Clarifications from competition authority on negative control

Clarifications from competition authority on negative control, illustration photo

Pursuant to Article 29.4 of the law, economic concentration in the form of acquisition will be triggered (and, further, may lead to the imposition of merger filing rules) if the acquiring enterprise acquires “control” over the target or any of the target’s trades or business lines.

Article 2.1 of Decree 35 elaborates the definition of “control”. However, regrettably, this definition has caused a certain amount of confusion among legal practitioners. In particular, under the definition, an acquiring enterprise will be regarded as exerting “control” over the target if, among other cases, the acquiring enterprise has one of the rights set forth in Article 2.1(c) of Decree 35.

These are the right to decide on amendment to or supplementation of the target’s charter; or the right to make important decisions concerning the business operations of the target. The latter can involve the selection of the form of the business organisation; selection of the industry, business line, business location, or business model; adjustment of business scope and business line; and the selection of form and method of mobilising, allocating, and utilising the business capital of the target.

However, Decree 35 fails to clarify whether the possession of “negative control” over the target via a right of veto over amendment of the target’s charter or the abovementioned corporate matters also constitutes “control” as regards to the possibility of imposing merger filing requirements.

The ambit of the grey area is the situation where numerous acquiring enterprises obtain sufficient ownership interests to exercise statutory veto rights over the amendment of the target’s charter or certain paramount corporate matters of the target in accordance with the Law on Enterprises 2020 (meaning ownership interests of greater than 35 per cent in a joint-stock company, or of greater than 25 per cent in a limited liability company).

The lacuna in Decree 35 also raises doubts to prudent minority acquirers those attain contractual veto rights over “reserved matters” with the target or its major shareholders, though the former only hold a 5-10 per cent stake in the target. To the best of our knowledge, in the early stages following the introduction of Decree 35, the Vietnam Competition and Consumer Authority (VCCA) took a conservative view (though unofficially) that “negative control” constituted “control” for the purpose of considering merger filing requirements under Decree 35.

Fortunately, the VCCA’s practical view seems to have become more moderate. In a seminar organised by the authority in January, VCCA officials expressly confirmed that a mere veto right granted to the acquirer should not be automatically treated as exercising “control” over the target. More recently, in March, in response to an official letter from us asking for clarification on “negative control”, with an illustrative example involving an acquiring enterprise planning to purchase 40 per cent of the shares of a joint-stock company, the VCCA was of the following view.

“The investor holding 40 per cent of the ordinary shares shall have rights in accordance with the Law on Enterprises 2020 and the charter of the target company. Accordingly, the investor shall not have the right to decide on amendments to the charter and other important matters of the target company. At the same time, in accordance with the charter of the target company, the investor shall not have the right to appoint, dismiss, or remove a majority or all of the members of the board of management [or] the general director of the target company.”

The VCCA further asserted that if none of the rights set forth in Article 2.1(c) of Decree 35 as quoted above are conferred in the acquisition agreement, the investment agreement, and other related contractual documents between the investor and the target, the transaction does not lead to the controlling or governing of the target company and therefore does not constitute an “acquisition of an enterprise” under Article 29.4 of the Law on Competition 2018. To reiterate, in its response to the letter, the VCCA emphasised its moderate (and welcome) view that the definition of “control” under Decree 35 does not encapsulate “negative control”.