As a periodical review of and guidance on Vietnam’s M&A landscape, this article updates on new legislation and legal practice that may affect inward M&A activities into Vietnam, particularly on entering the Vietnam market and running the acquired business in the country.
New free trade agreements make Vietnam’s market even more accessible to foreign investors
On 14 January 2019, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) entered into force for Vietnam. On 30 June 2019, the Free Trade Agreement (EVFTA) and the Investment Protection Agreement between Vietnam and the EU were signed. After the agreements of the World Trade Organization (WTO) to which Vietnam acceded by joining the WTO twelve years ago, the CPTPP and the EVFTA are the most ambitious free trade agreements (FTA) Vietnam has concluded. In addition to these monumental FTAs, Vietnam has concluded many other FTAs with its key trade partners such as the USA, Japan, Korea, Hong Kong, the ASEAN countries (AFTA) and China (via the AFTA).
Of note, these new FTAs are coined “new generation” in that any restriction to foreign investment must be specified in the FTAs, otherwise foreign investment is restriction-free.
The impact of FTAs is twofold. On the one hand, they enable Vietnam to boost the competitiveness of its exports via diversifying access to cheaper imports, and to make the jump into higher value-added production through partnership with foreign companies that can transfer knowledge and technology. On the other hand, foreign investors have also found it increasingly attractive to set up manufacturing plants in Vietnam to enjoy the preferred import tariffs the FTAs have granted to made-in-Vietnam products; to import into Vietnam products whose tariffs have been lowered by the FTAs; and to tap into a market of about 96 million people. In Resolution No. 50-NQ/TW of Vietnam’s Politburo dated 20 August 2019 on management and projections of foreign investment towards the year 2030 (Resolution 50), Vietnam targets to attract USD 30 billion to 40 billion per annum during 2021 – 2025.
Use of M&A to invest in Vietnam: additional advantages
In Vietnam, there are many reasons for using M&A transaction in addition to seeking a shortcut to enter the market. Take staffing for example: in many sectors, such as healthcare, education and real estate, it is more cost effective and efficient for a foreign investor to have the staff recruited by local investors before the foreign investor comes in, acquiring the whole or part of the business and existing personnel. For licensing, M&A also helps: for many years there has been no foreign invested life insurance company that is incorporated anew; instead, foreign life insurance investors choose to acquire fully-licensed existing companies. For synergy, many Vietnamese owners view foreign investors as a source of knowledge and technology, while foreign investors find the synergy in the new generation of Vietnamese entrepreneurs.
Updates for entering the Vietnam market
“Only fools rush in” (Haley Reinhart). Topping economies in terms of the number of FTAs, Vietnam is highly accessible to foreign investors. Still, there are things that a foreign acquirer needs to consider carefully before entering the market. To make the right decision, it is vital to raise the right questions. Bearing in mind the recent policy and legislative developments in Vietnam, a foreign acquirer should start with the following key questions.
Topping the economies in terms of the number of FTAs, Vietnam is highly accessible to foreign investors. Still, there are things that a foreign acquirer needs to consider carefully before entering the Vietnam market.
Is the targeted business subject to foreign investment restrictions?
Vietnam retains a ‘negative list’ of business sectors in which foreign investment is restricted, whether by investment conditions e.g. in retail, logistics or pharmaceutical trading, or by investment prohibition i.e. no market opening at all. In addition to the ‘negative list’, there are two points to note. First, the ‘negative list’ remains subject to changes to be introduced by the Amendment to the Law on Investment, which is expected to be promulgated around June 2020. Second, Resolution 50 introduces a new condition for screening foreign investment, namely “national security”, which is understood to target projects in sensitive industries such as information technology or data processing, or sensitive geographical locations. The policies under Resolution 50 would soon be legislated, tightening the authority’s appraisal of contemplated acquisitions by foreign investors.
