New M&A growth blocked by lack of legal clarification

Illustration photo

The effectiveness of the laws is arguably premature, as after more than a month since its implementation, the LOE and LOI still await their guiding documents. This has left enterprise registration and licence amendments in limbo, particularly for enterprises that have obtained licenses under the former LOE and LOI. This situation directly impacts M&A transactions.

To practically implement the LOE and the LOI, it is necessary for legislators to consider the following issues when drafting the guiding documents:

Business lines

Under the old and new LOE, enterprises may register their business lines in accordance with the business code. However, where the code is unavailable for a new business line, the application for the enterprise registration certificate (ERC) and the investment certificate (IC) is frequently rejected and the enterprises are required to register another code of a similar business line. Otherwise, the authorities may reject the application.

The LOE permits investors to conduct any business line that is not prohibited or restricted from investment. The registration of business lines in accordance with the business code is only for the purpose of internal administrative management of the licensing authorities, and therefore the licensing procedures should not be prolonged due to this “habit” of the licensing authorities.

In addition, when foreign investors wish to finance conditional business lines or uncommitted business lines under Vietnam’s WTO commitment, the licensing authorities always seek opinions from relevant central authorities. However, in some cases, even when the central authorities agree to the investment, the local authorities will still not grant the licences. To avoid this shortcoming, which has caused many difficulties for investors, the government should issue a guiding document to regulate this procedure.

Amendment to the ERC and IC

Under the LOE, the ERC has five primary contents, including name, registration code, head office address, legal representative, and charter capital of the enterprise. In case of any amendment to one of the above contents, the registration of such an amendment with the licensing authorities will be required.

When an enterprise with an IC issued prior to July 1 2015 applies for amendment to the above contents, the licensing authorities will always require it to first separate its IC into an IRC and ERC. However, the process for such separation is silent under law, and therefore the majority of licensing authorities have requested that the enterprise await further guidance from the government.

Corporate seal

Under the new LOE, the procedure for obtaining a corporate seal has been relaxed. However, the transition provision has proven to be confusing to both investors and licensing authorities.

To establish a company, foreign investors require both the IRC and the ERC, and only enterprises that have obtained the ERC may have their seal carved (as the code for carving the seal is the enterprise code recognised in the ERC).

Such a requirement places enterprises who have just obtained the IC and without a separate ERC (i.e., those that submitted their application prior to July 1, 2015) into an “embarrassing” situation as the licensing authorities will refuse their seal registration and request the application of a separate ERC. However, without the seal, enterprises face considerable difficulties in operating their businesses, making an initial tax declaration, and affixing the seal on the application for a separate ERC at the request of the licensing authorities.

To avoid this “catch 22” dilemma, the question remains whether the licensing authorities should allow the enterprises to carve their seal with IC’s number and have them re-carve the seal after they have been issued with the ERC.

Currently, the draft decrees guiding the LOE and LOI are being circulated and will be released soon. It is hoped that these instruments will rectify the above shortcomings and create a transparent, friendly, and workable legal framework for investment. Only in such a case will the investor be comfortable injecting capital into the Vietnamese market to promote healthy M&A activities in the country.

By Vu Thi Que and Nguyen Thi Hong Thang - Lawyers at Rajah & Tann LCT Lawyers