Increasing M&A strength with legal foundations

There was strong activity in both private and public M&A in 2020

In 2018 and 2019, the consumer goods, manufacturing, and real estate sectors recorded important M&A transactions in Vietnam. And last year, banking and real estate were the key sectors for M&A transactions.

According to the Foreign Investment Agency under the Ministry of Planning and Investment, as of March 20, the total newly-registered, adjusted, and contributed capital and purchased shares of foreign investors reached $10.13 billion, an increase of 18.5 per cent on-year.

In terms of newly-registered capital, 234 new projects were granted investment certificates (down 69.1 per cent on-year) with the total registered capital reaching $7.2 billion (up 30.6 per cent on-year), while adjusted capital grew by 97.4 per cent to $2.1 billion. Meanwhile, the total volume of capital contribution and share purchases by foreign investors reached $805.3 million, equivalent to a fall of 58.5 per cent on-year.

In the mentioned timeline, Singapore is deemed to be the biggest foreign financier with nearly $4.6 billion, or 45.6 per cent of the total registered capital, while Japan ranked second with $2.1 billion, followed by South Korea with $1.2 billion. Specifically, almost all the investment capital inflows from Singapore and Japan were newly-registered.

Looking back, there is strong activity in both private and public M&A, with both providing blockbuster deals in Vietnam during 2020. Naturally, there are more private M&A transactions, and listed companies help drive private-related activity.

A consortium led by US private equity (PE) powerhouse KKR made a $650 million investment into Vinhomes, the flagship real estate subsidiary of Vingroup and listed on the Ho Chi Minh City Stock Exchange, for an approximate 6 per cent stake.

The deal, in which YKVN acted as local counsel for Vingroup, witnessed a strong willingness of foreign investors to sit in minority positions in large Vietnamese companies. PE investment has been at lower values and rare in listed companies, so this investment, therefore, generated much interest regarding the future role of PE in headline public M&A transactions.

Another significant deal was the acquisition by Masan Group of Vincommerce and VinEco, the retail and agricultural businesses of Vingroup, with Vingroup remaining in a minority position. This involved a series of complex equity swap and corporate restructuring transactions.

The complex nature of the transaction illustrated that domestic deals of such technical nature can be expected and executed as Vietnamese organisations continue to grow. The deal generated significant public discussion regarding the positioning of major domestic players.

Plans and norms

As a result of the pandemic, Vietnam’s economy grew by only 2.91 per cent in 2020 – though it became one of the only economies to have shown any growth at all. Mirroring this lower growth, the total deal value experienced a decrease. Although declines were widespread, the tourism sector suffered the most.

Sectors that mustered growth included manufacturing and construction, real estate, agro-forestry-fisheries, and services. As a whole, Vietnam’s exemplary handling of the pandemic has enhanced its image as an investment destination and, on a country comparative basis, M&A deal flows have great prospects.

Foreign investors usually make use of ordinary shares, convertible loans, and convertible bonds while use of preference shares is less common. Due to foreign exchange regulations, instruments are considered when making investment in VND rather than foreign currency. Convertible loans are more commonly denominated in foreign currency than convertible bonds.

An investor’s choice in use of convertible loans, convertible bonds and preference shares is driven by the equity/debt classification of the instrument. As investors usually benchmark against US dollars, foreign exchange indemnities are becoming more common.

Despite a depressed market, deal structures have not changed significantly. This could be attributed to less distressed assets than other markets. Nevertheless, investors have been more careful in this new market condition and there has certainly been greater negotiation of material adverse change (MAC) clauses to cater for pandemic-related risks. Specific indemnity and post-closing price adjustments have also become more common.

Historically, PE and investment funds have not participated in larger-sized deals. However, recent activity indicates that this trend may be reversing. The $650 million investment by KKR in Vinhomes is a testament to this trend. A slight increase in shareholder activism and disputes has been noticed throughout the economy.

It is widely expected that Vietnam will continue to experience significant growth in 2021 on a comparative basis with other countries, and the M&A market should follow this.

Recently, Vietnamese regulators have been exercising their extra-territorial jurisdiction. Examples include the Vietnam Competition and Consumer Authority in respect of offshore transactions that require merger filings and tax authorities deeming offshore transaction proceeds subject to tax in Vietnam. Regulators may also scrutinise deals where national interests are at play.

