Mergers and acquisitions in Vietnam
With fostering global and regional integration, it is widely known that Mergers and Acquisitions (M&A) are increasingly common and have developed to a certain degree in Vietnam. According to the survey of Corporation Mergers and Acquisition Center (CMAC) and MAF research, the total value of M&A deals in Vietnam in the first seven months of 2019 is approximately 5.43 billion USD. Nowadays, M&A becomes an effective capital mobilization channel in total social investment capital. Therefore, the article herein shall provide information on M&A activity in Vietnam.
THE OVERVIEW OF M&A
The terms “Merger” and “Acquisition” are often used interchangeably. It is important to understand the difference between these two terms. In particular:
Far from other forms of direct investment, such as establishing an enterprise, business cooperation contract, M&A may help foreign investors to access the market of other countries and enhance the scope of business. Besides, the other values of the target company involving trademark, market share, human resource, experience, facilities are significant business advantages that can lead to high investment efficiency. In fact, due to the complication of the merger, investors often choose to purchase partly or fully the asset, capital contribution, or share or a business line of a domestic company to have more favorable and flexible conditions for restructuring the corporation.
Applicable regulations on M&A activity
Currently, Vietnamese regulations on M&A are scattered in many different legal documents involving Company Law, Competition Law, Law on investment, Law on Securities, and other guideline documents. Particularly:
In the pre-stage of purchasing capital contribution, share, if being one of the following cases: (i) the target company engages in business lines subject to conditions applied to foreign investors; (ii) after purchasing, the foreign investor owns 51% of charter capital of the target company or more, the foreign investor shall apply for registering the purchase of shares, or capital contributions according to Law on investment. If the target company is a public company, the holding of the foreign investor is conformable with regulations of Law on securities. Also, M&A activity is regulated by Competition Law relating to prohibiting the economic concentration that causes or probably causes substantial anti-competitive effects on the Vietnamese market.
In the stage of closing the deal, there are two key considerations. First, if the target company is a foreign direct investment company operating under an Investment Registration Certificate (IRC), the target company may need to apply for amendments to the IRC to record the respective changes in investors or capital according to Law on Investment, if applicable. Second, after completing the transaction, the target company has to apply for amendments to the Enterprise Registration Certificate (ERC) according to Company Law to record the respective changes of members or capital, if applicable, or to file a report to the DPI regarding the change in founding shareholders or foreign shareholders resulting from the acquisition, if applicable.
The recent changes in the law
Firstly, Law on Investment 2020 has become effective on January 1st, 2020. Accordingly, some changes are affecting M&A. In particular, under the Law on Investment 2014, the foreign investors wanting to purchase capital contribution or shares of a business organization in Vietnam shall satisfy requirements on (i) the holding of the foreign investor; (ii) the form of investment, the scope of work, Vietnamese partners, and other aspects that are conformable with the international agreements to which the Socialist Republic of Vietnam is a signatory. Meanwhile, besides the above-mentioned requirements, Law on Investment 2020 is supplemented with two requirements:
- Ensure national defense and security under this Law;
- Comply with regulations of the law on land regarding conditions for receipt of land use rights, and conditions for use of land on islands or border or coastal communes.
Secondly, with the expectation to attract foreign investment, Law on Securities 2019 which became effective on January 1, 2020, amends the regulation on the holding of the foreign investors at the listed company, public company, securities-trading organizations, and securities investment funds in Vietnam. Accordingly, the Government will promulgate the detailed guidelines relating to this regulation after Law on Securities officially come into effect to expand the market for foreign investors and ensure economic development.
THE M&A PROCESS
Dai Ha Thanh Law Firm would like to provide the general process of the M&A deal.
Stage 1: Market research
First of all, both the foreign investors and the domestic investors shall research Vietnamese regulations on mergers and acquisitions such as prohibited economic concentration if it has an impact or is likely to cause a significant competitive restraint affecting the Vietnamese market, regulations relating to DPI’s approval of purchasing shares or capital contribution. In addition, the foreign investors should research market access conditions of Vietnam for foreign individuals and organizations wanting to enter the market, such as the charter capital ownership proportion that foreign organizations and individuals are allowed to own, the commercial presence that these individuals and organizations are allowed to establish in Vietnam.
