Delving into specifics of amended business laws

Vaibhav Saxena and Le Tuan Anh, lawyers at Vietnam International Law Firm

Vietnam’s National Assembly (NA) on June 17 passed the amended Law on Investment and the Law on Enterprises. The new laws will replace the current Law on Investment No.67/2014/QH13 and the Law on Enterprises No.68/2014/QH13 issued by the NA in 2014.

Law on Investment modifications

The new Law on Investment enumerates changes related to the conditions for foreign financiers to invest in Vietnam, the procedures for merger and acquisition (M&A) approval for foreign investors to acquire shares and/or capital contribution in economic organisations, the categories of projects subject to investment policy decisions, and consideration on national defence and security to license investment proposals.

The new Law on Investment drops down the foreign ownership threshold from 51 to 50 per cent to determine if an economic organisation with foreign-owned capital must satisfy conditions applicable to overseas investors prior to the investment. These conditions apply to economic organisations with foreign-owned capital establishing economic organisations, contributing capital, acquiring shares or equity, or investing on the basis of a business co-operation contract. This change will invite investors to consider matters related to the competition laws of Vietnam.

The new Law on Investment simplifies the procedure for M&A approval by eradicating the need for such approval if the M&A transaction does not result in an increase of the foreign investors’ ownership ratio in the target company. Such conditions apply even if the target company operates in the business sectors subject to market entry conditions applicable to foreign investors.

Further, if any M&A transaction results in an increase of the ownership ratio in the target company and with the overseas investor holding more than 50 per cent of the shares or charter capital in the target company after the M&A transaction, the same shall be subject to M&A approval requirements under the new Law on Investment. This is significant relief provided from an administrative angle and will support businesses to cut short the timeline for M&A transactions.

Under the new Law on Investment, commercial arbitration, franchising, and logistics services are no longer considered conditional business lines. New conditional business lines are architectural services, data centre services, electronic identification and authentication services, import press distribution services, fishing vessel registration, and fishing vessel crew training.

Further, the new Law on Investment details the list of business lines restricted to foreign investment. It includes business lines for which foreign investment is not permitted or business lines for which it is subject to conditions. The detailed list on such business lines will be formulated by the relevant authorities.

The new Law on Investment has touched upon the long-existing issue under the current Law on Investment with respect to conditional business lines. Although, the conditional business lines are listed out under the Appendix 4 of the current Law on Investment but the list is not comprehensive and needs to be refined to avoid conflict with Vietnam’s international commitments.

The new Law on Investment supplements the categories of investment projects which are subject to the prime minister or provincial people’s committee investment policy decisions. The additional projects subject to the investment policy decisions include projects invested by the foreign investors in areas subject to national security concerns and housing and urban area construction projects.

The new Law on Investment provides more clarity on the relevant authority for certain investment projects falling in areas as mentioned. It is again a constructive provision and will support investment activities in certain areas.

Further, the new Law on Investment states that national defence and security-related matters will be considered while licensing a new project and granting M&A approval, if the project land or the business entity to be acquired has land use right on an island, commune, ward, border district, sea coast, or other areas which could affect national defence and security. It also adds that the project of investors could be terminated if it negatively affects national defence and security.

Significant Law on Enterprises changes

The new Law on Enterprises introduces modifications to relax the administrative procedures in order to support the ease of doing business in Vietnam.

First, minority shareholder rights are protected. The new Law on Enterprises details on the cases and permits a shareholder or a group of shareholders holding at least 5 per cent (it is 10 per cent under the current Law on Enterprises) of the total ordinary shares the right to request the organising of an annual general shareholder meeting and request the board of inspection to investigate issues relating to the management and administration of the company.

This is a golden provision inserted under the new Law on Enterprises especially for the minority investors who are usually concerned about their rights in relation to the functioning of the target company. Minority shareholders may have a lower risk appetite sometimes and accordingly are more careful to secure their rights under the shareholders agreement in an M&A transaction.

Second is exclusion of corporate seal notifications and management reports. The new Law on Enterprises reduces administrative procedures for enterprises by deleting the notification requirement regarding corporate seal use by the company; and reporting on the changes to personal information of managers of the company in Vietnam.It will increase the index for ease of doing business in Vietnam and the enterprises will be relieved from unnecessary administrative obligations.

The new Law on Enterprises also provides that in a single member limited liability company (LLC), an inspector is not required. Single member LLCs are the simplest form of an enterprise in Vietnam and removing the condition to appoint the inspector will benefit such enterprises operating in Vietnam.

Overall, the new law on Investment and Enterprises are aimed to make the financing scenario more investor-friendly in Vietnam and to increase the ease of doing business for the enterprises registered in Vietnam. The new laws will be guided further with relevant regulations to be drafted by Vietnamese authorities to ensure smooth implementation.