I OVERVIEW OF M&A ACTIVITY
No official statistics or reports on M&A activities in Vietnam during 2015 have been published yet. However, according to a report published by the Institute of Mergers, Acquisitions and Alliances, an institution that monitors M&A deals globally, the number of reported M&A deals in 2015 was 40 per cent higher than in 2014, with total value of US$4.3 billion.
In fact, if such total value amount of M&A deals in 2015 is accurate, it is comparable to the figure in 2012 (which is reported to be approximately between US$4.2 billion to US$5 billion, ‘an unchallengeable peak’ for M&A in Vietnam), or even the figure for 2011 (US$4.7 billion). These reported figures have delivered encouraging news to investors and the authorities. Foreign investors may see an opportunity to acquire attractive projects at good prices given the developments in investment conditions.
High-value deals in 2015 mainly focused on the areas of real estate business, finance and the retailing industry. See Section IV, infra, for further discussion on specific deals.
II GENERAL INTRODUCTION TO THE LEGAL FRAMEWORK FOR M&A
M&A activity has developed in the country during the past 10 years after the government’s issuance of a large number of new legal regimes, which was considered the government’s preparation for Vietnam’s official accession to the World Trade Organization on 11 January 2007. However, there is no united legal platform for M&A activities, and investors need to consider requirements, guidance and other information as to the interpretation
or practice of investment in different pieces of legislation. Principal regulations for M&A activities may be sorted into the following main categories:
- a international treaties and agreements to which Vietnam is a contracting party include Vietnam’s commitments to the World Trade Organization applicable to foreign investment into Vietnam from other state parties’ investors;
- b general regulations include the Civil Code 2005, which is the key general law regulating the ‘legal status and standards for conduct of individuals, legal entities and other subjects, the right and obligations of subjects in property and personal relations arising from civil relations, marriage and family, business, trade and labour’ (Article 1 of the Civil Code 2005) (the new Civil Code is scheduled to take effect on 1 January 2017);
- c the primary sources for regulating M&A activities in Vietnam are the Law on Enterprises 2014 and the Law on Investment 2014, which have replaced the Law on Enterprises 2005 and the Law on Investment 2005 respectively since 1 July 2015. The Law on Enterprises 2014 governs the establishment, management organisation and operation of enterprises, and the Law on Investment 2014 mainly focuses on investment activities within Vietnam. However, as the boundary between these two laws is unclear, the authorities and investors sometimes become confused during the implementation and interpretation of the laws, causing unnecessary difficulties for M&A activities in Vietnam. It is expected that now that the Law on Enterprises 2014 and the Law on Investment 2014 became effective from 1 July 2015, this confusion has been resolved;
- d regulations on land include the Law on Land 2013. In Vietnam, ownership of all land lies with the entire population, with the state acting as the representative owner. Therefore, no enterprise, including domestic private enterprises, state-owned enterprises and foreign private enterprises, is the actual owner of land. Investors may use land through a land use right;
- e regulations on specialised business areas, which specifically govern the relevant investment businesses of the investors, for instance, the areas of finance, education, distribution or restaurant services;
- f regulations applicable to public companies, including the Law on Securities 2006 (as amended in 2010) and its implementation decrees and circulars. In 2015, total foreign investment in a public company was relaxed by the government (see Section III.v, infra). According to Article 25 of the Law on Securities 2006, a public company is a joint-stock company that has already conducted the public offering of its shares; has its shares listed at the Stock Exchange or the Securities Trading Center; or has its shares owned by at least 100 investors, excluding professional securities investors, and has a contributed charter capital of 10 billion dong or more;
- g regulations on competition, including the Law on Competition 2004 and its implementation decrees and circulars. See Section IX, infra, on the Law on Competition; and
- h regulations on other relevant matters, including foreign exchange management and labour.
