The Merger Control Review: Vietnam
The 2018 Law on Competition (Law No. 23/208/QH14) governs mergers that have or may have a competition-restraining impact on the market of Vietnam. The Law came into effect on 1 July 2019, replacing an old set of merger control provisions under the 2004 Law on Competition. On 26 September 2019, the government issued Decree No. 75/2019/ND-CP on handling competition law violations, which became effective on 1 December 2019. On 24 March 2020, the government issued Decree No. 35/2020/ND-CP on detailed provisions guiding the implementation of the 2018 Law on Competition (Decree No. 35), which includes some material differences to what was set out in the draft decree issued in 2018. Decree No. 35 took effect on 15 May 2020. The last decree (in the set of three new decrees) to implement the 2018 Law on Competition, which will regulate the functions, tasks and organisational structure of the National Competition Commission (NCC), is in the process of being formulated (the NCC Draft Decree).2
The NCC, which sits within the Ministry of Industry and Trade, is the authority tasked with enforcing the merger control rules, and is responsible for reviewing and deciding whether mergers should be prohibited, cleared or cleared with conditions, and is intended to replace the existing Vietnam Competition and Consumer Authority and the Competition Council under the now-repealed 2004 Law on Competition once the NCC Draft Decree is promulgated.
Year in review
i Increasingly robust enforcement
In the past, compliance with the merger control provisions in the 2004 Law on Competition had been described by commentators as being 'very poor'.3 Several significant mergers were carried out without interference by the authorities despite apparently having ignored the merger control requirements. However, in more recent years, there appears to have been increasing levels of enforcement.
In December 2018, for example, the Vietnam regulator announced that Grab's acquisition of Uber in Vietnam raised potential concerns under Vietnam's Law on Competition. The transaction involved Grab's purchase of Uber's South East Asian business in consideration of Uber having a 27.5 per cent share in Grab. Under the 2004 Law on Competition, transactions that lead to a post-transaction market share of between 30 per cent and 50 per cent would need to be notified, and those that resulted in a post-transaction market share of over 50 per cent would generally be prohibited. Following investigations, the regulator found that parties may have infringed the 2004 Law on Competition by completing the transaction without notifying the regulator of the same. The regulator found in its earlier preliminary investigation that Grab could have a post-acquisition market share of more than 50 per cent in Vietnam, although this was contested by Grab, which took the view that its post-acquisition market share was less than 30 per cent. While the Vietnam Competition Council ruled in June 2019 that the transaction did not constitute an economic concentration that was notifiable under the 2004 Law on Competition, this decision was appealed by the Vietnam Competition and Consumer Authority, and is currently being reviewed by the Vietnam Competition Council, which has not yet issued an official decision. Importantly, the Vietnam regulator has prohibited no mergers since the Vietnam 2004 Law on Competition was passed, and this in-depth scrutiny of the Grab/Uber transaction represents a more assertive approach.
From 2013 to 2016, the regulator received an average of four to five notification dossiers annually.4 In contrast, in 2018, the regulator reviewed five merger cases, commenced an investigation into one merger (the Grab/Uber case), and provided pre-filing consultation to three cases. On top of that, it received and processed four additional merger notification applications.5 In 2019, the regulator reviewed two merger cases, assessed and responded to one merger notification application, and, additionally, received and processed five merger notification applications.6 Coupled with statements in recent years that merger control enforcement was going to be a priority,7 the NCC is expected to become more active in enforcing the merger control provisions.
ii Change to the 2018 Law on Competition
The new 2018 Law on Competition that came into force on 1 July 2019 represents a big change to merger control in Vietnam.
To begin with, the change in notification criteria calls for a significant shift to the way that businesses comply with merger control rules. Under the 2004 Law on Competition, many businesses found it challenging to be sure of their notification obligations because of the uncertainties surrounding what the relevant market should be, and the difficulties in obtaining market share information.8 As a result, many transactions have simply not been notified.9 A shift to notification based on assets, revenue and value of transaction, which are more objective measures, is expected to provide greater certainty to businesses of when the notification thresholds are met. It also becomes easier for the NCC to enforce the new notification requirements: instead of being involved in a protracted assessment of the correct relevant market to base market share calculations, it can simply point to the clearer and more objective indicia of assets, revenue and value of transaction to establish that the notification thresholds have been crossed.
Importantly, the current notification thresholds contained in Decree No. 35 are set at a relatively low level (e.g., value of transaction exceeding 1 trillion dong). Many more transactions are expected to require filing, given these low thresholds.
