Worldwide: Brief Guide To M&A In Southeast Asia

Introduction

Mayer Brown has been operating in Asia for over 150 years. We have a strong footprint across Asia with offices in China, Hong Kong, Singapore, Vietnam and Japan. In other countries in Southeast Asia, Mayer Brown has long experience in assisting clients with a wide variety of transactions and has close relationships with a number of well-established local firms. We regularly handle complex cross-border deals and, at the same time, use our local market knowledge and deep understanding of industry-specific issues to ensure we provide the best solutions for our clients. In addition to advising on the corporate, financial and structuring aspects of the transactions, our tax partner Pieter de Ridder based in our Singapore office is able to advise on various tax issues, tax planning opportunities and tax efficient structures for cross-border investments in each jurisdiction in Southeast Asia.

This publication is intended to give prospective investors an overview of the major legal and tax issues to consider when investing in Southeast Asian countries and India.

We hope you will find it useful in answering a number of frequently-asked questions regarding regulations on foreign investment, deal structures, corporate governance and tax.

Of course, we and the local firms featured in these pages would be happy to discuss any issues arising from your investment plans for the region. Please do not hesitate to contact us.

Vietnam

1. The legal system

• Vietnam's legal system is based on the French civil law system. Court judgments are based on codified law. While judicial decisions are generally not considered to be binding legal precedents, the Supreme Court has endorsed certain exceptional cases as having precedential value.
• M&A activities in Vietnam are primarily governed by the 2020 Enterprise Law, the 2020 Investment Law, and the 2019 Securities Law, all of which recently came into effect as of 1 January 2021, and general legal principles set out in the 2015 Civil Code and the 2005 Commercial Law.
• International treaties to which Vietnam is a party are also relevant for any M&A transaction related to Vietnam, including, most notably, Vietnam's commitments for accession to the WTO in 2007 (WTO Commitments).

2. Are there any restrictions on foreign investment ownership?

• Generally, a foreign investor is entitled to own an unlimited proportion of equity in a local entity, except for certain service sectors (such as banking) in which foreign ownership is restricted or conditional.
• Foreign investors may incorporate a local company in the form of either a wholly foreign-owned company or a joint venture with Vietnamese entities, subject to certain sectorspecific restrictions (such as in advertising, logistics, and tourism). Please refer to the Annex to this section for a list of common sectors for which foreign investment remains conditional or restricted.

3. What are the options available for an overseas investor in terms of the purchasing entity?

• Overseas investors may choose to acquire equity and become shareholders of an existing local entity, or incorporate either a new joint venture with Vietnamese partners or a wholly foreign-owned entity. Unless investing in sectors that restrict or impose conditions on foreign ownership and require participation of a local partner (such as advertising), or in the case where a Vietnamese partner has a particular piece of land that is ideally suited for development of a project, most foreign investors prefer the operational flexibility of establishing their own entity.
• A limited liability company (LLC) can have no more than 50 members. A joint stock company (JSC) must have at least three shareholders but there is no maximum number of shareholders. A JSC with 100 shareholders or more being minor shareholders and holding at least 10% of voting shares is considered a public company.
• An LLC has a simple corporate structure and therefore is preferable for foreign investors that intend to have complete control of a business. In the event there are multiple shareholders, a JSC may be preferable as a JSC may issue bonds and multiple classes of shares (whereas an LLC may only issue bonds).
• Shareholders of a JSC are entitled to freely transfer their shares, with certain exceptions. For example, founding shareholders are prohibited from transferring their shares within three years of incorporation unless approved by the general meeting of shareholders (GMS). In contrast, in an LLC, transfer of shares is subject to a mandatory right of first refusal by the other members. Equity transfers at prices lower than the market price are likely to be questioned by the tax authorities.¹
• For any initial public offering of shares, the minimum par value is VND10,000 (approx. USD 0.44).

4. Key corporate governance considerations for a local incorporated entity

• Investors in a multi-member LLC exercise their power to manage the company through a Members' Council, composed of three to seven representatives appointed by the owners. In a single-member LLC, the owner may appoint a Members' Council, or if the owner chooses to appoint only one representative, a President.
• In a JSC, the GMS is the highest management body. The Board of Management (BOM) is responsible for overall management of a JSC. The BOM may have from three to eleven members, who are appointed by the GMS with a term of no more than five years. A shareholder or group of shareholders holding at least 10% of the ordinary shares in a JSC is entitled to nominate a member for appointment to the BOM. Members of the BOM are elected in a cumulative voting process.
• For a JSC, the voting threshold for passing an ordinary resolution and a special resolution of the GMS, in case of voting at a physical meeting, is more than 50% and 65% of the voting shares of attending shareholders, respectively, or in case of collecting written opinions, more than 50% of the voting shares of all shareholders, unless the corporate charter (Vietnam's functional equivalent of the articles of association) provides otherwise. For the Members' Council of an LLC, this threshold is 65% and 75%, respectively, for voting at a meeting, and 65% in case of collecting written opinions.
• Certain transactions between a JSC and its related parties (i.e., shareholders, managers and their related persons) are prohibited by law, while other transactions are subject to the approval of the GMS or BOM.

5. Brief overview of structure, documentation and execution

• There are three general options for structuring an M&A transaction: (i) share acquisition, (ii) asset acquisition and (iii) merger. Share acquisition is the most common structure in the Vietnamese market, as certain types of assets (in particular, land and fixtures) cannot be sold to foreign investors.
• Convertible loans are common investment structures used to address regulatory restrictions on investment in certain sectors and manage lengthy timeframes for obtaining regulatory approvals (although many such approvals have now been phased out under the WTO Commitments).
• Transaction documentation for a share acquisition would include a customary sale and purchase agreement (SPA) or share subscription agreement, as well as a shareholders agreement, if the acquisition is for less than 100% of the target company's shares.
• Investors may need to obtain regulatory consents depending on the target company and the type of transaction. For example, in the context of a share acquisition, approval from the relevant provincial Department of Planning and Investment (DPI) must be obtained if a foreign investor is subscribing for, or purchasing, more than 50% of the equity in the private target company, or if the target operates in a foreign investment-restricted sector (such as education), or the target has land use right certificate for land in an area important to national security.
• The State Securities Commission (SSC) must approve a private placement in a public company. A private placement is an offer to sell shares to less than 100 investors (other than professional securities investors) without using public media.
  
  The 2020 Investment Law provides that the DPI issue the approval of the M&A registration within 15 days from receipt of a complete application, although the registration process as a whole may take longer. In practice, the DPI may need to seek additional opinions of relevant ministries for certain sectors for which foreign investment has not been committed or conditions applicable to foreign investment in those sectors are not clearly stipulated under international treaties or local regulations (such as the energy sector) prior to issuing the approval of M&A registration.
• In addition to regulatory consents, M&A transactions require internal approvals and relevant corporate documents, including the meeting minutes, resolutions of management bodies, and the amended charter.
• In the context of privately held JSCs, the share transfer is effective when the target company's register of shareholders is updated to reflect the transaction, and for LLCs, when the DPI issues an amended enterprise registration certificate recording the name of the new owner. Share certificates are often issued to investors in privately held companies; however, Vietnamese law does not attach legal value to certificates of securities as evidence of share ownership.
• As a post-closing procedure, documents showing registration of the proposed investment in the company are often required (i.e., the amended charter for either a LLC or JSC).

Footnote

1 Article 126 of the 2020 Enterprise Law

To read the full article click here