Stage 2: Determining the potential target company and offer to merge or acquire
At this stage, investors (the Buyer) will choose the target company (the Seller) for mergers or acquisitions based on preliminary review and assessment of a number of following factors:
- The target company has been doing business in the field that is consistent with the development orientation of the Buyer or being a competitor operating in the same field.
- The target company had customer basements or certain market share which the Buyer can continue to exploit
- The target company had a certain position in the market so that the Buyer can minimize short-term costs, increase market share in the market, take advantage of the available market experiences to continue expanding its business activity.
- Have advantages in infrastructure, facility, land,…
After that, the Buyer will offer to merger or acquire based on its investment purpose.
Stage 3: Due diligence
Due diligence is a test of whether the factors driving the deal and making it look attractive are real or illusory. Therefore, at this stage, the Buyer will evaluate legal documents, financial documents, strategy, contractual relationships, operation history, and the organizational structure of the seller.
The due diligence process is usually divided into two parts:
- Financial and strategic due diligence: A team of accountants and management of the buyer or companies providing financial appraisal services will consider financial and strategic documents of the Seller. In which, these teams will focus on reviewing compliance with the standard rules, capital assignment, provision, loans, cash flow stability (taking into account the business cycle), asset depreciation check, and debt recovery.
- Legal due diligence is conducted by the buyer’s counsel or organizations providing legal services. This process focuses on the potential legal issues and problems that may serve as impediments to the transaction, as well as sheds light on how the transaction documents should be structured.
Legal due diligence plays an important role in the success of a merger and acquisition deal. With a team of lawyers and associates who are highly qualified and experienced, knowledgeable, and especially have professional ethics, Dai Ha Thanh Law Firm shall assist Clients in reviewing legal documents of the Seller related to main matters. Particularly:
(i) Corporate Matters: Certificate of incorporation and all amendments, licensing, Agreements among the seller’s shareholders, All contracts restricting the sale or transfer of shares of the company, ….
(ii) Management and Employment Matters: All employment agreements, Collective labor agreements, All current contracts agreements with or pertaining to the seller and to which directors, officers, or shareholders of the seller are parties, Policies for employees,…
(iii) Documents on Tangible and Intangible Assets of the Seller;
(iv) Material Contracts and Obligations of the Seller;
(v) Financial Matters: loan contracts, monthly and annual financial statements,...
Through the legal due diligence, the lawyer team will set up a report on existing issues and potential risks, while offering solutions to solve each relevant legal issue as well as consulting measures to deal with risks to ensure the interests of Clients when entering into mergers or acquisitions.
The Seller, during this stage, may also request the Buyer to provide the necessary documents to verify that the buyer's financial capacity is sufficient to fulfill the payment obligation.
In addition, at this stage, because the above-mentioned documents are the internal ones that need to be confidential, when the Parties provide these documents there is a high risk of leaked internal information that can adversely affect the business activities of the parties. Therefore, to protect the benefits of the Clients, we will assist the Clients in drafting the non-disclosure agreement.
Stage 4: Negotiating and signing contract
Based on the result of the due diligence stage, The Seller and the Buyer will negotiate the terms and conditions of the merger or acquisition contract.
At this stage, DHT Law Firm assists the Clients in drafting and reviewing terms and conditions of contracts such as share purchase contract, contract on assigning capital contribution, acquisition contract,…
Stage 5: Closing/Finalisation
After entering into the contract, the Parties need to conduct relevant legal procedures in order that these transactions are recognized by competent state agencies.
In particular, based on transactions that the Clients enter into, DHT Law Firm will assist in conducting procedures involving registration of changing the business license, registration of changing company owner, registration of converting type of business entity for a merged company, procedures for changing capital contributors/shareholders, procedures for changing business name, and other related procedures.