Further, while the 2004 Law on Competition prohibited mergers that resulted in the post-transaction entity holding more than 50 per cent market share, the 2018 Law on Competition represents a fundamental shift in its approach to assessing mergers. Instead of prohibiting mergers purely based on market shares, they will be assessed depending on whether they restrict or are capable of significantly restricting competition in the Vietnam market. The move from a market share-based prohibition to an effects-based prohibition recognises that anticompetitive effects arising from mergers cannot be assessed on market shares alone – mergers that result in the post-merger entity having significant market share does not necessarily restrict competition if, for example, barriers to entry are low or countervailing buyer power is high. This change also opens the way for the NCC to consider other theories of harm (e.g., vertical, conglomerate) apart from horizontal theories of harm that come from a narrow focus on combined market shares. Moving forward, a greater level of analysis and sophistication of review is expected, as the regulator moves from a purely market share-based approach to an effects-based approach to assessing mergers.
Additionally, while the 2004 Law on Competition did not expressly provide that the merger control provisions would apply to foreign mergers, the 2018 Law on Competition now clearly states that it applies to any acts by foreign individuals or entities that have or may have the effect of restricting competition in Vietnam's markets.
Given the expanded criteria for notification, the relatively low notification thresholds and the clear application of the rules to foreign-to-foreign mergers, the number of notifications is expected to increase under the new merger control regime.
The merger control regime
i Mandatory notification regime
Before a merger is carried out, it would first have to be notified to the NCC if: (1) it falls within the type of transactions that may be notifiable, and (2) the prescribed notification thresholds are crossed.
Regarding (1), the following types of transactions may be notifiable under the 2018 Law on Competition:
- merger of enterprises: the transfer by one or more enterprises of all assets, rights, obligations and interests to another enterprise and, at the same time, the termination of business activities or existence of the former enterprises;
- consolidation of enterprises: the transfer by two or more enterprises of all of their assets, rights, obligations and interests to form one new enterprise and, at the same time, the termination of the business activities or existence of the consolidating enterprises;
- acquisition of an enterprise: the purchase by one enterprise of all or part of the capital contribution or assets of another enterprise sufficient to control or govern the acquired enterprise or any of its trades or business lines; and
- joint venture between enterprises: two or more enterprises together contributing a portion of their assets, rights obligations and interests to form a new enterprise.
The above transactions are collectively referred to in this chapter as 'mergers'. While the need for a change in control is an express requirement for acquisitions to be notifiable, it is arguably also an implied requirement in relation to mergers and consolidations, given the need for the consolidating or merging enterprises to terminate their business activity post-merger. Interestingly, there does not appear to be an express change of control requirement or a full functionality requirement before joint ventures are notifiable under the law.
Regarding (2), the notification thresholds under the 2018 Law on Competition are specified in Decree No. 35. Companies other than credit institutions, insurance companies and securities companies are subject to the following notification thresholds:
- total assets in the Vietnam market of either party (or group of affiliated companies of which such party is a member) exceeds 3 trillion dong in the preceding fiscal year;
- total turnover from sales or purchases in the Vietnam market of either party (or group of affiliated companies of which such party is a member) exceeds 3 trillion dong in the preceding fiscal year;
- value of the transaction exceeds 1 trillion dong (only applies to mergers in Vietnam); or
- combined market share of the combining entities in the relevant market is 20 per cent or more in the preceding fiscal year.
In addition, Decree No. 35 introduces separate and much higher notification thresholds for credit institutions, insurance companies and securities companies, which are as follows:
- total assets in the Vietnam market of either party (or group of affiliated companies of which such party is a member) in the preceding fiscal year (1) for insurance or securities companies, exceed 15 trillion dong, and (2) for credit institutions, exceed 20 per cent of the total assets of the credit institution system in the Vietnam market in the preceding fiscal year;
- total turnover from sales or purchases in the Vietnam market of either party (or the group of affiliated companies of which such party is a member) in the preceding fiscal year (1) for insurance companies, exceeds 10 trillion dong, (2) for securities companies, exceeds 3 trillion dong, and (3) for credit institutions, exceeds 20 per cent of the total turnover of the credit institution system in the preceding fiscal year;
- value of the transaction (1) for insurance or securities companies, exceeds 3 trillion dong, and (2) for credit institutions, exceeds 20 per cent of the total charter capital of the credit institution system in the preceding fiscal year (only applies to mergers in Vietnam); or
- combined market share of the combining entities in the relevant market is 20 per cent or more in the preceding fiscal year.
