Investors seeking room to move

The reports follow a public announcement by Finance Minister Vu Van Ninh in early March that the cap on foreign ownership in public unlisted companies - previously widely considered to be 30 per cent - will be raised to a maximum of 40 per cent. According to the Securities Law, unlisted public companies are those that have offered shares to the public or have at least 100 shareholders, not including professional financial institutions, and contributed charter capital of at least VND10 billion (approximately $625,000). There are currently nearly 900 companies registered as such in Vietnam, many of them operating in attractive sectors such as energy, construction, and mining.

While the news will generally be welcomed as giving extra scope for foreign investors to acquire equity stakes of these attractive targets and thus increase M&A activity and foreign capital in the market place, there are clear arguments that, in principle, Vietnam’s WTO commitments mean there should be no cap on foreign ownership for many of these companies. As a result, concerns grow that important WTO commitments are being eroded unwittingly at best or, at worst, deliberately by complex and unclear legal mechanisms.

The minister’s announcement of the increase, it is not yet known how the announcement might be codified in law, followed a formal directive from the prime minister (Official Letter No. 319 dated March 3, 2008) to the State Bank and multiple ministries outlining 19 measures aimed at reining in the double-digit inflation that has hit investor and consumer confidence and affected the stock market in recent months.

In Official Letter No. 319, the prime minister instructed the Ministry of Finance (MoF) to research and make a submission to the government on regulations on the percentage of foreign investors’ ownership of securities in unlisted companies. The prime minister expressly states in Official Letter No. 319 that the percentage should not be higher than that applicable to listed companies (currently 49 per cent). That requirement follows the prime minister’s earlier decision (Decision No. 3567 dated November 8, 2007) that foreign ownership of public unlisted companies should follow the rules applicable to listed companies.

The government Office subsequently issued Notice No. 63/TB-VPCP on March 11, 2008 in which Nguyen Sinh Hung, permanent Deputy Prime Minister, approved in principle the increase to 40 per cent maximum foreign ownership of unlisted public companies except for those in sectors “separately regulated by the government”. What this final qualification might mean in practice is open to considerable debate.

While the change might have been valid in November 2007, there are good arguments to suggest it should not be generally applicable after January 2008. Notably, Vietnam’s WTO service sector commitments setting out a clear roadmap on foreign ownership of service-sector entities, expressly state that the previous 30 per cent limit on foreign ownership of existing Vietnamese service-sector entities (treated differently than establishment of new service-sector entities) will no longer apply one year after Vietnam’s WTO accession (i.e. - January 11, 2008).
In addition, the minister’s announcement would appear to contradict a new government decree implementing the Law on Enterprises (Decree No. 139 dated September 5, 2007).

Decree No. 139 provides, in effect, that all organisations and individuals (regardless of nationality or place of establishment) may acquire unlimited stakes in existing Vietnamese entities except for the following cases which are subject to their own particular rules: (i) companies listed on the stock exchange; (ii) companies operating in sectors governed by specialised laws (e.g. - civil aviation, lawyers, education, publishing); (iii) state-owned enterprises undergoing equitisation; and (iv) companies in services sectors specifically regulated by the WTO service-sector commitments. While the exceptions are not insignificant, the general principle set out in Decree No. 139 is that there is no general cap on the permitted equity that a foreign investor may acquire in an unlisted company, including public unlisted companies.

Despite the apparently clear wording of Decree No. 139, foreign investors have faced significant difficulties in practice acquiring majority shares of unlisted companies, including private unlisted companies. Licencing authorities have either declined or delayed the paperwork necessary to give effect to such acquisitions, leaving investors frustrated and the status of private contractual documents open to doubt.

In doing this, the licencing authorities have argued that there are currently no detailed implementing guidelines for Decree No. 139 and that the decree guiding Vietnam’s WTO commitments, many months in the drafting, still has not been issued.

With such a climate of uncertainty, the MoF, in conjunction with the State Securities Commission (SSC), faced with a directive to address the issue, appear to have adopted a bizarre half-way house between the previously applicable 30 per cent cap on acquisitions of Vietnamese entities and the clear 49 per cent cap applicable for listed entities.

In doing so, the MoF appears to have taken a step not in compliance with Vietnam’s WTO commitments and in conflict with the spirit and principles of Government Decree No. 139 issued only months ago. Whether this has been knowingly and deliberately done or is a simple oversight borne from a special view taken of unlisted public companies, one apparently not otherwise supported by law, is not known. Regardless, it must be hoped this does not create a precedent for other state agencies to erode Vietnam’s WTO commitments by issuing regulations for ‘special’ industries or business areas.

Of equal concern is that the rules for acquisitions by foreign investors of Vietnamese entities continue to be clouded in uncertainty and complexity. What happens when a local company meets the criteria for a public unlisted company but already has more than 40 per cent foreign ownership? Is the new 40 per cent cap applicable to companies that meet the criteria but have not registered with the SSC as public companies?

This article is intended for information purposes only and should not be interpreted as legal advice. For further information contact Giles Cooper at GTCooper@duanemorris.com.