The existing uncertainty in merger filing regulations

December 13, 2021 | 14:00
The development of Vietnamese competition laws in recent years, notably with the promulgation of the Law on Competition 2018 and its guiding instrument Decree No.35/2020/ND-CP, has marked a critical milestone in changing the merger and acquisition market in Vietnam.
The existing uncertainty in merger filing regulations
Phan Anh Vu - Partner Indochine Counsel, Ho Chi Minh City

Perhaps the biggest change under the new legislation is in cases of economic concentration in which the threshold for notification to the authorities is no longer solely determined by the combined market share of the involved parties but will be further determined on the size of the transaction, assets, and revenues of the involved parties.

As reported by the Vietnam Competition and Consumer Authority (VCCA), the total number of applications for notification of economic concentration received and processed by the authority has reached new heights since the Law on Competition 2018 came into effect. Sixty-two applications were submitted in 2020 alone, which is immensely impressive as compared to 169 applications submitted from 2005 to 2019. However, existing ambiguity and uncertainty still remain, especially in provisions on the merger filing regime, causing confusion for its application.

Article 29 of the Law on Competition 2018 states that acquisition of all or a part of capital contribution/assets of an enterprise, which is sufficient to legally obtain control or governance over the acquired enterprise, shall be treated as the acquisition of an enterprise, and thus be considered as a form of economic concentration.

Cases where control or governance over the acquired enterprise are determined to exist are further elaborated by Article 2 of Decree 35. Other than cases where the acquiring party possesses more than 50 per cent of shares, voting rights, or assets of the acquired enterprise, an acquisition is deemed to be a form of economic concentration when it confers on the acquirer the right to directly or indirectly decide the appointment, removal or dismissal of a majority or all of the management positions of the acquired company; decide on the amendment to the charter of the acquired enterprise; and decide important issues during business activities of the acquired enterprise.

Since the control/governance of the acquirer over the acquired enterprise is interpreted through the word “decide”, it is not clear whether a “passive decision” – one in which the acquirer is only entitled to vote against a proposed issue – will be considered as granting “control or governance”. For instance, upon acquisition of contributed capital in one enterprise, the acquirer holds only 20 per cent of the charter capital of the acquired enterprise, but the acquirer is entitled to veto rights pursuant to a shareholders’ agreement between the acquirer and existing shareholders of the acquired enterprise.

In this scenario, the laws on competition do not explicitly provide whether the acquirer will be considered as having control and governance over the acquired enterprise, but the VCCA has apparently taken the view that such passive decisions will not be excluded from the control and governance concept, especially when such decisions are taken on critical issues, such as operating capital, markets, or business lines.

Fortunately, the VCCA has started to consider whether an acquisition with this kind of control and governance should be deemed as a form of economic concentration, and correspondingly require the application of the merger control regime, will be determined on a case-by-case basis.

Merger activities due to internal restructuring of a group of companies or between a parent company and its subsidiary, even if the threshold requiring notification of an economic concentration is triggered, are unlikely to result in an anti-competitive effect on their relevant market, and thus not trigger the necessity for a merger filing procedure.

In comparison, the Competition Act of Singapore prescribes that a merger where involved enterprises are under control of the same enterprise shall be exempted from the application of such an act. However, the laws on competition of Vietnam neither exempt mergers between group companies under applicable laws on competition nor provide for a fast-track, simplified procedure for them. This creates unnecessary compliance requirements for group companies and adds to administrative burdens.

In addition, it fails to provide an actual policy benefit in that there was no competition between the entities of a group to begin with, so there is no anti-competitive effect to prevent in the first place. It ultimately is a waste of time and money and effort to insist on this requirement remaining.

These inconsistencies may be troublesome, but they are relatively minor as the Law on Competition 2018 has little benefit of actual application as a new regulation. It has only seen a little over a year of application during which several lawyers have raised their voices over inconsistencies. We expect that the authority will take our concerns into consideration and will have an appropriate approach to resolve the existing flaws in the competition framework, and remove unnecessary regulatory procedures that hinder the process.

By Phan Anh Vu - Partner Indochine Counsel, Ho Chi Minh City

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