Some parts of the above regulations are not well enough developed, such as the overlapping and inconsistent regulations between the Law on Enterprises and the Law on Investment, as well as securities regulations and regulations on competition. In addition, similar to other new economic countries, foreign restrictions still play an important role, and foreign investors should look at both domestic laws and international treaties, including bilateral and multilateral, to understand the differences and decide the most appropriate M&A arrangement. In addition, if state-owned enterprises (SOEs) are involved in contemplated transactions, investors should also pay attention to the regulations applying to such SOEs, which sometimes prolong the closing of an M&A deal.
III DEVELOPMENTS IN CORPORATE AND TAKEOVER LAW AND THEIR IMPACT
i The Law on Enterprises 2014 and the Law on Investment 2014
As discussed above, despite the fact that the Law on Enterprises 2014 and the Law on Investment 2014 are the primary sources of legislation for M&A activities in Vietnam, the authorities and investors often get confused about the implementation of these laws, which creates difficulties for M&A activity in Vietnam.
Under the two laws, there are two types of investment based on sources of capital investment, foreign investment and domestic investment, each of which is carried out by the relevant investors under a different incorporation document.
ii The Law on Enterprises 2005 and the business registration certificate
According to the Law on Enterprises 2005, upon establishment, all companies, including domestic companies, had to be issued with a business registration certificate (or enterprise registration certificate after 1 June 2010), except for in cases where foreign investors invested in Vietnam for the first time and were issued with investment certificates that concurrently act as their business registration certificates.
iii The Law on Enterprises 2014 and the Law on Investment 2014
Under the current regime (effective from 1 July 2015), these new laws provide clearer procedures for each investment case by foreign investors.
For instance, foreign investors (i.e., foreign individuals or foreign organisations incorporated under foreign laws) that want to set up a new entity in Vietnam will first need to apply for investment approval from the investment licensing authorities (under the form of an investment registration certificate) for their investment projects in Vietnam. Upon issuance of the investment approval, the foreign investors will carry out the establishment procedure to set up the new entity in Vietnam. These steps are also applicable where a company of which foreign shareholders (directly and indirectly) together hold 51 per cent or more of total shares or equity wants to set up its subsidiary in Vietnam.
In the case of a shares acquisition or subscription of an existing Vietnamese company, foreign investors must register such proposed acquisition or subscription with the investment licensing authority if the target company engages in conditional business sectors; or the proposed transaction would result in 51 per cent or more of the total shares being (directly or indirectly) held by foreign investors. This registration step is not required for other acquisition or subscription cases. Upon completion of the registration, the target company shall amend its enterprise registration certificate in accordance with the Law on Enterprises 2014. This procedure is also applicable where the acquirer or subscriber is a foreign-invested company based in Vietnam of which 51 per cent or more of the total shares are (directly and indirectly) held by foreign shareholders.
iv The Law on Land 2013
In general, domestic private companies and state-owned companies may obtain land use rights by:
- a being allocated a land-use right by the state;
- b leasing land from the state;
- c receiving transfer of a land-use right from domestic private enterprises and foreign private enterprises;
- d leasing or subleasing land from domestic private enterprises; and
- e leasing and subleasing land from the developer of an industrial zone, high-technology zone or economic zone.
On the other hand, foreign-invested companies are only allowed to obtain a land-use right with one of the following methods:
- a directly leasing the land from the government or from a developer of an industrial zone, high-technology zone or economic zone;
- b receiving a land-use right as in-kind capital contribution from a lawful land user;
- c receiving an ongoing project using land; or
- d developing a housing project for sale or sale and lease using land.
M&A transactions may change the status of the target company from a domestic private company into a foreign-invested one (or vice versa). In such a case, the target company shall have rights of a land user as those of a foreign-invested company if foreign investors together hold 100 per cent or controlling shares. Otherwise, the rights of the target company will remain unchanged (Article 183.4 of the Law on Land 2013).
