In recent years, Vietnam’s legal system has made significant changes to promote business investment activities and M&A transactions between domestic and foreign investors. This article will focus mainly on some of the impacts that the Law on Investment 2020 would have on M&A transactions.
Market access conditions
In principle, before conducting M&A transactions and investment activities in Vietnam, foreign investors need to check whether market access conditions are met or not. Currently, the Law on Investment amends market access conditions.
Previously, according to the Law on Investment 2014, foreign investors must meet investment conditions when conducting investment activities in business lines that are conditional for foreign investors as prescribed in the relevant laws, ordinances, decrees and international treaties on investment. In other words, foreign investors must meet the conditions specified in various documents such as laws, ordinances, decrees, and international treaties. It can be seen that these conditions are specified in the direction of “positive list”.
However, the Law on Investment 2020 amends the above-mentioned regulations into the direction of “negative list“. Specifically, the Government revises the list of business lines with conditional market access for foreign investors, which includes (i) business lines that foreign investors do not have market access; and (ii) business lines that foreign investors are entitled to conditional market access. For business lines not included in these two lists, foreign investors are now entitled to the same market access conditions as those applicable to domestic investors.
This transparent regulations on access conditions not only expands foreign investors’ ability to enter Vietnamese market, but also serves as a way for the Government to encourage and create favorable conditions for foreign investors to carry out investment activities in Vietnam, unlike the list of available business lines and market access conditions designed in the form of a “positive list” in the Schedule of Commitments and Law on Investment 2014, which somewhat limits market access ability of foreign investors compared to domestic enterprises.
Procedures for registration of capital contribution, purchase of shares or capital contribution
The procedures for registration of capital contribution, shares or capital acquisition by foreign investors raise concerns when the Law on Investment 2020 takes effect. Pursuant to Article 26, the foreign investor must carry out this procedure when the capital contribution registration, shares or capital acquisition leads to one of the following situations:
- increase foreign investors’ ownership ratio in economic organizations operating in conditional market access business lines for foreign investors;
- increase the foreign investor’s ownership ratio to more than 50% of the charter capital or increase the ownership ratio when the foreign investor already owns more than 50%;
- the economic organization that receives capital contribution, having its shares or contributed capital acquisition (“Acquired Company”) owns certificate of land use rights in the island or border communes, wards and towns; coastal communes, wards and towns; other areas affecting national defense and security.
In case a foreign investor contributes capital, acquires shares or capital contribution, but does not increase ownership ratio of foreign investors, this procedure is not required.
In addition, the Law on Investment 2020 also adds that in case the Acquired Company owns a certificate of land use rights in the above-mentioned locations, the foreign investor must carry out the procedures for capital contribution registration, shares or capital acquisition before performing such transaction. However, at present, the Government has no guidance on how to identify areas affecting national defense and security.
Ownership ratio of foreign investors
Based on relevant legal provisions alone, Vietnam is managing and controlling business investment activities of foreign investors largely through the mechanism of limiting charter capital ratio of foreign investors in the acquired company (directly and indirectly). For example, whether a foreign-invested economic organization in Vietnam must meet the same conditions and follow the same procedures as a foreign investor when contributing capital or buying shares of other economic organizations or not also depends on the foreign investors’ ownership ratio in that economic organization. Currently, the Law on Investment 2020 reduces this ratio from 51% to above 50%.
As a result, compared to the Enterprise Law 2020, foreign investors will not be able to simultaneously guarantee that (i) they can control the Acquired Company by passing important decisions with the ratio of more than 50% and, (ii) the Acquired Company is still treated like a domestic investor when contributing capital or buying shares in another company.