment in government bonds, bonds guaranteed by the government, bonds of the provincial authority or enterprises. Foreign investors may also invest in securities investment fund certificates, shares of securities investment companies, non-voting shares of public listed companies, derivative securities, and depository receipts without any limit.
This new regulation was welcomed by many foreign investors as a ‘game changer’ expected to boost foreign capital inflows into the country’s stock market and improve its overall liquidity. Immediately, this will benefit at least 31 out of 303 listed companies where foreign ownership had already reached the previous 49 percent hard cap and another 10 companies that are close to the previous cap of 49 percent. These companies account for roughly 30 percent of market capitalisation. The new decree will also likely accelerate the equitisation process of 340 SOEs during the period from 2015-2017, especially those operating in high-growth sectors such as food and beverages, property, and infrastructure.
Procedural improvements intended to facilitate foreign investment projects and acquisitions
For over 17 years prior to the entry into effect of the 2005 Law on Investment, foreign investors were required to obtain an investment licence (IL) first, before registering (incorporating) a local entity to implement their investment project. This dual licensing process resulted in significant delays in the implementation of foreign investment projects and led the government to reform the foreign direct investment administration process by adopting a ‘one-stop-shop’ approach. The investment licence and the business registration certificate were then merged into one document: the investment certificate (IC).
The combination of the two approval processes into one did not prove to be flawless, however. Indeed, foreign investors setting up enterprises in Vietnam for the first time (regardless of the level of foreign ownership) were required to obtain an investment certificate via a licensing process involving either evaluation or registration of an investment project. Despite a 45 day maximum legally prescribed time limit, the lC issuance could take from four to six months or even longer.
In the M&A context, when purchasing an existing 100 percent Vietnamese company the foreign acquirer had to, in practice, apply for the issuance of an IC regardless of the foreign equity percentage. The necessity to obtain an IC significantly prolonged the acquisition process. In many cases, foreign investors opted not to undergo the torturous IC process at all, leaving the legal status of their investments in doubt.
The combination of the IL and the BRC into one IC also caused numerous problems for foreign invested businesses wishing to expand their operations or engage in new activities as this required them to adjust the IC which was as cumbersome a procedure as the new issuance of an IC.
All these shortcomings seemed to prompt the government to return, despite the scepticism of the international business community in Vietnam (who advocated for the abolition of the IC altogether), to the dual licensing process that existed before the enactment of the 2005 Law on Investment. Under the new Law on Investment, the IC is again split in two separate documents – an ‘investment registration certificate’ (IRC) and an ‘enterprise registration certificate’ (ERC). However, the IRC is now only required if 51 percent or more of a company is owned by foreign investors. With a lower level of ownership, the company is treated as a domestic company and thus is not subject to foreign investment registration procedures. The IRC is issued within a maximum 15 days unless the investment project requires appraisal where the timeline remains unchanged; previously this was 45 days.
The new Law on Investment also expressly provides that IRCs will not be required at all for acquisitions of target companies and the relevant business registration office has the obligation to update the target’s ERC to reflect the changes in a the company’s ownership within three working days.
The second step – obtaining an ERC – should be now more straightforward, as it only contains basic business information and also applies to domestic investors. According to governmental Decree 78, which came into effect on 1 November 2015, enterprises will also be able to register online via the national information gate on enterprise registration. The number of required documents in the application dossier is also reduced significantly. Importantly, Decree 78 clearly states that the enterprise registration authority is not allowed to request additional documents or other documents not required by the law in the enterprise registration dossier. The timeline to get an ERC after submission of a valid dossier is shortened to three working days instead of five working days as previously.
Although it still remains to be seen in practice whether the authorities will stick to the new shorter timeframes, it seems that the time needed to launch a new foreign investment project or to complete an acquisition in Vietnam will be reduced substantially.
Improved corporate governance rules
Access to corporate information. The lack of transparency, and insufficient disclosure of information from targets, was often cited as a key obstacle in conducting M&A transactions in Vietnam. In the absence of a reliable national business registration database, buyers did not have much to rely on, save for thorough due diligence. The seller’s disclosure had to be verified using multiple sources of information with varying degrees of reliability. As a result, the transaction documentation was filled with extensive representations and warranties by the sellers.
The new Law on Enterprise has attempted to establish a more transparent environment where corporate information will be more easily available to potential investors. Although the new ERC will have only limited basic information about the company (the company’s name, registration code, head office address, legal representatives and the charter capital), all companies are now required to make their general corporate information (such as the contents of their ERC, their business lines, and the list of founding and foreign shareholders) publicly available in a unified online information system (the National Enterprise Registration Information Portal). This new online database will also allow users to check the most updated information on the company’s business lines, tax payments and bankruptcy status (the 2005 Investment Law already provided that a national business registration database must be developed and managed under the supervision of the Ministry of Planning and Investment. Some local People’s Committees (Hanoi and Ho Chi Minh City) have set up websites providing information on enterprises established within their respective jurisdictions but no national database was created).
Any changes in the content of the company’s ERC, as well as changes in personal information of its key managers, including members of the board of management and the supervisory committee, will need to be notified to the registration authority within five days of the change.
Joint stock companies are required to make public disclosure on the company’s website (if available) of their charter, management team profiles and CVs, annual reports and board of management reports.
Reduced majority rules for corporate decision making. The previous rules on corporate decision making were not favourable to foreign investors who were obliged to acquire a very substantial amount of shares of a company if they wanted to secure control. Indeed, the 2005 Law on Enterprise required that ordinary and special resolutions be passed by votes of a minimum of 65 percent and 75 percent respectively.
The new Law on Enterprises has aligned the board decision making rules to international standards. The required majority for carrying ordinary and special resolutions was reduced to 51 percent and 65 percent respectively. Although, the new rule does not apply to limited liability companies where higher thresholds (65 percent and 75 percent) remain, it is still a welcome development for foreign investors for whom Vietnamese companies have become more attractive from a cost of investment perspective.
This new regulatory landscape is clearly the most favourable for foreign investment in Vietnam since the beginning of the economic reforms process. It also appears that despite all the remaining challenges and issues, the two new laws are considered the most liberal and investor-friendly in the region. As a result, M&A activity in Vietnam increased significantly in 2015. According to the Institute of Mergers, Acquisitions and Alliances (IMAA), the Vietnamese M&A market is predicted to be worth $3.8bn with around 400 deals announced in 2015. This represents a big jump from 2014 where total deals concluded were valued at $2.8bn. Not only has the total amount increased, the average value per deal has also increased from around $5m to $8m in 2011 to $11m in 2014, with a number of deals now in the region of $20m to $100m.
However, there are still obstacles and restrictions that must be removed in order to take Vietnam to the next level. The government must still adopt numerous guiding regulations for the two new laws and investors are still experiencing delays in the processing of their applications.
M&A transactions are also often stalled while competition authorities deliberate the existence of anti-competition issues. Furthermore, the basis for determining the market share in relation to an economic concentration is not clearly provided by the Law on Competition and its implementing regulations.
The two new laws are the product of a huge push by prime minister Nguyen Tan Dung and his cabinet. However, more will be required to make Vietnam potentially one of the most exciting markets in Asia.
Giles Cooper is a branch director and Bach Duong Pham is special counsel at Duane Morris. Mr Cooper can be contacted on +84 4 3946 2210 or by email: firstname.lastname@example.org. Mr Pham can be contacted on +84 8 3824 0235 or by email: email@example.com.
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Giles Cooper and Bach Duong Pham