Another key point under the Law on Land 2013 relates to the definition of ‘offshore entity’. According to the language of the Law on Land 2003, the definition of ‘offshore entity’ is unclear, and it is uncertain whether an offshore entity itself may obtain a land-use right. However, under the Law on Land 2013, it is clear that an offshore entity itself may not obtain a land-use right.
v The Law on Securities
On 1 September 2015, Decree 60/2015/ND-CP, which amended the Law on Securities, took effect, relaxing the restrictions imposed on foreign investment in public companies. Foreign ownership in a public company is regulated as follows:
- a if an international treaty to which Vietnam is a party has provisions on the foreign ownership ratio, then such provisions apply;
- b if a public company operates in a business investment line for which the law on investment and other relevant laws have provisions on foreign ownership ratio, then such provisions apply. If a public company operates in a business investment line with conditions applicable to foreign investors, but there is not yet any specific provision on the foreign ownership ratio, then the maximum foreign ownership ratio is 49 per cent;
- c if a public company operates in several business lines with different provisions on the foreign ownership ratio, then the foreign ownership ratio shall not exceed the lowest ratio of the business lines (in which such company operates) wherein there are provisions on foreign ownership, unless otherwise provided in international treaties; and
- d for public companies not falling into any of the above scenarios, the foreign ownership is unrestricted, unless otherwise provided in the company charter.
IV FOREIGN INVOLVEMENT IN M&A TRANSACTIONS
During 2011 and 2012, investors from Japan took the leading position in inbound M&A deals, according to a Stox Plus report. Accordingly, capital from Japanese investors was approximately US$2.2 billion put into Vietnam through the M&A channel, taking up to 23 per cent of the inbound M&A in 2011 and 2012 in total. Although Japan lost its leading position for inbound M&A deals in 2014 and 2015, it had the most active investors in Vietnam in 2015, with 15 inbound deals, representing 12.8 per cent of the total inbound value. According to Stox Plus’ report for 2015, Japan ranked second on the list of countries conducting M&A in Vietnam with the highest deal value after Hong Kong. The wave of Japanese investment into Vietnam continues due to the fact that the economic growth of companies in Japan has slowed down, and investment into South-East Asian countries may improve this; the relocation of Japanese investment out of China; and the similarity between Japanese and Vietnamese culture.
With a population of more than 90 million, Vietnam remains an attractive destination for investors in the retail industry and consumer goods manufacturing.
Outbound M&A investment from Vietnam to other countries is strictly managed by the licensing authorities, especially in the banking and financial sector. Accordingly, to conduct an outbound M&A project, a Vietnam-based company shall need to seek approval by the centre-level licensing authority, the Ministry of Planning of Investment, which considers applications on a case-by-case basis. Therefore the number of licensed offshore investment projects to date has been very limited compared with the number of licensed onshore investment projects, and mostly focused on South-East Asian countries such as Laos, Cambodia and Myanmar.
V SIGNIFICANT TRANSACTIONS, KEY TRENDS AND HOT INDUSTRIES
Highlighted M&A deals during 2015 focus on real estate, finance and the retailing industry, as these were the most active sectors.
