Considering restructuring processes

Dang Hoan My, associate at Indochine Council

Under the 2020 Law on Enterprises, corporate restructuring includes the forms of division, separation, consolidation, merger, and conversion of companies. A project in corporate restructuring may include one or more restructuring forms.

In terms of division of companies, limited liability company (LLC) and joint-stock company (JSC) may divide their assets, rights, and obligations, members or shareholders of the existing company in order to establish two or more new companies.

The company ceases to exist after the new companies are issued with enterprise registration certificates. The new companies must be jointly liable for unpaid obligations and debts, labour contracts and other property obligations of the company being divided or shall agree with creditors, customers and employees in order for one of them to perform such obligations. The new companies shall automatically inherit all of the lawful rights, obligations and interests which were divided pursuant to the resolution on the division of the company.

An LLC and JSC, alternatively, may be separated by transferring part of the assets, rights, obligations, members or shareholders of the existing company (separating company) to establish one or more new LLCs or shareholding companies (separated company) without terminating the existence of the separating company.

The separating company must register any change to charter capital and number of members or shareholders corresponding to their capital contribution portions or shares and the number of members or shareholders reduced (if any), and at the same time, implement enterprise registration for separated companies. As for consolidation of companies, two or more companies may be consolidated into a new one and at the same time, terminate the existence of the consolidating companies.

After the consolidated company has conducted enterprise registration, the consolidating companies cease to exist; the consolidated company is entitled to the lawful rights and interests and is liable for unpaid obligations and debts, labour contracts and other property obligations of the consolidating companies. The consolidated company automatically inherits all the lawful rights, obligations and interests of the consolidating companies pursuant to the contract for consolidation of companies.

Consolidating companies must ensure compliance with the Law on Competition regarding consolidation of companies.

In the fourth option, one or more companies may be merged into another company by way of transfer of all lawful assets, rights, obligations and interests to the merged company and, at the same time, terminate the existence of the merging companies.

After the merged company has conducted enterprise registration, the merging companies cease to exist; the merged company is entitled to the lawful rights and interests and is liable for unpaid obligations and debts, labour contracts and other property obligations of the merging companies. The merged company automatically inherits all the lawful rights, obligations and interests of the merging companies pursuant to the merger contract.

Companies involved in conducting the merger must comply with the Law on Competition regarding the merger of companies.

When conducting the corporate restructuring as mentioned above, companies are required to register the restructuring with the business registration authority and the results of registration will be issued within three working days of receipt of a proper application dossier from the companies.

For example, when conducting a corporate restructuring by way of a share swap between group companies (shareholders in subsidiaries will swap their share subsidiaries to a holding company), the shareholders and company may face several concerns.

Firstly, share swaps within public companies are regulated by the Law on Securities. However, share swaps in non-public companies have yet to be regulated in the Law on Enterprises. Accordingly, shareholders and companies will face risks when conducting such a corporate restructuring because the licensing authorities may not understand and accept the nature of share swaps.

Secondly, if there is a foreign shareholder involved in a share swap, they will be required to obtain approval for the purchase of the new shares issued by the holding company as required by the Law on Investment. They will need to make payment for the new shares via a direct or indirect investment capital account as required by the law of Vietnam. The nature of share swaps is cashless and the value of new shares will be deducted with the value of the shares in subsidiaries owned by shareholders/investors.

Thirdly, if a share swap is separated into two transactions, the first one being a share transfer, the tax laws also fail to regulate the share swap in non-public companies. In practice, to avoid tax risks, the shareholders/transferors will be subject to a 0.1 per cent sale price if they are individual shareholders; and 20 per cent of capital gains tax if they are corporate shareholders.

Finally, a share swap may also be subject to merger filing requirements (though the overall corporate restructuring does not change the competition landscape), and such a process will take time and money.

With this in mind, we encourage the authorities to review and develop a better legal framework within practice guidance for special cases so that investors may reduce the costs and risks when conducting a corporate restructuring.

For the purpose of preparing an excellent corporate restructuring plan, you should consider various related matters and collect advice from experts, especially legal and financial advisors.