An example of this relates to the acquisition by a Thai investor in a solar energy project that threatened national energy security due to excessive supply of solar energy in one region by potentially affecting the energy basket mix and strained energy networks. In this instance, the prime minister requested the relevant ministries to propose solutions to protect national energy security.

Vietnam’s regulatory regime, as with its economy, has experienced rapid development over a comparatively short period of time and, unlike developed jurisdictions, local authorities and even lawyers may have a different interpretation of laws.

Although there is a strong level of certainty on most matters, problem solving may differ to some extent compared to regular approaches expected by foreign investors. However, this often works out for the better.

Regulatory approvals may require a greater degree of consultation with authorities than expected, though authorities are continuously improving their turn-around times and responsiveness. Other frequently asked questions usually relate to deal structuring including offshore aspects, foreign ownership restrictions, regulatory approvals, and licensing.

Overlooked areas, which need careful consideration, include the time required for completion and sequencing of closing deliverables.

Vietnam is also beginning to embrace legal technology in the workplace. The use of virtual data rooms and virtual meetings is widespread, increasing efficiency in the diligence and deal-making process.

Public and private

An acquisition for 25 per cent or more of the issued voting shares of a public company requires that a public tender offer (PTO) be made and registered with the State Securities Commission (SSC).

In addition, a PTO is also triggered where the acquisition of voting shares in a public company results in an existing shareholder directly or indirectly holding at least 35 per cent and up to 75 per cent of the voting shares in such public company.

The target board is required to deliver its opinion of the PTO to shareholders and the SSC. Therefore, although Vietnamese law does not apply a takeover regime that distinguishes between friendly and hostile takeovers, engagement with the target board remains important.

The PTO must, among others, ensure equal treatment of all shareholders in respect of the PTO terms, including in relation to price as well as access to information concerning the PTO. In particular, the acquirer is prohibited from engaging in any side deal in respect of any securities that are the subject of the PTO (from date of submission of the PTO to the SSC until the date of completion of the process).

In the event that acceptances exceed the registered amount of shares to be acquired, the acquirer will acquire shares on a pro rata basis. An acquirer may only abandon or terminate a registered PTO in limited circumstances and when permitted by law. Instances of this include where acceptances of the offer are less than the registered amount of shares offered to be acquired, and where there is a change in the number of voting shares of the target company.

Break fees and reverse break fees are occasionally used, usually being 1-2 per cent of the transaction value. In a number of instances, even a higher percentage of transaction value is used.

Although simplistic purchase price structures are commonly utilised, structures that are more complex do occur. Locked-box mechanisms (on the last account date) are common where the acquisition is for a majority, or all, of the target. Completion account mechanisms are common where there is an acquisition of a minority position.

Earn-outs and other forms of deferred consideration are not typical. Escrow accounts are utilised, and sellers may request that a deposit be paid. Warranty and indemnity insurance remains relatively uncommon.

The pandemic has resulted in the growth of MAC clauses, which exclude the impacts of the pandemic and allow for the shifting of risk from closing to signing to avoid walk-aways.

In a number of instances, signing and closing occur almost simultaneously or the time gap between signing and closing is relatively short with less conditions precedent.

It is not unusual, where a foreign party is involved, for purchase agreements to be governed by Vietnamese law and referred to the Vietnam International Arbitration Center. For a high value or complex deal, this is usually accompanied by a foreign choice of dispute forum – in particular foreign arbitration.

The typical combination is Vietnamese law and the Vietnam International Arbitration Center or the Singapore International Arbitration Center. Vietnam is a member of the New York Convention and Vietnamese courts are becoming more open to enforcement of foreign arbitral awards and judgments.

When considering the exit environment, large initial public offerings (IPOs) in Vietnam were rare in 2020 as the equity market has witnessed a slow-down in activities. As a result of this slow down, exits in trade sales and sales to financial sponsors are more common. The lack of a viable option to exit through qualified IPOs has also increased shareholder disputes, particularly in respect of internal rate of return guaranteed exits.

Most legal experts and commentators agree that there will likely be increased M&A activity in Vietnam during 2021, mirroring the country’s economic fortunes. This is a result of Vietnam’s enhanced profile following on from its handling of the pandemic and global supply chain changes, as well as the general pattern of high growth that Vietnam has followed.