Real estate property prices in Vietnam are still affected by the bursting of the real estate balloon in 2007. Therefore, this area remains an attractive investment for offshore investors, and in 2015 it was one of the most active in M&A. The physical transfer of land, buildings and other types of real estate property, however, is a problematic issue and may take a long time, especially if it is a transfer to a foreign investor. In particular, the offshore investor may need to set up its subsidiary in Vietnam; apply to the licensing authorities to implement projects in connection with the use of the real estate properties to be transferred; and register the physical transfer of the real estate properties with the real estate authorities. Therefore, in practice, foreign acquirers often consider acquiring vendors’ shares in the project company that owns such real estate properties. The procedure for shares acquisition is much simpler, and the offshore investors still own the real estate properties through the project company. Highlights include Lotte Group’s acquisition of a 70 per cent stake in Diamond Plaza, a commercial, office and apartment complex in downtown Ho Chi Minh City (HCMC), in a deal the value of which was not disclosed. South Korea’s Lotte Group replaced Posco as the foreign investor in the joint venture that owns and operates Diamond Plaza. Another case is Indochina Land’s transfer of four property projects in Vietnam to Gaw Capital Partners, a real estate fund manager based in Hong Kong, for US$106 million. In addition, Saigon Thuong Tin Real Estate JSC (Sacomreal) and Thanh Thanh Cong JSC (TTC) transferred Celadon City to Gamuda Land Vietnam, a division of Malaysian property developer Gamuda Berhad, for an estimated US$64.1 million. Celadon City, located in Son Ky ward in HCMC’s Tan Phu district, has an estimated original investment of US$1.1 billion. Other remarkable transactions include the purchase by Van Phu Invest, a Hanoi-based real estate investment company, of prime land on Giang Vo street in Hanoi for US$29.67 million, and the investment by Japanese companies Hankyu Realty and Nishi-Nippon Railroad in Flora Anh Dao, an affordable apartment project developed by Nam Long Investment Company. The total investment for the project is estimated at US$23.8 million.
Highlights in the finance sector include mergers between the following credit institutions: Sai Gon Thuong Tin Commercial Joint Stock Bank (Sacombank) and Southern Commercial Joint Stock Bank, with Sacombank as the surviving entity; Mekong Housing Bank and the Bank for Investment and Development of Vietnam (BIDV), with BIDV as the surviving entity; and Mekong Development Bank and Maritime Bank, with Maritime Bank as the surviving entity. It is also expected that the merger between PG Bank and Vietinbank will be finalised in early 2016. In 2015, Credit Saison (Japan) also purchased 49 per cent stake in HDFinance from Ho Chi Minh Development Bank (HDBank); Dongbu Insurance (South Korea) purchased 37 per cent of the shares in Post and Telecommunication Insurance Corporation in a deal reportedly worth US$45.8 million; and Fairfax Financial Holdings (Canada) acquired, through its wholly-owned subsidiary Fairfax Asia Limited, 35 per cent of the shares in the Bank for Investment and Development of Vietnam Insurance Joint Stock Corporation for US$50 million, thereby becoming its strategic investor.
Retail continued to be an attractive area for M&A in 2015. Among the best-known deals were AEON’s (Japan) purchase of a 30 per cent stake in Fivimart, and a 49 per cent share in Citimart, with, at that time, 20 stores in Hanoi and 27 stores mainly in HCMC, respectively. Thailand’s Central Group also bought a stake, through its affiliate Power Buy, in Nguyen Kim, a major electronics retailer with 21 stores in Vietnam. Warburg Pincus also completed its follow-on minority investment of approximately US$100 million in Vincom Retail, a subsidiary of VinGroup and Vietnam’s largest owner and operator of shopping malls. This brings the total investment to date by the Warburg Pincus consortium to US$300 million, making it one of the largest investments by a private equity firm in Vietnam.
With respect to other industries, the list of significant M&A deals made in 2015 includes the acquisition by Masan Group of 52 per cent of the shares in Vietnam French Cattle Feed JSC (Proconco) and 70 per cent of the shares in Agro Nutrition Company JSC (Anco), through its purchase of 99.9 per cent stake in Sam Kim Limited Liability Company, which was renamed Masan Nutri-Science Company. In 2015, Mondelez International completed its acquisition of an 80 per cent stake in Kinh Do, Vietnam’s leading snacks business.
According to Stox Plus, there were 104 SOE IPOs, representing 40 per cent of the IPOs targeted for the year, with the most active sectors in industries, consumer goods and consumer services. The new innovation of M&A in Vietnam is IPOs of aviation companies such as Vietnam Airlines (in 2014) and Vietjet Air (scheduled in early 2016). These should be a turning point in M&A in future years.