ii Concept of 'control'
The concept of obtaining control under the 2018 Law on Competition is specifically defined in Decree No. 35. An enterprise that obtains more than 50 per cent10 of the charter capital (or voting shares) or acquires ownership in or the right to use more than 50 per cent of the assets of all or one business line of an acquired enterprise, or such other holding that is sufficient to enable the acquirer with the right to make decisions on amendment to the charter, appointment and dismissal of members of management (directly or indirectly), and important matters regarding the operations of the acquired enterprise such as organisational structure, business line, location, raising, utilising and allocating capital, would be considered to have obtained control. Such control can also be obtained by way of agreements between the acquirer and the acquired enterprise.
iii Prohibition against anticompetitive mergers
The 2018 Law on Competition prohibits mergers that cause or are capable of causing the effect of significantly restricting competition in the market of Vietnam.
Among other things, the NCC will assess the merger's impact by looking at:
- the combined market shares of the enterprises participating in the merger in the relevant market before and after the merger;
- the extent of mergers in the relevant market before and after the merger;
- the relationship of the enterprises participating in the merger in the chains of production, distribution and supply of a specified type of goods or services or whose business lines provide mutual inputs and assistance;
- competitive advantages brought by the merger in the relevant market;
- the ability of an enterprise to significantly increase prices or rate of returns on sale post-merger;
- the ability of an enterprise to exclude or hinder other enterprises from entering or expanding in the market post-merger; and
- particular factors in the industry or sector in which the enterprises participating in the merger are operating.
The NCC will also take into account positive impacts by looking at whether the merger:
- has a positive impact on the development of industries, sectors, and science and technology, in accordance with state strategies and master plans;
- has a positive impact on the development of small and medium-sized enterprises; and
- enhances the competitiveness of Vietnamese enterprises in the international market.
Interestingly, the factors that may be taken into account in assessing the benefits of a merger appear to go beyond pure consumer welfare considerations, to also take into account industrial policy considerations such as support for Vietnamese enterprises and the development of pre-identified industry sectors. These factors have been further regulated in Decree No. 35, which facilitates the NCC in its assessment. In particular, Decree 35 provides the basis as well as criteria for considering and assessing each of these factors to determine whether a merger causes or is capable of causing the effect of significantly restricting competition in the Vietnamese market.
iv Determination of market shares
The 2018 Law on Competition sets out specific ways of determining the market share of an enterprise in a relevant market. The market share of an enterprise is determined on the basis of turnover from sales or purchases of goods or services in the relevant market, or the percentage of quantity of units of goods or services sold or purchased on a monthly, quarterly or annual basis. The turnover from sales or purchases of a specific type of good or service of a group of affiliated companies is determined on the basis of the total turnover from sales or purchases of such type of good or service of all companies being members of such group, exclusive of the turnover from sales and purchases between the companies of the same group. The turnover used to determine market share is to be determined in accordance with Vietnamese accounting standards.
Market share information for the two years immediately preceding the year of notification of the merger is required to be submitted to the NCC, as part of a notification application.
v Foreign-to-foreign mergers
The 2018 Law on Competition expressly states that it applies to any acts by foreign individuals or entities that have or may have the effect of restricting competition in Vietnam's markets. In other words, foreign-to-foreign mergers that result in a restriction of competition in Vietnam could be caught under the 2018 Law on Competition.
vi Merger review timelines
Before filing a notification, it is important for parties to consider whether it would be helpful to have a pre-merger consultation with the regulator to clarify whether their transaction would need to be notified or if it would be prohibited. This tends to be an informal process that is not set out in any statutory instruments or governed by fixed timelines, but is an important first step in clarifying the merger control obligations.
Once parties have submitted a complete notification that has been accepted by the regulator, the statutory timelines start to run. Under the 2018 Law on Competition, the preliminary review would be completed within 30 days of notification. A merger qualifies for preliminary review if it satisfies any of the following criteria:
- the combined market share of the merging enterprises is less than 20 per cent in the relevant market;
- the combined market share of the enterprises participating in the merger is 20 per cent or more in the relevant market, and the Herfindahl–Hirschman Index (HHI) of the enterprises in the relevant market post-merger is less than 1,800;
- the combined market share of the enterprises participating in the merger is 20 per cent or more in the relevant market, the HHI of the enterprises in the relevant market post-merger is more than 1,800, and the rate of increase in the HHI from pre- to post-merger is less than 100;
- the post-merger enterprise does not fall within the group of five enterprises having a market share of 85 per cent or more in the relevant market; or
- the enterprises participating in the merger that have interactive relations in the chain of production, distribution and supply of a certain type of goods or services, or business lines that are mutual inputs or complementary to each other, have market shares of less than 20 per cent in the relevant market.