For the legal feasibility of an acquisition, it is important to identify and confirm if there is any foreign investment restriction, and the verification should be conducted in relation to the applicable market openings under the relevant FTA(s). When the restrictions are confirmed, measures, such as restructuring the target company’s business, crafting special investment structures, or seeking exception-based approval, could be deployed to help achieve the commercial purposes of the transaction.
Is the proposed transaction subject to merger filing?
The new Competition Law takes effect from 1 July 2019. In addition to expanding its extra-territorial application to “foreign enterprises that operate in Vietnam”, the new Competition Law introduces a series of new criteria for determining whether a contemplated acquisition would be subject to merger filing requirements. The criterion of 30% combined market share, which used to be the sole filing threshold, has been reduced to 20% in addition to the introduction of new thresholds such as the deal value, the total assets, and the total revenue of the parties to the proposed transaction. The widened tests render M&A transactions more likely to be caught by merger filing requirements. As merger filing is quite time-consuming, this matter has to be anticipated and cleared timely prior to concluding a transaction.
Updates for running the acquired business
To run the acquired business efficiently, the acquirer should raise the following key questions.
Have the key managers been retained properly?
Many times the real ‘asset’ that an investor targets to acquire is the target company’s managers, who may include the founder of the company. As part of the deal for their sale of shares in their company, these key managers are retained and accordingly shift from being employer to being employee. This is a significant change, the impacts of which are potentially decisive to the performance of the acquired business. The relation should be handled tactfully. Given the employee-friendly reputation of the Vietnamese employment regulations, the relation with the key managers has often been structured to manifest in the form of a service agreement rather than an employment agreement. Nevertheless, the new Labour Code dated 20 November 2019 appears to deal with this by stipulating that if a person is remunerated for working under another person’s management, instruction and supervision, the relation shall be considered an employment contract, irrespectively of how the contract is named. This requires even more sophisticated legal tools to successfully manage the relation.
Has the difference in company valuation been handled properly?
Vietnam’s economy has been performing consistently well and generally growing faster than the rest of the world. However, considering the vulnerability of the economy, there comes an obstruction preventing the parties from agreeing on a price for the M&A transaction: the parties’ different valuations of the target company.
There are many ways to respond to this, and from recent practice, using earn-out payment has proved an efficient and highly acceptable solution to the parties.
Earn-out structure is nonetheless fairly sophisticated. Thus the earn-out terms need to be highly anticipatory. Further, in the context where earn-out payment is applied to managers who are former owners, the management rules need to be properly considered and set out to help harmonise and meet the expectations of not only the acquirer but also the managers.
Have the new protections of minority shareholder been considered?
Regarding protection of minority shareholders, there are two key notes – one current and the other futuristic. The current is that recently a new type of preference share combining both political preferences (e.g. voting right) and economic preferences (e.g. preferred rights to distribution of dividend or of company liquidation) has been accepted. This long-awaited new legal practice is good news especially for financial investors who hold minority shareholding.
In addition, it should also be noted that the draft Amendment to the Law on Enterprises is proposing to reduce the minimum shareholding from the current 10% to 3%, and to abolish the minimum 6-month holding term of the minimum shares, as prerequisites for minority shareholder to have the right to nominate their person to the Board, and request for convening a general meeting of shareholders.
And finally, if it comes to exit, what could be the difficulties?
Exiting from an investment in Vietnam could become more difficult in two cases, one current and the other futuristic. The current difficulty is that exercising put options has shown very low rate of success. If this measure is considered, additional measures must be deployed at the outset to ensure the planned exit.
As to the other difficulty, according to the new Securities Law dated 26 November 2019, a company may be listed only if, among other conditions, its paid-up capital is at least VND30 billion (close to USD1.3 million). This triples the current requirement of VND10 billion, rendering exiting by way of IPO more challenging.
Vietnam has decisively made itself more accessible to foreign investors. Investing by way of M&A in Vietnam is a generally quicker and simpler way to enter the market. Of note, the country is transforming fast, and M&A is to deal with existing, running businesses. A foreign acquirer should start off on the right foot, for which raising the right questions is key to making the right investment decisions.