VI FINANCING OF M&A: MAIN SOURCES AND DEVELOPMENTS
Vietnam has seen gradual financial recovery in 2015, sustained by foreign investments and strong export growth. However, although lending interest rates have fallen by between 0.3 to 0.5 per cent from 2014 (with an average of 9 to 12 per cent), enterprises still continue to face difficulties in approaching financial sources from domestic banks due to high rates of interest. As a result, enterprises tend to look elsewhere for alternative solutions, in particular through downsizing business operations and obtaining additional capital from offshore creditors or potential investors. It is also a good chance for foreign investors to step into the Vietnamese market with good prices.
Vietnamese parties are familiar with typical clauses applicable to offshore loan arrangements such as financial covenants and security requirements. However, while an offshore creditor’s right to collect payment from debtors in the event of default is protected, enforceability of some terms may in practice be questionable. For instance, offshore creditors may face challenges if they want to exercise the right to acquire secured shares in the event of default if the project company is operating in areas that are conditional or restricted for foreign investment. In addition, it is only allowed for organisations established in Vietnam with a licence under the law on credit institutions to have collateral over a land-use right in Vietnam.
According to foreign exchange management regulations, offshore loans with terms of more than one year are subject to registration with the central bank of Vietnam (the State Bank of Vietnam). However, the loan registration requirement is just an administrative tool for the State Bank of Vietnam to manage and control the flow of foreign exchange currencies in Vietnam from time to time; it is not a confirmation or certification of the state that the agreement is legally recognised.
Vietnam remains an attractive place for investment in the private sector, and even more so now that it has relaxed the restrictions imposed on foreign investment in public companies (see Section III.v, supra).
VII EMPLOYMENT LAW
The current Labour Code 10/2012/QH13 has been effective since 1 May 2013. Key notes under the current Labour Code include the following.
According to Article 106 of the current Labour Code, the number of employees’ overtime hours does not exceed 50 per cent of the normal working hours in one day. In the case of working on a weekly basis, the total of normal working hours plus overtime hours must not exceed 12 hours in one day, 30 hours in one month and 200 hours in one year. The previous law simply provided that the number of overtime hours must not exceed four hours per day and 200 hours per year. Other provisions include:
- a adding one more day off during the lunar new year period (Article 115);
- b extending the maternity leave period for female employees from four to six months in general (Article 157);
- c extending the limitation period for dealing with breaches of labour discipline from three to six months, or 12 months in some special cases (Article 124); and
- d providing more details regarding cases where foreign workers are exempted from work permits requirements (Article 172). In particular, exemption cases include:
• capital-contributing members or owners of limited liability companies;
• members of the board of directors of joint-stock companies;
• chiefs of representative offices, and directors of projects of international organisations or non-governmental organisations in Vietnam;
• those who stay in Vietnam for under three months to offer services for sale;
• those who stay in Vietnam for under three months to deal with complicated technical or technological problems that adversely affect or are at risk of exerting adverse effects on production and business activities where these problems cannot be handled by Vietnamese and foreign experts who are currently in Vietnam;
• foreign lawyers possessing a professional practice licence in Vietnam in accordance with the Law on Lawyers;
• it is in accordance with a treaty to which Vietnam is a contracting party; and
• those who are studying and working in Vietnam, provided that the employer shall notify their employment to the provincial-level state management agency of labour seven days in advance.
VIII TAX LAW
Law No. 71/2014/QH13 on amending a number of articles of tax laws (Law No. 71) became effective from 1 January 2015. Key amendments include the following.
The list of deductible expenses of the companies used for the calculation of taxable income is expanded to include expenditures on vocational education (Article 1.3 of Law No. 71). On the other hand, the list of non-deductible expenses shall exclude expenses on advertising, marketing, promotion, commissions, receptions, conferences, support for marketing and expenses directly related to business that exceed 15 per cent of the deductible expenses (Article 1.4 of Law No. 71).