At the end of the 30-day period, the NCC is required to issue a notice indicating that the merger may be carried out. If it does not, the merger is subject to official appraisal. If it fails to issue such notice upon expiry of the time limit, the merger may be carried out.
If a more detailed official appraisal is required, the NCC is given a further 90 days from the date of issuance of the above notice to conduct the review. This can be further extended by 60 days in complex cases. The clock may also be stopped during the process if the NCC requests that parties provide additional information and documents as part of the review.
vii Effect of regulatory review
Following the official appraisal, the NCC must make a decision on whether the merger may be carried out, may be carried out subject to conditions, or is prohibited. If it fails to issue a decision within the stipulated time limit, thereby causing loss and damage to enterprise, it is required to pay compensation.
The NCC has a broad range of powers to impose conditions to address potential competition concerns. Among others, it is empowered to order the division, separation or sale of assets or capital contributions, and may also control the terms of sale and purchase of goods and services entered into by the post-merger entity.
A failure to notify a notifiable transaction before implementation amounts to a breach of the 2018 Law on Competition. It is also a breach to implement a merger without incorporating all the conditions imposed by the NCC, or to implement a merger without obtaining the necessary clearance.
Among others, such a breach may result in fines (up to a maximum of 5 per cent of the total turnover of the enterprise in breach), an order for the division, separation or sale of the post-merger enterprises' assets or capital contribution, and control over the terms of sale and purchase of goods and services entered into by the post-merger entity.
ix Third parties' right to challenge mergers
Organisations and individuals who consider that their lawful rights and interests have been infringed as a result of a breach of the merger control provisions have the right to lodge a complaint with the NCC. There is a three-year limitation period (starting from the date on which the alleged breaching conduct occurred) within which the complaint must be made.
Such complaints will be investigated, and the NCC will take a decision to either stay the case or deal with the breaches of the merger control provisions. Organisations and individuals who disagree with this decision have the further option to lodge a complaint with the chairman of the NCC within 30 days of receiving the decision. The chairman will take a decision to uphold, amend or revoke the original decision. This latter decision may be further appealed to the court of relevant jurisdiction within 30 days of receiving such decision.
The 2018 Law on Competition does not expressly provide a right for third parties to have access to the NCC's file.
Other strategic considerations
Given the transition to the new merger control regime, there appears to be further clarifications that may be required, both in law and in practice. For example, whether a change in control or full functionality is a requirement before a joint venture is notifiable, whether there is a process for offering commitments to resolve the competition concerns raised by the regulator, and the possibility of running defences such as the failing firm defence. It would be important for parties, early in the transaction, to engage with the NCC in a pre-merger consultation to understand how the merger control provisions would specifically apply to their deal, and to identify any potential red flags early on.
Outlook and conclusions
The transition to the 2018 Law on Competition is still developing, and further clarity is expected to be provided in the form of additional decrees, circulars and other guidance and decisions from the regulator.
In the meantime, following a transition period of more than one year, a more rigorous set of merger control rules is now in place in Vietnam. Given the expanded criteria for notification and the relatively low notification thresholds, coupled with more robust enforcement in recent years, it is increasingly likely that transactions will trigger notification requirements and attract liability for a breach of merger control rules. Decree No. 35 is expected to further assist companies in self-assessing the impact of their proposed mergers as well as facilitate regulators' investigation, assessment and handling of competition cases in the context of the 2018 Law on Competition.
1 John Hickin and Hannah Ha are partners at Mayer Brown.
2 Vietnam Competition and Consumer Authority (VCCA), Annual Report 2019, p. 68.
3 Luu Huong Ly, 'Competition Law in Vietnam' (August 2015) 1 CPI Antitrust Chronicle.
4 VCCA, Annual Report (2013, 2014, 2015 and 2016).
5 VCCA, Annual Report 2018.
6 VCCA, Annual Report 2019.
7 DFDL, Focus on Merger Activity by the VCCA (16 April 2014).
8 PaRR, Vietnam's competition authority to remove market share threshold for merger reviews (17 July 2017).
9 APEC Economic Committee Report, Use of Economic Evidence Experience from APEC Members and Implications to APEC Developing Economies and Viet Nam (March 2018) at 21, 22.
10 Under the Enterprise Law, major decisions (such as reorganisation, winding-up/liquidation, disposal of assets whose value is 35 per cent or greater of the value of total assets, issuance of shares with respect to a joint-stock company, appointment of board and executives, change of core business, amendments to charter) of a company are passed by 65 per cent of attending votes. Other decisions are passed by 51 per cent of attending votes.