Legal clear-up may assist M&A boom

In 2020, Vietnam has attracted $6.11 billion worth of foreign-led stake acquisitions so far, Photo: Shutterstock

At last week’s conference held by the Vietnam Chamber of Commerce and Industry, businesses, lawyers, and economists discussed how the changes in the Law on Investment 2020 will impact future investment inflows, including stake acquisitions.

Tran Thi Thanh Huyen, partner at law firm NHQuang & Associates, said that the changes are expected to open new opportunities for businesses and investors to participate in merger and acquisition (M&A) deals.

“In the previous law, investors could invest in project transfers. Now they will be able to venture further afield into the separation and merger channel,” Huyen told VIR.

In addition, the simplification of procedures will spur the M&A market. According to Vaibhav Saxena, lawyer at Vietnam International Law Firm, the new law simplifies many procedures for M&A approvals by eradicating their need for transactions that do not result in an increase of the foreign ownership ratio in the target company.

Such conditions apply even if the target company operates in sectors subject to market entry conditions applicable to foreign investors. Further, if any M&A transaction results in an increase of the foreign ownership ratio in the target company, with the foreign investor holding more than 50 per cent of the shares or charter capital after the transaction, the same shall be subject to the new conditions.

“This is a significant relief provided from administrative angle and will support businesses to cut-short on the timeline for M&A transactions,” Vaibhav added.

Lawyers and experts, however, noted that to leverage M&A investments in this channel, the to-be-issued decree should detail the regulations to prevent misunderstandings about corporate and project reorganisations, thus facilitating funds in adjustments of capital, assets, labour, land, and others.

There are concerns over lack of transition regulation on treating an economic organisation with foreign-owned capital, as there are conceptual differences in the Law on Investment 2020 and the previous one. The new version includes a reduced foreign ownership threshold, from 51 down to 50 per cent, to determine if an economic organisation with foreign-owned capital must satisfy conditions prior to investment.

As stated in the new law, economic units with foreign ownership of over 50 but less than 51 per cent, which are treated as domestic businesses in line with the 2014 law, will be treated as foreign investors and have to follow all business procedures and conditions applicable to them. For instance, they must have investment registration certificates.

A representative from the Vietnam Association of Securities Business stated, “The change is expected to create no favourable conditions for businesses and investors, and even creates additional burdens for them,” while pointing out that the transition rule is missing.

“The draft decree should add the transition rule towards allowing economic units between 50 and less than 51 per cent of foreign ownership before the Law on Investment 2020 comes into effect. Accordingly, these units should continue to enjoy investment incentives and not be subject to the conditions applicable to foreign investors, regardless of having an investment registration certificate,” the representative proposed.

In wake of future possible misunderstandings after the enforcement of the law, groups like Honda Vietnam want regulations to be clarified on the list of business lines with restricted market access for international ventures by adding foreign investors holding over 50 per cent of chartered capital.

Currently, the draft law is being completed and expected to deal with the concerns, thus enabling the country to welcome a possible new wave of M&A when it comes into effect in early 2021.

M&A has been proven to be an attractive investment channel in Vietnam. Nevertheless in 2020, the pandemic impacted Vietnam’s foreign investment attraction, with M&A no exception. As shown in statistics from the Ministry of Planning and Investment, the country attracted $6.11 billion worth of foreign-led stake acquisitions in the first 10 months of the year, down 43.5 per cent on-year.

According to researchers at the Vietnam M&A Forum, the country is one of the few Southeast Asian nations that will see a strong rise in M&A transactions in the upcoming years, focusing on fields like banking and finance, realty, retail, energy, infrastructure, healthcare, and education. Singapore, Japan, and South Korea are currently the biggest players in the local M&A market.