A tax rate of 10 per cent for 15 years is expanded to include income of a company from execution of a new investment project in:
- a manufacturing of products on the list of ancillary products given priority and satisfying one of the following conditions:
• ancillary products supporting high-technology defined in the Law on High-Technology; or
• ancillary products serving manufacturing in the following industries: textiles, leather, electronic, automobile manufacturing and assembly, and mechanical engineering, provided such products could not be manufactured in Vietnam until 1 January 2015, or can be manufactured in Vietnam and satisfy technical standards established by the European Union or equivalent; and
- b manufacturing, except for manufacturing of products subject to special excise tax and mineral extraction, the capital investment in which is not less than 12,000 billion dong, the technologies applied are assessed in accordance with the Law on High-Technology and the Law on Science and Technology, and the registered capital is disbursed within five years from the day on which the investment is permitted as prescribed by regulations of the Law on Investment.
IX COMPETITION LAW
There was no change to the Law on Competition in 2015. Under the current regulations, the following key points should be noted.
‘Economic concentration’ is defined in Article 16 of the Law on Competition as any of the following transactions: merger, amalgamation, acquisition, joint venture and other forms as stipulated in law.
An economic concentration is prohibited if the enterprises participating in the economic concentration have a combined market share of more than 50 per cent of the relevant market (the relevant market consists of the relevant product market and the relevant geographical market), except for certain cases under Article 19 of the Law on Competition, which include cases where the enterprise (or enterprises) is at risk of being dissolved or of becoming bankrupt, and the economic concentration has an effect on the extension of export or contributions to the social–economic development or to technical or technological progress.
An economic concentration to be conducted by enterprises with a combined market share in the relevant market of 30 to 50 per cent must be notified to the state authority (i.e., the Vietnam Competition Agency (VCA)) in advance. As set forth in Article 24 of the Law on Competition, enterprises may only carry out the concentration after receiving a written reply from the VCA confirming that such concentration is not within a prohibited category.
A company with a dominant position in the market (i.e., holding a market share of 30 per cent or more) or a company with a monopoly position will also be subject to certain restrictions and prohibitions to prevent the abuse of its dominant or monopoly position, including, inter alia, price dumping, price limiting, exclusive dealing and price discrimination in accordance with Articles 13 and 14 of the Law on Competition.
Finally, a normal company is prohibited from entering anticompetitive agreements for the restriction of the entry of another enterprise into the market, the elimination of an enterprise from the market or bid rigging as set forth in Article 9 of the Law on Competition. A group of companies with a combined market share of 30 per cent or more are prohibited from entering other anticompetitive agreements such as price fixing, dividing territories and exclusive dealing in accordance with Article 9.
With the signing of the Vietnam–Eurasia Economic Union fair trade agreement (FTA) on 29 May 2015, the Vietnam–EU FTA on 2 December 2015 and the Trans-Pacific Partnership on 4 February 2016, the coming into effect of the FTA with the Republic of Korea on 20 December 2015 and the easing of the restrictions imposed on foreign investment in public companies, 2016 is expected to be a significant year for M&A activity. According to Stox Plus, industrial goods and services and textiles will likely flourish this year as foreign investors take advantage of Vietnam’s FTAs. The banking sector continues to be attractive, especially with the efforts of the State Bank of Vietnam to restructure the banking system. With the projected decrease in the number of credit institutions from 34 to around 17 to 19, M&A is a sound option for small and medium-sized banks seeking to compete against larger ones for survival. Other attractive sectors in M&A include real estate, especially in commercial and industrial properties, as the market started to recover last year. Vietnam is still seen as the most-favoured real estate market in South-East Asia, and is expected to perform best in 2016. As Vietnam plans to increase the market share of modern retail channels (e.g., supermarkets and stores) from 25 to 45 per cent, analysts predict that the retail sector will be more active in 2016.
1 Hikaru Oguchi is a partner, Taro Hirosawa is a senior associate and Ha Hoang Loc is a Vietnam partner at Nishimura & Asahi